Horizon Bancorp, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; amounts below are in millions except per-share data. Horizon is an Indiana-based commercial bank operating in Indiana and southwestern Michigan.
Financial performance and condition
- Profit: Q3 net income was $4.85 million versus $3.42 million a year earlier; diluted EPS was $0.54 versus $0.36. Nine-month net income was $14.37 million versus $9.28 million; diluted EPS was $1.75 versus $1.05. Management reported nine-month earnings as a company record.
- Interest income and margin: Q3 net interest income increased to $15.00 million from $11.99 million; nine-month net interest income rose to $41.20 million from $34.52 million. Net interest margin was 3.79% for Q3 versus 3.76%, and 3.80% for nine months versus 3.67%.
- Other income and expenses: Other income was $7.71 million in Q3 and $19.41 million year to date, including mortgage-loan sale gains of $4.44 million and $10.12 million, respectively. Total other expenses were $14.84 million in Q3 and $38.18 million year to date, up 20.5% and 15.5% year over year. The filing cites acquisition costs, staffing and expansion, and higher loan-related expenses as contributors.
- Credit costs and asset quality: Provision for loan losses was $1.04 million for Q3 and $1.81 million for nine months, compared with $1.56 million and $4.44 million in 2011. Nine-month net charge-offs were $2.12 million versus $4.40 million. The allowance was $18.57 million, or 1.58% of loans, versus 1.89% at year-end 2011. Nonperforming loans were reported at approximately $24.4 million, or 2.08% of loans; management attributed the increase from the prior quarter primarily to Heartland. Excluding Heartland, management said nonperforming loans declined quarter over quarter.
- Balance sheet growth: Total assets were $1.847 billion at September 30, up from $1.547 billion at year-end 2011. Net loans were $1.136 billion versus $964.3 million; deposits were $1.307 billion versus $1.010 billion. Stockholders’ equity rose to $155.9 million from $121.5 million. Average equity to average assets was 8.45%; book value per common share was $16.64.
- Debt and liquidity: Borrowings were $333.2 million, down from $370.1 million at year-end; subordinated debentures were $32.3 million. Cash and equivalents were $41.6 million, up $21.1 million over the nine months. Cash flow was $17.5 million from operations, negative $42.0 million from investing, and positive $45.6 million from financing. The Bank reported $364.1 million of unused credit lines. Management stated capital ratios remained above regulatory well-capitalized standards.
Material changes and unusual items
- Horizon completed its acquisition of Heartland Bancshares and Heartland Community Bank on July 17, 2012. It issued 778,922 Horizon shares; estimated total consideration, including retirement of TARP preferred shares, was $26.9 million. The acquired business added approximately $245.6 million of assets, $211.2 million of deposits, and $114.6 million of loans at acquisition.
- Management cited organic growth as well: nine-month net loan growth of approximately $57.4 million and deposit growth of $85.9 million. The acquisition and organic growth contributed to higher average earning assets and interest income.
- Heartland-related expenses included approximately $1.5 million of acquisition costs for the first nine months, including about $1.1 million described in the expense discussion. The purchase-price allocation was preliminary; management said pro forma financial statements were impracticable to provide.
- Mortgage-loan sale gains increased materially with higher origination and sale activity. Prior-year comparisons included a $1.75 million securities gain and a $0.45 million officer-life-insurance death benefit, neither of which was material in 2012.
- Nonperforming and delinquent loans increased from the prior quarter, primarily due to acquired Heartland credits. Substandard loans also rose; management noted a $0.5 million specific reserve on one credit during Q3.
Outlook, risks, and contingencies
- No specific earnings or financial guidance is provided. Management did not expect a significant near-term increase in interest rates, while noting that rates may rise in the future from historically low levels. It attributed margin improvement to funding costs falling faster than asset yields and noted rate floors on portions of adjustable-rate loans.
- Key risks include local economic weakness and elevated unemployment, credit deterioration and loan losses, integration and credit risks from acquisitions, interest-rate and market changes, deposit and borrowing conditions, regulatory and capital requirements, cybersecurity, and litigation or regulatory matters.
- The company reported $8.4 million of troubled debt restructurings, of which $3.4 million were performing under modified terms. Management stated that legal proceedings were not expected to have a material adverse effect; it reported no material changes to previously disclosed risk factors.
- Management considered available-for-sale securities’ unrealized losses temporary and reported no security impairment considered other-than-temporary at September 30. It also concluded goodwill was not impaired based on its internal evaluation.
- Horizon announced a 3-for-2 stock split on October 16, payable November 9, 2012. The filing reports 8,693,741 shares outstanding as of November 8.
Important facts for investors to verify
- How Heartland integration, acquisition costs, acquired-credit marks, and expected cost savings affect results in subsequent quarters.
- Whether the increase in nonperforming, delinquent, and substandard loans persists, and whether the allowance remains adequate as acquired loans season.
- The sustainability of mortgage-banking gains and elevated mortgage origination volumes, given their significant contribution to noninterest income.
- Loan and deposit growth, funding mix, borrowing needs, liquidity availability, and capital ratios after the acquisition and stock split.
- Potential margin effects from future interest-rate changes, deposit repricing, and loan floors; the filing refers investors to the 2011 Form 10-K for interest-rate sensitivity and reports no significant change.