Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Bank. 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 founded in 1873 as a national association, and it remained a national association until its conversion to an Indiana commercial bank effective 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. All share data included below has been adjusted to reflect Horizon’s three–for–two stock split paid on June 15, 2018.
2020 Highlights
Following are some highlights of Horizon’s financial performance during 2020:
• Earned record net income of $68.5 million, or $1.55 diluted earnings per share, compared to $66.5 million, or $1.53 diluted earnings per share, for 2019.
• Grew pre–tax, pre–provision net income to a record $99.1 million for 2020, compared to $81.8 million for 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.)
• Grew net interest income to a record $170.9 million for 2020, compared to $160.8 million for 2019. Adjusted net interest income for 2020 was $167.8 million compared to $155.2 million for 2019. (See the “Non–GAAP Reconciliation of Net Interest Margin” table below.)
• Reported return on average assets (“ROAA”) of 1.22% and return on average common equity (“ROACE”) of 10.29% for 2020, as well as adjusted ROAA of 1.22% and adjusted ROACE of 10.19%, excluding the impact of gains on sale of investment securities, death benefit on bank owned life insurance and prepayment penalties on borrowings, net of tax. (See the “Non–GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity” tables below.)
• Grew mortgage–related non–interest income by 106.8% from 2019 with gain on mortgage loan sales of $26.7 million and net mortgage servicing income of $(3.7) million. The bank originated $756.9 million in mortgage loans during 2020, up 85.1% from 2019.
• Total non–interest income, excluding gains on sale of investment securities and death benefit on bank owned life insurance, grew to a record $55.1 million, up 29.4% from 2019, supported by increases in mortgage–related gains and servicing income.
• Reported net interest margin (“NIM”) of 3.44% and adjusted NIM of 3.38%, with reported NIM declining by 25 basis points and adjusted NIM declining by 19 basis points from 2019. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation).
• Increased the allowance for credit losses (“ACL”) by 222.8% from 2019 to $57.0 million at December 31, 2020, representing 1.47% of total loans, reflecting our January 2020 implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the allocation for the Company's identified stressed portfolios. ACL at period end also represented 1.55% of loans excluding $208.9 million in Federal Paycheck Protection Program (“PPP”) loans, and 212.7% of non–performing loans.
• COVID–19 deferral levels improved to 3.3% of total loans at period end, compared to 4.1% at September 30, 2020 and 14.3% at June 30, 2020, and the bank experienced no material specific loan losses attributed to COVID–19 closures in 2020.
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• Maintained solid asset quality metrics, including non–performing and delinquent loans representing 0.6% and 0.19% of total loans, respectively, at December 31, 2020, while net charge–offs were 0.05% of average outstanding loans for 2020.
• The efficiency ratio for 2020 was 57.01% compared to 59.86% for 2019. The adjusted efficiency ratio was 57.20% compared to 57.23% for 2019. (See the “Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” tables below.)
• Horizon's tangible book value per share increased from $10.63 at December 31, 2019 to $11.81 at December 31, 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 $1.6 billion in cash and investment securities, which is approximately 26.3% of total assets, and approximately $1.0 billion in unused availability on lines of credit, at December 31, 2020.
• Continued over thirty years of uninterrupted dividends, and as of year–end, we had in excess of $127 million in cash at the holding company, which provides us with considerable future optionality to build shareholder value.
Critical Accounting Policies
The Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10–K for 2020 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 the allowance for loan losses, goodwill and intangible assets, mortgage servicing rights, derivative instruments and valuation measurements as critical accounting policies.
Allowance for Credit Losses
The allowance for credit losses on loans and leases (“ACL”) replaces the allowance for loan and lease losses as a credit 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 loans 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. Assets purchased with credit deterioration (“PCD”) 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 to 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.
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Allowance for Credit Losses on Off–Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The Company determines the estimated amount of expected credit extensions based on historical usage to calculate the amount of exposure for a loss estimate. After review of the expected credit losses on off–balance sheet exposures, the Company determined the amount not being recorded as immaterial at this time.
Allowance for Credit Losses on Available for Sale Securities
For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recorded in other comprehensive income.
Changes in the ACL are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Allowance for Credit Losses on Held to Maturity Securities
For held to maturity securities, the Company conducts an assessment of its held to maturity securities at the time of purchase and on at least an annual basis to ensure such investment securities remain within appropriate levels of risk and continue to perform satisfactorily in fulfilling its obligations. The Company considers, among other factors, the nature of the securities and credit ratings or financial condition of the issuer. If available, the Company obtains a credit rating for issuers from the Nationally Recognized Statistical Rating Organization (“NRSRO”) for consideration. If this assessment indicates that a material credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss. After completing this assessment, management determined any credit losses as of December 31, 2020 were not material to the consolidated financial statements.
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 December 31, 2020, Horizon had core deposit intangibles of $23.0 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.
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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 December 31, 2020, it was more likely than not that the fair value exceeded its carrying value. 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.
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
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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.
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.
Analysis of Financial Condition
Horizon’s total assets were $5.9 billion as of December 31, 2020, an increase of $639.8 million from December 31, 2019. The increase was primarily in investment securities available for sale of $299.2 million, net loans of $191.2 million, cash and due from banks of $150.9 million and other assets of $26.9 million, offset by a decrease in investment securities held to maturity of $39.2 million.
Investment Securities
Investment securities carrying values totaled $1.3 billion at December 31, 2020, and consisted of Treasury and federal agency securities of $19.7 million (1.5%); state and municipal securities of $995.3 million (76.4%); federal agency mortgage–backed pools of $127.4 million and federal agency collateralized mortgage obligations of $150.1 million (21.3%); and corporate securities of $10.2 million (0.8%).
As indicated above, 21.3% of the investment portfolio consists of mortgage–backed securities and collateralized mortgage obligations. These instruments are secured by residential mortgages of varying maturities. Principal and interest payments are received monthly as the underlying mortgages are repaid. These payments also include prepayments of mortgage balances as borrowers either sell their homes or refinance their mortgages. Therefore, mortgage–backed securities and collateralized mortgage obligations have maturities that are stated in terms of average life. The average life is the average amount of time that each dollar of principal is expected to be outstanding. As of December 31, 2020, the mortgage–backed securities and collateralized mortgage obligations in the investment portfolio had an average duration of 2.46 years. Securities that have interest rates above current market rates are purchased at a premium.
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(Table dollars in thousands except per share data)
Available for sale municipal securities are priced by a third party using a pricing grid which estimates prices based on recent sales of similar securities. All municipal securities are investment grade or local non–rated issues. A credit review is performed annually on the municipal securities portfolio.
At December 31, 2020 and 2019, 87.1% and 80.1%, respectively, of investment securities were classified as available for sale. Securities classified as available for sale are carried at their fair value, with both unrealized gains and losses recorded, net of tax, directly to stockholders’ equity. Net appreciation on these securities totaled $43.7 million, which resulted in a balance of $34.4 million, net of tax, included in stockholders’ equity at December 31, 2020. This compared to net appreciation on securities which totaled $9.9 million, net of tax, included in stockholders’ equity at December 31, 2019.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is also established which requires an entity to maximize the use of observable and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There are no Level 1 securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and Federal agency securities, State and municipal securities, Federal agency collateralized mortgage obligations, Federal agency mortgage-backed pools and corporate notes. For Level 2 securities, Horizon uses a third party service to determine fair value. In performing the valuations, the pricing service relies on models that consider security–specific details as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities and certain prepayment assumptions. To verify the reasonableness of the fair value determination by the service, Horizon has a portion of the Level 2 securities priced by an independent securities broker–dealer.
