Horizon Bancorp Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Horizon is an Indiana-based commercial banking holding company operating across Indiana, Michigan and Ohio. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $8.2 million, up 23.8% from $6.6 million; diluted EPS was $0.36 versus $0.30. Management’s non-GAAP core net income was $9.2 million, or $0.41 diluted EPS, excluding merger expenses, securities-sale gains and purchase-accounting adjustments.
- Nine-month earnings: Net income was $25.5 million versus $18.3 million; diluted EPS was $1.13 versus $0.94. Non-GAAP core net income was $25.4 million versus $20.7 million.
- Interest income and margin: Q3 net interest income rose 14.2% to $27.9 million. Net interest margin was 3.71%, compared with 3.37% a year earlier and 3.84% in Q2; excluding acquisition purchase-accounting adjustments, Q3 margin was 3.63%. For the first nine months, net interest income was $80.6 million and margin was 3.77% (3.65% excluding those adjustments).
- Other income and expenses: Q3 non-interest income declined 13.9% to $8.0 million, mainly as mortgage-loan sale gains fell to $2.0 million from $3.5 million. Q3 non-interest expense rose 1.8% to $24.5 million. Nine-month non-interest income fell 8.4% to $23.8 million; expenses rose 3.6% to $68.5 million.
- Assets and lending: Total assets were $3.52 billion, up $378.3 million from year-end 2016. Net loans were $2.41 billion, up $289.1 million; deposits were $2.61 billion, up $137.1 million. Loan growth included $134.4 million acquired with Lafayette. Commercial and consumer lending grew, while mortgage warehouse balances declined.
- Funding and liquidity: Borrowings increased to $458.2 million from $267.5 million at year-end, including $320.3 million in short-term borrowings. Cash and cash equivalents were $72.7 million. Nine-month operating cash flow was $37.3 million, investing cash outflow $189.8 million, and financing cash inflow $154.3 million. Unused credit lines were $236.3 million, down from $453.9 million at year-end.
- Credit quality: The allowance for loan losses was $15.6 million, or 0.64% of loans, versus $14.8 million, or 0.69%, at year-end. Nonperforming loans increased to $12.4 million from $10.7 million; net charge-offs for the first nine months were $0.6 million. Other real estate owned declined to $1.8 million from $3.2 million.
- Capital and returns: Stockholders’ equity was $392.1 million, compared with $340.9 million at year-end. Q3 return on average assets was 0.96% (1.09% on management’s core basis). The Bank’s September 30 capital ratios were 12.93% total risk-based, 12.33% Tier 1 and 12.33% common equity Tier 1; it met the regulatory “well capitalized” requirements. Tangible book value per share was $12.38.
Material changes and notable items
- Horizon completed its $34.5 million Lafayette acquisition on September 1, issuing approximately 1.09 million shares and assuming $151.1 million in deposits. The acquisition’s initial purchase-price allocation remained provisional; $16.1 million was allocated to goodwill. Systems integration was reported completed on September 22.
- On October 17, after quarter-end, Horizon completed the approximately $95.1 million Wolverine acquisition. Wolverine had about $363.2 million in assets, $256.5 million in deposits and $308.1 million in net loans. Integration was scheduled for November; purchase accounting was incomplete.
- Growth in net interest income and margin reflected larger earning assets, higher loan yields and reduced funding costs. Management also attributed lower non-interest income to reduced mortgage-sale volume and fewer securities-sale gains.
- Merger-related expenses were $2.0 million in Q3 and $2.2 million for the first nine months. Acquisition purchase-accounting adjustments contributed $0.7 million to Q3 interest income and $2.6 million for the nine-month period.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management identified risks including economic and interest-rate changes, deposit outflows and mortgage activity, credit losses and collateral values, competition and technology, cybersecurity, regulatory or tax changes, liquidity, and acquisition integration and realization of expected savings. Management considered the loan-loss allowance appropriate but cautioned that future portfolio and economic assessments could require increases. Securities unrealized losses were considered temporary, with no individual security identified as other-than-temporarily impaired. Management did not expect ordinary-course litigation to materially adversely affect the company. Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Lafayette and Wolverine integration, provisional purchase accounting and expected cost savings proceed as planned.
- Whether loan growth and credit performance support the allowance, given higher nonperforming loans and increased commercial-market and agricultural loss allocations.
- Whether higher borrowings and reduced unused credit lines affect liquidity, funding costs or net interest margin.
- How much reported earnings growth depends on acquisition effects and purchase-accounting adjustments versus recurring operations; compare GAAP results with management’s non-GAAP measures.
- Whether mortgage-sale activity and fee income recover, and how interest-rate changes affect deposits, lending and securities values.