HBNC - Horizon Bancorp: Strong Loan Growth To Lift Earnings

Summary

• Robust pipelines, strong regional job markets, and acquisition plans will likely drive loan growth through the end of 2023.
• Rising interest rates will erode equity book value but at the same time slightly lift net interest income.
• Provisioning will likely remain higher than normal in the second half of 2022 before normalizing next year.
• The December 2022 target price suggests a high upside from the current market price. Further, HBNC is offering a decent dividend yield.

Earnings of Horizon Bancorp, Inc. ( HBNC ) will most probably continue to increase this year on the back of extraordinary loan growth. Further, the margin will expand slightly as a result of the significant surge in interest rates, which will support the bottom line. Overall, I'm expecting Horizon Bancorp to report earnings of $2.27 per share for 2022, up 14% year-over-year. Compared to my last report on the company, I've tweaked upwards my earnings estimate because I've revised upwards the loan balance estimate. For 2023, I'm expecting earnings to grow by a further 8% to $2.44 per share. The year-end target price suggests a high upside from the current market price. Therefore, I'm maintaining a buy rating on Horizon Bancorp.

Strong Loan Growth Momentum Likely to Continue

Horizon Bancorp's loan portfolio surged by 6.2% during the second quarter of 2022, or 24.7% annualized. Thanks to the second quarter’s performance, the loan book is now on track for double-digit loan growth for the year. The management is targeting a 50/50 mix of organic and acquired growth, as mentioned in the earnings presentation . Considering the plans for acquisitions, loan growth can easily reach the mid-teen range.

The management mentioned in the latest conference call that the pipelines for consumer and commercial loans were comparable to the same period last year when the portfolio actually grew by 4% (16% annualized). Therefore, loan growth will most probably remain strong in the third quarter of 2022.

The management especially appeared optimistic about consumer loan demand in the conference call due to low unemployment in Horizon’s markets. Horizon Bancorp mostly operates in Indiana and Michigan. The unemployment rates for both states are currently near the lowest level in decades.

Considering these factors, I'm expecting the loan portfolio to grow by 6% in the second half of 2022, leading to full-year loan growth of 16%. In my last report on Horizon, I estimated loan growth of 9.3% for this year. I've revised upwards my loan estimate because of the second quarter’s performance as well as an improvement in the overall outlook. For 2023, I'm expecting loan growth to return to a more normal level of around 8%.

Equity Book Value to Continue to Slip

The large balance of available-for-sale securities on Horizon Bancorp’s books will hurt the equity book value in a rising-rate environment. An increase in interest rates will lower the market value of these securities, which will build up unrealized losses. These losses will bypass the income statement to flow directly into the equity account through other comprehensive income.

The book value per share has already dropped to $15.10 at the end of June 2022 from $15.55 at the end of December 2021, as mentioned in the 10-Q Filing . I'm expecting further erosion of equity book value in the third quarter because of the 75 basis points hike in the Fed funds rate in July. Moreover, I'm expecting a further 75 basis point hike in the remainder of the year.

On the other hand, retained earnings (discussed below) will lift the equity book value. The following table shows my balance sheet estimates.

In my last report on Horizon Bancorp, I estimated earnings of $2.15 per share for 2022. I've tweaked upwards my earnings estimate mostly because I've revised upwards my loan balance estimate.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

High Total Expected Return Warrants a Buy Rating

Given the earnings outlook, I'm expecting Horizon Bancorp to increase its dividend by $0.02 per share in the third quarter of 2022, which will take the full-year dividend to $0.68 per share for 2023. My dividend and earnings estimates suggest a payout ratio of 28%, which is close to the last five-year average of 31%. Further, my dividend estimate suggests a dividend yield of 3.5%.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Horizon Bancorp. The stock has traded at an average P/TB ratio of 1.60 in the past, as shown below.

The stock has traded at an average P/E ratio of around 12.2x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $23.4 , which implies a 19.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 22.8%. Hence, I’m maintaining a buy rating on Horizon Bancorp.

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