Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward–Looking Statements
This report contains certain forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp, Inc. (“Horizon” or the “Company”) and Horizon Bank (the “Bank”). Horizon intends such forward–looking statements to be covered by the safe harbor provisions for forward–looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward–looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward–looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.
Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward–looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward–looking statement include but are not limited to:
• economic conditions and their impact on Horizon and its customers;
• COVID–19 related impact on Horizon and its customers (See Part II, Item 1A. Risk Factors within this Report on Form 10–Q for additional details)
• changes in the level and volatility of interest rates, spreads on earning assets and interest–bearing liabilities, and interest rate sensitivity;
• volatility in interest rates and their impact on mortgage loan volumes and the outflow of deposits;
• loss of key Horizon personnel;
• increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks;
• loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g. Apple Pay or Bitcoin) take a greater market share of the payment systems;
• estimates of fair value of certain of Horizon’s assets and liabilities;
• volatility and disruption in financial markets;
• prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;
• sources of liquidity;
• potential risk of environmental liability related to lending activities;
• changes in the competitive environment in Horizon’s market areas and among other financial service providers;
• legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular, including the effects resulting from the reforms enacted by the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd–Frank Act”) and the adoption of regulations by regulatory bodies under the Dodd–Frank Act;
• the impact of whole or partial dismantling of provisions of the Dodd–Frank Act under the current federal administration, including the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act;
• the impact of the Basel III capital rules;
• changes in regulatory supervision and oversight, including monetary policy and capital requirements;
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And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
• changes in accounting policies or procedures as may be adopted and required by regulatory agencies;
• litigation, regulatory enforcement, tax, and legal compliance risk and costs, as applicable generally and specifically to the financial and fiduciary (generally and as an ESOP fiduciary) environment, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same;
• the effects and costs of governmental investigations or related actions by third parties;
• changes in the legal and regulatory and enforcement environment including financial, fiduciary (generally and as an ESOP fiduciary), and taxes and tariffs;
• rapid technological developments and changes;
• the risks presented by cyber terrorism and data security breaches;
• containing costs and expenses;
• the slowing or failure of economic recovery;
• the ability of the U.S. federal government to manage federal debt limits;
• the potential influence on the U.S. financial markets and economy from material changes outside the U.S. or in overseas relations, including changes in the U.S. trade relations related to imposition of tariffs, Brexit and the phase out in 2021 of the London Interbank Offered Rate (“LIBOR”); and
• the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings.
The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward–looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward–looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2019 Annual Report on Form 10-K, in Part II, Item 1A of this Report on Form 10-Q, and in the subsequent reports we file with the SEC.
Overview
Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in northern and central Indiana and southern and central Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was originally chartered as a national banking association in 1873 and has operated continuously since that time and converted to an Indiana state–chartered bank effective on June 23, 2017. The Bank is a full–service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. Upon approval of a name change by Horizon’s shareholders at the annual meeting on May 3, 2018, Horizon’s full corporate name became “Horizon Bancorp, Inc.”
On March 26, 2019, Horizon completed the acquisition of Salin Bancshares, Inc. (“Salin”), an Indiana corporation and Horizon Bank’s acquisition of Salin Bank and Trust Company (“Salin Bank”), an Indiana commercial bank and wholly–owned subsidiary of Salin, through mergers effective March 26, 2019. Under the terms of the Merger Agreement, shareholders of Salin received 23,907.5 shares of Horizon common stock and $87,417.17 in cash for each outstanding share of Salin common stock. Salin shares outstanding at the closing to be exchanged were 275, and the shares of Horizon common stock issued to Salin shareholders totaled 6,563,697. Based upon the March 25, 2019 closing price of $15.65 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction had an implied valuation of approximately $126.7 million.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Third Quarter 2020 Highlights
• Earned net income of $20.3 million, or $0.46 diluted earnings per share, compared to $14.6 million, or $0.33 diluted earnings per share, for the second quarter of 2020 and $20.5 million, or $0.46 diluted earnings per share, for the third quarter of 2019.
• Grew pre–tax, pre–provision net income to $26.7 million for the quarter, compared to $23.7 million for the second quarter of 2020 and $24.9 million for the third quarter of 2019. This non–GAAP financial measure is utilized by banks to provide a greater understanding of pre–tax profitability before giving effect to credit loss expense. (See the “Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income” table below.)
• Reported return on average assets (“ROAA”) of 1.40% and return on average common equity (“ROACE”) of 12.08% in the quarter, as well as adjusted ROAA of 1.34% and adjusted ROACE of 11.55%, excluding the impact of gains on sale of investment securities, net of tax. (See the “Non–GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity” tables below.)
• Increased the allowance for credit losses (“ACL”) 2.2% during the quarter and 218.8% year–to–date to $56.3 million at period end, representing 1.39% of total loans, reflecting implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the Company’s general reserves. ACL at period end also represented 1.51% of loans excluding $310.8 million in Federal Paycheck Protection Program (“PPP”) loans, and 192.1% of non–performing loans.
• Maintained solid asset quality metrics, including non–performing and delinquent loans representing 0.72% and 0.15% of total loans, respectively, at September 30, 2020, while net charge–offs were 0.02% of average loans for the period.
• COVID–19 deferral levels improved to 4.1% of total loans at period end, from 14.3% on June 30, 2020.
• Reported non–interest expense of $33.4 million, representing 2.30% of average assets on an annualized basis compared to 2.18% for the second quarter of 2020 and 2.34% for the third quarter of 2019.
