Horizon Bancorp Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. Horizon is an Indiana bank holding company operating in Indiana and Michigan through Horizon Bank.
Financial performance and condition
| Metric | Q3 2016 / Sep. 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $24.4 million for Q3; $65.1 million for nine months | Q3 2015: $19.8 million; nine months 2015: $54.5 million |
| Net income | $6.6 million for Q3; $18.3 million for nine months | Q3 2015: $4.3 million; nine months 2015: $14.4 million |
| Diluted EPS | $0.30 for Q3; $0.94 for nine months | Q3 2015: $0.24; nine months 2015: $0.92 |
| Net interest margin | 3.37% Q3; 3.43% nine months. Excluding acquisition purchase-accounting adjustments: 3.31% and 3.36%, respectively. | 3.51% Q3 and 3.59% nine months in 2015; core margin was 3.44% for both comparable periods. |
| Total assets | $3,325.7 million | $2,652.4 million at Dec. 31, 2015 |
| Loans, net of allowance | $2,176.0 million; allowance $14.5 million | $1,734.6 million net loans at Dec. 31, 2015 |
| Deposits | $2,336.2 million | $1,880.2 million at Dec. 31, 2015 |
| Borrowings and subordinated debentures | $569.9 million and $37.4 million | $449.3 million and $32.8 million at Dec. 31, 2015 |
| Cash and cash equivalents | $83.7 million at quarter-end; operating cash flow was $11.4 million for nine months | $48.7 million at Dec. 31, 2015; operating cash flow was $22.0 million for nine months 2015 |
| Stockholders’ equity | $345.7 million; book value $15.61/share; tangible book value $11.83/share | $266.8 million and $14.20/share at Dec. 31, 2015; tangible book value was $11.02/share |
- Q3 interest income rose to $29.0 million from $23.6 million, while interest expense increased to $4.6 million from $3.8 million. The reported margin declined year over year, principally due to lower asset yields.
- For nine months, non-interest income rose 22.7% to $27.8 million; non-interest expense rose 20.3% to $66.1 million. Reported provision for loan losses fell to $1.2 million from $2.8 million.
- Net charge-offs were $1.2 million for nine months, compared with $3.2 million in 2015. Non-performing loans were $12.8 million, down from $16.7 million at year-end 2015; other real estate owned was $3.7 million.
- The allowance was 0.66% of total loans, compared with 0.83% at year-end. Management reported an adjusted reserve ratio, including acquired-loan discounts, of 1.40%; this is a non-GAAP measure.
- Bank capital ratios exceeded regulatory “well capitalized” thresholds. At September 30, the Bank reported total risk-based capital of 13.34%, Tier 1 risk-based capital of 12.73%, common equity Tier 1 of 12.73%, and Tier 1 leverage of 9.65%.
Material changes and unusual items
- Assets increased $673.2 million from year-end 2015, with net loans up $441.4 million, deposits up $456.0 million, and borrowings up $120.6 million. Growth reflects acquisitions and business expansion.
- Horizon acquired Kosciusko Financial/Farmers State Bank on June 1 for approximately $23.0 million and LaPorte Bancorp/The LaPorte Savings Bank on July 18 for approximately $98.6 million. The LaPorte purchase-price allocation and acquired-loan estimates remained preliminary at quarter-end. Goodwill was $74.3 million overall.
- Q3 reported net income included $2.953 million of merger expenses. Management’s non-GAAP reconciliation reported adjusted net income of $8.371 million and diluted EPS of $0.39 for Q3, excluding merger costs and acquisition purchase-accounting effects. For nine months, the corresponding adjusted figures were $20.717 million and $1.07 per diluted share, also excluding securities gains and a prior-year life-insurance death benefit. These non-GAAP figures are not substitutes for GAAP results.
- Horizon redeemed its $12.5 million Treasury-held preferred stock in February 2016 using holding-company cash, ending participation in the Small Business Lending Fund. Common dividends were $0.30 per share for the first nine months.
- The Board approved a three-for-two common-stock split after quarter-end; the filing states additional shares were expected to be issued November 14, 2016.
Outlook, risks, and contingencies
- The filing provides no formal earnings or margin guidance. Management cited loan growth, market expansion, and anticipated scale benefits from acquisitions; realization of expected cost savings is uncertain.
- Horizon anticipated closing its previously announced CNB Bancorp acquisition in early November 2016. It also announced an agreement to acquire about $5 million of loans and assume about $15 million of deposits from a First Farmers branch, subject to loan review and closing.
- Key stated risks include economic conditions, interest-rate changes and their effects on loan yields, mortgage activity and deposit flows; credit losses and collateral values; liquidity; competition, regulation, technology and cybersecurity; and acquisition integration, acquired-credit quality and achievement of cost savings.
- Management considered securities’ unrealized losses temporary and reported no security impairment deemed other-than-temporary. Acquired credit-impaired loans rely on estimates of expected cash flows; LaPorte valuations were not final at quarter-end.
- Management did not expect ordinary-course litigation to have a material adverse effect. The filing reported no material change in previously disclosed risk factors. Disclosure controls were considered effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much earnings growth persists after separating acquisition-related costs, purchase-accounting benefits, securities gains and other nonrecurring items.
- Whether margin pressure continues: core Q3 net interest margin was 3.31%, below 3.44% in Q3 2015.
- Credit quality and reserve adequacy as the loan portfolio expands, including acquired-loan discounts, preliminary LaPorte valuations, non-performing assets and consumer charge-offs.
- Funding and liquidity implications of higher borrowings: $307.9 million of borrowings were short-term, while unused credit lines were approximately $278.2 million.
- Integration progress and realized synergies from Kosciusko and LaPorte, and the terms, funding and execution of the announced CNB and branch transactions.