Horizon Bancorp, Inc. — Q2 2011 Form 10-Q
Business context and period. Horizon is an Indiana bank holding company serving northwestern Indiana and southwestern Michigan through Horizon Bank, N.A. The filing reports unaudited results for the quarter and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010. Amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Interest income | $15.71 | $16.81 | $31.14 | $32.94 |
| Net interest income | $11.46 | $11.37 | $22.53 | $21.92 |
| Provision for loan losses | $1.33 | $3.00 | $2.88 | $6.23 |
| Net interest income after provision | $10.13 | $8.37 | $19.65 | $15.69 |
| Other income | $4.45 | $4.92 | $8.76 | $9.30 |
| Other expenses | $10.49 | $10.18 | $20.75 | $19.74 |
| Net income | $3.09 | $2.52 | $5.86 | $4.31 |
| Net income available to common shareholders | $2.82 | $2.16 | $5.31 | $3.60 |
| Diluted earnings per share | $0.83 | $0.65 | $1.57 | $1.09 |
| Net interest margin | 3.67% | 3.78% | 3.62% | 3.66% |
Financial position, cash flow and liquidity
- At June 30, total assets were $1.414 billion, up $12.8 million from year-end. Available-for-sale securities rose $67.5 million to $449.8 million as liquidity was invested in securities.
- Net loans were $820.7 million, down $43.1 million from year-end, mainly reflecting a $48.7 million reduction in mortgage warehouse balances. Total deposits increased $34.8 million to $1.020 billion.
- Borrowings fell $30.6 million to $230.1 million. Subordinated debentures were $30.6 million. Cash and due from banks was $20.8 million.
- Six-month operating cash flow was $10.1 million, versus $11.1 million in the prior-year period. Investing activities used $7.7 million; financing activities provided $2.7 million. Cash increased $5.1 million to $20.8 million.
- Management reported $304.6 million of unused credit lines at June 30, compared with $380.8 million at year-end 2010.
- Stockholders’ equity was $121.5 million, up from $112.3 million at year-end. Book value per common share was $31.32; tangible book value per share was $28.76. Tier 1 capital to risk-weighted assets was 13.61%, which management said exceeded the well-capitalized regulatory standard.
Material changes and credit quality
- Net income increased 23% year over year in Q2 and 36% for the first half; management described both as record periods. Lower loan-loss provisions were a major contributor: the first-half provision declined to $2.9 million from $6.2 million.
- Asset yields declined faster than funding costs. Q2 interest-earning asset yield fell 53 basis points to 4.98%, while the cost of interest-bearing liabilities fell 44 basis points; reported net interest margin consequently declined 11 basis points year over year to 3.67%. For the first half, margin was 3.62%, down four basis points.
- Nonperforming loans were $20.6 million, or 2.44% of total loans, versus $22.1 million at March 31 and $21.2 million a year earlier. Nonaccrual loans were $14.4 million. Total troubled debt restructurings were $6.1 million, of which $4.2 million were performing to restructured terms.
- The allowance for loan losses was $18.6 million, or 2.20% of total loans, versus $19.1 million and 2.11% at year-end. First-half net charge-offs were $3.4 million, including $2.2 million in installment loans. Other real estate owned increased to $4.1 million from $2.3 million at March 31.
- Other income declined 5.8% in the first half, principally because mortgage-loan sale gains fell $1.2 million; this was partly offset by $728,000 of mortgage servicing asset impairment recovery and $639,000 of securities gains. Other expenses rose 5.1%, with increased payroll and recurring costs partly offset by lower transaction-related professional fees and FDIC expense.
Outlook, commentary, risks and unusual items
- No earnings or revenue guidance is provided. Management said it did not expect a significant near-term rise in interest rates, while expecting rates to increase at some point given historically low levels. It cited continued high local unemployment and weakness in steel, recreational vehicle and housing markets as pressures on borrowers and asset quality.
- Management considered the loan-loss allowance appropriate at June 30 but cautioned that future economic and portfolio developments could require increases. Credit, market-rate, liquidity, operational, economic and regulatory risks are identified as potential sources of adverse results.
- On July 29, 2011, after the reporting date, Treasury preliminarily approved a proposed $12.5 million Small Business Lending Fund investment. Horizon intended to combine proceeds with available funds to redeem the remaining $18.75 million of TARP preferred stock. Closing was conditional on a stock purchase agreement, due diligence and other Treasury conditions; the filing said it expected the redemption before August 31.
- After quarter-end, S&P downgraded the U.S. long-term debt rating on August 5 and certain agency debt ratings on August 8. Horizon warned that this could affect securities values and funding availability or cost; the effects were uncertain.
- A previously disclosed lawsuit by Capitol Bancorp and Michigan Commerce Bank against Horizon and others remained in discovery after unsuccessful mediation. Management did not expect ordinary legal proceedings to materially affect consolidated results or financial position.
- Horizon reported no material change in interest-rate sensitivity from its 2010 Form 10-K. It stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the proposed SBLF funding and planned TARP preferred-stock redemption closed, and the resulting capital, dividend and funding terms.
- Trends in nonperforming loans, TDRs, charge-offs, OREO and the adequacy of the allowance, especially in commercial real estate and consumer installment lending.
- Whether net interest margin stabilizes as asset yields and funding costs reset, and the effect of the low-rate environment on earnings.
- The sustainability of mortgage banking income and the valuation and impairment assumptions for mortgage servicing rights and securities.
- Any material developments in the lawsuit and the effects of the post-quarter U.S. sovereign and agency rating downgrades on investment values and collateralized funding.