• Improved the efficiency ratio in the period to 55.59% compared to 56.23% for the second quarter of 2020. (See the “Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” tables below.)
• Generated record gain on mortgage loan sales of $8.8 million, up 33.1% from the linked quarter and 226.2% from the prior year period, and originated $207.1 million in mortgage loans during the quarter, down 18.1% from the record second quarter of 2020 and up 71.0% from the third quarter of 2019.
• Reported net interest margin of 3.39% and adjusted net interest margin of 3.27%, with each declining by 8 basis points from the second quarter of 2020. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this Non–GAAP calculation). An estimated 4 basis points of compression is attributed to PPP lending and an estimated 8 basis points of compression is attributed to subordinated notes during the quarter, for both net interest margin and adjusted net interest margin.
• Horizon's book value per share increased from $14.29 at December 31, 2019 to $15.28 at September 30, 2020.
• Horizon’s tangible book value per share increased from $10.63 at December 31, 2019 to $11.29 at September 30, 2020, which includes the accounting adjustment for CECL as of January 1, 2020. This represents the highest tangible book value per share in the Company’s history. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” tables below.)
• Maintained strong liquidity position including approximately $1.3 billion in cash and investment securities, which is approximately 22.4% of total assets, and approximately $928.0 million in unused availability on lines of credit, at September 30, 2020.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Coronavirus Update/Status
The coronavirus (“COVID–19”) pandemic has placed significant health, economic and other major pressure throughout the communities we serve, in the states of Indiana and Michigan, the United States and the entire world. We have implemented a number of procedures in response to the pandemic to support the safety and well–being of our employees, customers and shareholders that continue through the date of this report:
• Employees
◦ Safety and well–being of employees and families is our first priority.
◦ Implemented pandemic plan in March after completing test run in February 2020.
◦ Installed sneeze guards, customer directional signage, implemented mask requirements, and continuing with sanitizing and social distancing protocols.
◦ Steadily reducing percentage of employees working remotely from early second quarter peak.
◦ Increased paid time off and sick time benefits.
• Consumers
◦ 100% of our branch locations are now open for walk–in traffic.
◦ Installed nine additional Interactive Teller Machines (“ITMs”) staffed by remote video tellers.
◦ Opened fourth call center location.
◦ Payment relief
▪ Approximately $8 million consumer and mortgage loans have been modified as of September 30, 2020, down from $63 million as of June 30, 2020.
▪ Continued to provide new loans to qualified applicants.
▪ Provided mortgage loan education programs.
▪ Provided additional financial assistance in the form of fee waivers and a freeze on all debt collection activities.
• Businesses
◦ Preferred SBA Lender
▪ Active participant in all SBA loan programs (PPP, 7a, Express and 504).
◦ Payment Relief Programs
▪ Approximately $152 million in commercial loans with payment extensions as of September 30, 2020, down from $470 million as of June 30, 2020.
▪ Processed and received approval for 2,438 PPP loans, funding approximately $310.9 million.
▪ Continued to provide new loans to qualified applicants.
▪ Began accepting PPP forgiveness applications on September 1, 2020.
• Communities
◦ Increased volunteerism in support of local not–for–profit entities.
◦ Contributed over $300,000 to COVID–19 related not–for–profit efforts (local food banks, United Way, housing).
◦ Participated in community conference calls related to COVID–19.
◦ Partnered with local neighborhood housing partnerships to provide funding for low to moderate income families.
◦ Partnered with local Certified Development Corporations to provide capital to small businesses.
◦ Supported flood victims in Midland, Michigan.
Financial Summary
For the Three Months Ended
September 30, June 30, September 30,
Net Interest Income and Net Interest Margin 2020 2020 2019
Net interest income $ 43,397 $ 42,996 $ 43,463
Net interest margin 3.39 % 3.47 % 3.82 %
Adjusted net interest margin 3.27 % 3.35 % 3.67 %
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
For the Three Months Ended
September 30, June 30, September 30,
Asset Yields and Funding Costs 2020 2020 2019
Interest earning assets 3.90 % 4.05 % 4.87 %
Interest bearing liabilities 0.67 % 0.74 % 1.35 %
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income September 30, June 30, September 30,
2020 2020 2019
Total non–interest income $ 16,700 $ 11,125 $ 11,514
Gain on sale of mortgage loans 8,813 6,620 2,702
Mortgage servicing income net of impairment (1,308) (2,760) 444
For the Three Months Ended
September 30, June 30, September 30,
Non–interest Expense 2020 2020 2019
Total non–interest expense $ 33,407 $ 30,432 $ 30,060
Annualized non–interest expense to average assets 2.30 % 2.18 % 2.34 %
At or for the Three Months Ended
Credit Quality September 30, June 30, September 30,
2020 2020 2019
Allowance for credit losses to total loans 1.39 % 1.38 % 0.49 %
Non–performing loans to total loans 0.72 % 0.70 % 0.52 %
Percent of net charge–offs to average loans outstanding for the period 0.02 % 0.01 % 0.02 %
CECL Adoption
Allowance for December 31, January 1, Net Reserve Build September 30,
Credit Losses 2019 Impact 2020 1Q20 2Q20 3Q20 2020
Commercial $ 11,996 $ 13,618 $ 25,614 $ 6,936 $ 6,597 $ 648 $ 39,795
Retail Mortgage 923 4,048 4,971 683 178 (368) 5,464
Warehouse 1,077 — 1,077 (22) 135 60 1,250
Consumer 3,671 4,911 8,582 599 (260) 889 9,810
Allowance for Credit Losses (“ACL”)
$ 17,667 $ 22,577 $ 40,244 $ 8,196 $ 6,650 1,229 $ 56,319
ACL/Total Loans 0.49 % 1.10 % 1.39 %
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2019 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical
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And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
accounting policies the allowance for loan losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.
