Horizon Bancorp, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Horizon Bancorp is an Indiana-based bank holding company operating through Horizon Bank, with commercial banking as its single reportable segment. This unaudited filing covers the three months ended March 31, 2017; balance-sheet comparisons are against December 31, 2016, and results are compared with Q1 2016. The year-over-year comparison is materially affected by acquisitions completed in 2016.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Total assets | $3.170 billion | $3.141 billion at Dec. 31, 2016 |
| Net interest income | $25.6 million | $19.8 million in Q1 2016 |
| Net income | $8.2 million; diluted EPS $0.37 | $5.4 million; diluted EPS $0.30 in Q1 2016 |
| Net interest margin | 3.80%; core margin 3.66% | 3.45%; core margin 3.36% in Q1 2016 |
| Return on average assets | 1.07% | 0.83% in Q1 2016 |
| Loans, net of allowance | $2.132 billion | $2.121 billion at Dec. 31, 2016 |
| Deposits | $2.444 billion | $2.471 billion at Dec. 31, 2016 |
| Borrowings and subordinated debentures | $357.5 million combined | $304.9 million combined at Dec. 31, 2016 |
| Stockholders’ equity | $348.6 million; tangible book value $11.79 per share | $340.9 million; $11.48 tangible book value per share at Dec. 31, 2016 |
Interest income rose to $28.8 million from $23.5 million, supported by larger earning-asset balances and a 19-basis-point increase in asset yield. Interest expense declined to $3.3 million from $3.8 million, as lower borrowing balances and funding costs more than offset growth in interest-bearing deposits. Acquisition-related purchase-accounting adjustments contributed $1.0 million of interest income in Q1 2017 versus $0.5 million in Q1 2016. Management reported adjusted net income, excluding merger costs, securities gains and purchase-accounting adjustments, of $7.5 million, or $0.34 diluted EPS, compared with $5.4 million, or $0.30, in Q1 2016.
Noninterest income was $7.6 million versus $7.4 million in Q1 2016, based on the income statement. Noninterest expense rose to $21.5 million from $19.3 million, principally reflecting higher salaries, occupancy, data processing and other costs amid growth and acquisitions. Provision for loan losses declined to $330,000 from $532,000. Operating cash flow was $19.0 million; investing cash outflow was $37.4 million and financing cash inflow was $7.8 million. Cash and cash equivalents fell $10.6 million to $60.3 million.
Material changes versus prior periods
- Net income increased 52.8% and diluted EPS rose from $0.30 to $0.37. Share count also increased substantially year over year, primarily due to shares issued in the Kosciusko and LaPorte acquisitions.
- Reported net interest margin improved 35 basis points year over year. Q4 2016’s 2.92% margin was depressed by $4.8 million of borrowing prepayment penalties; management’s core-margin comparison excludes those penalties and purchase-accounting effects.
- Loans grew modestly from year-end. Commercial loans increased $36.5 million and consumer loans $19.0 million, while mortgage warehouse loans declined $46.4 million. Deposits fell $27.5 million and borrowings increased $52.6 million.
- Available-for-sale securities increased $34.4 million and held-to-maturity securities rose $5.7 million from year-end. Total assets increased $28.5 million.
- The company completed a Bargersville, Indiana branch purchase in February 2017, assuming $14.8 million of deposits and recording a $463,000 core deposit intangible. The office was consolidated into an existing Horizon location.
Outlook, risks, contingencies and unusual items
No quantified earnings or financial guidance is provided. Management described Q1 as a strong start, noting that the quarter is typically a seasonal low point. It cited commercial and consumer loan growth and plans to expand in Grand Rapids, Fort Wayne, central Ohio and Noblesville. Expected cost savings and integration benefits from acquisitions remain subject to execution.
Key stated risks include economic and interest-rate changes, deposit outflows and mortgage-volume effects from rising rates, credit losses and collateral values, liquidity, competition and technology, cyber and data-security events, regulatory and capital changes, and acquisition integration and realization of cost savings. Management said the Bank met “well capitalized” regulatory thresholds; its March 31 total risk-based capital ratio was 13.87%, common equity Tier 1 ratio 13.22%, and Tier 1 leverage ratio 10.13%. Unused credit lines were approximately $304.8 million, down from $453.9 million at year-end.
Nonperforming loans declined to $9.8 million from $10.7 million at year-end; the allowance for loan losses was $15.1 million, or 0.70% of loans. Management cautioned that future portfolio assessments or economic conditions could require additional provision. Unrealized securities losses were attributed primarily to interest-rate volatility; management considered them temporary and reported no other-than-temporary impairment. Ordinary-course litigation was not expected to have a material adverse effect. The filing reports no material change in risk factors or interest-rate sensitivity from the 2016 Form 10-K.
Unusual or relevant accounting items include acquisition-related purchase-accounting income, prior-year acquisition expenses, and a $19,000 tax benefit from adopting share-based payment guidance. The new credit-loss standard (CECL) is expected to require a one-time allowance adjustment, but its amount and overall effect could not yet be determined. The upcoming lease standard is not expected to materially affect income, but management anticipates an $80 million to $100 million increase in assets and liabilities.
Investor verification priorities
- Reconcile the reported year-over-year growth with the effects of the 2016 acquisitions, purchase-accounting income, acquisition expenses and expanded share count; review both GAAP and adjusted results.
- Track margin sustainability, funding mix, deposit trends, increased borrowings and the availability of credit lines, particularly under rising-rate scenarios.
- Review loan growth by category, mortgage warehouse exposure, criticized and nonperforming assets, acquired-loan discounts, and adequacy of the allowance.
- Assess acquisition integration, expected cost savings, branch and market expansion costs, and whether new growth translates into durable earnings.
- Check the original filing’s noninterest-income disclosures: the income statement reports $7.559 million for Q1 2017 and $7.387 million for Q1 2016, while the MD&A contains inconsistent comparative totals and line-item values.