Horizon Bancorp Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Horizon is an Indiana bank holding company operating through Horizon Bank, serving northwestern Indiana and southwestern Michigan. This unaudited filing covers the three months ended March 31, 2012; income and cash-flow comparisons are with Q1 2011, while balance-sheet changes are generally compared with December 31, 2011. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $16.83 | $15.43 in Q1 2011 |
| Net interest income | $13.20 | $11.07 in Q1 2011 |
| Net interest margin | 3.87% | 3.57% in Q1 2011 |
| Provision for loan losses | $0.56 | $1.55 in Q1 2011 |
| Other income | $5.14 | $4.31 in Q1 2011 |
| Other expenses | $11.16 | $10.26 in Q1 2011 |
| Net income | $4.61; diluted EPS $0.88 | $2.77; diluted EPS $0.49 in Q1 2011 |
| Cash from operating activities | $7.40 | $4.37 in Q1 2011 |
| Total assets | $1,546.8 | $1,547.2 at December 31, 2011 |
| Loans, net of allowance | $969.1 | $964.3 at December 31, 2011 |
| Total deposits | $1,064.6 | $1,009.9 at December 31, 2011 |
| Borrowings / subordinated debentures | $310.9 / $30.7 | $370.1 / $30.7 at December 31, 2011 |
| Stockholders’ equity | $126.2 | $121.5 at December 31, 2011 |
- Net income increased 66.8% year over year; income available to common shareholders was $4.46 million. Basic EPS was $0.90 versus $0.51.
- Management reported Q1 return on average assets of 1.23% and return on average common equity of 15.90%. Tier 1 capital to risk-weighted assets was 11.77%; management said capital ratios exceeded regulatory well-capitalized standards.
- Net interest income rose as interest expense declined more than interest income. Average earning-asset yield was 4.91%, while the average cost of interest-bearing liabilities fell to 1.18% from 1.52%.
- Other income growth reflected mortgage-loan sale gains of $2.27 million, up from $0.53 million. Mortgage originations for sale were $80.3 million versus $64.2 million. Higher mortgage servicing income in Q1 2011 included a $0.70 million impairment recovery, making the year-over-year comparison less favorable for that item.
- Loan-loss provision and net charge-offs fell substantially: net charge-offs were $29,000 versus $1.52 million in Q1 2011. The allowance was $19.4 million, or 1.94% of loans, compared with 2.34% a year earlier.
- Nonperforming loans were $21.1 million, or 2.11% of loans, up from $20.1 million and 2.02% at year-end 2011, but below $22.1 million and 2.71% a year earlier. Nonaccrual loans were $15.5 million. Other real estate owned declined to $0.8 million from $2.8 million at year-end, primarily following property sales.
- Deposits increased $54.8 million, primarily from municipal deposits; borrowings decreased $59.2 million. Cash and cash equivalents fell $1.4 million to $19.0 million. Investing activities used $3.6 million and financing activities used $5.2 million. The Bank reported $333.4 million of unused credit lines.
- Common dividends were $0.13 per share for the quarter. The company reported tangible book value per share of $21.35 and book value per common share of $22.99 at quarter-end.
Material changes, outlook, and risks
- Acquisition: On February 9, 2012, Horizon agreed to acquire Heartland Bancshares for an estimated $14.0 million, based on Horizon’s share price at signing. Heartland shareholders are to receive 0.54 Horizon shares per share, subject to specified adjustments. Horizon also agreed to fund purchase of Heartland’s $7.248 million liquidation-value Treasury-issued preferred stock. Closing was anticipated at the end of Q2 or beginning of Q3 2012, subject to shareholder, regulatory, and other approvals.
- Management outlook: No earnings or financial guidance is provided. Management did not expect a significant near-term rise in interest rates, while anticipating rates could rise at some future point from historically low levels. It described local economic conditions as challenging, with elevated unemployment and continued weakness affecting housing and certain industries.
- Credit and market risks: Management cautioned that future economic conditions and loan reviews could require additional allowance provision. Borrower cash flows and collateral values, particularly in commercial real estate, may weaken. Mortgage servicing-rights values are exposed to interest rates and prepayment assumptions; investment values are also subject to interest-rate movements. The company reported no securities impairment considered other-than-temporary at quarter-end.
- Other items: Q1 included $168,000 of Heartland transaction costs. Salary, commission, and benefit expense rose by $602,000 year over year. Legal proceedings were described as incidental to the business, with no material adverse outcome expected by management. The filing says interest-rate sensitivity had not changed significantly from the 2011 Form 10-K.
- Forward-looking results remain subject to interest-rate, economic, credit, competitive, regulatory, technology/security, litigation, funding, and acquisition-integration risks. The filing states disclosure controls were effective and no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether the Heartland transaction received required approvals, closed on the anticipated terms, and produced the expected integration and credit outcomes.
- Whether earnings growth is sustainable given the substantial contribution from mortgage-loan sale gains and the year-over-year reduction in loan-loss provision.
- Trends in nonperforming loans, commercial real estate exposures, troubled debt restructurings, and allowance adequacy; nonperforming loans increased from year-end.
- Deposit stability and funding costs, including dependence on municipal deposits and short-term borrowings, and the availability of reported unused credit lines.
- Effects of interest-rate changes on net interest margin, securities values, derivatives, and mortgage servicing rights, including management’s prepayment assumptions.
- Capital and dividend capacity, including the preferred-stock funding and redemption plans and the terms of the planned acquisition consideration.