Allowance for Credit Losses
The allowance for credit losses on loans and leases replaces the allowance for loan and leases losses as a critical accounting estimate, as of January 1, 2020 with the adoption of ASU 2016–13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments .
The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.
The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast. Loan losses are estimated using the fair value of collateral for collateral–dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged–off against the ACL. Recoveries of amounts previously charged–off are credited to the ACL. PCD assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID–19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.
Goodwill and Intangible Assets
Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350–10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At September 30, 2020, Horizon had core deposit intangibles of $23.9 million subject to amortization and $151.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.
At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID–19, Horizon assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock and other relevant events. Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and stress testing performed. At the conclusion of the assessment, the Company determined that as of September 30, 2020 it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the COVID–19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing–retained basis. Capitalized servicing rights are amortized into non–interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market–based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage–servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.
Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.
Derivative Instruments
As part of the Company’s asset/liability management program, Horizon utilizes, from time–to–time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.
Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815–10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non–interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Valuation Measurements
Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post–retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.
Financial Condition
On September 30, 2020, Horizon’s total assets were $5.8 billion, an increase of approximately $543.3 million compared to December 31, 2019. The increase was primarily in net loans of $354.9 million, investment securities available for sale of $180.6 million and other assets of $25.5 million. These increases were offset by a decrease in investment securities held to maturity of $27.6 million.
Investment securities were comprised of the following as of (dollars in thousands):
September 30, 2020 December 31, 2019
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 6,250 $ 6,239 $ 1,415 $ 1,413
State and municipal 651,256 678,459 396,931 405,768
Federal agency collateralized mortgage obligations 180,628 185,849 267,272 269,252
Federal agency mortgage–backed pools 127,802 132,472 145,623 146,572
Corporate notes 10,877 12,324 10,848 11,771
Total available for sale investment securities $ 976,813 $ 1,015,343 $ 822,089 $ 834,776
Held to maturity
State and municipal $ 165,858 $ 176,777 $ 190,767 $ 197,842
Federal agency collateralized mortgage obligations 2,839 2,906 4,560 4,568
Federal agency mortgage–backed pools 11,573 11,929 12,572 12,737
Total held to maturity investment securities $ 180,270 $ 191,612 $ 207,899 $ 215,147
Investment securities available for sale increased $180.6 million since December 31, 2019 to $1.0 billion as of September 30, 2020. This increase was due to additional purchases to increase earning assets.
Gross loans increased $402.5 million since December 31, 2019 to $4.0 billion as of September 30, 2020. Commercial, mortgage warehouse and loans held for sale increased $275.0 million, $224.4 million and $9.0 million, respectively, offset by a decrease in residential mortgage and consumer loans of $95.5 million and $10.3 million, respectively. The majority of the increase in gross loans was due to the origination of approximately $310.8 million in PPP loans which are included in the commercial loan category.
Total deposits increased $405.3 million since December 31, 2019 to $4.3 billion as of September 30, 2020. This increase was primarily due to Federal stimulus payments to consumers and funds from the origination of PPP loans.
Total borrowings increased from $549.7 million as of December 31, 2019 to $587.5 million as of September 30, 2020. At September 30, 2020, the Company had $188.7 million in short-term funds borrowed compared to $398.8 million at December 31, 2019 as long–term funding provided opportunities to extend borrowings at lower rates. The Company also issued $60.0 million in subordinated notes during the second quarter of 2020.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Stockholders’ equity totaled $670.3 million at September 30, 2020 compared to $656.0 million at December 31, 2019. The increase in stockholders’ equity during the period was due to the generation of net income and an increase in accumulated other comprehensive income during the period, offset by the repurchase of outstanding stock, the impact of the adoption of ASU 2016–13 and dividends declared during the period. Book value per common share at September 30, 2020 increased to $15.28 compared to $14.59 at December 31, 2019.
Results of Operations
Overview
Consolidated net income for the three–month period ended September 30, 2020 was $20.3 million, or $0.46 diluted earnings per share, compared to $20.5 million, or $0.46 diluted earnings per share for the same period in 2019. The decrease in net income for the three–month period ended September 30, 2020 when compared to the same prior year period reflects an increase in non–interest expense of $3.3 million, an increase in credit loss expense of $1.7 million and an increase in income tax expense of $322,000, offset by an increase in non–interest income of $5.2 million. Excluding gain/loss on sale of investment securities and death benefit on bank owned life insurance (“adjusted net income”), adjusted net income for the third quarter of 2020 was $19.4 million, or $0.45 diluted earnings per share, compared to $20.3 million, or $0.45 diluted earnings per share for the third quarter of 2019.
Consolidated net income for the nine–month period ended September 30, 2020 was $46.6 million, or $1.06 diluted earnings per share, compared to $48.0 million, or $1.11 diluted earnings per share for the same period in 2019. The decrease in net income for the nine–month period ended September 30, 2020 when compared to the same prior year period reflects an increase in credit loss expense of $16.1 million and an increase in non–interest expense of $3.6 million, offset by an increase in net interest income of $8.0 million, an increase in non–interest income of $8.8 million and a decrease in tax expense of $1.5 million. Adjusted net income for the nine–month period ended September 30, 2020 was $45.0 million, or $1.02 diluted earnings per share, compared to $52.1 million, or $1.21 diluted earnings per share for the same period in 2019.
