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:
• COVID–19 related impact on Horizon and its customers, employees and vendors, which may depend on several factors, including the scope and continued duration of the pandemic, its influence on the financial markets, long–term and post–pandemic changes in the banking preferences and behaviors of customers, supply chain risks to the bank and its customers and actions taken by governmental authorities and other third parties in response to the pandemic;
• economic conditions and their impact on Horizon and its customers, including local and global economic recovery from the pandemic;
• changes to government regulations, including the CARES Act, on the accounting for modified loans;
• changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;
• the effect of low or negative interest rates on net interest rate margin 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, which may have been accelerated by the pandemic;
• potential 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;
• changes in regulatory supervision and oversight, including monetary policy and capital requirements;
• changes in accounting policies or procedures as may be adopted and required by regulatory agencies;
44
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
• 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;
• rapid technological developments and changes;
• the risks presented by cyber terrorism and data security breaches;
• the rising costs of effective cybersecurity;
• containing costs and expenses;
• 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 the effects of climate change and social justice initiatives;
• 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 of the London Interbank Offered Rate (“LIBOR”), and the geopolitical risk related to the increasing tension with China, Taiwan, Russia, Iran and other countries which could lead to disruption in supply chains, logistics and overall markets; 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 2020 Annual Report on Form 10–K and in the subsequent reports we file with the SEC.
Overview
Horizon Bancorp, Inc. (“Horizon” or the “Company”) 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 Bank” or the “Bank”) and other affiliated entities and Horizon Risk Management, Inc. 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. Horizon Bank (formerly known as “Horizon Bank, N.A.”) 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. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly–owned subsidiary of Horizon.
Over the last 20 years, Horizon has expanded its geographic reach and experienced financial growth through a combination of both organic expansion and mergers and acquisitions. Horizon's initial operations focused on northwest Indiana, but since then, the Company has developed a presence in new markets in southern and central Michigan and northeastern and central Indiana.
45
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Second Quarter 2021 Highlights
• Net income grew to a record $22.2 million, up 8.6% from the linked quarter and 51.5% from the year–ago period. Diluted earnings per share (“EPS”) of $0.50 includes the $0.01 after–tax impact of expenses associated with Horizon’s agreement to acquire 14 TCF National Bank branches, approximately $976 million in deposits and approximately $278 million in loans in a financially and strategically attractive extension of Horizon’s low–cost deposit franchise in Michigan, announced in the quarter. EPS was $0.46 for the first quarter of 2021 and $0.33 for the second quarter of 2020.
• Pre–tax, pre–provision net income grew to a second–quarter record $24.5 million, up 0.9% from the linked quarter and 3.2% from the year–ago period. 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 Income” table below.)
• Net interest income was $42.6 million for the quarter, compared to $42.5 million for the first quarter of 2021 and $43.0 million for the second quarter of 2020. Reported net interest margin (“NIM”) was 3.14% and adjusted NIM was 3.13%, with reported NIM declining by 15 basis points and adjusted NIM decreasing by four basis points from the first quarter of 2021. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation of adjusted NIM.) An estimated seven basis points attributed to Federal Paycheck Protection Program (“PPP”) lending improved the margin, offset by an estimated 21 basis point compression attributed to excess liquidity held during the quarter, for both NIM and adjusted NIM.
• Horizon’s in–market consumer and commercial deposit relationships, combined with strategic pricing moves to manage deposit growth and runoff of higher–priced time deposits, contributed to continued improvement in the cost of interest bearing liabilities, which declined to 0.45% in the quarter, compared to 0.50% in the first quarter of 2021 and 0.74% in the second quarter of 2020.
• Non–interest expense was $33.4 million in the quarter, or 2.18% of average assets on an annualized basis, compared to $32.2 million, or 2.20%, in the first quarter of 2021 and $30.4 million, or 2.18%, in the second quarter of 2020.
• The efficiency ratio for the period was 57.73% compared to 57.03% for the first quarter of 2021 and 56.23% for the second quarter of 2020. The adjusted efficiency ratio was 57.45% compared to 57.97% for the first quarter of 2021 and 56.49% for the second quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below.)