Unrealized gains and losses on available for sale securities, deemed temporary, are recorded, net of income tax, in a separate component of other comprehensive income on the balance sheet.
As a member of the Federal Home Loan Bank system, Horizon is required to maintain an investment in the common stock of the Federal Home Loan Bank. The investment in common stock is based on a predetermined formula. At December 31, 2020 and 2019, Horizon had investments in the common stock of the Federal Home Loan Bank totaling $23.0 million and $22.4 million, respectively.
At December 31, 2020, Horizon did not maintain a trading account.
For more information about securities, see Note 4 – Securities to the Consolidated Financial Statements at Item 8.
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(Table dollars in thousands except per share data)
Total Loans
Total loans, net of deferred fees/costs, the principal earning asset of the Bank, were $3.8 billion at December 31, 2020. The current level of total loans increased 5.3% from the December 31, 2019, level of $3.6 billion primarily due to an increase in mortgage warehouse loans and PPP loans originated during the year. The table below provides comparative detail on the loan categories.
December 31, December 31, Dollar Percent
2020 2019 Change Change
Commercial
Owner occupied real estate $ 496,306 $ 519,429 $ (23,123) (4.5) %
Non–owner occupied real estate 999,636 972,568 27,068 2.8 %
Residential spec homes 10,070 12,923 (2,853) (22.1) %
Development & spec land 26,372 35,940 (9,568) (26.6) %
Commercial and industrial 659,887 505,791 154,096 30.5 %
Total commercial 2,192,271 2,046,651 145,620 7.1 %
Real estate
Residential mortgage 598,700 751,031 (152,331) (20.3) %
Residential construction 25,586 19,686 5,900 30.0 %
Mortgage warehouse 395,626 150,293 245,333 163.2 %
Total real estate 1,019,912 921,010 98,902 10.7 %
Consumer
Direct installment 38,046 41,757 (3,711) (8.9) %
Indirect installment 357,511 348,658 8,853 2.5 %
Home equity 259,643 278,765 (19,122) (6.9) %
Total consumer 655,200 669,180 (13,980) (2.1) %
Total loans 3,867,383 3,636,841 230,542 6.3 %
Allowance for loan losses (57,027) (17,667) (39,360) 222.8 %
Loans, net $ 3,810,356 $ 3,619,174 $ 191,182 5.3 %
The acceptance and management of credit risk is an integral part of the Bank’s business as a financial intermediary. The Bank has established underwriting standards including a policy that monitors the lending function through strict administrative and reporting requirements as well as an internal loan review of consumer and small business loans. The Bank also uses an independent third-party loan review function that regularly reviews asset quality.
Changes in the mix of the loan portfolio averages are shown in the following table.
December 31, December 31, December 31,
2020 2019 2018
Commercial $ 2,218,812 $ 1,980,948 $ 1,676,013
Real estate 725,168 778,844 641,161
Mortgage warehouse 259,727 107,259 82,240
Consumer 663,405 633,598 511,327
Total average loans $ 3,867,112 $ 3,500,649 $ 2,910,741
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Commercial Loans
Commercial loans totaled $2.2 billion, or 56.7% of total loans as of December 31, 2020, compared to $2.0 billion, or 56.3% as of December 31, 2019. The increase during 2020 was primarily due to the origination of PPP loans during 2020 which totaled $208.9 million at December 31, 2020, offset by principal reductions from payments.
Commercial loans consisted of the following types of loans at December 31:
December 31, 2020 December 31, 2019
Number Amount Percent of
Portfolio Number Amount Percent of
Portfolio
SBA guaranteed 1,985 $ 264,727 12.1 % 325 $ 65,661 3.2 %
Municipal government 66 59,932 2.7 % 73 63,572 3.1 %
Lines of credit 1,334 437,487 20.0 % 1,328 407,558 19.9 %
Real estate and equipment 4,121 1,430,124 65.2 % 4,456 1,509,860 73.8 %
Total 7,506 $ 2,192,270 100.0 % 6,182 $ 2,046,651 100.0 %
Fixed rate term loans with a book value of $432.5 million and a fair value of $466.4 million have been swapped to a variable rate using derivative instruments. The loans are carried at fair value in the financial statements and the related swap is carried at fair value and is included with other liabilities in the balance sheet. The recognition of the loan and swap fair values are recorded in the income statement and for 2020 equally offset each other. Fair values are determined by the counterparty using a proprietary model that uses live market inputs to value interest rate swaps. The model is subject to daily market tests as current and future positions are priced and valued. These are Level 3 inputs under the fair value hierarchy as described above.
At December 31, 2020, the commercial loan portfolio held $295.8 million of adjustable rate loans that had interest rate floors in the terms of the note. Of the commercial loans with interest rate floors, loans totaling $230.3 million were at their floor at December 31, 2020.
Residential Real Estate Loans
Residential real estate loans totaled $624.3 million, or 16.1% of total loans as of December 31, 2020, compared to $770.7 million, or 21.2% of total loans as of December 31, 2019. This category consists of home mortgages that generally require a loan to value of no more than 80%. Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio. The decrease during 2020 was primarily due to the increase in refinance activity during the year as a result of historically low interest rates.
In addition to the customary real estate loans described above, the Bank also had outstanding on December 31, 2020, $226.6 million in home equity lines of credit compared to $238.0 million at December 31, 2019. Credit lines normally limit the loan to collateral value to no more than 89%. Home equity credit lines are primarily not combined with a first mortgage and are therefore evaluated in the allowance for loan losses as a separate pool. These loans are classified as consumer loans in the Loans table above and in Note 5 of the Consolidated Financial Statements at Item 8.
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(Table dollars in thousands except per share data)
Residential real estate lending is a highly competitive business. As of December 31, 2020, the real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but could generally be categorized as follows:
December 31, 2020 December 31, 2019
Amount Percent of
Portfolio Yield Amount Percent of
Portfolio Yield
Fixed rate
Monthly payment $ 189,197 30.3 % 4.03 % $ 160,742 20.9 % 4.33 %
Biweekly payment — — % — % — — % — %
Adjustable rate
Monthly payment 435,089 69.7 % 3.83 % 609,975 79.1 % 3.96 %
Biweekly payment — — % — % — — % — %
Subtotal 624,286 100.0 % 3.92 % 770,717 100.0 % 4.06 %
Loans held for sale 13,538 4,088
Total real estate loans $ 637,824 $ 774,805
The decrease in adjustable rate residential mortgage loans and increase in fixed rate residential mortgage loans during 2020 was primarily due to the decrease in overall interest rates. In addition to the real estate loan portfolio, the Bank originates and sells real estate loans and retains the servicing rights. During 2020 and 2019, approximately $584.1 million and $269.7 million, respectively, of residential mortgages were sold into the secondary market. Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1.5 billion and $1.4 billion at December 31, 2020 and 2019.
The aggregate fair value of capitalized mortgage servicing rights at December 31, 2020, totaled approximately $12.4 million compared to the carrying value of $12.5 million. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.
