Horizon Bancorp Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Horizon is an Indiana bank holding company serving markets in Indiana and southwestern Michigan. This unaudited report covers the quarter and six months ended June 30, 2012; balance-sheet comparisons are with December 31, 2011. Dollar amounts below are in millions unless stated otherwise. The July 17, 2012 Heartland acquisition occurred after quarter-end and is not reflected in June 30 balances.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Interest income | $16.5 | $15.7 | $33.3 | $31.1 |
| Net interest income | $13.0 | $11.5 | $26.2 | $22.5 |
| Provision for loan losses | $0.2 | $1.3 | $0.8 | $2.9 |
| Other income | $6.6 | $4.4 | $11.7 | $8.8 |
| Other expense | $12.2 | $10.5 | $23.3 | $20.7 |
| Net income | $4.9 | $3.1 | $9.5 | $5.9 |
| Net income available to common shareholders | $4.8 | $2.8 | $9.3 | $5.3 |
| Diluted EPS | $0.93 | $0.56 | $1.81 | $1.05 |
| Net interest margin | 3.79% | 3.67% | 3.84% | 3.62% |
- Management reported Q2 net income and first-half net income as records for the company. Net income rose 58.8% in Q2 and 62.6% in the first half year over year.
- At June 30, total assets were $1,563.3; loans were $997.1 gross and $978.8 net of allowance; available-for-sale securities were $435.6. Total assets increased $16.1 from year-end, while gross loans increased $13.9.
- Deposits were $1,045.8, up $35.9 from year-end. Borrowings were $339.9, down $30.2; subordinated debentures were $30.7. Stockholders’ equity was $130.6, up $9.1.
- Six-month operating cash flow was $12.6; investing activities used $13.7 and financing activities provided $4.3. Cash and cash equivalents increased $3.3 to $23.7.
- Q2 return on average assets was 1.31% and return on average common equity was 16.43%; first-half figures were 1.27% and 16.13%, respectively. The Bank’s Tier 1 capital to risk-weighted assets ratio was 12.03%; management said capital exceeded well-capitalized regulatory standards.
Material changes and operating drivers
- Net interest margin expanded as lower funding costs more than offset lower asset yields. For Q2, the average yield on interest-earning assets declined 19 basis points year over year while the cost of interest-bearing liabilities fell 33 basis points. Management noted interest-rate floors on about $387.5 million of $522.3 million in adjustable-rate loans.
- Mortgage banking was a major source of higher noninterest income: gains on mortgage loan sales were $3.4 in Q2 and $5.7 in the first half, versus $1.3 and $1.8, respectively, in 2011. Management attributed the increases to volume and pricing; loans originated for sale were $178.6 in the first half versus $108.1 a year earlier.
- Other expense rose 16.1% in Q2 and 12.5% in the first half. Higher staffing, compensation, commissions and bonuses contributed; first-half expenses included $0.5 of Heartland transaction costs ($0.3 in Q2).
- Loan quality improved in some measures: substandard loans declined $21.9 during the first half, and first-half net charge-offs fell to $1.3 from $3.4. Nonperforming loans were $20.8, or 2.09% of loans, compared with $20.6 and 2.44% a year earlier. The allowance was $18.4, or 1.83% of loans, versus $18.9 and 1.89% at year-end.
- Deposit growth included increased municipal and other interest-bearing deposits; time deposits fell $67.2, in part reflecting lower brokered deposits and shifts into other interest-bearing accounts. Short-term borrowings were $133.0 at quarter-end.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management did not expect a significant near-term rise in interest rates, while anticipating that rates may rise eventually from historically low levels.
- Management cited continued high local unemployment and weak commercial, housing and construction activity as contributors to elevated nonperforming loans. It cautioned that future economic conditions and loan evaluations could require higher loss provisions; the current allowance was considered appropriate by management.
- On July 17, 2012, Horizon completed its acquisition of Heartland Bancshares for 778,922 Horizon shares, valued at approximately $19.7 million at the closing share price. Heartland Community Bank reported March 31 assets of approximately $238.1, deposits of $211.2 and loans of $134.9. Integration, acquired asset quality and customer retention are relevant post-quarter considerations.
- Available-for-sale securities had $0.2 of gross unrealized losses at June 30. Management considered the declines temporary, attributed them mainly to interest-rate volatility, and reported no security impairment deemed other-than-temporary.
- Horizon reported about $295.2 of unused credit lines, including Federal Home Loan Bank and Federal Reserve facilities. It also participates in the Small Business Lending Fund; management described quarterly preferred-stock dividend costs that vary with lending measurements and said it intended to reserve cash for a possible redemption if that capital becomes more costly than alternatives.
- The company disclosed ordinary-course legal proceedings but did not expect a material adverse effect. It reported no material change in previously disclosed risk factors, effective disclosure controls, and no material quarterly change in internal control over financial reporting.
- Forward-looking results are subject to credit, interest-rate, market, competitive, regulatory, cybersecurity, litigation and acquisition-integration risks, among others.
Important facts for investors to verify
- Whether mortgage-sale gains and elevated mortgage origination volumes continue, and how much of earnings growth is recurring versus volume- or market-dependent.
- Post-acquisition Heartland purchase accounting, integration costs, realized synergies, customer retention and acquired loan/deposit quality.
- Trends in nonperforming and substandard loans, troubled debt restructurings, charge-offs and allowance adequacy, particularly amid local economic weakness.
- Funding mix, municipal-deposit concentration, short-term borrowing needs, unused credit-line availability and sensitivity to changing interest rates.
- Future preferred-stock dividend expense and any decision or capacity to redeem the Small Business Lending Fund shares.