• Horizon experienced an increased return on average assets (“ROAA”) of 1.45% and return on average common equity (“ROACE”) of 12.59% in the quarter, as well as adjusted ROAA of 1.46% and adjusted ROACE of 12.61%, excluding the impact of acquisition expenses and prepayment penalties, net of tax, and death benefits on bank owned life insurance. (See the “Non–GAAP Reconciliation of Return on Average Assets” and the “Non–GAAP Reconciliation of Return on Average Common Equity” tables below.)
• Horizon recorded a provision release of $1.5 million and maintained solid asset quality metrics at period end, including non–performing loans declining 10.9% during the quarter to $22.3 million, or 0.63% of total loans, substandard loans declining 4.6% to $82.5 million, or 2.3% of total loans, net charge–offs declining 81.3% to $39,000, or 0.00% of average loans for the period, and COVID–19 deferrals declining 42.7% to $52.5 million, or 1.5% of total loans.
• Total non–interest income grew to $15.2 million, up 9.6% from the linked quarter and 36.7% from the year–ago period, due to favorable impact of mortgage production, bank owned life insurance, banking fees and fiduciary activities. Following record residential lending in 2020, mortgage–related non–interest income remained strong in the second three months of 2021, with gain on mortgage loan sales of $5.6 million and net mortgage servicing income of $1.5 million. The Horizon Bank (the “Bank”) originated $173.0 million in mortgage loans during the quarter, with 61% of volume from purchases, as Horizon continued to focus residential lending on prime borrowers in Indiana and Michigan markets.
46
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
• Loans, excluding PPP lending, totaled $3.36 billion on June 30, 2021, were lower reflecting cash reserves maintained by many current and prospective commercial borrowers and retail households through the quarter. Loans, excluding PPP lending, totaled $3.42 billion on March 31, 2021 and $3.69 billion on June 30, 2020.
• Horizon’s book value per share and tangible book value per share increased to all–time highs of $16.16 and $12.24, respectively. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.)
• As part of the Company's annual branch performance review and a third–party analysis of the Bank's retail network, Horizon's Board of Directors approved the permanent closure of nine Indiana branch locations and one in Michigan to occur on August 27, 2021. Access to Horizon branch that provides the same products and services will be in close proximity of the consolidated branch in addition to alternative delivery channels are available, including online banking and mobile banking. Any impairment to fixed assets is not estimated to be material.
• Horizon increased cash dividends paid in the quarter by 8.3% to $0.13 per share, as previously announced. As of June 30, 2021, in excess of $129 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value.
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.
◦ Installed sneeze guards, customer directional signage, implemented mask requirements, and continuing with sanitizing and social distancing protocols.
◦ Substantial reduction in percentage of employees working remotely.
• Consumers
◦ 100% of our branch locations are now open to lobby traffic.
◦ Payment relief
▪ Approximately $2 million consumer and mortgage loans have been modified as of June 30, 2021, down from $6 million as of December 31, 2020 and $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 $51 million in commercial loans with payment extensions as of June 30, 2021, down from $121 million as of December 31, 2020 and $470 million as of June 30, 2020.
▪ Processed and received approval for 4,003 PPP loans, funding approximately $450.1 million.
▪ As of June 30, 2021, $276.5 million of PPP loans had been forgiven.
• Communities
◦ Increased volunteerism in support of local not–for–profit entities.
◦ Contributed over $300,000 during 2020 to COVID–19 related not–for–profit efforts (local food banks, United Way, housing).
47
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
◦ 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.
