Horizon Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Horizon is an Indiana-based bank holding company operating through Horizon Bank in Indiana and Michigan. Financial amounts below are in U.S. dollars; figures are rounded.
Financial performance
- Q2 profit: Net income was $24.9 million, up 12.1% from $22.2 million a year earlier; diluted EPS was $0.57 versus $0.50. Pre-tax, pre-provision net income, a non-GAAP measure, was $29.1 million, up 18.9% year over year.
- First-half profit: Net income was $48.4 million versus $42.6 million; diluted EPS was $1.11 versus $0.97.
- Interest income and margin: Q2 net interest income rose to $53.0 million from $42.6 million year over year. Reported net interest margin was 3.19% (3.14% a year earlier); adjusted NIM was 3.12% (3.13%). First-half NIM was 3.03%, down from 3.21%; adjusted NIM was 2.97%, down from 3.15%.
- Other income and expenses: Q2 non-interest income fell 18.2% to $12.4 million, including lower mortgage-loan sale gains ($2.5 million versus $5.6 million). Non-interest expense rose 9.7% to $36.4 million, mainly reflecting compensation, acquired branches, technology investment and higher FDIC insurance expense. The reported efficiency ratio improved to 55.57% from 57.73% a year earlier.
- Credit costs: Q2 credit-loss expense was $0.24 million, compared with a $1.49 million recovery a year earlier. First-half credit-loss expense was a recovery of $1.15 million. The allowance for credit losses was $52.4 million, or 1.33% of loans, versus $54.3 million, or 1.51%, at year-end 2021.
Balance sheet, cash flow and capital
- Total assets were $7.64 billion at June 30, up from $7.41 billion at year-end. Net loans were $3.89 billion, up $295.1 million; deposits were $5.85 billion, up $42.6 million.
- Investment securities held to maturity increased to $2.05 billion from $1.55 billion. Their disclosed fair value was $1.75 billion. Available-for-sale securities had a fair value of $1.04 billion, down from $1.16 billion at year-end.
- Borrowings increased to $959.2 million from $712.7 million; short-term funds borrowed were $458.0 million, versus $180.8 million at year-end. Cash and due from banks declined to $108.8 million from $593.5 million.
- For the first half, operating cash flow was $51.4 million, investing cash flow was negative $809.9 million and financing cash flow was positive $273.8 million. Cash and cash equivalents declined $484.7 million.
- Stockholders’ equity fell to $657.9 million from $723.2 million, primarily reflecting securities-related other comprehensive losses and dividends, partly offset by earnings. Book value per share was $15.10 versus $16.61 at year-end; tangible book value per share was $11.11 versus $12.58.
- The Bank met regulatory requirements to be considered well capitalized. At June 30, its total risk-based capital ratio was 13.83%, common equity tier 1 ratio 12.87%, and Tier 1 leverage ratio 8.85%. Management reported $917.6 million of unused credit lines and $2.2 billion of unpledged investment securities.
Material changes, outlook and risks
- Management described asset quality as favorable: non-performing loans were $20.2 million, or 0.51% of loans, compared with $19.0 million, or 0.54%, at year-end. Second-quarter net charge-offs were 0.01% of average loans.
- Rising interest rates produced substantial securities valuation losses. Q2 unrealized losses on available-for-sale securities were reported at $122.0 million; accumulated other comprehensive income/loss moved from positive $7.3 million at year-end to negative $93.1 million. Management attributed the losses to interest-rate movements and said it did not intend to sell the affected securities before amortized cost recovery, which may not occur until maturity.
- Management reported greater asset sensitivity at quarter-end, citing deposit betas lagging rate increases and more adjustable-rate assets. Its modeled parallel 100- and 200-basis-point rate shocks indicated increases in net interest income of approximately $7.0 million and $12.8 million, respectively. These are estimates, not earnings guidance.
- The company approved permanent closure of seven branches in the second half of 2022 and recorded an approximately $380,000 Q2 charge to mark related fixed assets to fair value. The filing provides no formal earnings or revenue guidance.
- Key disclosed risks include changes in interest rates and deposit behavior, inflation and economic conditions, credit losses and collateral values, mortgage origination and prepayment trends, liquidity, cybersecurity, regulation, competition and acquisition integration. Management said there were no material changes to the risk factors in its 2021 Form 10-K.
- The filing revised prior-period amounts for errors it deemed immaterial. One correction added $37.0 million to loans and borrowings at December 31, 2021 for commercial loan participations that did not qualify as sales; another corrected certain securities classifications. Management concluded the errors were not material to prior issued statements.
- Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no materially affecting changes in internal control reported during the quarter.
Important facts for investors to verify
- How interest-rate changes affect deposit pricing, funding costs, asset yields and the company’s modeled net-interest-income sensitivity.
- The scale and duration of unrealized securities losses, including the gap between held-to-maturity carrying value and disclosed fair value, and the consequences if liquidity needs require sales.
- Whether loan growth, credit quality and the allowance remain appropriate as economic conditions and borrower performance change.
- How mortgage banking income, expense growth and the seven planned branch closures affect future profitability and efficiency.
- How much of first-half earnings and margin performance reflects acquisition-related purchase-accounting adjustments or other non-GAAP items, and the effects of the disclosed prior-period revisions.