Horizon Bancorp Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014; balance-sheet comparisons are to December 31, 2014. Horizon is an Indiana-based commercial bank holding company serving Indiana and Michigan. Unless otherwise noted, financial amounts below are in millions of dollars. The comparison is affected by the April 2014 Summit acquisition: Q1 2015 includes Summit, while Q1 2014 preceded the acquisition.
Financial performance and condition
- Earnings: Net income was $5.36 million, up 56.8% from $3.42 million. Net income available to common shareholders was $5.33 million. Basic EPS was $0.58 versus $0.39; diluted EPS was $0.55 versus $0.38.
- Income and margins: Interest income was $20.09 million versus $16.47 million; interest expense was $3.21 million versus $3.20 million. Net interest income rose 27.2% to $16.89 million. Reported net interest margin increased to 3.70% from 3.48%; excluding acquisition-related purchase-accounting income, core margin was 3.47% versus 3.38%. Non-interest income rose 28.0% to $7.07 million.
- Expenses and credit provision: Non-interest expense increased 10.7% to $16.07 million, including higher compensation, loan-related costs and expansion costs. Provision for loan losses was $0.61 million, compared with none in Q1 2014. Income before tax was $7.27 million and income tax expense was $1.91 million.
- Cash flow: Operating activities provided $11.18 million, versus $1.82 million in Q1 2014. Investing used $86.68 million, principally reflecting $81.52 million of net loan growth. Financing provided $70.70 million, including $89.26 million of net borrowings, partly offset by a $17.22 million decrease in deposits. Cash and cash equivalents declined $4.80 million to $38.68 million.
- Balance sheet and funding: Total assets were $2.154 billion, up $77.0 million from year-end. Net loans grew $82.7 million to $1.445 billion; deposits declined $17.2 million to $1.465 billion. Borrowings rose $89.2 million to $440.4 million, including $166.0 million of short-term borrowings versus $95.0 million at year-end. Shareholders’ equity increased to $199.5 million.
- Credit quality: The allowance for loan losses was $16.63 million, or 1.13% of loans, versus $16.50 million and 1.19% at year-end; management cited loan growth and improving classified and non-performing loan trends. Non-performing loans were $22.38 million, essentially unchanged from year-end. Past-due loans over 90 days still accruing were $19,000. Other real estate owned fell to $0.75 million from $1.2 million at year-end.
- Capital and liquidity: The Bank met regulatory “well capitalized” requirements. At March 31, its total risk-based capital ratio was 12.35%, Tier 1 risk-based ratio 11.30%, common equity Tier 1 ratio 11.30%, and leverage ratio 8.77%. It had $252.9 million of unused credit lines, compared with $301.4 million at year-end.
Material changes and notable items
- Loan growth was 24.3% annualized, including mortgage warehouse growth of 156.2% annualized; excluding warehouse loans, growth was 10.7% annualized. Management attributed growth to increased calling efforts and market expansion.
- Non-interest income growth reflected higher mortgage loan sale gains ($2.38 million versus $1.41 million), fiduciary income and interchange fees. Q1 2015 also included a $145,000 officer life-insurance death benefit and a $124,000 securities-sale gain. Q1 2014 included a nonrecurring gain that reduced the year-over-year comparison in other income.
- Reported margin benefited from $1.08 million of acquisition-related purchase-accounting interest income, versus $0.39 million in Q1 2014. Compensation and other expenses increased with business growth; the filing identifies approximately $146,000 of one-time transaction-related costs in Q1 2015.
- Horizon announced an agreement to acquire Peoples Bancorp for 0.95 Horizon shares and $9.75 cash per Peoples share; estimated transaction value was $73.1 million. Completion was anticipated in Q3 2015, subject to shareholder, regulatory and other approvals. Peoples reported year-end 2014 assets of approximately $486.6 million, deposits of $368.7 million and loans of $235.1 million.
- Horizon paid a $0.14-per-share common dividend in Q1 2015, up from $0.11 in Q1 2014. It also reported a $31,000 preferred dividend for the quarter and intended to retain the Small Business Lending Fund preferred stock for the time being.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said it expected to complete the Peoples transaction in Q3 2015, subject to closing conditions, and believed Horizon and the Bank would meet fully phased-in Basel III capital requirements. Management described the allowance as appropriate but cautioned that future economic conditions and loan reviews could require increases. Interest-rate changes, mortgage volumes and prepayments, credit losses and collateral values, liquidity, competition, regulation, cybersecurity, expense control, and acquisition execution and integration are among the cited risks. Management reported no significant change in interest-rate sensitivity from the 2014 Form 10-K. Securities losses were considered temporary; management said it intended and was able to hold the affected securities until recovery or maturity. Legal proceedings were described as routine, with no expected material adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of earnings and the reported 3.70% margin depends on acquisition-related purchase-accounting accretion, and whether core margin trends continue.
- Whether loan growth—especially mortgage warehouse lending—can be funded without sustained increases in short-term borrowings, and how deposits and available credit lines develop.
- Whether credit quality and the allowance remain adequate as the loan portfolio expands, including acquired loans, troubled debt restructurings and commercial real estate exposures.
- Whether the Peoples merger receives required approvals, closes on anticipated terms and timing, and delivers expected integration benefits without unanticipated credit or operating costs.
- How recurring operating costs, mortgage-sale income and other nonrecurring items affect sustainable earnings and dividend capacity.