December 31, December 31, December 31,
2020 2019 2018
Mortgage servicing rights
Balances, January 1 $ 15,046 $ 12,876 $ 12,189
Servicing rights capitalized 5,530 3,547 1,883
Amortization of servicing rights (2,932) (1,377) (1,196)
Balances, December 31 17,644 15,046 12,876
Impairment allowance
Balances, January 1 (719) (527) (587)
Additions (5,106) (234) (78)
Reductions 653 42 138
Balances, December 31 (5,172) (719) (527)
Mortgage servicing rights, net $ 12,472 $ 14,327 $ 12,349
Mortgage Warehouse Loans
Horizon’s mortgage warehousing lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the
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(Table dollars in thousands except per share data)
loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.
At December 31, 2020, the mortgage warehouse loan balance was $395.6 million compared to $150.3 million as of December 31, 2019. The increase in mortgage warehouse loans reflected a decrease in long–term interest rates in 2020 and higher refinance volume.
Consumer Loans
Consumer loans totaled $655.2 million, or 16.9% of total loans as of December 31, 2020, compared to $669.2 million, or 18.4% as of December 31, 2019. The decrease during 2020 was due to home equity loans paying down when they were refinanced through first mortgages.
Allowance and Provision for Credit Losses
At December 31, 2020, the allowance for credit losses was $57.0 million, or 1.47% of total loans outstanding, compared to $17.7 million, or 0.49%, at December 31, 2019. During 2020, the expense for provision for credit losses totaled $20.8 million compared to $2.0 million in 2019. The increase credit loss expense during 2020 reflects our January 2020 implementation of the CECL accounting method and prudent increases in the allocation for the Company's identified stressed portfolios.
Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of all of its loan portfolios. As a result of its quarterly reviews, a provision for credit losses is determined to bring the total ACL to a level called for by the analysis. In addition to the adoption of the CECL accounting method, Horizon's reserve build during 2020 includes allocations for potential future loan losses related to economic factors and the nature and characteristics of its loan portfolios, primarily related to the impact on non–essential businesses caused by COVID–19 closures and the slow pace of reopening and economic recovery. Through December 31, 2020, Horizon has not recorded any material specific loan losses attributed to COVID–19 closures.
No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for credit losses. Horizon considers the allowance for credit losses to be adequate to cover losses inherent in the loan portfolio as of December 31, 2020.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non–performing Loans
Non–performing loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. Management continues to work diligently toward returning non–performing loans to an earning asset basis. Non–performing loans for the previous three years ending December 31 are as follows:
December 31, December 31, December 31,
2020 2019 2018
Non–performing loans $ 26,807 $ 21,185 $ 15,175
Non–performing loans total 47.0%, 119.9% and 85.2% of the allowance for credit losses at December 31, 2020, 2019 and 2018, respectively. Non–performing loans at December 31, 2020 totaled $26.8 million, an increase from a balance of $21.2 million as of December 31, 2019 and an increase from the balance of $15.2 million as of December 31, 2018. The increase in non–performing loans in 2020 was primarily due to two commercial relationships moving to non–accrual, neither of which were the direct result of the economic slowdown. Non–performing loans as a percentage of total loans was 0.69% as of December 31, 2020, an increase from 0.58% as of December 31, 2019 and 0.50% from December 31, 2018.
COVID–19 related loan deferrals decreased to $126.7 million, or 3.3% of total loans at December 31, 2020, compared to $160.1 million, or 4.1% of total loans at September 30, 2020 and $533.9 million, or 14.3% of total loans at June 30, 2020.
Other Real Estate Owned (“OREO”) net of any related allowance for OREO losses for the previous three years ending December 31 were as follows:
December 31, December 31, December 31,
2020 2019 2018
Other real estate owned $ 1,908 $ 3,726 $ 2,027
OREO totaled $1.9 million on December 31, 2020, a decrease of $1.8 million from December 31, 2019 and $119,000 from December 31, 2018. On December 31, 2020, OREO was comprised of 7 properties, all of which were commercial real estate.
No mortgage warehouse loans were non–performing or OREO as of December 31, 2020, 2019 or 2018.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Deferred Tax
Horizon had a net deferred tax asset totaling $188,000 as of December 31, 2020 and a net deferred tax liability of $3.5 million as of December 31, 2019. The following table shows the major components of deferred tax:
December 31, December 31,
2020 2019
Assets
Allowance for loan losses $ 13,966 $ 4,120
Net operating loss and tax credits (from acquisitions) 3 54
Director and employee benefits 2,035 1,890
Accrued pension — 775
Other 3,139 2,145
Total assets 19,143 8,984
Liabilities
Depreciation (4,374) (4,456)
State tax (315) (10)
Federal Home Loan Bank stock dividends (363) (368)
Difference in basis of intangible assets (2,921) (3,427)
Fair value adjustment on acquisitions (3,284) (2,488)
Unrealized gain on AFS securities and fair value hedge (7,404) (1,710)
Other (294) (63)
Total liabilities (18,955) (12,522)
Net deferred tax asset/(liability) $ 188 $ (3,538)
Deposits
The primary source of funds for the Bank comes from the acceptance of demand and time deposits. However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank and other sources when it can do so at interest rates and terms that are more favorable than those required for deposited funds or loan demand is greater than the ability to grow deposits. Total deposits were $4.5 billion at December 31, 2020, compared to $3.9 billion at December 31, 2019. Average deposits and rates by category for the three years ended December 31 are as follows:
Average Balance Outstanding for the Average Rate Paid for the
Years Ended December 31 Years Ended December 31
2020 2019 2018 2020 2019 2018
Non–interest bearing demand deposits $ 919,449 $ 757,389 $ 624,576
Interest bearing demand deposits 1,267,617 1,024,099 827,255 0.19 % 0.68 % 0.33 %
Savings deposits 625,842 552,101 416,404 0.12 % 0.32 % 0.08 %
Money market 615,722 483,187 403,475 0.38 % 1.09 % 0.74 %
Time deposits 818,736 948,550 771,853 1.60 % 2.07 % 1.57 %
Total deposits $ 4,247,366 $ 3,765,326 $ 3,043,563
The $482.0 million increase in average deposits during 2020 was primarily due to the level of stimulus payments received by our customers, in addition to commercial customers depositing their proceeds from PPP lending. The transactional accounts average balances, as the lower cost funding sources, increased $611.9 million and the average balances for higher cost time deposits decreased $129.8 million. Horizon continually enhances its interest
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
bearing consumer and commercial demand deposit products based on local market conditions and its need for funding to support various types of assets.
Certificates of deposit of $250,000 or more, which are considered to be rate sensitive and are not considered a part of core deposits, mature as follows as of December 31, 2020:
Due in three months or less $ 50,496
Due after three months through six months 72,142
Due after six months through one year 52,677
Due after one year 67,102
$ 242,417
Interest expense on time certificates of $100,000 or more was approximately $5.0 million, $10.7 million, and $6.8 million for 2020, 2019 and 2018. Interest expense on time certificates of $250,000 or more was approximately $2.9 million, $7.4 million and $4.6 million for 2020, 2019 and 2018.