Financial Summary
For the Three Months Ended
June 30, March 31, June 30,
Net Interest Income and Net Interest Margin 2021 2021 2020
Net interest income $ 42,632 $ 42,538 $ 42,996
Net interest margin 3.14 % 3.29 % 3.47 %
Adjusted net interest margin 3.13 % 3.17 % 3.35 %
For the Three Months Ended
June 30, March 31, June 30,
Asset Yields and Funding Costs 2021 2021 2020
Interest earning assets 3.48 % 3.66 % 4.05 %
Interest bearing liabilities 0.45 % 0.50 % 0.74 %
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income June 30, March 31, June 30,
2021 2021 2020
Total non–interest income $ 15,207 $ 13,873 $ 11,125
Gain on sale of mortgage loans 5,612 5,296 6,620
Mortgage servicing income net of impairment 1,503 213 (2,760)
For the Three Months Ended
June 30, March 31, June 30,
Non–interest Expense 2021 2021 2020
Total non–interest expense $ 33,388 $ 32,172 $ 30,432
Annualized non–interest expense to average assets 2.18 % 2.20 % 2.18 %
At or for the Three Months Ended
Credit Quality June 30, March 31, June 30,
2021 2021 2020
Allowance for credit losses to total loans 1.58 % 1.56 % 1.38 %
Non–performing loans to total loans 0.63 % 0.68 % 0.70 %
Percent of net charge–offs to average loans outstanding for the period 0.00 % 0.01 % 0.01 %
48
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Allowance for December 31, Net Reserve June 30,
Credit Losses 2020 1Q20 2Q20 2021
Commercial $ 42,210 $ 770 $ (1,214) $ 41,766
Retail Mortgage 4,620 (391) (121) 4,108
Warehouse 1,267 (104) (8) 1,155
Consumer 8,930 (116) (194) 8,620
Allowance for Credit Losses (“ACL”)
$ 57,027 $ 159 $ (1,537) $ 55,649
ACL/Total Loans 1.47 % 1.58 %
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 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 as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.
Allowance for Credit Losses
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. Assets purchased with credit deterioration (“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 June 30, 2021, Horizon had core deposit intangibles of $21.2 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.
49
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
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 most recent qualitative assessment, the Company determined that as of June 30, 2021, 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.
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
50
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
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.
Financial Condition
On June 30, 2021, Horizon’s total assets were $6.1 billion, an increase of approximately $222.6 million compared to December 31, 2020. The increase was primarily in investment securities available for sale of $557.2 million and cash and due from banks of $54.5 million. These increases were offset by a decrease in net loans of $346.5 million, investments held to maturity of $15.4 million and other assets of $13.9 million.
Investment securities were comprised of the following as of (dollars in thousands):
June 30, 2021 December 31, 2020
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 191,490 $ 191,101 $ 19,750 $ 19,715
State and municipal 1,090,693 1,113,493 803,100 837,843
Federal agency collateralized mortgage obligations 96,344 98,622 144,022 147,453
Federal agency mortgage–backed pools 165,016 167,510 114,484 118,799
Private labeled mortgage–backed pools 33,074 33,568 — —
Corporate notes 85,637 86,892 9,007 10,215
Total available for sale investment securities $ 1,662,254 $ 1,691,186 $ 1,090,363 $ 1,134,025
Held to maturity
State and municipal $ 144,430 $ 153,606 $ 157,421 $ 168,456
Federal agency collateralized mortgage obligations 1,007 1,023 2,661 2,697
Federal agency mortgage–backed pools 3,733 3,908 8,594 8,837
Private labeled mortgage–backed pools 4,114 4,114 — —
Total held to maturity investment securities $ 153,284 $ 162,651 $ 168,676 $ 179,990
Investment securities available for sale increased $557.2 million since December 31, 2020 to $1.7 billion as of June 30, 2021. This increase was due to additional purchases to increase earning assets.
51
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Gross loans decreased $354.2 million since December 31, 2020 to $3.5 billion as of June 30, 2021. Mortgage warehouse, commercial, residential mortgage, loans held for sale and consumer decreased $190.3 million, $87.6 million, $64.8 million, $6.3 million and $5.1 million, respectively. PPP loans decreased $39.4 million since December 31, 2020 to $169.4 million as of June 30, 2021.
Total deposits increased $250.5 million since December 31, 2020 to $4.8 billion as of June 30, 2021. This increase was primarily due to Federal stimulus payments to consumers and funds from the origination of PPP loans.
