Business context and reporting period
Horizon Bancorp, Inc. is an Indiana bank holding company operating through Horizon Bank, serving northern and central Indiana and southern and central Michigan. This unaudited Form 10-Q covers the quarter ended March 31, 2023; comparisons are primarily with the first quarter of 2022 and, where stated, December 31, 2022. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Financial performance and condition
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Net income; diluted EPS | $18.2 million; $0.42 | $23.6 million; $0.54 in Q1 2022 |
| Net interest income | $45.2 million | $46.8 million in Q1 2022; $48.8 million in Q4 2022 |
| Net interest margin | 2.67% | 2.90% in Q1 2022; 2.85% in Q4 2022 |
| Noninterest income | $9.6 million | $14.2 million in Q1 2022 |
| Noninterest expense | $34.5 million | $35.3 million in Q1 2022; $35.7 million in Q4 2022 |
| Credit loss expense | $0.2 million | $1.4 million recovery in Q1 2022 |
| Total assets | $7.90 billion | $7.87 billion at December 31, 2022 |
| Loans, gross; deposits | $4.25 billion; $5.70 billion | Loans up $89.0 million; deposits down $155.8 million from year-end |
| Borrowings | $1.31 billion | $1.14 billion at December 31, 2022 |
| Stockholders’ equity | $702.6 million | $677.4 million at December 31, 2022 |
Interest income rose to $71.8 million from $50.7 million year over year, but interest expense increased to $26.6 million from $3.9 million as funding costs climbed. The average yield on interest-earning assets was 4.17%, while the cost of interest-bearing liabilities was 1.85%. Management reported a 51% beta on interest-bearing deposits for the quarter, up from 32% in the prior quarter.
Net cash provided by operating activities was $25.3 million, investing activities used $19.5 million, and financing activities provided $5.4 million. Cash and due from banks ended the quarter at $134.7 million, up from $123.5 million at year-end. The loan-to-deposit ratio was 74.5%. The Bank reported about $1.65 billion of unused credit lines, including FHLB and Federal Reserve Discount Window capacity, and $666.3 million of unpledged securities at quarter-end.
Credit metrics remained favorable by management’s account: nonperforming loans were $19.8 million, or 0.47% of loans, versus $21.8 million and 0.52% at year-end; net charge-offs were 0.01% of average loans. The allowance for credit losses was $49.5 million, or 1.17% of loans, compared with $50.5 million, or 1.21%, at year-end. The Bank met regulatory “well capitalized” thresholds; its reported total risk-based capital ratio was 13.56% and leverage ratio was 8.86% at March 31.
Material changes versus comparable periods
- Net income fell $5.3 million year over year. Management attributed the decline mainly to lower net interest income, higher credit loss expense, and lower noninterest income, partly offset by lower expenses and taxes.
- Net interest margin declined 23 basis points year over year as funding costs rose faster than asset yields; the reported interest-bearing liability cost increased 155 basis points from Q1 2022.
- Noninterest income declined $4.5 million year over year, led by lower mortgage gains and servicing income. Mortgage servicing income included a $2.6 million impairment recovery in Q1 2022 that did not recur.
- Deposits declined $155.8 million from year-end, including a $122.2 million decline in municipal and other public deposits; consumer and commercial deposits declined $33.6 million. Borrowings increased $169.0 million over the same period.
- Loans grew $89.0 million from year-end, including growth in commercial and consumer loans; mortgage warehouse balances declined $16.6 million.
- Accumulated other comprehensive loss improved to $92.0 million from $106.2 million at year-end, primarily reflecting higher fair values of available-for-sale securities. Tangible book value per share increased to $12.17 from $11.59.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or financial guidance. Management described deposit relationships and asset quality as solid and cited the Bank’s available liquidity sources and capital position. Its forward-looking statements remain subject to economic, rate, funding, credit, market and regulatory uncertainty.
- Available-for-sale securities had $121.5 million of gross unrealized losses at quarter-end. Held-to-maturity securities had a disclosed fair value of $1.71 billion versus a $2.02 billion carrying amount. Management attributed securities fair-value declines principally to interest rates, considered them temporary, and recorded no securities credit-loss allowance. The company sold about $64 million of available-for-sale securities during the quarter, recognizing a $0.5 million loss.
- The filing highlights regional banking confidence and deposit-flight risks, including the potential for technology and rapid information sharing to accelerate deposit outflows. Other cited risks include interest-rate changes, inflation, economic conditions, cyber threats, competition, regulation and liquidity.
- Disclosure controls were not effective at March 31 because of previously identified material weaknesses involving controls over loan and investment reporting, classification and disclosure, cash flow line items, and timely financial statement release. Remediation was ongoing; management estimated completion before fiscal year-end 2023, subject to implementation and testing. Management nevertheless concluded the quarterly financial statements were fairly presented in all material respects under GAAP.
- A securities class action was filed April 20, 2023 against the company and two officers. The company said it believes the claims are without merit and intends to defend them; no liability was accrued, and management assessed the likelihood of loss as remote.
- The company revised certain Q1 2022 comparative line items for immaterial errors related to indirect loan dealer reserve amortization and a securities transfer disclosure. It stated the revisions did not affect net income. The Q1 2022 figures shown in this summary reflect the revised presentation.
- The board approved Thomas M. Prame as CEO effective June 1, 2023; Craig M. Dwight was to remain chairman and retire as an employee effective July 3, 2023.
Important facts for investors to verify
- Deposit trends and mix, especially the stability of public deposits, deposit pricing and further reliance on borrowings.
- Actual availability and terms of the disclosed credit lines and unpledged securities, and liquidity under stressed deposit-outflow scenarios.
- Net interest margin and funding-cost direction, given the sharp year-over-year rise in deposit and borrowing costs.
- Unrealized securities losses, including the held-to-maturity fair-value gap, and the potential effects of rates, sales or liquidity needs.
- Credit quality, commercial real estate exposures, allowance adequacy and any change in delinquencies, nonperforming loans or charge-offs.
- Progress and independent testing of remediation for the material weaknesses, as well as developments in the securities lawsuit.
- Reconciliation of GAAP results with management’s non-GAAP measures; reported Q1 2023 diluted EPS was $0.42 versus adjusted diluted EPS of $0.43.