Off–Balance Sheet Arrangements
As of December 31, 2020, Horizon did not have any off–balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off–balance sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party and under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Contractual Obligations
The following tables summarize Horizon’s contractual obligations and other commitments to make payments as of December 31, 2020:
Total Within One Year One to Three Years Three to Five Years After Five Years
Certificates of deposit $ 675,218 $ 445,914 $ 195,558 $ 33,524 $ 222
Borrowings (1)
475,000 174,516 220 100,190 200,074
Subordinated notes (2)
58,603 — — — 58,603
Junior subordinated debentures issued to capital trusts (3)
56,548 — — — 56,548
(1) Includes debt obligations to the Federal Home Loan Bank and term repurchase agreements with maturities beyond one year borrowed by Horizon's banking subsidiary. See Note 12 in Horizon's Consolidated Financial Statements at Item 8.
(2) Includes subordinated notes issued by Horizon Bancorp, Inc.
(3) Includes Trust Preferred Capital Securities issued by Horizon Statutory Trusts II and III and those assumed in the acquisitions of Alliance Bank in 2005, American Trust in 2009, Heartland in 2012, LaPorte/City Savings in 2016 and Salin in 2019.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Expiration by Period
Within
One Year Greater
Than One
Year
Letters of credit $ 3,717 $ 8,711
Unfunded loan commitments 430,306 487,105
Capital Resources
Horizon has no material commitments for capital expenditures as of December 31, 2020. Horizon’s sources of funds and liquidity are discussed below in the section captioned “Liquidity” in this Item 7.
Results of Operations
Net Income
Consolidated net income was $68.5 million, or $1.55 per diluted share, in 2020, $66.5 million or $1.53 per diluted share in 2019, and $53.1 million or $1.38 per diluted share in 2018. The increase in net income from the previous year reflects an increase in net interest income of $10.1 million, an increase in non–interest income of $16.6 million and a decrease in income tax expense of $3.4 million, partially offset by an increase in credit loss expense of $18.8 million and non–interest expenses of $9.4 million. The increase in diluted earnings per share compared to the previous year reflects an increase in net income, partially offset by an increase in diluted shares. Adjusted net income for the year ended December 31, 2020 was $67.8 million, or $1.53 diluted earnings per share, compared to $70.7 million, or $1.63 diluted earnings per share, for the year ended December 31, 2019. (See the “Non–GAAP Reconciliation of Net Income and Diluted Earnings per Share” table under the heading “Use of Non–GAAP Financial Measures” below for the definition of adjusted net income.)
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 2020 was $170.9 million, an increase of $10.1 million, or 6.3%, over the $160.8 million earned in 2019. Yields on the Company’s interest earning assets decreased by 64 basis points to 4.11% during 2020 from 4.75% in 2019. Interest income decreased $3.0 million to $205.4 million for 2020 from $208.3 million in 2019. This decrease was due to the overall decrease in interest rates during 2020, offset by an increase in the recognition of interest income from the acquisition–related purchase accounting adjustments of approximately $1.3 million from $5.6 million in 2019 to $6.9 million in 2020.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Interest expense decreased $13.1 million from $47.5 million in 2019 to $34.4 million in 2020. This decrease was due to the overall decrease in interest rates during 2020 and was partially offset by $3.8 million in prepayment penalties on borrowings. The prepayment penalties on borrowings were incurred as part of a deleverage strategy in which $83.0 million in FHLB advances with an average cost of 2.61% were paid off during the 4th quarter of 2020. The decrease in rates paid on interest bearing liabilities in addition to the decrease in the yield on the Company’s interest earning assets resulted in a decrease in the net interest margin of 25 basis points from 3.69% for 2019 to 3.44% in 2020. Excluding interest income recognized from acquisition–related purchase accounting adjustments and prepayment penalties on borrowings, the margin would have been 3.38% for 2020 compared to 3.57% for 2019. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin.
Net interest income during 2019 was $160.8 million, an increase of $26.2 million, or 19.5%, over the $134.6 million earned in 2018. Yields on the Company’s interest earning assets increased by 19 basis points to 4.75% during 2019 from 4.56% in 2018. Interest income increased $42.2 million to $208.3 million for 2019 from $166.2 million in 2018. This increase was due to increased volume in interest earning assets primarily due to the Salin acquisition, offset by a decrease in the recognition of interest income from the acquisition–related purchase accounting adjustments of approximately $499,000 from $6.1 million in 2018 to $5.6 million in 2019.
Interest expense increased $15.9 million from $31.6 million in 2018 to $47.5 million in 2019. This increase was due to increased volume in interest bearing liabilities primarily due to the Salin acquisition. The increase in the yield on the Company's interest earning assets combined with the increase in rates paid on interest bearing liabilities resulted in a decrease in the net interest margin of two basis points from 3.71% for 2018 to 3.69% in 2019. Excluding interest income recognized from acquisition–related purchase accounting adjustments, the margin would have been 3.57% for 2019 compared to 3.54% for 2018. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company's net interest margin.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 2020 December 31, 2019 December 31, 2018
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 61,408 $ 154 0.25 % $ 21,301 $ 511 2.40 % $ 4,696 $ 115 2.45 %
Interest earning deposits 25,943 268 1.03 % 19,601 342 1.74 % 24,491 393 1.60 %
Investment securities – taxable 459,551 8,071 1.76 % 474,833 11,753 2.48 % 431,970 10,113 2.34 %
Investment securities – non–taxable (1)
706,092 17,213 3.09 % 454,066 12,095 3.34 % 326,040 8,069 3.13 %
Loans receivable (2)(3)(4)
3,867,112 179,672 4.66 % 3,500,649 183,631 5.27 % 2,910,741 147,478 5.08 %
Total interest earning assets (1)
5,120,106 205,378 4.11 % 4,470,450 208,332 4.75 % 3,697,938 166,168 4.56 %
Non–interest earning assets
Cash and due from banks 84,065 62,920 44,645
Allowance for loan losses (46,329) (18,019) (16,964)
Other assets 470,941 417,707 337,016
Total average assets $ 5,628,783 $ 4,933,058 $ 4,062,635
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,327,917 $ 18,556 0.56 % $ 3,007,937 $ 33,690 1.12 % $ 2,418,987 $ 18,225 0.75 %
Borrowings 559,953 11,430 2.04 % 468,159 10,672 2.28 % 492,830 11,009 2.23 %
Subordinated notes 30,610 1,824 5.96 % — — — % — — — %
Junior subordinated debentures issued to capital trusts 56,427 2,628 4.66 % 50,134 3,179 6.34 % 36,547 2,365 6.47 %
Total interest bearing liabilities 3,974,907 34,438 0.87 % 3,526,230 47,541 1.35 % 2,948,364 31,599 1.07 %
Non–interest bearing liabilities
Demand deposits 919,449 757,389 624,576
Accrued interest payable and other liabilities 68,961 43,720 16,275
Stockholders’ equity 665,466 605,719 473,420
Total average liabilities and stockholders’ equity $ 5,628,783 $ 4,933,058 $ 4,062,635
Net interest income/spread $ 170,940 3.24 % $ 160,791 3.40 % $ 134,569 3.49 %
Net interest income as a percent of average interest earning assets (1)
3.44 % 3.69 % 3.71 %
(1) Horizon has no foreign office and, accordingly, no assets or liabilities to foreign operations. Horizon's subsidiary bank had no funds invested in Eurodollar Certificates of Deposit at December 31, 2020.