Total borrowings decreased from $475.0 million as of December 31, 2020 to $439.1 million as of June 30, 2021. At June 30, 2021, the Company had $178.5 million in short-term funds borrowed compared to $315.5 million at December 31, 2020. During the second quarter of 2021, the Bank paid–off $50.0 million in long–term Federal Home Loan Bank of Indianapolis advances which resulted in a prepayment penalty of $125,000.
Stockholders’ equity totaled $710.4 million at June 30, 2021 compared to $692.2 million at December 31, 2020. The increase in stockholders’ equity during the period was due to the generation of net income, offset by dividends paid and a decrease in accumulated other comprehensive income during the period. Book value per common share at June 30, 2021 increased to $16.16 compared to $15.78 at December 31, 2020.
Results of Operations
Overview
Consolidated net income for the three–month period ended June 30, 2021 was $22.2 million, or $0.50 diluted earnings per share, compared to $14.6 million, or $0.33 diluted earnings per share for the same period in 2020. The increase in net income for the three–month period ended June 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $4.1 million and a decrease in credit loss expense of $8.5 million, offset by an increase in non–interest expense of $3.0 million, an increase in income tax expense of $1.8 million and a decrease in net interest income of $364,000. Excluding acquisition expenses, gain on sale of investment securities, death benefit on bank owned life insurance and prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the second quarter of 2021 was $22.2 million, or $0.50 diluted earnings per share, compared to $14.4 million, or $0.32 diluted earnings per share for the second quarter of 2020.
Consolidated net income for the six–month period ended June 30, 2021 was $42.6 million, or $0.97 diluted earnings per share, compared to $26.3 million, or $0.59 diluted earnings per share for the same period in 2020. The increase in net income for the six–month period ended June 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $5.9 million, an increase in net interest income of $1.2 million and a decrease in credit loss expense of $16.8 million, offset by increases in non–interest expense of $4.0 million and income tax expense of $3.6 million. Excluding acquisition expenses, gain on sale of investment securities, death benefits on bank owned life insurance and prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the six–month period ended June 30, 2021 was $41.9 million, or $0.95 diluted earnings per share, compared to $25.6 million, or $0.57 diluted earnings per share for the six–month period ended June 30, 2020.
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 June 30, 2021 was $42.6 million, a decrease of $364,000 from the $43.0 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 57 basis points to 3.48% for the three months ended June 30, 2021 from 4.05% for the three months ended June 30, 2020. Interest income decreased $2.9 million from $50.3 million for the three months ended June 30, 2020 to $47.4 million for the same
52
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
period in 2021. The decrease in interest income was due to a decrease in yield as interest earning assets reprice during the current low rate environment. Interest income from acquisition–related purchase accounting adjustments was $230,000 for the three months ending June 30, 2021 compared to $1.6 million for the same period of 2020.
Rates paid on interest bearing liabilities decreased by 29 basis points for the three–month period ended June 30, 2021 compared to the same period in 2020. Interest expense decreased $2.6 million when compared to the three–month period ended June 30, 2020 to $4.8 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 33 basis points while the cost of average borrowings decreased 20 basis points. Average balances of interest bearing deposits increased $381.1 million and average balances of borrowings decreased $164.4 million for the three-month period ended June 30, 2021 when compared to the same period in 2020.
The net interest margin decreased 33 basis points from 3.47% for the three–month period ended June 30, 2020 to 3.14% for the same period in 2021. The decrease in the margin for the three–month period ended June 30, 2021 compared to the same period in 2020 was due to a decrease in the yield on 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 and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.13% for the three-month period ending June 30, 2021 compared to 3.35% for the same period in 2020.
The net interest margin was impacted due to PPP lending and high level of cash held during the second quarter of 2021. Horizon estimates that the PPP loans increased the net interest margin by seven basis points for the second quarter of 2021. 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. In addition, Horizon estimates that the high level of cash held on the balance sheet compressed the net interest margin by 21 basis points for the second quarter of 2021. This assumes that the high level of cash was not included in average interest earning assets or interest income and was excluded from non–interest bearing deposits.
