Horizon Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Horizon is an Indiana bank holding company operating primarily in Indiana and Michigan. Financial amounts below are in U.S. dollars; reported figures are generally in millions unless noted.
Financial performance and condition
- Q2 earnings: Net income was $18.8 million, or $0.43 per diluted share, versus $24.9 million, or $0.57 per share, in Q2 2022. Six-month net income was $37.0 million ($0.85 per diluted share), down from $48.4 million ($1.11).
- Interest income and margins: Q2 net interest income was $46.2 million, down from $52.0 million a year earlier. Net interest margin was 2.69%, versus 3.13%; adjusted margin, excluding purchase-accounting adjustments and the swap-termination gain, was 2.57%. Higher asset yields were outweighed by sharply higher funding costs. Q2 interest expense rose to $30.7 million from $4.6 million.
- Other income and expenses: Q2 non-interest income was $11.0 million, down 11.6% year over year, mainly reflecting lower mortgage loan sale gains. Non-interest expense rose 2.4% to $36.3 million. The reported efficiency ratio was 63.44%, compared with 54.91%.
- Balance sheet: Total assets were $7.96 billion at June 30, up $90.8 million from year-end 2022. Loans were $4.27 billion, up $108.3 million; deposits were $5.71 billion, down $148.4 million; and borrowings were $1.35 billion, up $209.1 million. Cash and due from banks totaled $229.0 million.
- Credit quality: The allowance for credit losses was $50.0 million, or 1.17% of loans. Non-performing loans were $22.1 million, or 0.52% of loans, compared with $21.8 million at year-end. Q2 net charge-offs were 0.01% of average loans. The filing reports $680,000 of consolidated credit-loss expense for the quarter; MD&A reports $741,000 of loan credit-loss expense.
- Capital and liquidity: Stockholders’ equity was $709.2 million. The Bank’s reported leverage and risk-based capital ratios were 8.90% and 13.64%, respectively; the filing states the Bank met well-capitalized requirements. The Bank reported $1.71 billion in unused credit lines and $650.7 million in unpledged securities. Tangible common equity was 6.91% of tangible assets.
- Investment marks: Available-for-sale securities had a fair value of $905.8 million against $1.03 billion amortized cost; held-to-maturity securities had a fair value of $1.67 billion against $1.98 billion carrying value. Management attributed most unrealized losses to interest-rate changes and considered them temporary. Accumulated other comprehensive loss was $97.9 million.
- Cash flow: Six-month operating cash flow was $44.1 million; investing activities provided $15.6 million, reflecting security sales and other cash flows; financing activities provided $45.8 million. Cash and cash equivalents increased $105.5 million to $229.0 million.
Material changes and notable items
- Year-over-year Q2 net income fell $6.1 million. Lower net interest income and non-interest income, higher credit-loss expense, and higher operating expense were partly offset by lower income tax expense.
- Q2 results included a $1.5 million gain from terminating an interest-rate swap, contributing approximately $0.02 to diluted EPS. Adjusted diluted EPS excluding the gain was $0.41 versus reported EPS of $0.43.
- Deposits were broadly stable versus March 31, 2023 ($5.71 billion versus $5.70 billion), but down from December 2022. The company said higher borrowings principally reflected the decline in deposits.
- The company revised previously issued 2022 comparative figures for immaterial errors involving indirect loan dealer reserve amortization and cash-flow classification. It said the revisions did not affect net income.
Outlook, risks, contingencies, and controls
- The filing provides no specific earnings or financial guidance. Management noted loan growth and resilient linked-quarter deposits; it also highlighted funding-cost pressure and continued technology and operating-cost management.
- Key risks include regional-bank deposit confidence and liquidity, interest-rate and margin changes, deposit competition and outflows, economic conditions, credit quality and collateral values, securities valuation, cybersecurity, regulatory developments, and the ability to remediate internal-control weaknesses.
- Disclosure controls were deemed ineffective at June 30 because previously identified material weaknesses remained in financial reporting controls for loans, investments, cash-flow classification and timely financial-statement release. Remediation steps were underway but not yet fully tested; management estimated completion before year-end 2023.
- A putative securities class action filed in April 2023 names the company and two officers. Management considers the claims without merit and the likelihood of loss remote; no accrual was recorded.
- The company reported that it remained well capitalized and had no material change in interest-rate sensitivity from its 2022 annual report. These statements do not remove the risks associated with funding costs, liquidity, or unrealized securities losses.
Most important facts for investors to verify
- Whether deposit levels and mix remain stable, and whether reliance on borrowings continues to increase.
- Whether loan yields can keep pace with deposit and borrowing costs, and how net interest margin develops after the one-time swap gain.
- Trends in non-performing loans, consumer delinquencies, charge-offs, and the adequacy of the credit-loss allowance.
- The size and duration of unrealized securities losses, liquidity available without selling securities, and related capital effects.
- Progress and independent testing of remediation controls, plus developments in the securities litigation.