(2) Yields are presented on a tax–equivalent basis.
(3) Non–accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees.
(4) Loan fees and late fees included in interest on loans aggregated $16.6 million, $9.8 million and $7.7 million in 2020, 2019 and 2018, respectively.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
2020 - 2019 2019 - 2018
Total
Change Change
Due To
Volume Change
Due To
Rate Total
Change Change
Due To
Volume Change
Due To
Rate
Interest Income
Federal funds sold $ (357) $ 379 $ (736) $ 396 $ 398 $ (2)
Interest earning deposits (74) 90 (164) (51) (83) 32
Investment securities – taxable (3,682) (368) (3,314) 1,640 1,040 600
Investment securities – non–taxable 5,118 7,854 (2,736) 4,026 4,239 (213)
Loans receivable (3,959) 18,253 (22,212) 36,153 30,914 5,239
Total interest income (2,954) 26,208 (29,162) 42,164 36,508 5,656
Interest Expense
Interest bearing deposits (15,134) 3,269 (18,403) 15,465 5,137 10,328
Borrowings 758 1,950 (1,192) (337) (559) 222
Subordinated notes 1,824 1,824 — — — —
Junior subordinated debentures issued to capital trusts (551) 365 (916) 814 862 (48)
Total interest expense (12,552) 7,043 (19,595) 15,128 4,578 10,550
Net interest income $ 9,598 $ 19,165 $ (9,567) $ 27,036 $ 31,930 $ (4,894)
Credit Loss Expense
Horizon assesses the adequacy of its ACL by regularly reviewing the performance of its loan portfolios. Credit loss expense totaled $20.8 million in 2020 compared to $2.0 million in 2019. Total loan net charge–offs were $1.9 million, which included commercial loan net charge–offs of $497,000, residential mortgage loan net charge–offs of $167,000 and consumer loan net charge–offs of $1.2 million for the year ending December 31, 2020. The higher level of credit loss expense for 2020 was due to the adoption of CECL at the beginning of 2020 increasing credit loss expense for economic factors due to the economic shutdown and exposures to loans with nature and characteristics that have greater loss exposure due to economic uncertainty brought on by COVID–19.
Credit loss expense totaled $2.0 million in 2019 compared to $2.9 million in 2018. Total loan net charge–offs were $2.1 million, which included commercial loan net charge–offs of $664,000, residential mortgage loan net charge–offs of $47,000 and consumer loan net charge–offs of $1.4 million for the year ending December 31, 2019. The lower level of credit loss expense for loan losses in 2019 was due to all–time low historical loss rates and stable economic factors.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non–interest Income
The following is a summary of changes in non–interest income:
Twelve Months Ended
December 31 2019 - 2020 Twelve Months Ended
December 31 2018 - 2019
Non–interest Income 2020 2019 Amount Change Percent Change 2019 2018 Amount Change Percent Change
Service charges on deposit accounts $ 8,848 $ 9,959 $ (1,111) (11.2) % $ 9,959 $ 7,762 $ 2,197 28.3 %
Wire transfer fees 1,000 653 347 53.1 % 653 612 41 6.7 %
Interchange fees 9,306 7,655 1,651 21.6 % 7,655 5,715 1,940 33.9 %
Fiduciary activities 9,145 8,580 565 6.6 % 8,580 7,827 753 9.6 %
Gain (loss) on sale of investment securities 4,297 (75) 4,372 (5,829.3) % (75) (443) 368 (83.1) %
Gain on sale of mortgage loans 26,721 9,208 17,513 190.2 % 9,208 6,613 2,595 39.2 %
Mortgage servicing net of impairment (3,716) 1,914 (5,630) (294.1) % 1,914 2,120 (206) (9.7) %
Increase in cash surrender value of bank owned life insurance 2,243 2,190 53 2.4 % 2,190 1,912 278 14.5 %
Death benefit on officer life insurance 264 580 (316) (54.5) % 580 154 426 276.6 %
Other income 1,513 2,394 (881) (36.8) % 2,394 2,141 253 11.8 %
Total non–interest income $ 59,621 $ 43,058 $ 16,563 38.5 % $ 43,058 $ 34,413 $ 8,645 25.1 %
During 2020, the Company originated approximately $584.1 million of mortgage loans to be sold on the secondary market, compared to $269.7 million in 2019 primarily due to the decrease in long–term interest rates. This increase in volume in addition to an increase in the percentage earned on the sale of mortgage loans, resulted in an increase in the overall gain on sale of mortgage loans of $17.5 million compared to the prior year. Gain on the sale of investment securities increased $4.4 million in 2020. Mortgage servicing net of impairment decreased by $5.6 million during 2020 compared to 2019 primarily due to net impairment charges of $4.5 million recorded during 2020. The increase in interchange fee income in 2020 compared to 2019 was the result of organic growth in transactional deposit accounts and volume during 2020. The decrease in service charges on deposit accounts income in 2020 was due to an increase in digital transactions and stimulus funds resulting in a decrease in non–sufficient funds fee income.
During 2019, the Company originated approximately $269.7 million of mortgage loans to be sold on the secondary market, compared to $188.8 million in 2018. This increase in volume offset by a decrease in the percentage earned on the sale of mortgage loans, resulted in an increase in the overall gain on sale of mortgage loans of $2.6 million compared to the prior year. Gain on the sale of investment securities increased $368,000 in 2019. Mortgage servicing net of impairment decreased by $206,000 during 2019 compared to 2018. The increase in service charges on deposit accounts and interchange fee income in 2019 compared to 2018 was the result of the deposits acquired from Salin, in addition to organic growth in transactional deposit accounts and volume during 2019.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non–interest Expense
The following is a summary of changes in non–interest expense:
Twelve Months Ended
December 31 2019 - 2020 Twelve Months Ended
December 31 2018 - 2019
Non–interest Expense 2020 2019 Amount
Change Percent
Change 2019 2018 Amount
Change Percent
Change
Salaries $ 47,024 $ 44,671 $ 2,353 5.3 % $ 44,671 $ 40,857 $ 3,814 9.3 %
Commission and bonuses 10,428 6,861 3,567 52.0 % 6,861 5,547 1,314 23.7 %
Employee benefits 13,630 13,673 (43) (0.3) % 13,673 10,219 3,454 33.8 %
Net occupancy expenses 12,811 12,157 654 5.4 % 12,157 10,482 1,675 16.0 %
Data processing 9,200 8,480 720 8.5 % 8,480 6,816 1,664 24.4 %
Professional fees 2,433 1,946 487 25.0 % 1,946 1,926 20 1.0 %
Outside services and consultants 7,318 8,152 (834) (10.2) % 8,152 5,271 2,881 54.7 %
Loan expense 10,628 8,633 1,995 23.1 % 8,633 6,341 2,292 36.1 %
FDIC deposit insurance 1,855 252 1,603 636.1 % 252 1,444 (1,192) (82.5) %
Other losses 1,162 740 422 57.0 % 740 665 75 11.3 %
Other expenses 14,952 16,466 (1,514) (9.2) % 16,466 12,948 3,518 27.2 %
Total non–interest expense $ 131,441 $ 122,031 $ 9,410 7.7 % $ 122,031 $ 102,516 $ 19,515 19.0 %
For the twelve months ended December 31, 2020, commission and bonuses increased by $3.6 million reflecting record mortgage origination volume and related commission expense. Salaries increased $2.4 million reflecting a full year of additional employees from the Salin acquisition and annual merit increases. Loan expense increased $2.0 million primarily due to the increased volume in commercial and mortgage lending. The increase of $1.6 million in FDIC deposit insurance was due to the assessment credits the Bank received during the third quarter of 2019 as the FDIC reserve was overfunded at that time. Offsetting these increases was a decrease of $1.5 million in other expenses.