53
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
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
June 30, 2021 June 30, 2020
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 359,184 $ 98 0.11 % $ 62,832 $ 17 0.11 %
Interest earning deposits 29,584 44 0.60 % 20,278 61 1.21 %
Investment securities – taxable 645,139 2,386 1.48 % 481,552 2,243 1.87 %
Investment securities – non–taxable (1)
1,054,703 5,656 2.72 % 647,375 4,105 3.15 %
Loans receivable (2) (3)
3,570,774 39,236 4.43 % 3,900,599 43,918 4.54 %
Total interest earning assets 5,659,384 47,420 3.48 % 5,112,636 50,344 4.05 %
Non–interest earning assets
Cash and due from banks 84,469 84,297
Allowance for credit losses (57,196) (48,611)
Other assets 455,850 472,373
Total average assets $ 6,142,507 $ 5,620,695
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,680,796 $ 2,053 0.22 % $ 3,299,661 $ 4,506 0.55 %
Borrowings 453,856 1,296 1.15 % 618,274 2,074 1.35 %
Subordinated notes 58,653 881 6.02 % 4,527 58 5.15 %
Junior subordinated debentures issued to capital trusts 56,627 558 3.95 % 52,835 710 5.40 %
Total interest bearing liabilities 4,249,932 4,788 0.45 % 3,975,297 7,348 0.74 %
Non–interest bearing liabilities
Demand deposits 1,139,068 924,890
Accrued interest payable and other liabilities 46,855 71,018
Stockholders’ equity 706,652 649,490
Total average liabilities and stockholders’ equity $ 6,142,507 $ 5,620,695
Net interest income/spread $ 42,632 3.03 % $ 42,996 3.31 %
Net interest income as a percent of average interest earning assets (1)
3.14 % 3.47 %
(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.
54
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Net interest income during the six months ended June 30, 2021 was $85.2 million, an increase of $1.2 million from the $83.9 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 68 basis points to 3.57% for the six months ended June 30, 2021 from 4.25% for the six months ended June 30, 2020. Interest income decreased $7.0 million from $102.0 million for the six months ended June 30, 2020 to $95.0 million for the same period in 2021. Average interest earning assets during the six months ended June 30, 2021 increased $620.7 million to $5.6 billion compared to $4.9 billion during the six months ended June 30, 2020. Interest income from acquisition–related purchase accounting adjustments was $1.8 million for the six months ended June 30, 2021 compared to $3.0 million for the same period of 2020.
Rates paid on interest bearing liabilities decreased 46 basis points for the six–month period ended June 30, 2021 compared to the same period in 2020. Interest expense decreased $8.2 million when compared to the six–month period ended June 30, 2020 to $9.8 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 50 basis points while the cost of average borrowings decreased 40 basis points. Average balances of interest bearing deposits increased $340.4 million and average balances of borrowings decreased $110.2 million for the six–month period ended June 30, 2021 when compared to the same period in 2020.
The net interest margin decreased 30 basis points from 3.51% for the six–month period ended June 30, 2020 to 3.21% for the same period in 2021. The decrease in the margin for the six–month period ended June 30, 2021 compared to the same period in 2020 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 and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.15% for the six–month period ended June 30, 2021 compared to 3.39% for the same period in 2020.
