Horizon Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statement amounts below are in millions unless noted. Horizon is an Indiana-based commercial bank holding company operating through Horizon Bank.
Business context and material change
Horizon completed its acquisition of Salin Bancshares and Salin Bank on March 26, 2019. The approximately $126.7 million transaction was funded with $102.7 million of Horizon shares and $24.0 million cash. Q1 results include Salin only from the acquisition date, while the March 31 balance sheet includes its acquired assets and liabilities; therefore, period-end growth and year-over-year comparisons are affected by the acquisition. The purchase price allocation remains preliminary.
Financial performance
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Interest income | $45.4 | $39.4 |
| Net interest income | $34.3 | $33.4 |
| Net interest margin | 3.62% | 3.81% |
| Core net interest margin, excluding purchase accounting adjustments | 3.46% | 3.55% |
| Non-interest income | $8.7 | $8.3 |
| Non-interest expense | $29.7 | $25.8 |
| Net income | $10.8 | $12.8 |
| Diluted EPS | $0.28 | $0.33 |
- Net income fell 15.5% year over year; management attributed the decline primarily to acquisition-related merger expenses. Core net income, a non-GAAP measure excluding specified items, rose 16.5% to $13.0 million, and core diluted EPS increased to $0.34 from $0.29.
- Interest income increased with higher average earning assets and yields, but interest expense rose more sharply as deposit and borrowing costs increased. Net interest margin declined 19 basis points year over year.
- Merger expenses were $4.1 million pretax. Excluding these expenses, non-interest expense was $25.6 million, down $0.2 million from Q1 2018.
- Provision for loan losses was $0.4 million versus $0.6 million. Net charge-offs were $0.4 million; the allowance was $17.8 million, or 0.49% of loans. Management cited improving credit trends and low charge-offs, while noting that future losses or economic changes could require higher reserves.
Financial position, cash flow and liquidity
- Total assets were $5.052 billion at March 31, up $805.0 million from year-end 2018, primarily due to Salin. Net loans were $3.603 billion, up $607.7 million; deposits were $3.888 billion, up $748.6 million.
- Borrowings declined to $457.8 million from $550.4 million; subordinated debentures were $55.3 million. Stockholders’ equity rose to $609.5 million from $492.0 million, reflecting acquisition-related share issuance, earnings and other comprehensive income.
- Cash and cash equivalents ended at $86.1 million, up $27.6 million during the quarter. Reported operating cash flow was $111.6 million, including a $97.8 million favorable change in other assets; investing activities provided $76.5 million, including $128.7 million net cash received in the Salin acquisition. Financing activities used $160.4 million, including net borrowing reductions.
- Horizon reported $480.7 million of unused credit lines and $663.7 million of unpledged securities. The Bank met regulatory requirements to be considered well capitalized; its total risk-based capital ratio was 12.30% and common equity Tier 1 ratio was 11.84%.
- Non-performing loans were $19.4 million, up from $15.2 million at December 31, 2018, largely due to acquired Salin loans. The filing reports $3.7 million of other real estate owned and repossessed assets, also increased mainly by Salin.
Outlook, risks and unusual items
- No specific numerical earnings or growth guidance is provided. Management expects acquisition-related economies of scale and cost reductions, but cautions that integration, acquired-loan credit quality and realization of expected savings pose risks.
- Other cited risks include economic conditions, changing interest rates and funding costs, deposit outflows, credit losses and collateral values, liquidity, competition, regulation, cybersecurity, and technology and payment-system changes.
- Unrealized securities losses were attributed to interest-rate volatility rather than credit deterioration; management considered them temporary and reported no security impairment deemed other-than-temporary.
- Management said ordinary-course litigation was not expected to materially affect financial position or results. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
- The company adopted lease accounting in January 2019, recording approximately $3.5 million of right-of-use assets and lease liabilities. Adoption of the new hedging standard had no material impact.
Important facts for investors to verify
- Track final Salin purchase accounting, integration costs, and whether projected cost savings are achieved.
- Assess underlying earnings using GAAP results alongside management’s non-GAAP core measures and their stated exclusions.
- Monitor deposit pricing, borrowing costs and net interest margin, which declined year over year despite higher net interest income.
- Review acquired-loan performance, non-performing assets, credit discounts and reserve adequacy as the combined portfolio seasons.
- Reconcile operating cash flow and changes in other assets, and review liquidity and capital after the acquisition.