For the twelve months ended December 31, 2019, salaries, commission and bonuses, and employee benefits expense increased by $3.8 million, $1.3 million and $3.5 million, respectively, reflecting the acquisition of Salin, overall company growth and an increase of approximately 102 full and part–time employees. Outside services and consultants expense increased $2.9 million, primarily due to $2.5 million in merger–related expenses during 2019. Loan expense increased $2.3 million, primarily due to the increased volume in consumer lending and the timing of related origination and amortization costs. The increase in other expenses of $3.5 million, net occupancy expenses of $1.7 million and data processing of $1.7 million reflect the acquisition of Salin during the first quarter of 2019 and overall company growth. Offsetting these increases was a decrease of $1.2 million in FDIC deposit insurance. FDIC insurance decreased due to the assessment credits the Bank received during the third quarter of 2019 as the FDIC reserve was overfunded at that time.
Income Taxes
Income tax expense totaled $9.9 million for the year ended December 31, 2020, a decrease of $3.4 million when compared to the year ended December 31, 2019. The decrease was primarily due to the ability to recognize solar tax credits from completed projects the Company has invested in along with an increase in tax exempt municipal investments.
Income tax expense totaled $13.3 million for the year ended December 31, 2019, an increase of $2.9 million when compared to the year ended December 31, 2018. The increase was primarily due to an increase in income before income tax expense of $16.3 million when comparing 2019 to the prior year.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Expected Replacement of London Interbank Offered Rate
The ARRC continues its work to the goal of finding suitable replacements for LIBOR. It is expected that a transition away from the widespread use of LIBOR to alternative reference rates and other potential interest rate benchmark reforms will occur beginning potentially in 2022. Although the full impact of such reforms and actions, together with any transition away from LIBOR remains unclear, we are preparing to transition from the LIBOR to an alternative reference rate.
Our transition plan includes a number of key steps, including continued engagement with central bank and industry working groups and regulators, active client engagement, internal operational readiness, and risk management, among other things, to promote the transition to alternative reference rates. We are identifying on-balance sheet and off-balance sheet references to LIBOR, determining appropriate language to replace the LIBOR index language, and determining disclosures necessary for customers, with appropriate procedures and schedules to complete the LIBOR transition.
There remain, however, a number of unknown factors regarding the transition from LIBOR or interest rate benchmark reforms that could impact our business, including, for example, the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of the alternative reference rates, prices of and the liquidity of trading markets for products based on the alternative reference rates, and our ability to transition to and develop appropriate systems and analytics for one or more alternative reference rates. For a further discussion of the various risks we face in connection with the expected replacement of LIBOR and reform of interest rate benchmarks on our operations, see “Risk Factors – Risks Related to Our Business.”
Use of Non–GAAP Financial Measures
Certain information set forth in this report on Form 10–K 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, in order to show the impact of such events as acquisition–related purchase accounting adjustments, prepayment penalties on borrowings and the Tax Cuts and Jobs Act, among other matters we have identified in our reconciliations. Horizon believes 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 following tables for reconciliations of the non–GAAP measures identified in this Form 10–K to their most comparable GAAP measures.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Years Ended December 31
2020 2019 2018
Net income as reported $ 68,499 $ 66,538 $ 53,117
Merger expenses — 5,650 487
Tax effect — (987) (102)
Net income excluding merger expenses 68,499 71,201 53,502
(Gain) / loss on sale of investment securities (4,297) 75 443
Tax effect 902 (16) (93)
Net income excluding (gain) / loss on sale of investment securities 65,104 71,260 53,852
Death benefit on bank owned life insurance (“BOLI”) (264) (580) (154)
Net income excluding death benefit on BOLI 64,840 70,680 53,698
Prepayment penalties on borrowings 3,804 — —
Tax effect (799) — —
Net income excluding prepayment penalties on borrowings 67,845 70,680 53,698
Adjusted net income $ 67,845 $ 70,680 $ 53,698
Non–GAAP Reconciliation of Diluted Earnings per Share
(Dollars in Thousands, Unaudited)
Years Ended December 31
2020 2019 2018
Diluted earnings per share (“EPS”) as reported $ 1.55 $ 1.53 $ 1.38
Merger expenses — 0.13 0.01
Tax effect — (0.02) —
Diluted EPS excluding merger expenses 1.55 1.64 1.39
(Gain) / loss on sale of investment securities (0.10) — 0.01
Tax effect 0.02 — —
Diluted EPS excluding (gain) / loss on sale of investment securities 1.47 1.64 1.40
Death benefit on bank owned life insurance (“BOLI”) (0.01) (0.01) —
Diluted EPS excluding death benefit on BOLI 1.46 1.63 1.40
Prepayment penalties on borrowings 0.09 — —
Tax effect (0.02) — —
Diluted EPS excluding prepayment penalties on borrowings 1.53 1.63 1.40
Adjusted diluted EPS $ 1.53 $ 1.63 $ 1.40
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income
(Dollars in Thousands, Unaudited)
Years Ended December 31
2020 2019 2018
Pre–tax income $ 78,369 $ 79,841 $ 63,560
Credit loss expense 20,751 1,976 2,906
Pre–tax, pre–provision income $ 99,120 $ 81,817 $ 66,466
Pre–tax, pre–provision income $ 99,120 $ 81,817 $ 66,466
Merger expenses — 5,650 487
(Gain) / loss on sale of investment securities (4,297) 75 443
Death benefit on bank owned life insurance (264) (580) (154)
Prepayment penalties on borrowings 3,804 — —
Adjusted pre–tax, pre–provision income $ 98,363 $ 86,962 $ 67,242
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Years Ended December 31
2020 2019 2018
Net interest income as reported $ 170,940 $ 160,791 $ 134,569
Average interest earning assets 5,120,106 4,470,450 3,697,938
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 3.44 % 3.69 % 3.71 %
Net interest income as reported $ 170,940 $ 160,791 $ 134,569
Acquisition–related purchase accounting adjustments (“PAUs”) (6,936) (5,590) (6,089)
Prepayment penalties on borrowings 3,804 — —
Adjusted net interest income $ 167,808 $ 155,201 $ 128,480
Adjusted net interest margin 3.38 % 3.57 % 3.54 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Years Ended December 31
2020 2019 2018
Average assets $ 5,628,783 $ 4,933,058 $ 4,062,635
Return on average assets (“ROAA”) as reported 1.22 % 1.35 % 1.31 %
Merger expenses — % 0.11 % 0.01 %