55
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 313,467 $ 164 0.11 % $ 43,903 $ 113 0.52 %
Interest earning deposits 27,567 90 0.66 % 23,391 163 1.40 %
Investment securities – taxable 528,250 3,822 1.46 % 491,360 4,943 2.02 %
Investment securities – non–taxable (1)
1,005,855 10,879 2.76 % 618,080 7,903 3.16 %
Loans receivable (2) (3)
3,674,977 80,054 4.41 % 3,752,654 88,876 4.78 %
Total interest earning assets 5,550,116 95,009 3.57 % 4,929,388 101,998 4.25 %
Non–interest earning assets
Cash and due from banks 84,866 81,203
Allowance for credit losses (57,486) (36,588)
Other assets 462,401 459,184
Total average assets $ 6,039,897 $ 5,433,187
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,602,882 $ 4,396 0.25 % $ 3,262,492 $ 12,222 0.75 %
Borrowings 465,502 2,565 1.11 % 575,702 4,312 1.51 %
Subordinated debentures 58,635 1,761 6.06 % 2,264 58 5.15 %
Junior subordinated debentures issued to capital trusts 56,599 1,117 3.98 % 52,801 1,485 5.66 %
Total interest bearing liabilities 4,183,618 9,839 0.47 % 3,893,259 18,077 0.93 %
Non–interest bearing liabilities
Demand deposits 1,101,377 820,997
Accrued interest payable and other liabilities 52,850 63,393
Stockholders’ equity 702,052 655,538
Total average liabilities and stockholders’ equity $ 6,039,897 $ 5,433,187
Net interest income/spread $ 85,170 3.10 % $ 83,921 3.32 %
Net interest income as a percent of average interest earning assets (1)
3.21 % 3.51 %
(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.
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 June 30, 2021, a provision reversal of $1.5 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $7.1 million for the same period of 2020. During the three–month period ended June 30, 2021, commercial loan net charge–offs were $46,000, residential mortgage loan net recoveries were $23,000 and consumer loan net charge–offs were $22,000.
56
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
During the six–month period ended June 30, 2021, a provision reversal of $1.1 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $15.7 million for the same period of 2020. During the six–month period ended June 30, 2021, commercial loan net charge–offs were $204,000, residential mortgage loan net recoveries were $88,000 and consumer net charge–offs were $137,000.
The ACL balance at June 30, 2021 was $55.6 million, or 1.58% of total loans compared to an ACL balance of $57.0 million at December 31, 2020 or 1.47% of total loans. The increase in the ACL to total loans ratio was primarily due to a decrease in loans from December 31, 2020, including a decrease in PPP loans of $39.4 million which do not require a related ACL balance.
As of June 30, 2021, non–performing loans totaled $22.3 million, which reflects a 6 basis point decrease in non–performing loans to total loans, or a $4.5 million decrease from $26.8 million in non–performing loans as of December 31, 2020. Non–performing commercial loans decreased by $4.0 million, non–performing real estate loans decreased by $153,000 and non–performing consumer loans decreased by $329,000 at June 30, 2021 compared to December 31, 2020.
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 June 30, 2021, the Bank modified loans totaling $52.5 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 20 $50.8 96.8 % 2.4 %
Mortgage (Retained Only) 10 $1.1 2.1 % 0.2 %
Indirect Auto 4 $0.0 0.0 % 0.0 %
Consumer Direct 4 $0.5 1.0 % 0.0 %
Consumer Revolving 2 $0.1 0.1 % 0.8 %
Total 40 $52.5 100.0 % 1.6 %
Mortgage (Serviced Only) 27
Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.5 million at June 30, 2021 compared to $1.9 million at December 31, 2020.
57
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–interest Income
The following is a summary of changes in non–interest income for the three months ending June 30, 2021 and 2020 (table dollar amounts in thousands):
Three Months Ended
June 30, Amount Percent
2021 2020 Change Change
Non–interest Income
Service charges on deposit accounts $ 2,157 $ 1,888 $ 269 14.2 %
Wire transfer fees 222 230 (8) (3.5) %
Interchange fees 2,892 2,327 565 24.3 %
Fiduciary activities 1,961 1,765 196 11.1 %
Gain on sale of investment securities — 248 (248) (100.0) %
Gain on sale of mortgage loans 5,612 6,620 (1,008) (15.2) %
Mortgage servicing net of impairment 1,503 (2,760) 4,263 (154.5) %
Increase in cash surrender value of bank owned life insurance 502 557 (55) (9.9) %
Death benefit on bank owned life insurance 266 — 266 0.0 %
Other income 92 250 (158) (63.2) %
Total non–interest income $ 15,207 $ 11,125 $ 4,082 36.7 %
Total non–interest income was $4.1 million higher during the second quarter of 2021 compared to the same period of 2020. Residential mortgage loan activity during the second quarter of 2021 generated $5.6 million of income from the gain on sale of mortgage loans, down from $6.6 million for the same period in 2020 due to a lower volume of loans sold, offset by an increase in the percentage gain on loans sold. Mortgage servicing rights, net of impairment, increased $4.3 million during the second quarter of 2021 compared to the same period of 2020 primarily due to the reversal of $1.6 million in impairment charges during the second quarter of 2021. Interchange fees, service charges on deposit accounts and death benefit on bank owned life insurance increased $565,000, $269,000, $266,000, respectively, when comparing the second quarter of 2021 to the same period of 2020.
