Horizon Bancorp Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Dollar figures below are in millions unless otherwise noted. Horizon is an Indiana bank holding company operating primarily in Indiana and Michigan; its reported business is commercial banking.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $2,627.9 | $2,652.4 at Dec. 31, 2015 |
| Total loans, before allowance | $1,720.1 | $1,749.1 at Dec. 31, 2015 |
| Total deposits | $1,878.5 | $1,880.2 at Dec. 31, 2015 |
| Borrowings / subordinated debentures | $430.5 / $32.8 | $449.3 / $32.8 at Dec. 31, 2015 |
| Net interest income | $19.8 | $16.9 in Q1 2015 |
| Net interest margin | 3.45%; core margin excluding acquisition purchase-accounting adjustments was 3.36% | 3.70% reported and 3.47% core in Q1 2015 |
| Net income / common net income | $5.4 / $5.3 | $5.4 / $5.3 in Q1 2015 |
| Diluted EPS | $0.44 | $0.55 in Q1 2015 |
| Operating cash flow | $9.4 | $11.2 in Q1 2015 |
| Cash and cash equivalents | $47.6 | $48.7 at Dec. 31, 2015 |
| Stockholders’ equity | $261.4 | $266.8 at Dec. 31, 2015 |
Interest income was $23.5 million and interest expense $3.8 million. The loan-loss provision was $0.5 million. Non-interest income was $7.9 million and non-interest expense $19.7 million; income before tax was $7.4 million. Comprehensive income was $8.8 million, including $3.4 million of other comprehensive income, principally securities valuation gains.
The allowance for loan losses was $14.2 million, or 0.83% of loans. Net charge-offs were $0.8 million. Non-performing loans were $15.0 million, 0.87% of loans, versus $16.7 million and 0.95% at year-end. Other real estate owned was $3.8 million, up from $3.2 million. The Bank had $257.5 million of unused credit lines. It met well-capitalized regulatory standards: the Bank’s reported ratios included total risk-based capital of 13.10%, Tier 1 risk-based capital of 12.33%, common equity Tier 1 of 12.33%, and leverage of 8.98% in the regulatory table.
Material changes versus comparable periods
- Net interest income rose 17.1% year over year, largely reflecting higher average earning assets following acquisitions; reported net interest margin fell 25 basis points to 3.45%. Core margin also declined, to 3.36% from 3.47%.
- Non-interest income increased 11.3% to $7.9 million, with higher deposit service charges, interchange fees, fiduciary income, and mortgage servicing income. Mortgage loan sale gains declined to $2.1 million from $2.4 million as loan-sale volume fell.
- Non-interest expense increased 22.9% to $19.7 million, principally from higher staffing, occupancy, professional fees, and growth-related costs. Expenses included $0.6 million of costs for pending acquisitions.
- GAAP net income was nearly unchanged, but diluted EPS declined as the weighted-average share count increased following the Peoples acquisition. On the company’s non-GAAP basis—excluding merger costs, securities gains, the prior-year life-insurance death benefit, and acquisition purchase-accounting adjustments—net income was $5.4 million versus $4.6 million in Q1 2015; diluted EPS was $0.45 versus $0.47.
- Total assets declined $24.5 million from year-end, mainly due to lower loans, partly offset by securities growth. Loans fell $29.1 million on the balance sheet; management attributed the reduction to seasonal agricultural paydowns, loan payoffs, and lower mortgage warehouse activity. Deposits were nearly flat and borrowings decreased $18.8 million.
Outlook, commentary, risks, and unusual items
- No numerical earnings or financial guidance is provided. Management said core deposits are the principal liquidity source and described short-term borrowings as part of its funding strategy.
- Horizon agreed to acquire Kosciusko Financial, with an implied value of about $22.5 million and completion anticipated in Q2 2016, subject to shareholder approval and other conditions. It also agreed to acquire LaPorte Bancorp, with an implied value of about $94.1 million and completion anticipated in Q3 2016, subject to approvals and closing conditions.
- Horizon redeemed all $12.5 million of its Treasury-held SBLF preferred stock on February 1, 2016, using holding-company cash, ending its participation in the program.
- Management cited risks including economic conditions, interest-rate and deposit sensitivity, credit losses and collateral values, liquidity, competition, regulation, cybersecurity, cost control, and acquisition integration and realization of expected savings. It reported no significant change in interest-rate sensitivity from its 2015 Form 10-K.
- Management considered the loan-loss allowance appropriate but cautioned that future portfolio assessments and economic conditions could require increases. It judged securities’ unrealized losses to be temporary and reported no other-than-temporary impairment at March 31.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Track whether the pending Kosciusko and LaPorte transactions close as anticipated, their integration costs, and whether expected cost savings materialize.
- Monitor core net interest margin, asset yields, funding costs, and deposit mix; reported and core margins both declined year over year.
- Review credit trends, including non-performing and substandard loans, charge-offs, the allowance, acquired-loan discounts, and rising OREO.
- Assess liquidity and reliance on borrowings alongside the reported unused credit lines and deposit trends.
- Reconcile the Bank leverage ratio: the regulatory capital table reports 8.98%, while the MD&A highlights 9.03%. The filing does not explain the difference.
- Interpret adjusted earnings alongside GAAP results: the company’s non-GAAP adjustments exclude several items, and diluted EPS remains affected by the larger post-acquisition share count.