Horizon Bancorp, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2019. Horizon is an Indiana-based commercial bank holding company operating primarily in Indiana and Michigan. Results include Salin Bancshares and Salin Bank from their March 26, 2019 acquisition; comparisons with 2018 therefore reflect a larger company as well as organic changes. Unless otherwise stated, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q3 2019 | Comparable period |
|---|---|---|
| Net income | $20.5 | $13.1 in Q3 2018 |
| Diluted EPS | $0.46 | $0.34 in Q3 2018 |
| Net interest income | $43.5 | $33.8 in Q3 2018 |
| Net interest margin | 3.82% | 3.67% in Q3 2018; 3.73% in Q2 2019 |
| Non-interest income | $11.5 | $8.7 in Q3 2018 |
| Non-interest expense | $30.1 | $25.6 in Q3 2018 |
| Provision for loan losses | $0.4 | $1.2 in Q3 2018 |
| Return on average assets / equity | 1.60% / 12.72% | 1.26% / 10.87% in Q3 2018 |
- Nine-month results: net income was $48.0 versus $40.0 in 2018; diluted EPS was $1.11 versus $1.04. Net interest income rose to $119.3 from $100.7, while non-interest income increased to $31.1 from $25.9 and non-interest expense to $91.4 from $76.4.
- Core measures: management reported Q3 core net income of $20.3 and core diluted EPS of $0.45, excluding specified merger, securities-sale and bank-owned life insurance death-benefit items. Nine-month core net income was $52.1 and core diluted EPS $1.21. These are non-GAAP measures and should be considered alongside GAAP results.
- Balance sheet at September 30: assets were $5.187 billion, up $940 million from year-end 2018; net loans were $3.649 billion, deposits $3.916 billion and stockholders’ equity $642.7 million. The increases largely reflect Salin. Total borrowings were $516.6 million and subordinated debentures $56.3 million.
- Cash flow and liquidity: nine-month operating cash flow was $165.1 million, investing cash outflow $49.5 million and financing cash outflow $82.9 million. Cash and cash equivalents ended at $91.3 million, up $32.8 million from year-end. The filing reports $590.6 million of unused credit lines and $728.4 million of unpledged investment securities.
- Asset quality: the allowance for loan losses was $18.0 million, or 0.49% of loans, compared with 0.59% at year-end; management also cited a 1.07% combined reserve-and-acquired-loan-discount ratio. Non-performing loans were $19.2 million, up from $15.2 million at year-end. Net charge-offs were $1.5 million for the first nine months.
- Capital: Horizon Bank met the regulatory definition of well capitalized. At September 30, bank total risk-based capital was 12.08%, common equity Tier 1 was 11.62%, and Tier 1 leverage was 9.35%. Tangible book value per share was $10.31; reported book value per share was $14.29.
Material changes and notable items
- Horizon completed the Salin acquisition for an implied value of approximately $126.7 million, issuing 6.56 million shares and paying $24 million cash as presented in the purchase-price allocation. Salin added $568.9 million of loans and $741.3 million of deposits. Purchase accounting valuations remained preliminary at September 30; the acquired core deposit intangible was $19.8 million and goodwill approximately $31.2 million.
- Q3 net income increased 57% year over year, supported by higher net interest income, fee income and a lower loan-loss provision. Higher expenses and taxes partially offset the gains. Net interest margin improved year over year, but the nine-month margin was 3.72%, slightly below 3.74% in 2018, as higher funding costs offset asset-yield increases.
- Q3 non-interest income growth included higher deposit service charges, interchange fees and mortgage-loan sale gains. Nine-month non-interest expense included $5.65 million of merger costs; excluding merger expenses, management said expense growth was $9.3 million, largely related to Salin and organic growth.
- The company authorized a repurchase program of up to 2.25 million shares and had repurchased 99,407 shares at an average $16.04 through September 30. Dividends declared during the first nine months were $0.34 per share.
- Available-for-sale securities had net unrealized gains at quarter-end; management judged identified unrealized losses temporary and reported no security impairment deemed other-than-temporary.
Outlook, risks and contingencies
- No numerical earnings or margin guidance is provided. Management cited expected Salin cost savings and economies of scale, but realization and integration remain subject to execution and acquired-asset risks.
- Horizon expected an increase in its allowance for credit losses when it adopts CECL in 2020, but had not provided an estimate. Its implementation work included model validation and evaluation of portfolio, economic and forecast assumptions.
- Management identified risks including economic and interest-rate changes, deposit outflows and funding costs, credit losses and collateral values, competition and technology, cybersecurity, regulation, LIBOR transition, and acquisition integration and savings. It reported no significant change in interest-rate sensitivity from its 2018 Form 10-K.
- The company is involved in ordinary-course legal proceedings; management did not expect them to have a material adverse effect. The filing reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- How final Salin purchase accounting, acquired-loan performance and integration costs compare with current preliminary estimates and expected savings.
- The CECL adoption impact, including the eventual allowance increase and its effect on retained earnings and capital.
- Whether non-performing loans and net charge-offs continue to rise, and whether the allowance and acquired-loan discounts remain adequate as the loan portfolio expands.
- Whether margin improvement is sustainable given deposit pricing, funding competition and interest-rate changes; distinguish reported margin from management’s non-GAAP core margin.
- The quality and sustainability of earnings growth, including acquisition-related purchase-accounting income, mortgage-sale gains, death benefits and management’s non-GAAP core adjustments.
- The composition of reported operating cash flow, which included a substantial positive change in other assets, and continuing liquidity and capital needs.