Horizon Bancorp Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Horizon is a commercial bank holding company operating in Indiana and Michigan. It completed its acquisition of Summit on April 3, 2014; the acquisition materially increased the size of the balance sheet and affects year-over-year comparisons. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
- Q2 earnings: Net income was $4.8 million, down 15.7% from $5.7 million. Net income available to common shareholders was $4.7 million; diluted EPS was $0.50 versus $0.62.
- First-half earnings: Net income was $8.2 million, down 25.3% from $11.0 million. Diluted EPS was $0.88 versus $1.20.
- Net interest income and margin: Q2 net interest income increased 1.3% to $16.8 million. Reported net interest margin was 3.78%, down from 4.21% a year earlier; excluding acquisition-related purchase-accounting income, the company-reported margin was 3.52% versus 3.61%. First-half net interest income fell to $30.1 million from $32.6 million, and reported margin declined to 3.62% from 4.17% (3.43% versus 3.66% excluding acquisition effects).
- Other income and expenses: Non-interest income was $6.6 million in Q2, down 3.2%, and $12.1 million in the first half, down 15.1%. First-half mortgage-loan sale gains fell to $3.9 million from $5.9 million, alongside lower mortgage originations; 2013 also included a $0.4 million securities-sale gain. Non-interest expense rose 10.9% in Q2 to $16.4 million and 7.5% in the first half to $30.9 million. Acquisition costs were approximately $1.2 million in the first half.
- Balance sheet at June 30: Total assets were $2.073 billion, up $315.0 million from year-end 2013. Net loans were $1.306 billion, up $253.0 million; deposits were $1.499 billion, up $207.6 million. Stockholders’ equity was $187.3 million, versus $164.5 million at year-end.
- Funding and liquidity: Borrowings were $340.2 million, up $83.9 million from year-end; short-term borrowings were $110.0 million versus $41.0 million. Cash and cash equivalents increased $19.1 million to $50.8 million during the first half. The Bank reported $268.9 million of unused credit lines at June 30, down from $311.8 million at year-end.
- Cash flow, first half: Operating activities provided $5.9 million, compared with $21.2 million in 2013. Investing activities used $138.1 million, versus providing $41.5 million; financing activities provided $151.3 million, versus using $61.7 million. Loan growth was a major use of investing cash, funded in part by deposit growth and additional borrowing.
- Asset quality and reserves: Non-performing loans were $18.7 million, or 1.41% of total loans, compared with $18.3 million and 1.70% at year-end, and $25.6 million and 2.27% a year earlier. The allowance for loan losses was $15.7 million, or 1.18% of loans, versus $16.0 million and 1.49% at year-end. First-half provision was $0.3 million versus $2.8 million. Other real estate owned was $1.2 million.
- Capital and shareholder returns: Management said Horizon and the Bank exceeded regulatory “well capitalized” thresholds; the filing excerpt does not provide the specific regulatory capital ratios. Common dividends declared totaled $0.24 per share in the first half. On July 18, the quarterly dividend was increased from $0.11 to $0.13 per share.
Material changes and unusual items
- The Summit acquisition was completed April 3 for an estimated purchase price of $19.9 million, including cash, issued shares and retirement of holding-company debt. Horizon issued 570,820 shares. Acquired assets included $121.0 million of deposits and approximately $124.1 million of loans; preliminary purchase accounting included $8.3 million of goodwill and $0.8 million of core deposit intangible. Management cited potential deposit growth and cost savings from economies of scale, but integration and savings remain execution risks.
- Horizon reclassified securities with $167.1 million fair value from available-for-sale to held-to-maturity in April, citing intent and ability to hold them to maturity. The filing reports $2.6 million of gross unrealized losses on securities at June 30 and says management considered the declines temporary; no security was deemed other-than-temporarily impaired.
- Q2 and first-half earnings were pressured by lower mortgage-sale income, reduced loan yields and acquisition-related expenses. Lower loan-loss provisions partly offset these effects. The filing attributes the year-over-year decline in net interest margin in part to lower acquisition-related purchase-accounting accretion.
Outlook, risks and contingencies
- The filing gives no quantified earnings or margin guidance. Management expected acquisition-related efficiencies but did not quantify timing or savings.
- Key stated risks include economic conditions, interest-rate movements, credit losses and collateral values, liquidity availability, regulatory and capital-rule changes, competition, cost control, fair-value estimates, and the integration and credit quality of acquired loans.
- Management stated that legal proceedings incidental to the business were not expected to have a material adverse effect. It reported no material change in previously disclosed risk factors, and no material change in internal control over financial reporting during the quarter.
- The company’s forward-looking statements are subject to risks and uncertainties; actual results may differ. Management reported no significant change in interest-rate sensitivity from its 2013 Form 10-K.
Important facts for investors to verify
- Track whether Summit integration delivers the expected cost savings and deposit growth, and separate recurring results from the reported $1.2 million of first-half acquisition costs.
- Assess whether loan growth and funding remain sustainable as borrowings rose faster than deposits; monitor unused credit lines and the mix of short-term funding.
- Review loan quality, including non-performing loans, TDRs, acquired Summit and Heartland credits, charge-offs, and allowance coverage as the portfolio expands.
- Monitor net interest margin and purchase-accounting accretion, as well as mortgage origination volumes and gains on loan sales.
- Confirm regulatory capital ratios and the effect of the Basel III phase-in; specific ratios are not stated in the supplied filing text.
- Reconcile share counts by date: the filing reports 9,201,786 common shares outstanding at June 30 and 9,210,786 at August 11, 2014.