Tax effect — % (0.02) % — %
ROAA excluding merger expenses 1.22 % 1.44 % 1.32 %
(Gain) / loss on sale of investment securities (0.08) % — % 0.01 %
Tax effect 0.02 % — % — %
ROAA excluding (gain) / loss on sale of investment securities 1.16 % 1.44 % 1.33 %
Death benefit on bank owned life insurance — % (0.01) % — %
ROAA excluding death benefit on bank owned life insurance 1.16 % 1.43 % 1.33 %
Prepayment penalties on borrowings 0.07 % — % — %
Tax effect (0.01) % — % — %
ROAA excluding prepayment penalties on borrowings 1.22 % 1.43 % 1.33 %
Adjusted ROAA 1.22 % 1.43 % 1.33 %
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Years Ended December 31
2020 2019 2018
Average common equity $ 665,466 $ 605,719 $ 473,420
Return on average common equity (“ROACE”) as reported 10.29 % 10.98 % 11.22 %
Merger expenses — % 0.93 % 0.10 %
Tax effect — % (0.16) % (0.02) %
ROACE excluding merger expenses 10.29 % 11.75 % 11.30 %
(Gain) / loss on sale of investment securities (0.65) % 0.01 % 0.09 %
Tax effect 0.14 % — % (0.02) %
ROACE excluding (gain) / loss on sale of investment securities 9.78 % 11.76 % 11.37 %
Death benefit on bank owned life insurance (0.04) % (0.10) % (0.03) %
ROACE excluding death benefit on bank owned life insurance 9.74 % 11.66 % 11.34 %
Prepayment penalties on borrowings 0.57 % — % — %
Tax effect (0.12) % — % — %
ROACE excluding prepayment penalties on borrowings 10.19 % 11.66 % 11.34 %
Adjusted ROACE 10.19 % 11.66 % 11.34 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
December 31, September 30, June 30, March 31, December 31,
2020 2020 2020 2020 2019
Total stockholders’ equity $ 692,216 $ 670,293 $ 652,206 $ 630,842 $ 656,023
Less: Intangible assets 174,193 175,107 176,020 176,961 177,917
Total tangible stockholders’ equity $ 518,023 $ 495,186 $ 476,186 $ 453,881 $ 478,106
Common shares outstanding 43,880,562 43,874,353 43,821,878 43,763,623 44,975,771
Book value per common share $ 15.78 $ 15.28 $ 14.88 $ 14.41 $ 14.59
Tangible book value per common share $ 11.81 $ 11.29 $ 10.87 $ 10.37 $ 10.63
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Years Ended December 31
2020 2019 2018
Non–interest expense as reported $ 131,441 $ 122,032 $ 102,516
Net interest income as reported 170,940 160,791 134,569
Non–interest income as reported $ 59,621 $ 43,058 $ 34,413
Non–interest expense / (Net interest income + Non–interest income)
(“Efficiency Ratio”) 57.01 % 59.86 % 60.67 %
Non–interest expense as reported $ 131,441 $ 122,032 $ 102,516
Merger expenses — (5,650) (487)
Non–interest expense excluding merger expenses 131,441 116,382 102,029
Net interest income as reported 170,940 160,791 134,569
Prepayment penalties on borrowings 3,804 — —
Net interest income excluding prepayment penalties on borrowings 174,744 160,791 134,569
Non–interest income as reported 59,621 43,058 34,413
(Gain) / loss on sale of investment securities (4,297) 75 443
Death benefit on bank owned life insurance (264) (580) (154)
Non–interest income excluding (gain) / loss on sale of investment securities and death benefit on bank owned life insurance $ 55,060 $ 42,553 $ 34,702
Adjusted efficiency ratio 57.20 % 57.23 % 60.28 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Liquidity and Rate Sensitivity Management
Management and the Board of Directors meet regularly to review both the liquidity and rate sensitivity position of Horizon. Effective asset and liability management ensures Horizon’s ability to monitor the cash flow requirements of depositors along with the demands of borrowers and to measure and manage interest rate risk. Horizon utilizes an interest rate risk assessment model designed to highlight sources of existing interest rate risk and consider the effect of these risks on strategic planning. Management maintains (within certain parameters) an essentially balanced ratio of interest sensitive assets to liabilities in order to protect against the effects of wide interest rate fluctuations.
Liquidity
The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayments, investment security sales, cashflows and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the FHLB and the Federal Reserve Bank (“FRB”). At December 31, 2020, Horizon had available approximately $1.04 billion in available credit from various money center banks, including the FHLB and the FRB Discount Window. The following factors could impact Horizon’s funding needs in the future:
◦ Horizon had outstanding borrowings of over $365.6 million with the FHLB and total borrowing capacity with the FHLB of $728.2 million. Generally, the loan terms from the FHLB are better than the terms Horizon can receive from other sources, making it less expensive to borrow money from the FHLB. Financial difficulties at the FHLB could reduce or eliminate Horizon’s additional borrowing capacity with the FHLB or the FHLB could change collateral requirements, which could lower the Company’s borrowing availability.
◦ If residential mortgage loan rates remain low, Horizon’s mortgage warehouse loans could create an additional need for funding.
◦ Horizon had a total of $180.0 million of unused Federal Fund lines from various money center banks. These are uncommitted lines and could be withdrawn at any time by the correspondent banks.
◦ Horizon had a total of $483.3 million of available collateral at the FRB secured by municipal securities. These securities may mature, call, or be sold, which would reduce the available collateral.
◦ Horizon had approximately $632.4 million of unpledged investment securities at December 31, 2020.
◦ A downgrade in Horizon’s ability to obtain credit due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition could impact the availability of funding sources.
◦ An act of terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund, hedge fund or a government agency could affect the cost and availability of funding sources.
◦ Market speculation or rumors about Horizon or the banking industry in general may adversely affect the cost and availability of normal funding sources.
If any of these events occur, they could force Horizon to borrow money from other sources including negotiable certificates of deposit. Such other monies may only be available at higher interest rates and on less advantageous terms, which will impact our net income and could impact our ability to grow. Management believes Horizon has adequate funding sources to meet short and long term needs.
Horizon maintains a liquidity contingency plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
During 2020, cash flows were generated primarily from net cash received from sales, maturities, and prepayments of investment securities of $356.4 million and an increase in deposits of $600.1 million. Cash flows were used to purchase investments totaling $590.3 million, to fund an increase in loans of $234.2 million and a decrease in borrowings of $74.7 million. The net cash and cash equivalent position increased by $150.9 million during 2020.
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2020. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.