Net Interest Income
The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread, which affects the net interest margin. Volume refers to the average dollar levels of interest–earning assets and interest–bearing liabilities. Net interest spread refers to the difference between the average yield on interest–earning assets and the average cost of interest–bearing liabilities. Net interest margin refers to net interest income divided by average interest–earning assets and is influenced by the level and relative mix of interest–earning assets and interest–bearing liabilities.
Net interest income during the three months ended September 30, 2020 was $43.4 million, a decrease of $66,000 from the $43.5 million earned during the same period in 2019. Yields on the Company’s interest–earning assets decreased by 97 basis points to 3.90% for the three months ended September 30, 2020 from 4.87% for the three months ended September 30, 2019. Interest income decreased $5.6 million from $55.7 million for the three months ended September 30, 2019 to $50.1 million for the same period in 2020. The decrease in interest income was due to a decrease in interest rates during the third quarter of 2020. Interest income from acquisition–related purchase accounting adjustments was $1.5 million for the three months ending September 30, 2020 compared to $1.7 million for the same period of 2019.
Rates paid on interest–bearing liabilities decreased by 68 basis points for the three–month period ended September 30, 2020 compared to the same period in 2019. Interest expense decreased $5.5 million when compared to the three–month period ended September 30, 2019 to $6.7 million for the same period in 2020. This decrease was due to lower rates paid on deposits and borrowings. The cost on average interest–bearing deposits decreased 72 basis points while the cost of average borrowings decreased 103 basis points. Average balances of interest–bearing deposits increased $201.6 million and average balances of borrowings increased $163.6 million for the three-month period ended September 30, 2020 when compared to the same period in 2019.
The net interest margin decreased 43 basis points from 3.82% for the three–month period ended September 30, 2019 to 3.39% for the same period in 2020. The decrease in the margin for the three–month period ended September 30, 2020
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
compared to the same period in 2019 was due to a decrease in the yield of interest–earning assets, offset by a decrease in the cost of interest–bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 3.27% for the three-month period ending September 30, 2020 compared to 3.67% for the same period in 2019.
The following are the average balance sheets for the three months ending (dollars in thousands):
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Three Months Ended Three Months Ended
September 30, 2020 September 30, 2019
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 45,307 $ 12 0.11 % $ 18,133 $ 115 2.52 %
Interest earning deposits 28,428 53 0.74 % 17,823 93 2.07 %
Investment securities – taxable 447,762 1,639 1.46 % 478,764 2,949 2.44 %
Investment securities – non–taxable (1)
720,111 4,391 3.07 % 462,997 3,099 3.36 %
Loans receivable (2) (3)
4,010,003 44,051 4.39 % 3,646,268 49,455 5.41 %
Total interest earning assets 5,251,611 50,146 3.90 % 4,623,985 55,711 4.87 %
Non–interest earning assets
Cash and due from banks 94,039 66,970
Allowance for credit losses (55,271) (18,277)
Other assets 478,312 434,581
Total average assets $ 5,768,691 $ 5,107,259
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,334,436 $ 3,616 0.43 % $ 3,132,852 $ 9,109 1.15 %
Borrowings 577,447 1,662 1.15 % 413,859 2,275 2.18 %
Subordinated notes 58,716 895 6.06 % — — — %
Junior subordinated debentures issued to capital trusts 56,458 576 4.06 % 54,433 864 6.30 %
Total interest bearing liabilities 4,027,057 6,749 0.67 % 3,601,144 12,248 1.35 %
Non–interest bearing liabilities
Demand deposits 996,427 818,164
Accrued interest payable and other liabilities 76,410 47,181
Stockholders’ equity 668,797 640,770
Total average liabilities and stockholders’ equity $ 5,768,691 $ 5,107,259
Net interest income/spread $ 43,397 3.23 % $ 43,463 3.52 %
Net interest income as a percent of average interest earning assets (1)
3.39 % 3.82 %
(1)
Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)
Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)
Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
The net interest margin was impacted during the second and third quarters of 2020 due to the PPP loans that were originated. Horizon estimates that the PPP loans compressed the net interest margin by 3 and 4 basis points for the second and third quarters, respectively. This assumes these PPP loans were not included in average interest earning assets or interest income and were primarily funded by the growth in non–interest bearing deposits. The compression to the net interest margin for the first nine months of 2020 using the same assumptions was estimated to be 3 basis points.
The net interest margin was also impacted during the second and third quarters of 2020 due to the issuance of $60.0 million in subordinated notes in June 2020. Horizon estimates that the subordinated notes compressed the net interest margin by 1 and 10 basis points for the second and third quarters, respectively. This assumes the subordinated notes were not included in average interest bearing liabilities or interest expense and were primarily offset by a reduction in cash. The compression to the net interest margin for the first nine months of 2020 using the same assumptions was estimated to be 4 basis points.
Net interest income during the nine months ended September 30, 2020 was $127.3 million, an increase of $8.0 million from the $119.3 million earned during the same period in 2019. Yields on the Company’s interest–earning assets decreased by 68 basis points to 4.13% for the nine months ended September 30, 2020 from 4.81% for the nine months ended September 30, 2019. Interest income decreased $2.8 million from $154.9 million for the nine months ended September 30, 2019 to $152.1 million for the same period in 2020. Average interest earning assets during the nine months ended September 30, 2020 increased $660.7 million to $5.0 billion compared to $4.4 billion during the nine months ended September 30, 2019. Interest income from acquisition–related purchase accounting adjustments was $4.5 million for both the nine months ending September 30, 2020 and 2019.
