Horizon Bancorp, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013 unless noted. Dollar amounts are in millions except per-share data. Horizon is an Indiana bank holding company operating primarily in commercial banking across Indiana and Michigan. Its April 3, 2014 acquisition of Summit Community Bank materially expanded the business.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $16.4 | $14.7 | $46.5 | $47.3 |
| Non-interest income | $7.4 | $5.9 | $19.5 | $20.2 |
| Net income | $5.0 | $4.8 | $13.2 | $15.8 |
| Diluted EPS | $0.51 | $0.52 | $1.39 | $1.72 |
| Net interest margin | 3.59% | 3.78% | 3.62% | 4.06% |
- Q3 interest income rose to $19.9 million from $18.0 million, while interest expense increased to $3.5 million from $3.4 million. Q3 net income increased 3.6%, but diluted EPS declined as the Summit issuance increased shares outstanding.
- Nine-month net income fell 16.5%. Management cited lower loan yields and acquisition-related purchase-accounting accretion, lower mortgage-sale gains, increased operating expenses and additional shares issued in the acquisition. Nine-month mortgage-sale gains were $6.1 million versus $7.6 million.
- Reported margins declined year over year. Excluding acquisition-related purchase-accounting income, management reported margins of 3.50% for Q3 2014 versus 3.52% in Q3 2013, and 3.47% for the first nine months versus 3.61% in 2013.
- Total assets were $2.04 billion; net loans were $1.33 billion, deposits $1.45 billion, borrowings $350.1 million, subordinated debentures $32.6 million, and stockholders’ equity $189.8 million. Total assets increased $278.8 million from year-end, largely reflecting Summit and loan growth.
- Total loans grew $275.1 million from year-end, including $124.0 million acquired with Summit and $150.0 million of organic growth, according to management. Deposits grew $158.1 million, including $121.0 million acquired; borrowings rose $93.8 million as loan growth exceeded deposit growth.
- Cash and cash equivalents increased $5.6 million to $37.3 million. For the first nine months, operating cash flow was $19.1 million (down from $40.0 million); investing used $124.1 million (versus $41.8 million provided), while financing provided $110.7 million (versus $71.9 million used).
- The allowance for loan losses was $16.2 million, or 1.20% of total loans; management reported 1.32% excluding loans with credit-related purchase-accounting adjustments. Nine-month provision was $2.1 million versus $2.9 million. Q3 provision rose to $1.7 million from $0.1 million, partly due to a $1.0 million charge-off on one commercial credit.
- Liquidity sources include core deposits, loan repayments, securities sales and maturities, mortgage-loan sales, and borrowing facilities. Unused credit lines were approximately $284 million. Management said the company and bank exceeded regulatory “well capitalized” ratios; specific ratios are not stated in the supplied filing text.
Material changes and unusual items
- Summit was acquired on April 3, 2014 for consideration valued at approximately $18.9 million, excluding retirement of Summit debt. The preliminary purchase-price allocation included $8.3 million of goodwill and $0.8 million of core deposit intangible. Horizon recorded approximately $1.3 million of Summit-related costs in the first nine months, including $124,000 in Q3.
- Horizon transferred securities with fair value of $167.1 million from available-for-sale to held-to-maturity in April. It also sold securities and recognized a $988,000 gain in 2014, citing an opportunity to add gains to capital and help fund loan growth. Total investment securities were $495.9 million at September 30, compared with $518.5 million at year-end.
- Non-interest expense rose 9.2% in Q3 and $3.4 million for the first nine months. Drivers included the larger workforce and Summit-related occupancy, data-processing and advisory costs, as well as growth and expansion spending.
- Management reported non-performing loans equal to 1.47% of total loans, versus 1.70% at year-end 2013 and 2.07% at September 2013. It also reported $19.8 million of non-performing loans at September 30. The detailed note table reports $14.4 million of total non-performing loans under its presented categories; investors should verify the definitions and reconciliation.
- Common dividends declared were $0.37 per share for the first nine months, versus $0.31 a year earlier. Horizon said it intended to continue participating in the Small Business Lending Fund and may reserve cash to redeem the preferred stock if its cost exceeds other capital sources, subject to regulatory approval.
Outlook, risks and contingencies
- No specific earnings, revenue, loan-growth or margin guidance is provided. Management anticipated that Summit could expand deposits and create cost savings through economies of scale; realization depends on integration and expected savings.
- Key disclosed risks include economic and interest-rate changes, credit losses and collateral values, liquidity availability, competition, regulatory and capital-rule changes, cost control, and acquisition integration and acquired-loan quality. Management cautioned that actual results may differ materially from forward-looking statements.
- Management considered securities’ unrealized losses temporary and reported no other-than-temporary impairment at September 30. It stated the securities were not expected to be sold before recovery or maturity, but adverse impairment determinations could affect earnings.
- Horizon and subsidiaries were involved in ordinary-course legal proceedings; management did not expect a material adverse effect. The filing reported no material change to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $19.8 million non-performing-loan figure and 1.47% ratio in MD&A with the $14.4 million total in the detailed loan table, including treatment of troubled debt restructurings.
- Track post-acquisition credit quality, loan-loss provision and charge-offs, particularly commercial credits and acquired Summit loans.
- Monitor whether deposit growth catches up with loan growth and whether increased borrowings remain manageable; verify available liquidity and funding costs.
- Assess underlying earnings trends excluding the $988,000 securities gain, Summit expenses and acquisition-related purchase-accounting accretion; compare margins and EPS on consistent bases.
- Follow integration costs and realization of expected Summit cost savings, and review capital ratios and the company’s plans for its preferred-stock obligations.