Horizon Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. Horizon is an Indiana-based commercial banking company operating through Horizon Bank. Unless otherwise indicated, dollar figures below are in millions. Comparisons are with Q1 2017 for income and cash flow, and December 31, 2017 for balance-sheet figures.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $33.4 | $25.6 in Q1 2017; up 30.7% |
| Net interest margin | 3.81% | 3.80% in Q1 2017; excluding acquisition purchase-accounting adjustments, 3.55% versus 3.66% |
| Net income; diluted EPS | $12.8; $0.50 | $8.2; $0.37 in Q1 2017 |
| Core net income; core diluted EPS (company-defined, non-GAAP) | $11.2; $0.44 | $7.5; $0.34 in Q1 2017 |
| Non-interest income / expense | $8.3 / $25.8 | $7.6 / $21.5 in Q1 2017 |
| Provision for loan losses | $0.57 | $0.33 in Q1 2017 |
| Operating cash flow | $30.0 | $19.0 in Q1 2017 |
| Total assets | $3,969.8 | $3,964.3 at December 31, 2017 |
| Loans, net of allowance | $2,840.3 | $2,815.6 at December 31, 2017 |
| Total deposits | $2,933.7 | $2,881.0 at December 31, 2017 |
| Borrowings / subordinated debentures | $520.3 / $37.7 | $564.2 / $37.7 at December 31, 2017 |
| Stockholders’ equity | $460.4 | $457.1 at December 31, 2017 |
Net cash decreased $12.9 million during the quarter to $63.6 million: operating activities provided $30.0 million, investing activities used $48.0 million, and financing activities provided $5.1 million. Available liquidity included $161.6 million in unused credit lines and $528.5 million of unpledged investment securities. The Bank met regulatory requirements to be considered well capitalized; its March 31 total risk-based capital ratio was 12.87% and common equity Tier 1 ratio was 12.32%.
Reported return on average assets was 1.32% and return on average equity was 11.29%. Tangible book value per share, a non-GAAP measure, was $12.86, compared with $12.72 at year-end 2017 and $11.79 at March 31, 2017. The quarterly common dividend was $0.15 per share.
Material changes and drivers
- Net income rose 56% year over year. Management attributed the increase chiefly to $7.8 million higher net interest income and $0.8 million higher non-interest income, partly offset by increased loan-loss provision and $4.3 million higher non-interest expense.
- Higher average earning assets and yields supported interest income, while funding costs also rose: the average cost of interest-bearing liabilities increased to 0.85% from 0.59%. The company reported $2.0 million of acquisition-related purchase-accounting interest income in Q1 2018, versus $1.0 million in Q1 2017; excluding these adjustments, core net interest margin declined.
- Non-interest expense increased 20%, primarily reflecting salaries and benefits, occupancy, data processing, and other costs associated with company growth and prior acquisitions. Management also cited higher snow-removal costs.
- Deposits grew $52.7 million from year-end, while borrowings fell $43.9 million. Total loans increased $23.7 million; consumer, residential mortgage, and mortgage warehouse loans grew, while commercial loans declined.
- Non-performing loans decreased to $15.1 million from $16.4 million at year-end. The allowance for loan losses was $16.5 million, or 0.58% of total loans, versus $16.4 million and 0.58% at year-end. Net charge-offs were $0.49 million, including $0.52 million in consumer loans.
- Unrealized losses on available-for-sale securities increased, contributing to other comprehensive loss of $5.9 million and accumulated other comprehensive loss of $10.2 million. Management attributed the securities’ unrealized losses principally to interest-rate volatility and reported no other-than-temporary impairment.
Outlook, commentary, risks, and unusual items
- The filing provides no numerical earnings, growth, or margin guidance. Management described Q1 as the highest quarterly net income and diluted EPS in the company’s history and reported ongoing loan growth in several markets.
- Q1 2018 results include the effects of the 2017 Lafayette and Wolverine acquisitions; the 2017 comparison does not include those acquired operations for the full quarter. The acquisitions also increased shares outstanding and added purchase-accounting income and acquired-loan discounts. Management’s non-GAAP core measures exclude purchase-accounting adjustments; they are not GAAP measures.
- The company early adopted ASU 2018-02, transferring $0.766 million from accumulated other comprehensive income to retained earnings. It adopted the new revenue standard and ASU 2016-01 without material impact. The expected allowance impact of the future credit-loss standard was not yet determinable.
- Management identified exposure to economic and interest-rate changes, deposit outflows and mortgage volumes, credit losses and collateral values, liquidity, competition, regulation, cybersecurity, cost control, and acquisition integration and realization of anticipated savings. The filing said interest-rate sensitivity had not materially changed from the 2017 Form 10-K.
- Management stated that ordinary-course claims and lawsuits were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth is sustainable excluding acquisition purchase-accounting income, and whether core margin pressure continues.
- Whether deposit pricing and borrowing costs continue to rise, and the resulting effect on net interest margin and liquidity.
- Credit performance, especially consumer charge-offs, non-performing loans, acquired-loan credit marks, and the adequacy of the allowance as the portfolio grows.
- The magnitude and persistence of securities-related accumulated other comprehensive losses under changing interest rates, alongside the company’s stated ability and intent to hold securities through recovery or maturity.
- The drivers and recurrence of the increase in “other income” to $0.81 million from $0.05 million; the filing text does not provide a clear explanation of this increase.
- Acquisition integration, expense trends, deposit retention, and whether anticipated cost savings materialize.