Rates paid on interest–bearing liabilities decreased by 55 basis points for the nine–month period ended September 30, 2020 compared to the same period in 2019. Interest expense decreased $10.8 million when compared to the nine–month period ended September 30, 2019 to $24.8 million for the same period in 2020. This decrease was due to lower rates paid on deposits and borrowings. The cost on average interest–bearing deposits decreased 50 basis points while the cost of average borrowings decreased 105 basis points. Average balances of interest–bearing deposits increased $362.2 million and average balances of borrowings increased $113.7 million for the nine–month period ended September 30, 2020 when compared to the same period in 2019.
The net interest margin decreased 24 basis points from 3.72% for the nine–month period ended September 30, 2019 to 3.48% for the same period in 2020. The decrease in the margin for the nine–month period ended September 30, 2020 compared to the same period in 2019 was due to a decrease in the yield of interest–earning assets, offset by a decrease in the cost of interest–bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 3.36% for the nine–month period ending September 30, 2020 compared to 3.58% for the same period in 2019.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
The following are the average balance sheets for the nine months ending (dollars in thousands):
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2020 September 30, 2019
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 44,375 $ 125 0.38 % $ 14,778 $ 339 3.07 %
Interest earning deposits 25,083 216 1.15 % 21,938 284 1.73 %
Investment securities – taxable 476,735 6,582 1.84 % 469,330 8,929 2.54 %
Investment securities – non–taxable (1)
652,339 12,294 3.19 % 423,141 8,520 3.37 %
Loans receivable (2) (3)
3,839,008 132,927 4.64 % 3,447,654 136,862 5.32 %
Total interest earning assets 5,037,540 152,144 4.13 % 4,376,841 154,934 4.81 %
Non–interest earning assets
Cash and due from banks 85,511 58,890
Allowance for credit losses (42,864) (18,053)
Other assets 469,509 405,923
Total average assets $ 5,549,696 $ 4,823,601
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,286,648 $ 15,838 0.64 % $ 2,924,433 $ 24,923 1.14 %
Borrowings 576,288 5,974 1.38 % 462,575 8,391 2.43 %
Subordinated debentures 21,218 953 6.00 % — — — %
Junior subordinated debentures issued to capital trusts 56,398 2,061 4.88 % 48,666 2,348 6.45 %
Total interest bearing liabilities 3,940,552 24,826 0.84 % 3,435,674 35,662 1.39 %
Non–interest bearing liabilities
Demand deposits 879,840 760,717
Accrued interest payable and other liabilities 69,026 37,444
Stockholders’ equity 660,278 589,766
Total average liabilities and stockholders’ equity $ 5,549,696 $ 4,823,601
Net interest income/spread $ 127,318 3.29 % $ 119,272 3.42 %
Net interest income as a percent of average interest earning assets (1)
3.48 % 3.72 %
(1)
Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)
Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)
Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Credit Loss Expense
Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio. During the three–month period ended September 30, 2020, a provision of $2.1 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to $376,000 for the same period of 2019. During the three–month period ended September 30, 2020, commercial loan net charge–offs were $488,000, residential mortgage loan net charge–offs were $136,000 and consumer loan net charge–offs were $199,000.
During the nine–month period ended September 30, 2020, a provision of $17.7 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to $1.6 million for the same period of 2019. During the nine–month period ended September 30, 2020, commercial loan net charge–offs were $474,000, residential mortgage loan net charge–offs were $177,000 and consumer loan net charge–offs were $983,000.
The ACL balance at September 30, 2020 was $56.3 million, or 1.39% of total loans. This compares to an ACL balance of $17.7 million at December 31, 2019 or 0.49% of total loans.
As of September 30, 2020, non–performing loans totaled $29.3 million, which reflects a 14 basis point increase in non–performing loans to total loans, or an $8.1 million increase from $21.2 million in non–performing loans as of December 31, 2019. Non–performing commercial loans increased by $8.8 million, non–performing real estate loans decreased by $675,000 and non–performing consumer loans decreased by $18,000 at September 30, 2020 compared to December 31, 2019.
The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At September 30, 2020, the Bank modified loans totaling $160.1 million which qualify for treatment under the CARES Act. The following is a summary of loan modifications related to the COVID–19 pandemic by type of loan.
Type of Loan # Net
Balance % of
Total
Modifications % of
Portfolio
Commercial 61 $152.0 94.9 % 6.5 %
Mortgage (Retained Only) 24 $6.6 4.1 % 1.0 %
Indirect Auto 16 $0.4 0.3 % 0.1 %
Consumer Direct 14 $0.5 0.3 % 0.7 %
Consumer Revolving 10 $0.6 0.4 % 0.3 %
Total 125 $160.1 100.0 % 4.1 %
Mortgage (Serviced Only) 162
Other Real Estate Owned (“OREO”) and repossessed assets totaled $2.3 million at September 30, 2020 compared to $3.7 million at December 31, 2019.
