Horizon Bancorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Horizon is an Indiana-based commercial bank holding company operating in Indiana and Michigan.
Financial performance and condition
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior date |
|---|---|---|
| Interest income | $21.1 in Q2; $41.2 in first half | $20.1 and $36.6, respectively, in 2014 |
| Net interest income | $17.9 in Q2; $34.7 in first half | $16.8 and $30.1, respectively, in 2014 |
| Net interest margin | 3.67% in Q2; 3.68% in first half | 3.78% and 3.62%, respectively, in 2014 |
| Net income | $4.7 in Q2; $10.1 in first half | $4.8 and $8.2, respectively, in 2014 |
| Diluted EPS | $0.49 in Q2; $1.04 in first half | $0.50 and $0.88, respectively, in 2014 |
| Non-interest income / expense | $7.2 / $16.7 in Q2; $14.3 / $32.7 in first half | First-half income and expense were $12.1 and $30.9 in 2014 |
| Total assets | $2,219.3 | $2,076.9 at Dec. 31, 2014 |
| Total loans, gross / net | $1,519.3 / $1,502.9 | $1,378.6 / $1,362.1 at Dec. 31, 2014 |
| Deposits | $1,584.7 | $1,482.3 at Dec. 31, 2014 |
| Borrowings / subordinated debentures | $385.2 / $32.7 | $351.2 / $32.6 at Dec. 31, 2014 |
| Cash and cash equivalents | $43.9 at June 30 | $43.5 at Dec. 31, 2014 |
| Stockholders’ equity | $202.1 | $194.4 at Dec. 31, 2014 |
For the six months ended June 30, operating cash flow was $15.9 million, investing cash outflow was $149.7 million, and financing cash inflow was $134.2 million. Cash and cash equivalents increased $0.4 million over the period. The Bank reported $361.7 million of unused credit lines at June 30, compared with $301.4 million at year-end.
The allowance for loan losses was $16.4 million, or 1.08% of total loans, versus $16.5 million, or 1.19%, at year-end. Non-performing loans were $23.1 million, up from $22.4 million at year-end; other real estate owned fell to $0.5 million from $1.2 million. The Bank was reported well capitalized: its June 30 total risk-based capital ratio was 11.76%, common equity Tier 1 ratio 10.76%, and Tier 1 leverage ratio 8.24%.
Changes versus prior comparable periods
- Q2 net income declined 1.0% year over year, while first-half net income increased 23.1%. First-half diluted EPS rose to $1.04 from $0.88.
- First-half net interest income increased $4.7 million, supported by loan growth and acquisition-related purchase-accounting accretion. Reported Q2 margin fell 11 basis points year over year; first-half margin rose 6 basis points.
- First-half non-interest income increased $2.1 million, including higher mortgage-loan sale gains, fiduciary income and interchange fees. Non-interest expense rose $1.8 million, partly reflecting growth-related staffing and loan activity.
- Total loans grew $142.3 million from year-end; mortgage warehouse loans increased $66.8 million. Deposits grew $102.4 million, so borrowings also increased as lending growth exceeded deposit growth.
- Q2 provision for loan losses was $1.9 million versus $0.3 million a year earlier. First-half net charge-offs were $2.6 million versus $0.7 million in 2014.
Outlook, commentary, risks and unusual items
- Horizon did not provide specific forward earnings or financial guidance. Management said core net interest margin, excluding acquisition-related purchase-accounting adjustments, increased 4 basis points from the prior quarter and 5 basis points for the first half versus 2014.
- Management attributed the higher Q2 provision chiefly to a $1.3 million charge-off of a legacy commercial workout loan, following borrower payment difficulties and a decline in collateral value. It cited continued loan growth and improving credit trends, but cautioned that future economic or portfolio developments could require higher reserves.
- On July 1, 2015, after the reporting date, Horizon completed its acquisition of Peoples Bancorp for stated consideration of approximately $78.1 million. Peoples had approximately $462.7 million in assets, $350.6 million in deposits and $226.6 million in net loans. The acquisition was not included in June 30 results; pro forma combined assets were estimated at approximately $2.7 billion. Purchase accounting was incomplete.
- First-half results included $0.124 million gain on securities sales and a $0.145 million bank-owned life insurance death benefit. Management’s non-GAAP presentation also excludes merger expenses and acquisition-related purchase-accounting accretion; these adjustments should not be confused with GAAP results.
- Key disclosed risks include economic and interest-rate changes, mortgage volume and prepayments, credit losses and collateral values, liquidity, competition, regulation, cybersecurity, cost control, and acquisition integration and acquired-loan quality. Management reported no material change in previously disclosed risk factors, no material expected adverse effect from ordinary-course litigation, and effective disclosure controls.
- Management considered unrealized securities losses temporary and reported no individual security impairment deemed other-than-temporary at June 30. It also stated that interest-rate sensitivity had not changed significantly from the 2014 Form 10-K.
Most important facts for investors to verify
- Whether post-quarter Peoples acquisition integration, final purchase accounting and realized synergies match management’s expectations.
- Whether loan and deposit growth can be sustained without greater reliance on borrowings or pressure on funding costs and margins.
- Credit trends behind higher charge-offs and non-performing loans, including reserve adequacy and the performance of acquired loans.
- How much future earnings depend on mortgage origination and sale activity, acquisition accretion, and other non-recurring items.
- Capital and liquidity measures after the Peoples acquisition, including the resulting impact on regulatory ratios and funding needs.