Horizon Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and period. Horizon is an Indiana bank holding company operating through Horizon Bank, serving northern and central Indiana and southern and central Michigan. This unaudited filing covers the three months ended March 31, 2022; comparisons are primarily with Q1 2021 and, where noted, December 31, 2021. Amounts below are in U.S. dollars.
Financial performance and condition
- Profit and revenue: Net income was $23.6 million, up 15.4% year over year; diluted EPS was $0.54 versus $0.46. Net interest income was $48.2 million, up $5.6 million. Noninterest income was $14.2 million, up 2.0%. Combined net interest and noninterest income was $62.3 million, compared with $56.4 million in Q1 2021. Pre-tax, pre-provision income, a non-GAAP measure, was $25.7 million, up 6.1% year over year.
- Margins and operating costs: Net interest margin was 2.99%, down from 3.29% a year earlier but up from 2.97% in Q4 2021. Adjusted NIM was 2.93% versus 3.17% a year earlier. The efficiency ratio was 58.74%, compared with 57.03% in Q1 2021. Noninterest expense rose 13.8% to $36.6 million, including higher compensation, outside services, occupancy, and other expenses.
- Credit quality: The company recorded a $1.4 million credit-loss recovery, versus $367,000 of expense in Q1 2021. The allowance for credit losses was $52.5 million, or 1.41% of loans, versus $54.3 million, or 1.51%, at year-end. Nonperforming loans were $20.1 million, or 0.54% of loans, compared with $19.0 million, or 0.53%, at year-end. Net charge-offs were 0.00% of average loans.
- Balance sheet and funding: Total assets were $7.42 billion, broadly unchanged from year-end. Net loans rose $68.9 million to $3.66 billion; deposits rose $48.5 million to $5.85 billion. Borrowings were $728.7 million, including $428.1 million of short-term funds, versus $712.7 million and $180.8 million, respectively, at year-end. Cash declined to $121.0 million from $593.5 million.
- Liquidity and cash flow: Q1 operating cash flow was $27.1 million; investing activities used $556.0 million, primarily reflecting securities purchases; financing activities provided $56.4 million. Cash and cash equivalents fell $472.6 million. The Bank reported $575.3 million of unused credit lines and $2.3 billion of unpledged investment securities at quarter-end.
- Capital and equity: Stockholders’ equity was $677.5 million, down from $723.2 million at year-end; book value per share was $15.55 versus $16.61. Tangible book value per share, a non-GAAP measure, was $11.54 versus $12.58. The company reported regulatory capital ratios of 15.21% total risk-based capital and 9.70% Tier 1 leverage; the Bank remained well capitalized under regulatory standards.
Material changes and management commentary
- Management attributed higher year-over-year net interest income mainly to substantially higher average interest-earning assets, while the yield on those assets fell 44 basis points to 3.22%. Lower funding costs helped offset the yield decline.
- Loans grew, led by commercial and consumer lending. The company continued investing deposit growth in securities; held-to-maturity securities increased $453.7 million during the quarter.
- Rising market rates drove a sharp decline in securities values: AFS securities moved from $7.2 million of unrealized gains at year-end to $73.6 million of unrealized losses at March 31. This contributed to a $62.1 million quarterly decline in accumulated other comprehensive income and lower reported equity. Management said it did not intend to sell the impaired securities before recovery of amortized cost, which may not occur until maturity.
- Mortgage banking income was mixed: gains on mortgage loan sales fell to $2.0 million from $5.3 million, while mortgage servicing income benefited from a $2.6 million impairment recovery as prepayments slowed.
- Management described the balance sheet as asset-sensitive at quarter-end. Its modeled net interest income increases under parallel rate shocks were approximately $2.5 million for +100 basis points and $3.8 million for +200 basis points; management said asset sensitivity had moderated as cash was deployed into higher-yielding assets.
- The Board approved permanent closure of seven branches in the second half of 2022. Management expects a one-time charge of approximately $432,000 and an estimated six-month earn-back period. No formal earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies, and unusual items
- Key disclosed risks include interest-rate movements and securities valuation, economic conditions and borrower credit performance, liquidity and deposit competition, cyber and data-security threats, regulatory and legal matters, and integration or credit risks from acquisitions. The filing reports no material change to previously disclosed risk factors.
- Unrealized securities losses were attributed by management to interest-rate changes; no securities credit-loss allowance was recorded. Their market-value impact remains relevant to equity and tangible capital.
- The filing revised certain previously reported balances for an immaterial error involving commercial loan participations that did not qualify as sales. The correction increased December 31, 2021 loans and borrowings by $37.0 million each; management concluded the prior-period errors were not material.
- Management said ordinary-course litigation is not expected to have a material adverse effect. The filing also reports $1.2 million of loans modified under CARES Act treatment at March 31, 2022.
- Horizon completed its purchase of assets and assumption of deposits from 14 former TCF branches in September 2021; the acquired deposit relationships contributed to Q1 fee income and operating costs.
Important facts for investors to verify
- How rapidly securities unrealized losses and the resulting pressure on equity and tangible book value may change as interest rates move.
- Whether loan growth, deposit retention, and funding costs support NIM and earnings as cash is redeployed and rates change.
- Whether the allowance remains adequate as nonperforming loans rose modestly, despite low net charge-offs and the quarterly provision release.
- The sustainability of mortgage servicing income, including the impairment recovery, and the outlook for mortgage loan-sale volume.
- Execution and expected savings from the seven planned branch closures, including the stated charge and earn-back estimate.
- The effects of the revised loan-participation accounting on reported comparative balances and future presentation.