Horizon Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Horizon is an Indiana-based commercial bank holding company serving northern and central Indiana and southern and central Michigan. Amounts below are rounded to millions unless otherwise noted.
Financial performance and condition
- Q3 earnings: Net income was $16.2 million and diluted EPS was $0.37, versus $23.8 million and $0.55 in Q3 2022. For the first nine months, net income was $53.2 million and diluted EPS was $1.21, versus $72.2 million and $1.65.
- Revenue and margins: Q3 interest income rose to $80.1 million from $61.5 million, but interest expense increased to $38.0 million from $9.6 million. Net interest income fell to $42.1 million from $51.9 million; net interest margin was 2.41% versus 3.04%. Nine-month net interest income was $133.5 million versus $150.7 million, and margin was 2.59% versus 3.02%. Higher funding costs more than offset improved asset yields.
- Non-interest items and expenses: Q3 non-interest income increased 16.1% year over year to $11.8 million, partly reflecting higher mortgage-related income and $0.85 million of additional other income from asset sales. Non-interest expense decreased 1.8% to $36.2 million. The Q3 efficiency ratio was 67.08%, up from 59.33% a year earlier. Nine-month non-interest income declined 11.8% to $32.4 million; non-interest expense declined 0.5% to $107.0 million.
- Balance sheet and lending: Total assets were $7.96 billion, up from $7.87 billion at year-end 2022. Loans were $4.36 billion, up $201.0 million; commercial loans were $2.59 billion. Deposits were $5.70 billion, down $157.7 million from year-end. Cash and due from banks were $175.1 million.
- Funding and liquidity: Borrowings rose to $1.36 billion from $1.14 billion, primarily as deposits declined. The Bank reported approximately $1.65 billion of unused credit lines, including FHLB and Federal Reserve Discount Window capacity, and $622.9 million of unpledged securities. Management identifies core deposits as its principal liquidity source.
- Cash flow, nine months: Operating activities provided $74.0 million, investing activities used $55.7 million, and financing activities provided $33.4 million. Cash increased $51.6 million to $175.1 million; in the comparable 2022 period cash declined $483.8 million.
- Credit quality: Nonperforming loans were $19.4 million, or 0.45% of loans, down from $21.8 million at year-end. The allowance for credit losses was $49.7 million, or 1.14% of loans, versus $50.5 million, or 1.21%, at year-end. Q3 net charge-offs were 0.02% of average loans.
- Capital and securities: Stockholders’ equity was $693.4 million. The Bank met regulatory “well capitalized” requirements; its total risk-based capital ratio was 13.11% and common equity Tier 1 ratio was 12.22%. Securities had substantial rate-related unrealized losses: combined gross unrealized losses were $569.4 million at quarter-end. Accumulated other comprehensive loss was $123.4 million. Management considered the securities declines temporary and recorded no securities credit-loss allowance.
Changes versus comparable periods
- Q3 net income declined 32.0% year over year, primarily reflecting a $9.8 million reduction in net interest income and higher credit-loss expense, partly offset by stronger non-interest income and lower expenses.
- Nine-month net income declined 26.4%. Net interest income fell $17.2 million, credit-loss expense increased $2.9 million versus a prior-year recovery, and non-interest income fell $4.3 million.
- Interest-earning asset yields improved, but deposit and borrowing costs rose sharply. Q3 interest-bearing liability cost was 2.52%, compared with 0.69% a year earlier.
- Loans grew while deposits contracted, increasing reliance on borrowings. Available-for-sale securities declined $132.4 million from year-end, and held-to-maturity securities declined $56.3 million, largely due to repayments and securities sales.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings, margin, or growth guidance. Management described deposits as resilient during Q3 and reported ongoing loan growth and expense-management efforts.
- Management cited interest-rate changes, deposit competition and outflows, banking-sector confidence and liquidity, economic conditions, credit losses, securities valuations, cybersecurity, regulation, and execution of internal-control remediation among key risks.
- Disclosure controls were not effective as of September 30, 2023 because of previously identified material weaknesses involving loan, investment, and cash-flow reporting and the financial-close process. Remediation measures were underway but had not been fully tested; management estimated completion before fiscal year-end 2023. Management nevertheless concluded the financial statements were fairly presented in all material respects.
- A securities class action and related derivative lawsuits allege, among other matters, misleading disclosures and breaches of fiduciary duty. The derivative cases were stayed pending a motion to dismiss in the securities action. The Company said it intends to defend the matters; no liability was recorded because loss was not considered probable or reasonably estimable.
- A $1.5 million swap-termination gain benefited Q2 2023, not Q3, and elevated nine-month reported results; Q2 included an estimated $1.1 million after-tax benefit. The Company also recorded a $0.48 million net loss on securities sales in the first nine months.
- The filing revised certain previously issued comparative disclosures for immaterial errors involving loan interest/expense presentation, cash-flow classification, and loan vintage classification. The revisions did not affect net income.
Important facts for investors to verify
- Whether funding costs, deposit trends, and reliance on borrowings continue to pressure net interest margin and liquidity.
- How the securities portfolio’s unrealized losses, securities sales, and any need for liquidity affect capital and earnings.
- Whether loan growth is maintained without deterioration in delinquency, nonperforming loans, or charge-offs, particularly in commercial real estate and consumer lending.
- Whether management completes and tests remediation of the material weaknesses and reports effective controls.
- Developments in the securities and derivative lawsuits, and any resulting financial exposure.
- How reported results compare with adjusted non-GAAP measures, which exclude specified items and are not substitutes for GAAP results.