Horizon Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Horizon is an Indiana bank holding company serving northwestern Indiana and southwestern Michigan. Unless otherwise noted, financial amounts below are in millions of dollars; the filing’s financial statements are unaudited.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Interest income | $16.0 | $17.9 | $47.2 | $50.8 |
| Net interest income | $12.0 | $12.6 | $34.5 | $34.5 |
| Provision for loan losses | $1.6 | $2.7 | $4.4 | $8.9 |
| Noninterest income | $6.5 | $5.6 | $15.3 | $14.9 |
| Noninterest expense | $12.3 | $11.3 | $33.1 | $31.0 |
| Net income | $3.4 | $3.3 | $9.3 | $7.6 |
| Diluted EPS | $0.80 | $0.88 | $2.37 | $1.96 |
- Q3 net income increased 4.2%, while diluted EPS declined because preferred-stock discount accretion reduced income available to common shareholders. Nine-month net income rose 22.3%.
- Net interest margin was 3.76% in Q3 versus 3.84% a year earlier, and 3.67% for the first nine months versus 3.72%. Management attributed pressure to asset yields falling faster than funding costs.
- At September 30, total assets were $1.491 billion, loans $925.8 million gross ($906.7 million net), and deposits $989.7 million. Since December 31, 2010, assets increased $89.9 million, gross loans increased $43.0 million, and deposits increased $4.3 million.
- Borrowings rose to $336.1 million from $260.7 million at year-end; short-term borrowings were $128.1 million versus $31.5 million. Management linked the increase primarily to mortgage warehouse lending and its funding strategy.
- Cash and cash equivalents were $18.5 million, up $2.8 million year to date. Nine-month operating cash flow was $14.9 million, investing cash outflow $83.2 million, and financing cash inflow $71.1 million. Unused credit lines were approximately $211.8 million.
- Stockholders’ equity was $118.7 million, compared with $112.3 million at year-end. The reported Tier 1 capital-to-risk-weighted-assets ratio was 12.37%; management said capital ratios exceeded well-capitalized regulatory standards.
Material changes and credit quality
- Asset growth reflected higher securities balances and loan growth, especially commercial and mortgage warehouse lending. Consumer loans declined modestly.
- The allowance for loan losses was $19.1 million, or 2.04% of loans, versus 2.11% at year-end. Nine-month net charge-offs fell to $4.4 million from $6.9 million; provision expense fell to $4.4 million from $8.9 million.
- Nonperforming loans were $23.6 million, or 2.52% of loans, up from $20.6 million at June 30 and $21.7 million at September 30, 2010. Management cited two newly nonperforming commercial loans totaling $2.1 million secured by retail income property. Nonaccrual loans were $17.8 million.
- Loans classified as troubled debt restructurings totaled $5.7 million; $4.0 million were performing under modified terms. Other real estate owned was $3.6 million at quarter-end.
- Q3 noninterest income included a $1.1 million securities-sale gain, a $453,000 officer life-insurance death benefit, and $2.1 million in mortgage-sale gains. Securities gains partly offset a $798,000 FHLB prepayment penalty recorded in other losses; other losses also included a $210,000 lawsuit settlement.
- On August 25, Horizon issued $12.5 million of Series B preferred stock to the U.S. Treasury under the Small Business Lending Fund (SBLF) and redeemed its remaining $18.75 million of TARP Series A preferred stock, using the issuance proceeds and other available funds. Recognition of the remaining TARP preferred-stock discount reduced Q3 income available to common shareholders by $449,000, or $0.13 per diluted share; the filing describes this as a one-time effect.
Outlook, commentary, and risks
The filing gives no quantified earnings or financial guidance. Management did not expect a significant near-term rise in interest rates, while anticipating rates would eventually rise from historically low levels. It noted that low rates had compressed net interest margin. Management described local economic conditions as challenging, with high unemployment and weakness in steel, recreational vehicles, and housing affecting borrowers and credit quality.
Key disclosed risks include further deterioration in local economic conditions and collateral values; loan losses exceeding the allowance; interest-rate and margin changes; reliance on mortgage and warehouse lending and secondary-market loan sales; access to funding and capital; and regulatory, operational, cyber, and competitive risks. Management considered the allowance adequate at quarter-end but cautioned that future economic conditions and portfolio reviews could require increases.
- Horizon increased its quarterly common dividend to $0.18 per share. SBLF terms restrict certain dividends and repurchases if preferred dividends are missed or specified capital conditions are not met.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It did not expect the newly issued goodwill-impairment guidance to affect financial condition or results.
Important facts for investors to verify
- Whether the rise in nonperforming commercial loans and nonperforming assets continues, and how the allowance compares with subsequent charge-offs and criticized loans.
- Whether loan growth—particularly mortgage warehouse lending—can be funded sustainably without further reliance on short-term borrowings, and how available credit lines change.
- Whether net interest margin stabilizes as asset yields and funding costs reprice, including the sensitivity of earnings to interest-rate changes.
- How much recurring earnings depend on securities gains, mortgage-sale income, insurance benefits, and other unusual or nonrecurring items.
- The ongoing cost and restrictions associated with SBLF preferred stock, including dividend-rate terms, and the effect on common dividends and capital.