Horizon Bancorp Inc. - 10-Q Summary (Q3 2010)
Business Context and Reporting Period
Horizon Bancorp Inc. (Horizon) is a registered bank holding company headquartered in Michigan City, Indiana, operating Horizon Bank, N.A. The company provides commercial and retail banking services in Northwestern Indiana and Southwestern Michigan. This report covers the quarterly period ended September 30, 2010. Horizon operates as a single segment (commercial banking) and is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q3 2010 (3 Months) | Q3 2009 (3 Months) | YTD 2010 (9 Months) | YTD 2009 (9 Months) |
|---|---|---|---|---|
| Net Income | $3.279 million | $2.357 million | $7.585 million | $7.056 million |
| Diluted EPS | $0.88 | $0.61 | $1.96 | $1.84 |
| Net Interest Income | $12.620 million | $10.719 million | $34.541 million | $33.398 million |
| Net Interest Margin | 3.84% | 3.64% | 3.72% | 3.64% |
| Provision for Loan Losses | $2.657 million | $3.416 million | $8.890 million | $9.903 million |
| Total Assets | $1.485 billion | N/A | N/A | N/A |
| Total Deposits | $999.5 million | N/A | N/A | N/A |
| Stockholders' Equity | $120.1 million | N/A | N/A | N/A |
Liquidity & Debt: Cash and due from banks decreased to $18.2 million from $68.7 million at year-end 2009. Borrowings increased to $318.5 million. The company maintains approximately $405.1 million in unused credit lines.
Material Changes vs. Prior Period
- Profitability: Net income increased 39.1% year-over-year for Q3 2010, driven by a 17.7% increase in net interest income and a 24.4% increase in non-interest income.
- Interest Rates: The net interest margin expanded to 3.84% in Q3 2010 (from 3.64% in Q3 2009) as the cost of interest-bearing liabilities decreased more significantly than the yield on earning assets.
- Asset Growth: Total assets increased $98.0 million from December 31, 2009, primarily due to the acquisition of American Trust & Savings Bank (ATSB) in Q2 2010 and growth in mortgage warehouse lending.
- Asset Quality: Non-performing loans (NPLs) increased to $21.7 million (2.22% of total loans) from $16.5 million in Q3 2009. However, this ratio remains favorable compared to national (4.77%) and Indiana peer (2.78%) averages. Net charge-offs declined to $1.2 million in Q3 2010 from $2.6 million in Q2 2010.
- Non-Interest Income: Gains on the sale of mortgage loans surged 93.7% to $2.5 million in Q3 2010 due to strong refinancing activity. Conversely, mortgage servicing rights incurred a net impairment of $331,000.
- Expenses: Non-interest expenses rose 26.1% year-over-year in Q3, largely due to the consolidation of ATSB, expansion into Kalamazoo, Michigan, and higher litigation/collection costs.
Outlook, Risks, and Unusual Items
- Subsequent Event (TARP Redemption): On November 10, 2010, Horizon redeemed $6.25 million (25%) of the U.S. Treasury's preferred stock investment under the Capital Purchase Program (TARP). This is expected to save $312,500 annually in dividends. The company plans to repurchase the remaining shares over the next three years.
- Legal Proceedings: Horizon is involved in a lawsuit with Capitol Bancorp regarding the hiring of ex-employees and alleged breach of non-solicitation agreements; parties are in settlement negotiations. Additionally, Horizon is defending against a claim by the bankruptcy trustee for AmerLink, LTD., seeking up to $25 million related to an ESOP plan where Horizon served as trustee.
- Risk Factors: Management highlights credit risk due to high local unemployment and slow economic recovery in steel, recreational vehicle, and housing sectors. Market risk remains a factor due to interest rate fluctuations, though the company utilizes derivatives (swaps) to hedge exposure.
- Goodwill: Management concluded that goodwill ($5.9 million) is not impaired, despite a market price below book value, citing an independent impairment test performed in late 2009.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-performing loans and the adequacy of the allowance for loan losses (1.85% of total loans) given the local economic conditions.
- Mortgage Servicing Rights: Monitor the valuation and impairment of mortgage servicing rights, which turned negative in Q3 2010 due to prepayment speeds and interest rate environments.
- Legal Exposure: Track the resolution of the AmerLink bankruptcy trustee lawsuit, which involves a potential $25 million claim.
- Capital Management: Confirm the timeline and funding source for the remaining TARP preferred stock redemption.
- Expense Control: Assess whether the elevated non-interest expenses (driven by the ATSB acquisition and expansion) will normalize in future quarters.