Horizon Bancorp Inc. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, for Horizon Bancorp Inc. and its wholly-owned subsidiary, Horizon Bank, N.A. The company is a non-accelerated filer incorporated in Indiana. As of August 13, 2007, there were 3,251,582 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q2 2007 (3 Months) | Q2 2006 (3 Months) | YTD 2007 (6 Months) | YTD 2006 (6 Months) |
|---|---|---|---|---|
| Net Income | $2,016,000 | $1,834,000 | $3,860,000 | $3,283,000 |
| Diluted EPS | $0.62 | $0.57 | $1.19 | $1.02 |
| Net Interest Income | $8,042,000 | $7,836,000 | $15,678,000 | $15,646,000 |
| Net Interest Margin | 3.00% | 3.11% | 2.97% | 3.15% |
| Total Assets | $1,192,283,000 (as of June 30, 2007) | |||
| Total Deposits | $820,944,000 (as of June 30, 2007) | |||
| Stockholders' Equity | $63,172,000 (as of June 30, 2007) | |||
| Cash & Equivalents | $24,894,000 (as of June 30, 2007) | |||
| Allowance for Loan Losses | $8,665,000 (1.02% of gross loans) | |||
| Non-Performing Assets | $2,600,000 (0.30% of gross loans) |
Material Changes vs. Prior Period
- Profitability: Net income increased 10% for the quarter and 17.6% year-to-date compared to 2006. This was driven primarily by a 25.6% increase in non-interest income.
- Non-Interest Income: Gains on the sale of loans nearly doubled due to a strategic shift where approximately 90% of conforming residential mortgage loans are now sold, compared to 50% in 2006. Fiduciary income also rose due to increased assets under administration and fee adjustments.
- Net Interest Margin (NIM): NIM declined to 3.00% in Q2 2007 from 3.11% in Q2 2006, and 2.97% YTD from 3.15% YTD. The decline was caused by higher costs on consumer certificates of deposit renewing at higher rates, offsetting growth in earning assets.
- Balance Sheet: Total assets decreased by approximately $30 million from year-end 2006. Investment securities decreased by $18.5 million, while loans increased by $5.6 million. Cash and cash equivalents dropped by $33.9 million over the six-month period.
- Deposits: Total deposits declined significantly from year-end 2006 due to the withdrawal of a large municipal deposit in early January 2007.
Guidance, Outlook, Risks, and Unusual Items
- Capital Adequacy: Horizon Bank's risk-based capital ratio was 10.92% at June 30, 2007, which is 8 basis points below the required 11.0% (including a 100 basis point cushion mandated by the OCC following the Alliance acquisition). Management has requested the removal of this excess requirement as classified loans from the acquisition have decreased from $10 million to $2 million. The bank remains above the standard "well capitalized" minimums.
- Regulatory Uncertainty: Regulators have questioned the classification of mortgage warehouse loans. If reclassified from home mortgages to "other loans," risk-based capital ratios would decrease, though the bank would likely remain "well capitalized."
- Accounting Changes: The company adopted FASB Interpretation No. 48 (FIN 48) on January 1, 2007, resulting in a $563,000 reduction in tax liabilities recorded as a cumulative effect adjustment to equity.
- Liquidity: Despite a decrease in cash on hand, the bank maintains approximately $137 million in unused credit lines with money center banks and the Federal Home Loan Bank.
- Risks: Key risks identified include credit risk, market risk (interest rate sensitivity), liquidity risk, and operational risk. The company does not currently engage in derivative or hedging activities.
Investor Verification Checklist
- Capital Ratio Status: Verify the outcome of the request to the OCC to remove the 100 basis point capital cushion and confirm the bank's ongoing compliance with regulatory capital requirements.
- Loan Classification: Monitor the regulatory stance on the classification of mortgage warehouse loans and its potential impact on risk-weighted assets and capital ratios.
- Deposit Stability: Assess the sustainability of deposit levels following the withdrawal of the large municipal deposit and the reliance on short-term borrowings.
- Mortgage Sales Strategy: Confirm the continued execution of the strategy to sell 90% of conforming mortgage production and its impact on non-interest income volatility.
- Interest Rate Sensitivity: Review the impact of rising interest rates on the cost of deposits and the net interest margin, given the company's lack of hedging activity.