Horizon Bancorp Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unless stated otherwise, dollar amounts are in millions. Horizon is an Indiana bank holding company operating through Horizon Bank in Indiana and southwestern Michigan. The July 2012 Heartland acquisition affects year-over-year comparability.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $16.6 | $13.0 | $32.6 | $26.2 |
| Provision for loan losses | $0.7 | $0.2 | $2.8 | $0.8 |
| Non-interest income | $6.8 | $6.6 | $14.3 | $11.7 |
| Non-interest expense | $14.8 | $12.2 | $28.8 | $23.3 |
| Net income | $5.7 | $4.9 | $11.0 | $9.5 |
| Diluted EPS | $0.62 | $0.62 | $1.20 | $1.21 |
| Net interest margin | 4.21% | 3.79% | 4.17% | 3.84% |
- Net income increased 15.4% in Q2 and 15.3% in the first half. Management reported record quarterly and first-half net income. Basic EPS was $0.65 for Q2 and $1.25 for the first half, unchanged year over year.
- Higher interest income reflected loan growth and about $2.4 million of Q2 and $4.3 million of first-half interest income from accretion of Heartland loan discounts, including loans paid off before maturity. Excluding this accretion, reported net interest margin would have been 3.61% for Q2 and 3.66% for the first half.
- At June 30, total assets were $1.786 billion, down $62.3 million from year-end 2012; net loans were $1.099 billion, down $73.7 million. Mortgage warehouse loans fell $96.5 million, partly offset by $41.8 million growth in commercial loans. Commercial loans reached $502.2 million.
- Deposits were $1.297 billion, up $3.1 million from year-end. Borrowings were $282.8 million, down $62.9 million; subordinated debentures were $32.4 million. Stockholders’ equity was $160.2 million and book value per common share was $17.14.
- Six-month cash flows: $21.2 million provided by operations, $41.5 million provided by investing activities, and $61.7 million used in financing. Cash and cash equivalents increased $1.0 million to $31.7 million. The Bank reported $346.5 million of unused credit lines.
- Q2 return on average assets was 1.29% and return on average common equity was 14.67%; first-half figures were 1.25% and 14.31%, respectively.
Material changes and credit quality
- Year-over-year net interest income benefited from larger average earning assets, Heartland-related loan discount accretion, and lower funding costs. Average interest-earning asset yield rose to 5.05% in Q2 from 4.79%; interest-bearing liability costs declined to 1.00% from 1.15%.
- First-half non-interest income rose 22.3%, mainly from deposit service charges, interchange fees, mortgage servicing income, and a $0.4 million securities-sale gain. Non-interest expense increased 23.3%, including higher compensation, occupancy, loan origination/workout costs, and growth-related expenses.
- The allowance for loan losses was $18.9 million, or 1.67% of loans, versus $18.3 million and 1.52% at year-end. First-half provision was $2.8 million, including $1.5 million of additional provision for Heartland loan credit losses exceeding acquisition discounts. Net charge-offs were $2.2 million.
- Non-performing loans were $25.6 million, or 2.27% of loans, versus $23.8 million and 1.97% at year-end. Nonaccrual loans were $13.9 million; non-performing TDRs were $6.6 million. Management attributed elevated problem loans to weak local economic conditions and the Heartland acquisition.
- Available-for-sale securities had $5.9 million of gross unrealized losses at June 30, compared with $0.2 million at year-end. Accumulated other comprehensive income fell from $9.1 million to $1.2 million; first-half other comprehensive loss was $7.9 million, principally from securities valuation changes. Management attributed losses to interest-rate volatility, considered them temporary, and reported no other-than-temporary impairment.
Outlook, risks, and other items
- The filing provides no formal earnings or revenue guidance. Management cited commercial loan growth and Heartland synergies as earnings contributors, while noting that mortgage warehouse balances declined with higher long-term rates, seasonality, and weaker refinancing demand. Heartland discount accretion was a significant contributor to reported margins and may not recur at the same level.
- Management said capital ratios exceeded well-capitalized regulatory standards: Tier 1 capital to average assets was 8.84% and total capital to risk-weighted assets was 13.22%. It was evaluating Basel III rules adopted in July 2013, with phase-in for Horizon beginning in 2015.
- Risks identified include local and broader economic conditions, unemployment, interest-rate and market movements, loan losses and collateral values, liquidity, regulation and capital requirements, competition, technology, cost control, and acquisition integration and credit quality. Management noted local unemployment remained elevated.
- The company intends to continue participating in the Small Business Lending Fund; preferred dividend cost was about $96,000 for Q2, with lower costs anticipated for Q3 and Q4. Common dividends declared in the first half were $0.20 per share.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. It did not expect pending legal proceedings to have a material adverse effect.
Key facts for investors to verify
- How much of net interest income and margin is sustainable as Heartland acquisition-related discount accretion runs down.
- Whether credit quality stabilizes: non-performing loans rose from year-end, and the provision increased substantially year over year.
- Whether commercial loan growth offsets continued contraction in mortgage warehouse and consumer/residential balances without weakening underwriting.
- How interest-rate changes affect securities values, accumulated other comprehensive income, mortgage servicing rights, and funding costs.
- Whether Heartland integration produces expected synergies and whether Basel III implementation affects capital planning.