Horizon Bancorp, Inc. — 2018 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Horizon is an Indiana-based bank holding company operating through Horizon Bank, with commercial banking as its sole reported segment. Comparisons below are with the corresponding 2017 period or December 31, 2017, as applicable. Dollar amounts are in U.S. dollars; financial statement amounts are rounded to millions.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest income | $40.7m | $30.8m | $80.2m | $59.6m |
| Net interest income | $33.6m | $27.2m | $67.0m | $52.8m |
| Net interest margin | 3.78% | 3.84% | 3.81% | 3.81% |
| Non-interest income | $8.9m | $8.2m | $17.3m | $15.8m |
| Provision for loan losses | $0.6m | $0.3m | $1.2m | $0.7m |
| Non-interest expense | $24.9m | $22.5m | $50.8m | $44.0m |
| Net income | $14.1m | $9.1m | $26.9m | $17.3m |
| Diluted EPS | $0.37 | $0.27 | $0.70 | $0.51 |
Q2 net income rose 55.6% year over year; diluted EPS increased 37.0%. For the first half, net income rose 55.6% and diluted EPS increased 37.3%. Management described both results as records for the company. Return on average assets was 1.41% for Q2 and 1.36% for the first half; return on average equity was 12.15% and 11.72%, respectively.
Quarterly net interest income increased 23.4%, reflecting higher average earning assets and yields, including acquisition-related purchase-accounting income. The margin nevertheless declined six basis points year over year as funding costs rose. The reported first-half margin was unchanged year over year. Excluding purchase-accounting adjustments, core margin was 3.60% for Q2 (versus 3.71%) and 3.61% for the first half (versus 3.67%).
Financial position, funding and credit
- At June 30, total assets were $4.077bn, up $112.3m from year-end 2017. Net loans were $2.907bn, up $91.8m; total deposits were $3.016bn, up $135.2m.
- Cash and due from banks was $69.0m, down $7.4m from year-end. Six-month cash flow was $45.4m provided by operating activities, $141.5m used in investing, and $88.7m provided by financing, resulting in a $7.4m decrease in cash and cash equivalents.
- Borrowings declined to $524.8m from $564.2m; subordinated debentures were $37.7m. Stockholders’ equity was $470.5m, compared with $457.1m at year-end. Book value per share was $12.27 and tangible book value per share was $8.84.
- Liquidity sources included $207.3m of unused credit lines and $561.3m of unpledged investment securities. The filing does not provide a single liquidity ratio.
- The bank met regulatory “well capitalized” requirements: total risk-based capital was 12.77%, Tier 1 risk-based capital 12.21%, common equity Tier 1 12.21%, and Tier 1 leverage 9.65% at June 30.
- The allowance for loan losses was $17.1m, or 0.58% of total loans. Nonperforming loans were $15.4m, down from $16.4m at year-end; net charge-offs were $0.5m in the first half. Substandard loans were $40.9m, versus $46.2m at year-end.
Changes, outlook and risks
- Growth in average assets and earnings partly reflects the 2017 Lafayette and Wolverine acquisitions. The company also reported organic loan and deposit growth. First-half gross loans increased $92.4m; consumer loans increased $46.9m. Acquisition-related purchase-accounting adjustments contributed $1.6m to Q2 and $3.7m to first-half interest income.
- Higher funding costs and expense growth partly offset revenue gains. Non-interest expense rose 10.9% in Q2 and 15.4% for the first half; management attributed much of the increase to company growth and acquisitions, along with higher lending and collection costs.
- The loan-loss provision increased as management added general reserves for lending growth, faster-than-expected indirect consumer lending growth, and economic factors including the possibility of recession. Management considered the allowance appropriate but cautioned that future assessments could require increases.
- Other real estate owned and repossessed assets rose to $3.0m from $0.8m at year-end. Management attributed most of the increase to acquired bank-owned properties being reclassified to OREO and recorded at fair value. Q2 expense also included property write-downs and an accrual for a potential fiduciary-account loss; the filing does not specify the accrual amount.
- The lower federal corporate tax rate, from 35% to 21%, and stock-option exercise benefits reduced income tax expense versus 2017. A $154,000 bank-owned life insurance death benefit was recorded in Q2 and the first half. Management also presented non-GAAP “core” results that exclude specified items, including purchase-accounting adjustments; these are not GAAP measures.
- No specific earnings or financial guidance is provided. Management reported no material change in previously disclosed risk factors or interest-rate sensitivity. Risks discussed include economic and interest-rate conditions, deposit outflows, credit losses, liquidity, competition, regulation, cybersecurity, and execution and integration of acquisitions. Management did not expect ordinary-course litigation to materially affect the company.
- The company completed a three-for-two stock split in June 2018; share and per-share figures were retrospectively adjusted. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth and earnings can be sustained as funding costs rise and quarterly net interest margin has narrowed.
- Credit trends in the indirect consumer portfolio and the adequacy of reserves, including the effects of economic conditions and acquired-loan discounts.
- How much earnings growth is attributable to acquired operations and purchase-accounting adjustments, versus ongoing organic performance.
- The nature and potential amount of the fiduciary-account accrual, and the valuation and disposition of OREO properties.
- Liquidity and funding resilience, including reliance on interest-bearing deposits, borrowings, and available credit lines.