Horizon Bancorp Inc. — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are in millions. Comparisons are with Q1 2013 for income and cash flow, and December 31, 2013 for balance-sheet movements.
Business context
Horizon is an Indiana-based bank holding company operating as a single commercial-banking segment, serving markets in Indiana and Michigan. Its services include commercial and retail banking, trust and agency services, and mortgage banking. The company completed its acquisition of SCB Bancorp and Summit Community Bank on April 3, 2014, after quarter-end.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior balance |
|---|---|---|
| Net income | $3.417 million | $5.311 million in Q1 2013 |
| Net income available to common shareholders | $3.386 million | $5.165 million in Q1 2013 |
| EPS | $0.39 basic; $0.38 diluted | $0.60 basic; $0.58 diluted in Q1 2013 |
| Net interest income | $13.272 million | $16.010 million in Q1 2013 |
| Net interest margin | 3.48% | 4.10% in Q1 2013 |
| Non-interest income | $5.522 million | $7.460 million in Q1 2013 |
| Non-interest expense | $14.514 million | $13.979 million in Q1 2013 |
| Operating cash flow | $1.821 million provided | $15.637 million provided in Q1 2013 |
| Total assets | $1,806.6 million | $1,758.3 million at December 31, 2013 |
| Loans, net of allowance | $1,084.7 million | $1,052.8 million at December 31, 2013 |
| Total deposits | $1,355.6 million | $1,291.5 million at December 31, 2013 |
| Borrowings | $236.0 million | $256.3 million at December 31, 2013 |
| Stockholders’ equity | $169.8 million | $164.5 million at December 31, 2013 |
| Cash and cash equivalents | $35.8 million | $31.7 million at December 31, 2013 |
Average yield on interest-earning assets was 4.29%, down from 4.95% a year earlier; the cost of interest-bearing liabilities was 0.97%, compared with 1.01%. The company reported no loan-loss provision for Q1 2014, versus $2.084 million in Q1 2013. The allowance for loan losses was $16.1 million, or 1.46% of loans, at March 31. Nonperforming loans were $17.6 million, down from $18.3 million at year-end and $23.7 million a year earlier.
Quarter-end liquidity included $317.1 million of unused credit lines. Horizon reported Bank capital ratios of 9.51% for Tier 1 capital to average assets and 14.12% for total capital to risk-weighted assets, stating these exceeded well-capitalized regulatory standards. No net cash flow from financing activities is characterized as operating liquidity; cash rose by $4.1 million during the quarter.
Material changes and management commentary
- Net income declined 35.7% year over year. Management attributed weaker earnings mainly to lower mortgage warehouse activity, reduced mortgage-sale gains and loan yields, and less accretion of acquired Heartland loan discounts.
- Net interest income fell $2.7 million; net interest margin decreased 62 basis points. Management said loan discount accretion and payoffs contributed to the decline. Excluding loan discount income, margin was 3.38% versus 3.62% in Q1 2013.
- Non-interest income fell $1.9 million, primarily because gain on mortgage loan sales declined $1.7 million and securities-sale gains declined $368,000. Mortgage loans originated for sale were $52.6 million, versus $89.5 million a year earlier.
- Non-interest expense rose $535,000, including acquisition-related costs. Management reported $311,000 of SCB transaction expenses; identified $96,000 of one-time data-processing fees and $169,000 of professional fees related to the acquisition. Excluding transaction expenses, management stated net income would have been $3.6 million, or $0.40 diluted EPS.
- Loans grew approximately $34.0 million during the quarter, including $23.4 million in commercial loans. Deposits increased $64.1 million; core deposits increased $67.7 million. Borrowings declined about $20.3 million as deposit growth outpaced loan growth.
- Other comprehensive income was $2.730 million, mainly reflecting unrealized gains on available-for-sale securities; accumulated other comprehensive income moved to $1.001 million from a $1.729 million loss at year-end.
Outlook, risks, contingencies and unusual items
- No specific earnings or financial guidance is provided. Management said it intended to continue participating in the Small Business Lending Fund; preferred-stock dividends were approximately $31,000 for Q1, and redemption would be considered if the cost exceeded other capital sources, subject to regulatory approval.
- The SCB acquisition consideration was approximately $18.9 million, comprising 570,820 Horizon shares and cash under the stated exchange terms. Summit Community Bank reported approximately $154.1 million in assets, $119.3 million in deposits and $130.9 million in net loans; the filing’s note labels these figures “as of March 31, 2013.”
- Management identified risks including economic and interest-rate changes, credit losses and collateral values, liquidity availability, competition, regulation and capital requirements, cost control, and execution and integration risks from acquisitions.
- Available-for-sale securities had $5.885 million of gross unrealized losses at March 31. Management considered the declines temporary, citing interest-rate volatility rather than credit deterioration, and reported no security as other-than-temporarily impaired.
- Legal proceedings were described as incidental to the business; management did not expect them to materially adversely affect financial position or results. The filing reported no material changes to the risk factors previously disclosed in the company’s 2012 Form 10-K.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. The company said its interest-rate sensitivity had not changed significantly since its 2013 Form 10-K.
Important facts for investors to verify
- Whether acquisition-related expenses and post-close integration costs affect subsequent-quarter earnings, and how the SCB acquisition contributes to assets, deposits, loans and capital.
- Whether net interest margin stabilizes after the decline in asset yields and acquired-loan discount accretion.
- Whether mortgage origination and mortgage-sale gains recover, given the sharp reduction in volume and fee income.
- Whether credit quality and the allowance remain adequate as loans grow; track nonperforming loans, criticized loans, charge-offs and acquired-credit-impaired assets.
- Whether the reported liquidity and capital position remain strong after acquisition funding and integration, and whether the preferred stock is ultimately redeemed.