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And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Non–interest Income
The following is a summary of changes in non–interest income for the three months ending September 30, 2020 and 2019 (table dollar amounts in thousands):
Three Months Ended
September 30, Amount Percent
2020 2019 Change Change
Non–interest Income
Service charges on deposit accounts $ 2,154 $ 2,836 $ (682) (24.0) %
Wire transfer fees 298 189 109 57.7 %
Interchange fees 2,438 2,138 300 14.0 %
Fiduciary activities 2,105 1,834 271 14.8 %
Gain (loss) on sale of investment securities 1,088 — 1,088 100.0 %
Gain on sale of mortgage loans 8,813 2,702 6,111 226.2 %
Mortgage servicing net of impairment (1,308) 444 (1,752) -394.6 %
Increase in cash surrender value of bank owned life insurance 566 556 10 1.8 %
Death benefit on bank owned life insurance 31 213 (182) 0.0 %
Other income 515 602 (87) (14.5) %
Total non–interest income $ 16,700 $ 11,514 $ 5,186 45.0 %
Total non–interest income was $5.2 million higher during the third quarter of 2020 compared to the same period of 2019. Residential mortgage loan activity during the third quarter of 2020 generated $8.8 million of income from the gain on sale of mortgage loans, up from $2.7 million for the same period in 2019 due to a higher volume of loans sold and an increase in the percentage gain on loans sold. Mortgage servicing rights, net of impairment, decreased $1.8 million during the third quarter of 2020 compared to the same period of 2019 primarily due to an impairment charge of $1.5 million recorded during the third quarter of 2020. Service charges on deposit accounts, death benefit on bank owned life insurance and other income decreased $682,000, $182,000, and $87,000, respectively, when comparing the third quarter of 2020 to the same period of 2019.
The following is a summary of changes in non–interest income for the nine months ending September 30, 2020 and 2019 (table dollar amounts in thousands):
Nine Months Ended
September 30, Amount Percent
2020 2019 Change Change
Non–interest Income
Service charges on deposit accounts $ 6,488 $ 7,193 $ (705) (9.8) %
Wire transfer fees 699 474 225 47.5 %
Interchange fees 6,661 5,659 1,002 17.7 %
Fiduciary activities 6,398 5,986 412 6.9 %
Gain on sale of investment securities 1,675 (85) 1,760 -2,070.6 %
Gain on sale of mortgage loans 18,906 6,089 12,817 210.5 %
Mortgage servicing net of impairment (4,043) 1,620 (5,663) -349.6 %
Increase in cash surrender value of bank owned life insurance 1,677 1,624 53 3.3 %
Death benefit on bank owned life insurance 264 580 (316) (54.5) %
Other income 1,163 1,984 (821) (41.4) %
Total non–interest income $ 39,888 $ 31,124 $ 8,764 28.2 %
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And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Total non–interest income was $8.8 million higher for the nine–month period ended September 30, 2020 compared to the same period of 2019. Residential mortgage loan activity during the nine–month period ended September 30, 2020 generated $18.9 million of income from the gain on sale of mortgage loans, up from $6.1 million for the same period in 2019 due to a higher volume of loans sold and an increase in the percentage gain on loans sold. Mortgage servicing rights, net of impairment, decreased $5.7 million during the nine–month period ended September 30, 2020 compared to the same period of 2019 primarily due to an impairment charge of $4.7 million recorded during 2020.
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ending September 30, 2020 and 2019 (table dollar amounts in thousands):
Three Months Ended
September 30, September 30,
2020 2019 Adjusted
Actual Merger
Expenses Adjusted Actual Merger
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 18,832 $ — $ 18,832 $ 16,948 $ — $ 16,948 $ 1,884 11.1 %
Net occupancy expenses 3,107 — 3,107 3,131 — 3,131 (24) (0.8) %
Data processing 2,237 — 2,237 2,140 — 2,140 97 4.5 %
Professional fees 688 — 688 335 — 335 353 105.4 %
Outside services and consultants 1,561 — 1,561 1,552 — 1,552 9 0.6 %
Loan expense 2,876 — 2,876 2,198 — 2,198 678 30.8 %
FDIC deposit insurance 570 — 570 (273) — (273) 843 -308.8 %
Other losses 114 — 114 90 — 90 24 26.7 %
Other expenses 3,422 — 3,422 3,939 — 3,939 (517) (13.1) %
Total non–interest expense $ 33,407 $ — $ 33,407 $ 30,060 $ — $ 30,060 $ 3,347 11.1 %
Annualized Non–interest Exp. to Avg. Assets 2.30 % 2.30 % 2.34 % 2.34 %
Total non–interest expense was $3.3 million higher for the third quarter of 2020 when compared to the third quarter of 2019. Increases in salaries and employee benefits, FDIC deposit insurance, loan expense and professional fees were offset in part by a decrease in other expense.
Annualized non–interest expense as a percent of average assets were 2.30% and 2.34% for the three months ended September 30, 2020 and 2019, respectively.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
The following is a summary of changes in non–interest expense for the nine months ending September 30, 2020 and 2019 (table dollar amounts in thousands):
Nine Months Ended
September 30, September 30,
2020 2019 Adjusted
Actual Merger
Expenses Adjusted Actual Merger
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 51,052 $ — $ 51,052 $ 48,365 $ (484) $ 47,881 $ 3,171 6.6 %
Net occupancy expenses 9,549 — 9,549 9,051 (75) 8,976 573 6.4 %
Data processing 7,074 — 7,074 6,245 (360) 5,885 1,189 20.2 %
Professional fees 1,742 — 1,742 1,426 (392) 1,034 708 68.5 %
Outside services and consultants 5,235 — 5,235 6,737 (2,466) 4,271 964 22.6 %
Loan expense 7,667 — 7,667 6,195 (2) 6,193 1,474 23.8 %
FDIC deposit insurance 955 — 955 252 — 252 703 279.0 %
Other losses 427 — 427 363 (71) 292 135 46.2 %
Other expenses 11,287 — 11,287 12,748 (1,800) 10,948 339 3.1 %
Total non–interest expense $ 94,988 $ — $ 94,988 $ 91,382 $ (5,650) $ 85,732 $ 9,256 10.8 %
Annualized Non–interest Exp. to Avg. Assets 2.29 % 2.29 % 2.53 % 2.38 %
Total non–interest expense was $3.6 million higher for the nine-month period ended September 30, 2020 when compared to the same period of 2019. Increases in salaries and employee benefits, loan expense, data processing FDIC deposit insurance and net occupancy expenses were offset in part by decreases in outside services and consultants and other expense. Excluding merger expenses, total non–interest expense increased by $9.3 million for the nine-month period ended September 30, 2020 when compared to the same period of 2019. This increase was primarily related to the closing of the Salin Bancshares, Inc. merger on March 26, 2019 and the related increase in costs.
