Horizon Bancorp, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Horizon is an Indiana bank holding company operating through Horizon Bank in Indiana and Michigan. It reports as a single commercial banking segment. This unaudited filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021.
Financial performance and condition
- Quarterly earnings: Net income was $23.8 million and diluted EPS was $0.55, versus $23.1 million and $0.52 in Q3 2021. Compared with Q2 2022, net income declined 4.2% and diluted EPS fell from $0.57.
- Nine-month earnings: Net income was $72.2 million and diluted EPS was $1.65, compared with $65.7 million and $1.49 in the first nine months of 2021.
- Net interest income and margin: Q3 net interest income rose 14.7% year over year to $53.4 million. Reported net interest margin was 3.13%, down from 3.17% a year earlier and 3.19% in Q2; adjusted Q3 margin, excluding acquisition-related purchase accounting adjustments, was 3.08%. Nine-month net interest income was $154.6 million, up $22.9 million, while reported margin declined to 3.03% from 3.20%.
- Noninterest income and expenses: Q3 noninterest income declined $5.9 million year over year to $10.2 million, chiefly from lower mortgage loan sale gains and wealth-management fees, as well as prior-year one-time gains. Noninterest expense rose $4.0 million to $38.4 million. Year-to-date expense was $111.3 million, or 1.99% of average assets on an annualized basis; management cited a 2.00% target.
- Credit quality: Q3 credit-loss recovery was $0.6 million, compared with $1.1 million of expense in Q3 2021. The allowance for credit losses was $51.4 million, or 1.28% of loans, versus $54.3 million, or 1.51%, at year-end. Nonperforming loans were $19.2 million, or 0.48% of loans; net charge-offs were 0.00% of average loans for the quarter.
- Balance sheet and lending: Total assets were $7.72 billion, up $306.8 million from year-end. Net loans grew $370.5 million to $3.96 billion; deposits rose $27.8 million to $5.83 billion. Gross loans increased especially in commercial and consumer lending. Total assets and loan balances reflect the filing’s revised accounting for certain commercial loan participations.
- Liquidity and funding: Cash and due from banks fell to $109.7 million from $593.5 million. Borrowings increased to $1.05 billion from $712.7 million, including $871.6 million of short-term funds borrowed. Management reported $917.6 million in unused credit lines and $2.2 billion of unpledged securities at quarter-end.
- Debt and capital: Horizon had $58.9 million of subordinated notes and $57.0 million of junior subordinated debentures, in addition to borrowings. Stockholders’ equity was $645.0 million, down from $723.2 million at year-end. The Bank’s reported capital ratios remained above “well-capitalized” thresholds; its total risk-based capital ratio was 13.65% and Tier 1 leverage ratio was 8.84%.
- Cash flow: For the first nine months, operating activities provided $77.7 million, investing activities used $902.3 million, and financing activities provided $340.8 million. Cash and cash equivalents declined $483.8 million, primarily amid securities purchases and loan growth.
Material changes and unusual items
- Rapidly rising rates coincided with significant securities valuation declines. AFS securities had $162.0 million of gross unrealized losses at September 30, and HTM securities had $391.0 million. HTM fair value was $1.64 billion versus $2.03 billion carrying value. Accumulated other comprehensive loss was $123.1 million, compared with accumulated income of $7.3 million at year-end; total stockholders’ equity consequently declined.
- Management said the unrealized securities losses primarily reflected interest-rate changes and that it did not intend to sell the identified securities before recovery of amortized cost. The filing states there was no securities credit-loss allowance at quarter-end.
- Q3’s effective tax rate fell to 7.8% following recognition of solar tax credits as projects entered service.
- The company revised previously issued figures for immaterial errors. One correction increased December 31, 2021 loans and borrowings by $37.0 million because certain sold commercial loan participations did not qualify for sale accounting; another corrected AFS/HTM security classifications. Management concluded the errors were not material to prior filings.
- The filing identifies no formal earnings or revenue guidance. Management noted lower mortgage originations, higher deposit betas and reduced asset sensitivity as rates rose. Its interest-rate model estimated that parallel +100- and +200-basis-point shocks would reduce net interest income by approximately $3.3 million and $6.7 million, respectively; a separate nonparallel scenario estimated a $1.3 million increase for a 200-basis-point move.
Outlook, risks, and contingencies
Management highlighted interest-rate and funding-cost changes, inflation and economic conditions, loan and collateral performance, deposit disintermediation, mortgage activity, competition, cybersecurity, regulatory and legal developments, and acquisition integration as risks that could affect results. It stated that litigation arising in the ordinary course was not expected to have a material adverse effect and reported no material change in previously disclosed risk factors. The Bank’s liquidity sources include core deposits, loan repayments, securities, correspondent lines and Federal Home Loan Bank and Federal Reserve facilities. The filing provides no specific forward earnings forecast.
Investor verification priorities
- Assess the effect of securities’ unrealized losses on tangible equity and liquidity, including the distinction between AFS and HTM accounting and management’s ability to hold securities to recovery.
- Track deposit costs, deposit betas, borrowings and short-term funding needs as market rates change.
- Review loan growth and mix alongside delinquency, criticized and classified credits, nonperforming loans, charge-offs, and allowance adequacy.
- Separate recurring fee income and operating costs from prior-period gains, solar tax credits and other unusual items when comparing earnings.
- Review the disclosed commercial participation accounting correction and security-classification revisions against the detailed notes and prior-period presentations.
- Confirm regulatory capital and available liquidity remain adequate under changing rate and economic scenarios; the filing’s sensitivity figures are management estimates, not guarantees.