Horizon Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Horizon is an Indiana-based commercial bank holding company operating in Indiana and Michigan. The July 1 acquisition of Peoples Bancorp and Peoples Federal Savings Bank materially expanded the company; Peoples results are included from the acquisition date.
Key financial metrics
Dollar amounts are in millions unless otherwise noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest income | $23.6 | $19.9 | $64.8 | $56.4 |
| Net interest income | $19.8 | $16.4 | $54.5 | $46.5 |
| Provision for loan losses | $0.3 | $1.7 | $2.8 | $2.1 |
| Non-interest income | $8.4 | $7.4 | $22.7 | $19.5 |
| Non-interest expense | $22.2 | $15.4 | $55.0 | $46.3 |
| Net income | $4.3 | $5.0 | $14.4 | $13.2 |
| Diluted EPS | $0.36 | $0.51 | $1.37 | $1.39 |
| Net interest margin | 3.51% | 3.59% | 3.59% | 3.62% |
At September 30, total assets were $2.608 billion, net loans $1.710 billion, deposits $1.913 billion, borrowings $373.9 million, subordinated debentures $32.8 million, and stockholders’ equity $264.7 million. Cash and cash equivalents were $48.2 million. Nine-month operating cash flow was $22.0 million; cash increased $4.7 million.
The allowance for loan losses was $16.2 million, or 0.93% of total loans (1.12% excluding acquired-loan discounts, per management). Non-performing loans were $21.0 million, down from $22.4 million at year-end 2014. Bank regulatory capital ratios included 12.30% Tier 1 risk-based capital, 13.17% total risk-based capital, and 9.31% Tier 1 leverage; the Bank remained well capitalized.
Material changes versus comparable periods
- Q3 net income fell 13.5% year over year as non-interest expense rose $6.9 million, more than offsetting higher net interest income and non-interest income and a lower loan-loss provision. Nine-month net income rose 9.3%, while diluted EPS declined because the share count increased following the acquisition.
- For the first nine months, net interest income increased $8.1 million and non-interest income increased $3.1 million. Net interest margin declined 3 basis points year over year; the reported Q3 margin declined 8 basis points.
- Total assets rose $531.0 million from year-end, including $485.1 million of Peoples assets acquired. Loans increased $347.4 million and deposits $430.8 million; the acquisition added $224.4 million of loans and $351.1 million of deposits.
- Excluding Peoples-acquired loans, total loans grew 8.9% (11.9% annualized) from year-end. Common shares issued for the acquisition contributed to dilution.
- Management’s non-GAAP reconciliation reports adjusted net income of $6.456 million and diluted EPS of $0.54 for Q3, excluding merger expenses, securities gains and acquisition purchase-accounting adjustments; corresponding 2014 figures were $4.112 million and $0.42. Nine-month adjusted figures were $15.678 million and $1.50 versus $12.061 million and $1.27. These are company-defined non-GAAP measures, not GAAP results.
Outlook, commentary, risks and unusual items
- Peoples was acquired for estimated consideration of $78.1 million, including $55.5 million in Horizon shares; acquisition-related expenses were $3.6 million in Q3 and $4.4 million year to date. Management expects opportunities to expand deposits and reduce costs through transaction efficiencies and economies of scale; the filing provides no quantified savings target or earnings guidance.
- The quarter included $0.988 million of securities gains in Q3 2014, versus none in Q3 2015. Nine-month 2015 included $0.124 million of securities gains and a $0.145 million life-insurance death benefit.
- Management cited continued low interest rates and lower yields on earning assets as pressure on margins. It noted that rising rates could affect mortgage volumes, and identified economic conditions, credit losses, collateral values, liquidity, competition, regulation, technology and cybersecurity, cost control, and acquisition integration as risks.
- The Bank had approximately $328 million of unused credit lines at September 30. Management reported no significant change in interest-rate sensitivity from its prior annual report. The company stated that its securities’ unrealized losses were temporary and that no individual security was considered other-than-temporarily impaired.
- Management did not expect ordinary-course legal proceedings to have a material adverse effect. It reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether Peoples integration costs and expected cost efficiencies develop as management anticipates; distinguish the reported GAAP results from the company’s non-GAAP adjustments.
- Whether core net interest margin stabilizes, given reported margin pressure and lower earning-asset yields.
- Trends in criticized, non-performing and restructured loans, charge-offs, and adequacy of the allowance, particularly after rapid loan growth and acquisition-related portfolio additions.
- Funding mix, borrowing levels, deposit retention and available liquidity as the enlarged balance sheet is integrated.
- Acquisition-related share dilution, capital ratios, and the sustainability of the increased common dividend.