Total Within
One Year One to
Three Years Three to
Five Years After Five
Years
Remaining contractual maturities of time deposits $ 675,218 $ 445,914 $ 195,558 $ 33,524 $ 222
Borrowings 475,000 174,516 220 100,190 200,074
Subordinated notes 58,603 — — — 58,603
Junior subordinated debentures issued to capital trusts 56,548 — — — 56,548
Loan commitments 917,411 430,306 487,105 — —
Letters of credit 12,428 3,717 8,711 — —
Total $ 2,195,208 $ 1,054,453 $ 691,594 $ 133,714 $ 315,447
Interest Rate Sensitivity
The degree by which net interest income may fluctuate due to changes in interest rates is monitored by Horizon using computer simulation models, incorporating not only the current GAP position but the effect of expected repricing of specific financial assets and liabilities. When repricing opportunities are not properly aligned, net interest income may be affected when interest rates change. Forecasting results of the possible outcomes determines the exposure to interest rate risk inherent in Horizon’s balance sheet. The goal is to manage imbalanced positions that arise when the total amount of assets that reprice or mature in a given time period differs significantly from liabilities that reprice or mature in the same time period. The theory behind managing the difference between repricing assets and liabilities is to have more assets repricing in a rising rate environment and more liabilities repricing in a declining rate environment. Based on a model that assumes a lag in repricing, at December 31, 2020, the amount of assets that reprice within one year was 257% of liabilities that reprice within one year. At December 31, 2019, this same model reported that the amount of assets that reprice within one year was approximately 161% of the amount of liabilities that reprice within the same time period. During the year 2020, the increase in the cost of funding outpaced the increase in the yield of interest-earning assets resulting in a decrease in net interest margin.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
3 Months
or Less > 3 Months
&
</= 6 Months > 6 Months
&
</= 1 Year Greater
Than
1 Year Total
Loans $ 1,759,514 $ 236,584 $ 447,257 $ 1,437,566 $ 3,880,921
Federal funds sold 155,288 — — — 155,288
Interest earning balances with banks 11,800 — — — 11,800
Investment securities and FHLB stock 50,637 32,894 77,262 1,164,931 1,325,724
Other assets — — — 512,881 512,881
Total assets $ 1,977,239 $ 269,478 $ 524,519 $ 3,115,378 $ 5,886,614
Non–interest bearing deposits $ 24,909 $ 24,909 $ 49,818 $ 953,606 $ 1,053,242
Interest bearing deposits 198,934 241,517 403,644 2,633,796 3,477,891
Borrowed funds 60,797 58,140 16,819 454,395 590,151
Other liabilities — — — 73,114 73,114
Stockholders’ equity — — — 692,216 692,216
Total liabilities and stockholders’ equity $ 284,640 $ 324,566 $ 470,281 $ 4,807,127 $ 5,886,614
GAP $ 1,692,599 $ (55,088) $ 54,238 $ (1,691,749)
Cumulative GAP $ 1,692,599 $ 1,637,511 $ 1,691,749
Quantitative and Qualitative Disclosures about Market Risk
Horizon’s primary market risk exposure is interest rate risk. Interest rate risk (“IRR”) is the risk that Horizon’s earnings and capital will be adversely affected by changes in interest rates. The primary approach to IRR management is one that focuses on adjustments to the asset/liability mix in order to limit the magnitude of IRR.
Horizon’s exposure to interest rate risk arises from repricing or mismatch risk, embedded options risk, and yield curve risk. Repricing risk is the risk of adverse consequence from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect Horizon’s assets and liabilities. Basis risk is the risk that the spread, or rate difference, between instruments of similar maturities will change. Options risk arises whenever products give the customer the right, but not the obligation, to alter the quantity or timing of cash flows. Yield curve risk is the risk that changes in prevailing interest rates will affect instruments of different maturities by different amounts. Horizon’s objective is to remain reasonably neutral with respect to IRR. Horizon utilizes a variety of strategies to maintain this position, including the sale of mortgage loans on the secondary market, hedging certain balance sheet items using derivatives, varying maturities of FHLB advances, certificates of deposit funding and investment securities.
The table which follows provides information about Horizon’s financial instruments that were sensitive to changes in interest rates as of December 31, 2020. The table incorporates Horizon’s internal system generated data related to the maturity and repayment/withdrawal of interest earning assets and interest bearing liabilities. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted–average interest rates by contractual maturities as well as the historical experience of Horizon related to the impact of interest rate fluctuations on the prepayment of residential loans and mortgage–backed securities. From a risk management perspective, Horizon believes that repricing dates are more relevant than contractual maturity dates when analyzing the value of financial instruments. For deposits with no contractual maturity dates, the table presents principal cash flows and weighted average rate, as applicable, based upon Horizon’s experience and management’s judgment concerning the most likely withdrawal behaviors.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
2021 2022 2023 2024 2025 2026 & Beyond Total Fair Value December 31,
2020
Rate–sensitive assets
Fixed interest rate loans $ 735,982 $ 419,249 $ 205,524 $ 124,376 $ 66,334 $ 92,082 $ 1,643,547 $ 1,543,967
Average interest rate 3.95 % 3.97 % 4.71 % 4.62 % 4.56 % 4.62 % 4.16 %
Variable interest rate loans 1,713,622 162,388 119,039 92,309 79,135 70,881 2,237,374 2,236,919
Average interest rate 3.72 % 4.18 % 4.30 % 4.22 % 4.08 % 3.84 % 3.82 %
Total loans 2,449,604 581,637 324,563 216,685 145,469 162,963 3,880,921 3,780,886
Average interest rate 3.79 % 4.03 % 4.56 % 4.45 % 4.30 % 4.28 % 3.97 %
Securities, including FHLB stock 160,793 84,029 69,828 53,457 58,717 898,900 1,325,724 1,325,724
Average interest rate 2.22 % 2.92 % 3.15 % 2.92 % 2.93 % 2.85 % 2.80 %
Other interest earning assets 167,088 — — — — — 167,088 167,088
Average interest rate 0.24 % — % — % — % — % — % 0.24 %
Total earning assets $ 2,777,485 $ 665,666 $ 394,391 $ 270,142 $ 204,186 $ 1,061,863 $ 5,373,733 $ 5,273,698
Average interest rate 3.48 % 3.89 % 4.31 % 4.15 % 3.90 % 3.07 % 3.56 %
Rate–sensitive liabilities
Non–interest bearing deposits $ 99,637 $ 90,211 $ 81,677 $ 73,950 $ 66,955 $ 640,812 $ 1,053,242 $ 1,053,242
NOW accounts 109,349 95,067 82,651 71,857 62,472 415,876 837,272 808,687
Average interest rate 0.07 % 0.07 % 0.07 % 0.07 % 0.07 % 0.07 % 0.07 %
Savings and money market accounts 288,857 245,851 209,317 178,272 151,883 891,221 1,965,401 1,976,512
Average interest rate 0.13 % 0.13 % 0.13 % 0.13 % 0.13 % 0.12 % 0.12 %
Certificates of deposit 445,914 151,805 43,753 23,807 9,717 222 675,218 681,323
Average interest rate 0.97 % 0.92 % 1.84 % 1.80 % 1.09 % 0.14 % 1.04 %
Total deposits 943,757 582,934 417,398 347,886 291,027 1,948,131 4,531,133 4,519,764
Average interest rate 0.50 % 0.30 % 0.27 % 0.20 % 0.12 % 0.07 % 0.22 %
Fixed interest rate borrowings 103,234 61,633 85,211 58,968 57,877 108,077 475,000 483,245
Average interest rate 0.72 % 0.38 % 1.19 % 1.40 % 0.59 % 1.32 % 0.97 %
Variable interest rate borrowings 56,548 — — — 58,603 — 115,151 110,301
Average interest rate 4.87 % — % — % — % 5.63 % — % 5.25 %
Total funds $ 1,103,539 $ 644,567 $ 502,609 $ 406,854 $ 407,507 $ 2,056,208 $ 5,121,284 $ 5,113,310
Average interest rate 0.74 % 0.31 % 0.43 % 0.38 % 0.98 % 0.14 % 0.40 %
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this item is incorporated by reference to the information appearing in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.
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