Horizon Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless otherwise noted, dollar amounts are in millions. Horizon is an Indiana-based bank holding company operating through Horizon Bank in Indiana and Michigan; it reports one commercial-banking segment. Comparisons are with 2017, while balance-sheet changes are generally versus December 31, 2017.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $33.8 | $27.9 | $100.7 | $80.6 |
| Net income | $13.1 | $8.2 | $40.0 | $25.5 |
| Diluted EPS | $0.34 | $0.24 | $1.04 | $0.75 |
| Net interest margin | 3.67% | 3.71% | 3.74% | 3.77% |
- Q3 interest income was $42.3 million and interest expense $8.5 million. Net interest income rose 21.1% year over year, reflecting larger earning-asset balances and higher asset yields, partly offset by higher funding costs.
- Q3 provision for loan losses was $1.2 million, versus $0.7 million; non-interest income was $8.7 million, up 8.3%; and non-interest expense was $25.6 million, up 4.5%. Nine-month provision was $2.4 million, non-interest income $25.9 million, and non-interest expense $76.4 million.
- Reported return on average assets was 1.26% for Q3 and 1.33% year to date; return on average equity was 10.87% and 11.43%, respectively. Management’s non-GAAP core diluted EPS was $0.32 for Q3 and $0.94 year to date, excluding specified items including acquisition purchase-accounting adjustments.
Financial position, liquidity and capital
- At September 30, total assets were $4.151 billion, up $186.3 million since year-end. Total loans were $2.957 billion, up $125.4 million; net loans were $2.940 billion. Consumer and residential mortgage lending drove much of loan growth.
- Total deposits were $3.129 billion, up $247.6 million since year-end. Borrowings declined to $477.7 million from $564.2 million; subordinated debentures were $37.8 million. Cash and due from banks was $69.7 million.
- For the first nine months, operating cash flow was $64.6 million, investing cash outflow $221.6 million, and financing cash inflow $150.2 million; cash and cash equivalents declined $6.7 million to $69.7 million.
- Management reported $405.1 million of unused credit lines and $600.5 million of unpledged investment securities. The Bank met regulatory “well-capitalized” requirements; its total risk-based capital ratio was 12.66% and common equity Tier 1 ratio 12.09%.
- Stockholders’ equity was $477.6 million, up from $457.1 million at year-end. Tangible book value was $9.04 per share. Dividends declared during the first nine months were $0.30 per share.
Material changes and notable items
- Compared with Q3 2017, net income increased 59.9% and diluted EPS increased 41.7%. Nine-month diluted EPS increased 38.7%. Management attributed earnings growth primarily to higher net interest income and the benefit of the lower federal corporate tax rate, partly offset by increased credit provision and operating expenses.
- Average interest-earning assets and loan income expanded, in part reflecting the 2017 Lafayette and Wolverine acquisitions. However, funding costs rose: Q3 rates paid on interest-bearing liabilities increased 45 basis points year over year, and the reported net interest margin contracted four basis points.
- Asset-quality indicators were mixed. Non-performing loans declined to $14.5 million from $16.4 million at year-end, while net charge-offs for the first nine months rose to $1.0 million from $0.6 million. The allowance was $17.8 million, or 0.60% of total loans; management cited indirect-loan growth, new-market lending and recession risk among reasons for higher provision.
- Available-for-sale securities had $16.5 million of net unrealized losses at quarter-end, contributing to accumulated other comprehensive loss of $13.0 million. Management attributed losses mainly to interest-rate changes and said no security was considered other-than-temporarily impaired.
- Other real estate owned and repossessed assets increased to $2.3 million from $0.8 million at year-end, partly because acquired bank-owned properties were reclassified and recorded at fair value. Q3 other losses included property write-downs and an additional accrual for a potential fiduciary-account loss; the filing does not provide a clear amount for each item.
- On October 29, 2018, after quarter-end, Horizon agreed to acquire Salin Bancshares for stock and cash. The parties anticipated closing in Q1 2019, subject to shareholder, regulatory and other approvals. Salin reported approximately $918.4 million of assets, $752.1 million of deposits and $595.7 million of loans at September 30.
Outlook, risks and contingencies
- The filing provides no specific earnings, loan-growth or margin guidance. Management described continued loan and deposit growth but identified interest-rate changes, deposit outflows, mortgage activity, economic conditions and credit performance as uncertainties.
- Disclosed risks include loan losses and collateral values, interest-rate and financial-market volatility, competition and technology, cybersecurity, regulation and tax changes, cost control, and integration and credit risks from acquisitions. Management stated there were no material changes to the risk factors in its 2017 Form 10-K.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The Bank’s interest-rate sensitivity was reported as not significantly changed from its 2017 Form 10-K analysis.
- The company early adopted a standard allowing certain tax effects to be reclassified from accumulated other comprehensive income to retained earnings, recording a $0.766 million adjustment. The upcoming expected-credit-loss standard’s impact remained undetermined; management was implementing related systems and methodologies.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further pressure on funding costs and net interest margin.
- Trends in indirect consumer-loan charge-offs, non-performing commercial loans, the allowance and acquired-loan credit discounts.
- The duration and potential capital or earnings effects of securities’ unrealized losses, and sensitivity to further rate changes.
- Salin transaction approvals, final consideration, integration costs and expected benefits; these are forward-looking and not assured.
- Potential fiduciary-account exposure and the valuation or sale of properties held in OREO.