Horizon Bancorp, Inc. — 2022 Form 10-K
Business and reporting period. Horizon is an Indiana bank holding company operating primarily in Indiana and Michigan through Horizon Bank. This filing reports the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report. The Bank operated 71 full-service offices and reported $7.9 billion in assets.
Financial performance and condition
| Metric | 2022 | Comparison / context |
|---|---|---|
| Net income | $93.4 million; diluted EPS $2.14 | 2021: $87.1 million; $1.98 diluted EPS |
| Net interest income | $199.5 million | Up 13.5% from $175.8 million |
| Net interest margin | 2.98% | Down 5 basis points from 3.03%; adjusted margin was 2.93% versus 2.96% |
| Non-interest income / expense | $47.5 million / $143.2 million | Income down 18.1%; expense up 7.4% year over year |
| Cash from operations | $94.4 million | Down from $106.4 million in 2021 |
| Cash and cash equivalents | $123.5 million | Declined $470.0 million during 2022 |
| Total assets / stockholders’ equity | $7.87 billion / $677.4 million | Assets up $460.6 million; equity down $45.8 million |
| Loans / deposits | $4.16 billion / $5.86 billion | Loans up 13.7%; deposits up $54.8 million year end to year end |
| Borrowings | $1.14 billion | Up from $712.7 million; includes $244.0 million from the Federal Reserve discount window |
| Capital | Bank total risk-based capital 13.59%; leverage 8.89% | Bank classified as well capitalized |
Return on average assets was 1.24%, compared with 1.34% in 2021; return on average tangible equity was 18.33%. The common dividend was $0.63 per share for the year. No common stock was repurchased in the fourth quarter.
Material changes and notable items
- Loan growth was led by consumer lending, up 30.6%, and commercial lending, up 11.4%. Mortgage warehouse balances fell 36.2%.
- Higher rates lifted interest income by $41.9 million but increased interest expense by $18.2 million. Funding costs rose faster than earning-asset yields, compressing margin.
- Mortgage loan sale gains fell $12.0 million as secondary-market originations declined; total non-interest income decreased $10.5 million.
- The allowance for credit losses fell to $50.5 million, or 1.21% of loans, from $54.3 million, or 1.48%. The company recorded a $1.8 million credit-loss recovery. Non-performing loans were $21.8 million, approximately 0.53% of loans, versus $19.0 million and 0.52% a year earlier; net charge-offs were $0.8 million.
- Rising rates produced substantial unrealized securities losses: $140.5 million on available-for-sale securities and $341.8 million on held-to-maturity securities at year end. Accumulated other comprehensive loss was $106.2 million. Management said it did not expect to need material securities sales before recovery of amortized cost, but a forced sale could affect liquidity and capital.
- Deposits were nearly flat year over year, while estimated uninsured deposits were approximately $2.4 billion. About $697.6 million of time deposits were due in 2023. The company reported approximately $1.9 billion in unpledged securities and additional borrowing sources; availability is subject to collateral, market and counterparty conditions.
Outlook, risks and controls
The filing provides no specific earnings or financial guidance. Management said it believed funding was adequate for short- and long-term needs and was monitoring liquidity, interest-rate exposure and its securities portfolio. The company’s interest-rate model estimated net interest income would decline approximately $5.1 million under a 100-basis-point rate increase and $10.5 million under a 200-basis-point increase; it estimated increases of $5.1 million and $6.8 million, respectively, under comparable rate decreases.
A significant reporting and control concern is disclosed: management found material weaknesses in controls over loan, investment and cash-flow reporting and in the financial reporting process. Disclosure controls and internal control over financial reporting were ineffective at December 31, 2022, and the auditor issued an adverse opinion on ICFR. The weaknesses led to immaterial revisions to prior-period reporting and a late 10-K filing following a public-float calculation error. The auditor gave an unqualified opinion on the financial statements. Management began remediation in the first quarter of 2023; the weaknesses will not be considered remediated until controls operate effectively and are tested.
Other principal risks include deposit competition and outflows, further interest-rate changes and securities valuation losses, commercial and consumer credit deterioration, economic weakness, cyber and operational risks, regulatory requirements, and the ability to complete control remediation. The company disclosed no material off-balance-sheet arrangements and said ordinary-course legal proceedings were not expected to have a material adverse effect. It planned to transition applicable LIBOR-linked contracts to CME Term SOFR after June 30, 2023.
Most important facts for investors to verify
- Progress and independent testing of the remediation plan for the material weaknesses, and whether future filings require further revisions.
- Uninsured deposit concentration, deposit retention and repricing, and actual access to disclosed borrowing capacity and collateralized liquidity.
- Realized and unrealized securities losses, securities classification, and whether liquidity needs could force sales below amortized cost.
- Net interest margin and funding costs as rates change, compared with the company’s sensitivity scenarios.
- Loan quality trends, especially non-performing commercial relationships, consumer portfolio growth, and adequacy of the credit-loss allowance.