Horizon Bancorp Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Horizon is an Indiana-based commercial bank holding company serving northern and central Indiana and southwestern and central Michigan. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Interest income | $24.7 | $21.1 | $48.2 | $41.2 |
| Net interest income | $20.9 | $17.9 | $40.6 | $34.7 |
| Provision for loan losses | $0.2 | $1.9 | $0.8 | $2.5 |
| Non-interest income | $9.9 | $7.2 | $17.7 | $14.3 |
| Non-interest expense | $21.6 | $16.7 | $41.3 | $32.7 |
| Net income | $6.3 | $4.7 | $11.7 | $10.1 |
| Diluted earnings per share | $0.52 | $0.49 | $0.96 | $1.04 |
| Net interest margin | 3.48% | 3.67% | 3.47% | 3.68% |
Quarterly net income rose about 34% year over year; first-half net income rose about 16%, while diluted EPS declined from $1.04 to $0.96, primarily reflecting more shares issued in acquisitions. Core net interest margin, excluding acquisition-related purchase-accounting effects, was 3.42% for Q2 and 3.40% for the first half, versus 3.51% and 3.49%, respectively, in the prior-year periods. Management attributed margin pressure to lower asset yields and reduced purchase-accounting accretion.
Q2 non-interest income included a $0.8 million securities gain. For the first half, mortgage-loan sale gains were $5.6 million and securities gains were $0.9 million. Expense growth reflected a larger workforce and footprint, as well as merger costs; reported non-interest expense increased 30% in Q2 and 26% in the first half. The filing’s non-GAAP reconciliation reports adjusted net income, after specified merger costs, securities gains, the prior-year life-insurance death benefit, and acquisition purchase-accounting adjustments, of $6.9 million for Q2 2016 and $12.3 million for the first half. These are non-GAAP measures and are not substitutes for reported results.
Financial condition, liquidity and capital
- At June 30, total assets were $2.918 billion, up $265.7 million from year-end 2015. Net loans were $1.924 billion, up $189.0 million; deposits were $2.082 billion, up $202.1 million.
- Cash and due from banks totaled $109.2 million, compared with $48.7 million at year-end. First-half cash flow was $12.0 million from operations, $(49.1) million from investing, and $97.7 million from financing; cash increased $60.6 million.
- Borrowings were $492.9 million, up $43.5 million from year-end; subordinated debentures were $32.9 million. Management reported $192.0 million of short-term borrowings and $300.6 million of unused credit lines at quarter-end.
- Stockholders’ equity was $281.0 million, versus $266.8 million at year-end. The Bank met regulatory “well capitalized” standards; its total risk-based capital ratio was 12.45%, common equity Tier 1 ratio 11.77%, and leverage ratio 9.18%.
Material changes, outlook and risks
- Horizon completed the $23.0 million Kosciusko acquisition on June 1, 2016, issuing 582,287 shares. The preliminary allocation included $6.9 million of goodwill and $1.9 million of core deposit intangible; acquired-loan valuations and purchase accounting remained subject to finalization.
- After quarter-end, Horizon completed the LaPorte Bancorp acquisition on July 18, for an implied value of approximately $101.7 million. It also announced a pending acquisition of CNB Bancorp on July 12. LaPorte was not included in June 30 results; the filing provides no earnings guidance or quantified synergy target.
- The allowance for loan losses was $14.2 million, or 0.73% of total loans, versus $14.5 million, or 0.83%, at year-end. Nonperforming loans declined to $13.2 million from $16.7 million; the filing notes that loan growth and acquired portfolios affect reserve comparisons.
- Management cited risks including economic and interest-rate changes, deposit outflows, credit losses and collateral values, liquidity, competition, regulation, cybersecurity, expense control, and acquisition integration and acquired-loan quality. It reported no significant change in interest-rate sensitivity from its 2015 annual report. Management considered securities’ unrealized losses temporary and reported no other-than-temporary impairment at June 30.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether loan and deposit growth, net interest margin, and funding costs hold up after the acquisitions and any further interest-rate changes.
- Final purchase accounting, acquired-loan credit performance, integration expenses, and realization of expected cost savings, especially for Kosciusko and LaPorte.
- Credit quality and reserve adequacy as the loan portfolio expands: nonperforming loans, charge-offs, acquired-loan discounts, and the 0.73% allowance ratio.
- Recurring earnings versus unusual items, including merger expenses, securities gains, and acquisition-related purchase-accounting income; adjusted figures are non-GAAP.
- Liquidity and capital after the LaPorte transaction and the announced CNB transaction; the filing does not provide pro forma capital or liquidity figures for those events.