Horizon Bancorp, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2013; financial statements are unaudited. Horizon is an Indiana bank holding company providing commercial and retail banking and related services in Indiana and southwestern Michigan. Unless stated otherwise, dollar amounts below are in millions. The July 2012 Heartland acquisition affects comparisons with Q1 2012, which predates the acquisition.
Financial performance and position
- Earnings and revenue: Net income was $5.31 million, up 15.1% from $4.61 million. Net income available to common shareholders was $5.17 million. Basic EPS was $0.60, unchanged year over year; diluted EPS was $0.58 versus $0.59. Net interest income was $16.01 million versus $13.20 million; other income was $7.46 million versus $5.14 million.
- Interest margin: Net interest margin rose to 4.10% from 3.87%. Management attributed much of the improvement to approximately $2.0 million of acquired-loan discount accretion and loans paying off ahead of schedule; excluding this interest income, management reported a 3.60% margin.
- Expenses and credit costs: Noninterest expense increased 25.3% to $13.98 million. Provision for loan losses rose to $2.08 million from $0.56 million, including $1.4 million related to Heartland credits whose losses exceeded acquisition-date discounts. Net charge-offs were $0.79 million, versus $0.03 million.
- Balance sheet: Total assets were $1.734 billion, down from $1.848 billion at December 31, 2012. Net loans were $1.070 billion, down from $1.172 billion, largely reflecting a $107.8 million decline in mortgage warehouse loans. Deposits increased to $1.315 billion from $1.294 billion. Borrowings declined to $208.9 million from $345.8 million; the company had no short-term borrowings at quarter-end.
- Cash flow and liquidity: Operating cash flow was $15.6 million; investing activities provided $97.6 million, principally reflecting the net reduction in loans; financing activities used $116.9 million, largely from borrowing repayments. Cash and cash equivalents fell $3.7 million to $27.1 million. The Bank reported $435.5 million of unused credit lines at quarter-end.
- Capital and returns: Stockholders’ equity was $162.3 million. Horizon reported Bank Tier 1 capital to average assets of 8.80% and total capital to risk-weighted assets of 13.99%, above regulatory well-capitalized standards. Return on average assets was 1.23%; return on average common equity was 14.11%. The quarterly common dividend was $0.10 per share.
Material changes versus comparable periods
- Net interest income and other income increased year over year, while higher provision and operating expenses partially offset revenue growth. Management cited commercial-loan growth and Heartland synergies in describing record quarterly net income.
- Mortgage-loan sale gains increased to $3.11 million from $2.27 million; mortgage loans originated for sale were $95.0 million versus $80.3 million. Horizon also recorded a $0.37 million gain on securities sales, which management said followed a review of market conditions.
- Nonperforming loans were $23.7 million, slightly below $23.8 million at year-end but above $21.1 million a year earlier. Management attributed the year-over-year increase to Heartland; excluding acquired loans, nonperforming loans were $17.3 million versus $21.1 million a year earlier.
- Total loans fell $100.9 million during the quarter, mainly due to lower mortgage warehouse balances. Deposits rose $20.9 million and borrowings declined $136.9 million over the same period.
- Diluted EPS declined by one cent despite higher net income, reflecting additional shares issued in the Heartland acquisition and increased dilutive shares. The filing notes a 3:2 stock split in November 2012.
Outlook, commentary, risks and contingencies
- Management did not expect a significant near-term rise in interest rates, while anticipating rates would eventually increase from historically low levels. It reported no significant change in interest-rate sensitivity from the 2012 Form 10-K.
- Management considered the allowance for loan losses appropriate at March 31, but cautioned that future economic conditions and portfolio assessments could require additional provisions. Local unemployment and weak business, housing and construction conditions were cited as continuing credit-quality pressures.
- Reported risks include interest-rate and market volatility, credit losses and collateral values, liquidity, competition, regulation, technology, expense control, and acquisition integration and realization of expected savings. Management stated that no material changes had occurred in previously disclosed risk factors.
- At March 31, nonperforming loans were 2.16% of loans; the allowance was $19.6 million, or 1.78% of loans. Troubled debt restructurings totaled $11.4 million, of which $4.6 million were performing under modified terms. Other real estate owned was $1.8 million.
- Available-for-sale securities had $346,000 of gross unrealized losses. Management considered these declines temporary and reported no individual security as other-than-temporarily impaired. Legal proceedings were described as ordinary-course matters, with no material adverse outcome expected by management.
- Horizon said it intended to continue participating in the Small Business Lending Fund and planned to reserve cash for possible redemption of the preferred stock if its cost exceeded alternatives. The filing gives estimated preferred-dividend costs for Q2 and Q3 2013, but provides no broader earnings or revenue guidance.
Most important facts for investors to verify
- How much of the improved margin and earnings depends on acquired-loan accretion and early loan payoffs, and whether that contribution is sustainable.
- Credit trends in acquired and legacy portfolios, including nonperforming loans, TDR performance, charge-offs, and adequacy of the allowance.
- Whether Heartland integration produces the anticipated cost savings as expenses rise and the company expands into growth markets.
- The sustainability of mortgage banking income and warehouse lending, given their sensitivity to refinancing activity, rates and loan-sale volumes.
- Liquidity and funding conditions after the substantial quarter-end borrowing reduction, including availability and terms of unused credit lines.