Income Taxes
Income tax expense totaled $4.3 million for the third quarter of 2020 an increase of $322,000 when compared to the third quarter of 2019. The decrease in income tax expense in the third quarter of 2020 compared to the third quarter of 2019 was primarily due to a decrease in income before taxes of $97,000.
Income tax expense totaled $7.9 million for the nine-month period ended September 30, 2020, a decrease of $1.5 million when compared to the same period of 2019. The decrease in income tax expense was due to a decrease in income before taxes of $2.9 million in addition to an increase in tax–exempt municipal interest income.
Liquidity
The Bank maintains a stable base of core deposits provided by long–standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At September 30, 2020, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $928.0 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $517.1 million at December 31, 2019. The Bank had approximately $517.2 million of unpledged investment securities at September 30, 2020 compared to $807.4 million at December 31, 2019.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2020. Stockholders’ equity totaled $670.3 million as of September 30, 2020, compared to $656.0 million as of December 31, 2019. For the nine months ended September 30, 2020, the ratio of average stockholders’ equity to average assets was 11.90% compared to 12.28% for the twelve months ended December 31, 2019. The increase in stockholders’ equity during the period was the result of the net income and the increase in accumulated other comprehensive income, offset by the repurchase of outstanding stock, the impact of the adoption of ASU 2016–13 and dividends declared.
Horizon declared common stock dividends in the amount of $0.36 per share during the first nine months of 2020 and $0.34 per share for the same period of 2019. The dividend payout ratio (dividends as a percent of basic earnings per share) was 34.0% and 30.5% for the first nine months of 2020 and 2019, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2019.
Use of Non–GAAP Financial Measures
Certain information set forth in this quarterly report on Form 10–Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non–GAAP financial measures relating to net income, diluted earnings per share, net interest margin, the allowance for credit losses, tangible stockholders’ equity, tangible book value per share, the return on average assets, the return on average common equity, and pre–tax pre–provision net income. In each case, we have identified special circumstances that we consider to be adjustments and have excluded them, to show the impact of such events as acquisition–related purchase accounting adjustments, among others we have identified in our reconciliations. Horizon believes that these non–GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and other adjustments. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Net income as reported $ 20,312 $ 14,639 $ 11,655 $ 18,543 $ 20,537 $ 46,606 $ 47,995
Merger expenses — — — — — — 5,650
Tax effect — — — — — — (987)
Net income excluding merger expenses 20,312 14,639 11,655 18,543 20,537 46,606 52,658
(Gain)/loss on sale of investment
securities (1,088) (248) (339) (10) — (1,675) 85
Tax effect 228 52 71 2 — 352 (18)
Net income excluding (gain)/loss on sale of investment securities 19,452 14,443 11,387 18,535 20,537 45,283 52,725
Death benefit on bank owned life insurance (“BOLI”) (31) — (233) — (213) (264) (580)
Net income excluding death benefit on BOLI 19,421 14,443 11,154 18,535 20,324 45,019 52,145
Adjusted net income $ 19,421 $ 14,443 $ 11,154 $ 18,535 $ 20,324 $ 45,019 $ 52,145
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Diluted earnings per share (“EPS”) as reported $ 0.46 $ 0.33 $ 0.26 $ 0.41 $ 0.46 $ 1.06 $ 1.11
Merger expenses — — — — — — 0.13
Tax effect — — — — — — (0.02)
Diluted EPS excluding merger expenses 0.46 0.33 0.26 0.41 0.46 1.06 1.22
(Gain)/loss on sale of investment securities (0.02) (0.01) (0.01) — — (0.04) —
Tax effect 0.01 — — — — 0.01 —
Diluted EPS excluding (gain)/loss on investment securities 0.45 0.32 0.25 0.41 0.46 1.03 1.22
Death benefit on BOLI — — (0.01) — (0.01) (0.01) (0.01)
Diluted EPS excluding death benefit on BOLI 0.45 0.32 0.24 0.41 0.45 1.02 1.21
Adjusted Diluted EPS $ 0.45 $ 0.32 $ 0.24 $ 0.41 $ 0.45 $ 1.02 $ 1.21
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Pre–tax income $ 24,638 $ 16,632 $ 13,239 $ 22,463 $ 24,541 $ 54,509 $ 57,378
Credit loss expense 2,052 7,057 8,600 340 376 17,709 1,636
Pre–tax, pre–provision net income $ 26,690 $ 23,689 $ 21,839 $ 22,803 $ 24,917 $ 72,218 $ 59,014
Pre–tax, pre–provision net income $ 26,690 $ 23,689 $ 21,839 $ 22,803 $ 24,917 $ 72,218 $ 59,014
Merger expenses — — — — — — 5,650
