Horizon Bancorp, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Horizon is an Indiana bank holding company operating through Horizon Bank in Indiana and Michigan. This unaudited filing covers the quarter ended March 31, 2020; amounts below are in U.S. dollars. Year-over-year comparisons are affected by the Salin acquisition, completed March 26, 2019.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $40.9 million | $34.3 million in Q1 2019 |
| Credit loss expense | $8.6 million | $0.4 million in Q1 2019 |
| Net income; diluted EPS | $11.7 million; $0.26 | $10.8 million; $0.28 in Q1 2019 |
| Net interest margin | 3.56%; adjusted 3.44% | 3.62%; adjusted 3.46% in Q1 2019 |
| Total assets | $5.35 billion | $5.25 billion at December 31, 2019 |
| Gross loans; net loans | $3.71 billion; $3.66 billion | Gross loans $3.64 billion at December 31, 2019 |
| Deposits; borrowings | $3.88 billion; $704.6 million | $3.93 billion; $549.7 million at December 31, 2019 |
| Stockholders’ equity | $630.8 million | $656.0 million at December 31, 2019 |
| Cash flow | Operating +$28.2 million; investing −$142.0 million; financing +$101.5 million | Cash and equivalents fell $12.4 million to $86.5 million |
| Credit quality | Allowance $48.4 million, or 1.30% of loans; non-performing loans $24.0 million, or 0.65% | Allowance 0.49% and non-performing loans 0.58% at December 31, 2019 |
Interest income increased with acquisition-related and organic asset growth; lower funding costs partly offset lower asset yields. Non-interest income rose to $12.1 million from $8.7 million, including mortgage loan sale gains of $3.5 million versus $1.3 million. Non-interest expense was $31.1 million, up $1.4 million year over year. The reported efficiency ratio was 58.79%. Pre-tax, pre-provision net income, a non-GAAP measure, was $21.8 million.
Material changes and unusual items
- Horizon adopted CECL on January 1, 2020. The adoption reduced retained earnings by $15.6 million and increased the allowance; the company also recorded a $2.8 million initial allowance on purchased credit-deteriorated loans. Q1 credit loss expense included $7.0 million in special allocations for hotel and restaurant exposures affected by COVID-19 measures; management said no specific loss had yet been identified.
- Non-performing loans increased to $24.0 million from $21.2 million at year-end. Past-due loans were 0.33% of total loans, and net charge-offs were 0.01% of average loans for the quarter. Commercial loans classified as Special Mention increased, primarily reflecting hotel and restaurant risks.
- Deposits declined $48.7 million, which management attributed primarily to seasonality and replacing higher-cost public time deposits with lower-cost borrowings. Borrowings consequently rose $154.9 million.
- Equity declined $25.2 million, reflecting the CECL adoption, dividends and share repurchases, partly offset by net income and other comprehensive income. Horizon repurchased 273,916 shares during the quarter under its public program and separately agreed to repurchase 1 million shares from an individual shareholder for $15.19 per share.
- Q1 2020 net income was above Q1 2019, but diluted EPS was lower, reflecting a higher weighted-average share count. Q1 2020 income also included a $0.3 million securities-sale gain and a $0.2 million bank-owned life insurance death benefit.
Outlook, management commentary and risks
The filing provides no quantified earnings or financial guidance. Management described the balance sheet as well positioned before the pandemic and reported approximately $435.4 million of unused credit lines and approximately $743.5 million of unpledged securities at March 31. It also cited approximately $1.1 billion in cash and investment securities, described as 20.5% of assets.
As of April 24, 2020, Horizon reported SBA approval for more than 1,700 first-round PPP loans totaling approximately $280 million, and more than $350 million of loans with payment extensions. It also reported over $51 million of consumer and mortgage loan modifications. These are post-quarter developments. The Bank elected CARES Act relief allowing eligible COVID-related modifications to avoid TDR classification; $56.6 million of loans qualified at March 31.
Management identified material uncertainty from COVID-19, including potential borrower repayment problems, weaker collateral values, reduced loan demand, funding and interest-rate volatility, and operational and cybersecurity risks associated with remote work and third-party service disruptions. Other disclosed risks include competition, regulation, fair-value estimates, technology, and acquisition integration. Management said it found no goodwill impairment indicator requiring an impairment charge as of March 31, but will continue monitoring conditions. The company reported that it and the Bank met applicable well-capitalized requirements. Management did not expect ordinary-course litigation to materially affect financial condition or results.
Important facts for investors to verify
- How COVID-19 developments, loan deferrals and PPP performance affect credit quality, the allowance and future charge-offs—especially in hotel and restaurant portfolios.
- The assumptions and forecast inputs behind CECL and the durability of the $48.4 million allowance, including the distinction between the adoption adjustment and Q1 provision.
- Whether deposit trends, increased borrowings and available liquidity remain adequate as customer credit-line usage and funding needs evolve.
- Whether mortgage banking gains, net interest margin and expense levels are sustainable after unusually strong refinancing activity and changes in market rates.
- The share-repurchase disclosures and equity impact, including the separate 1-million-share agreement, and the company’s capital position after repurchases, dividends and CECL adoption.
- Post-quarter PPP and loan-modification figures, which are management-reported developments through April 24, 2020 and not Q1 financial-statement results.