(Gain)/loss on sale of investment securities (1,088) (248) (339) (10) — (1,675) 85
Death benefit on bank owned life insurance (31) — (233) — (213) (264) (580)
Adjusted pre–tax, pre–provision net income $ 25,571 $ 23,441 $ 21,267 $ 22,793 $ 24,704 $ 70,279 $ 64,169
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Net interest income as reported $ 43,397 $ 42,996 $ 40,925 $ 41,519 $ 43,463 $ 127,318 $ 119,272
Average interest earning assets 5,251,611 5,112,636 4,746,202 4,748,217 4,623,985 5,037,540 4,376,841
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 3.39 % 3.47 % 3.56 % 3.58 % 3.82 % 3.48 % 3.72 %
Net interest income as reported $ 43,397 $ 42,996 $ 40,925 $ 41,519 $ 43,463 $ 127,318 $ 119,272
Acquisition–related purchase accounting adjustments
(“PAUs”) (1,488) (1,553) (1,434) (1,042) (1,739) (4,475) (4,548)
Adjusted net interest income $ 41,909 $ 41,443 $ 39,491 $ 40,477 $ 41,724 $ 122,843 $ 114,724
Adjusted net interest margin 3.27 % 3.35 % 3.44 % 3.49 % 3.67 % 3.36 % 3.58 %
Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
September 30, June 30, March 31, December 31, September 30,
2020 2020 2020 2019 2019
Total stockholders’ equity $ 670,293 $ 652,206 $ 630,842 $ 656,023 $ 642,711
Less: Intangible assets 175,107 176,020 176,961 177,917 178,896
Total tangible stockholders’ equity $ 495,186 $ 476,186 $ 453,881 $ 478,106 $ 463,815
Common shares outstanding 43,874,353 43,821,878 43,763,623 44,975,771 44,969,021
Book value per common share $ 15.28 $ 14.88 $ 14.41 $ 14.59 $ 14.29
Tangible book value per common
share $ 11.29 $ 10.87 $ 10.37 $ 10.63 $ 10.31
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Non–interest expense as reported $ 33,407 $ 30,432 $ 31,149 $ 30,650 $ 30,060 $ 94,988 $ 91,382
Net interest income as reported 43,397 42,996 40,925 41,519 43,463 127,318 119,272
Non–interest income as reported $ 16,700 $ 11,125 $ 12,063 $ 11,934 $ 11,514 $ 39,888 $ 31,124
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 55.59 % 56.23 % 58.79 % 57.34 % 54.68 % 56.81 % 60.76 %
Non–interest expense as reported $ 33,407 $ 30,432 $ 31,149 $ 30,650 $ 30,060 $ 94,988 $ 91,382
Merger expenses — — — — — — (5,650)
Non–interest expense excluding merger expenses 33,407 30,432 31,149 30,650 30,060 94,988 85,732
Net interest income as reported 43,397 42,996 40,925 41,519 43,463 127,318 119,272
Non–interest income as reported 16,700 11,125 12,063 11,934 11,514 39,888 31,124
(Gain)/loss on sale of investment securities (1,088) (248) (339) (10) — (1,675) 85
Death benefit on bank owned life insurance ("BOLI") (31) — (233) — (213) (264) (580)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI $ 15,581 $ 10,877 $ 11,491 $ 11,924 $ 11,301 $ 37,949 $ 30,629
Adjusted efficiency ratio 56.64 % 56.49 % 59.43 % 57.35 % 54.89 % 57.48 % 57.19 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Average assets $ 5,768,691 $ 5,620,695 $ 5,257,332 $ 5,250,574 $ 5,107,259 $ 5,549,696 $ 4,823,601
Return on average assets ("ROAA") as reported 1.40 % 1.05 % 0.89 % 1.40 % 1.60 % 1.12 % 1.33 %
Merger expenses — — — — — — 0.16
Tax effect — — — — — — (0.03)
ROAA excluding merger expenses 1.40 1.05 0.89 1.40 1.60 1.12 1.46
(Gain)/loss on sale of investment securities (0.08) (0.02) (0.03) — — (0.04) —
Tax effect 0.02 — 0.01 — — 0.01 —
ROAA excluding (gain)/loss on sale of investment securities 1.34 1.03 0.87 1.40 1.60 1.09 1.46
Death benefit on bank owned life insurance ("BOLI") — — (0.02) — (0.02) (0.01) (0.02)
ROAA excluding death benefit on BOLI 1.34 1.03 0.85 1.40 1.58 1.08 1.44
Adjusted ROAA 1.34 % 1.03 % 0.85 % 1.40 % 1.58 % 1.08 % 1.44 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2020 and 2019
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2020 2020 2020 2019 2019 2020 2019
Average common equity $ 668,797 $ 649,490 $ 667,588 $ 653,071 $ 640,770 $ 660,278 $ 589,766
Return on average common equity ("ROACE") as reported 12.08 % 9.07 % 7.02 % 11.26 % 12.72 % 9.43 % 10.88 %
Merger expenses — — — — — — 1.28
Tax effect — — — — — — (0.22)
ROACE excluding merger expenses 12.08 9.07 7.02 11.26 12.72 9.43 11.94
(Gain)/loss on sale of investment securities (0.65) (0.15) (0.20) (0.01) — (0.34) 0.02
Tax effect 0.14 0.03 0.04 — — 0.07 —
ROACE excluding (gain)/loss on sale of investment securities 11.57 8.95 6.86 11.25 12.72 9.16 11.96
Death benefit on bank owned life insurance ("BOLI") (0.02) — (0.14) — (0.13) (0.05) (0.13)
ROACE excluding death benefit on BOLI 11.55 8.95 6.72 11.25 12.59 9.11 11.83
Adjusted ROACE 11.55 % 8.95 % 6.72 % 11.25 % 12.59 % 9.11 % 11.83 %
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon’s 2019 Annual Report on Form 10–K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2019 Annual Report on Form 10–K.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.