The following is a summary of changes in non–interest income for the six months ending June 30, 2021 and 2020 (table dollar amounts in thousands):
Six Months Ended
June 30, Amount Percent
2021 2020 Change Change
Non–interest Income
Service charges on deposit accounts $ 4,391 $ 4,334 $ 57 1.3 %
Wire transfer fees 477 401 76 19.0 %
Interchange fees 5,232 4,223 1,009 23.9 %
Fiduciary activities 3,704 4,293 (589) (13.7) %
Gain on sale of investment securities 914 587 327 55.7 %
Gain on sale of mortgage loans 10,908 10,093 815 8.1 %
Mortgage servicing net of impairment 1,716 (2,735) 4,451 (162.7) %
Increase in cash surrender value of bank owned life insurance 1,013 1,111 (98) (8.8) %
Death benefit on bank owned life insurance 266 233 33 14.2 %
Other income 459 648 (189) (29.2) %
Total non–interest income $ 29,080 $ 23,188 $ 5,892 25.4 %
58
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Total non–interest income was $5.9 million higher for the six–month period ended June 30, 2021 compared to the same period of 2020. Residential mortgage loan activity during the six–month period ended June 30, 2021 generated $10.9 million of income from the gain on sale of mortgage loans, up from $10.1 million for the same period in 2020 due to an increase in the percentage gain on loans sold. Mortgage servicing rights, net of impairment, increased $4.5 million during the six–month period ended June 30, 2021 compared to the same period of 2020 due to the reversal of $1.8 million in impairment charges during the six–month period ended June 30, 2021 compared to impairment charges of $3.2 million during the same period in 2020. Interchange fees increased $1.0 million during the six–month period ended June 30, 2021 compared to the same period of 2020.
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ending June 30, 2021 and 2020 (table dollar amounts in thousands):
Three Months Ended
June 30, June 30,
2021 2020 Adjusted
Actual Acquisition
Expenses Adjusted Actual Acquisition
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 17,730 $ — $ 17,730 $ 15,629 $ — $ 15,629 $ 2,101 13.4 %
Net occupancy expenses 3,084 — 3,084 3,190 — 3,190 (106) (3.3) %
Data processing 2,388 — 2,388 2,432 — 2,432 (44) (1.8) %
Professional fees 588 (51) 537 518 — 518 19 3.7 %
Outside services and consultants 2,220 (187) 2,033 1,759 — 1,759 274 15.6 %
Loan expense 3,107 — 3,107 2,692 — 2,692 415 15.4 %
FDIC deposit insurance 500 — 500 235 — 235 265 112.8 %
Other losses 6 — 6 193 — 193 (187) (96.9) %
Other expenses 3,765 (4) 3,761 3,784 — 3,784 (23) (0.6) %
Total non–interest expense $ 33,388 $ (242) $ 33,146 $ 30,432 $ — $ 30,432 $ 2,714 8.9 %
Annualized
Non–interest Exp. to Avg. Assets 2.18 % 2.16 % 2.18 % 2.18 %
Total non–interest expense was $3.0 million higher for the second quarter of 2021 when compared to the second quarter of 2020. Increases in salaries and employee benefits, outside services and consultants, loan expense and FDIC insurance expense were offset in part by decreases in other losses and net occupancy expenses. Salaries and benefits expense for the three months ended June 30, 2020 did not include accruals related to annual bonus payments, while a normalized level of annual bonus accruals were recorded for the three months ended June 30, 2021. Excluding acquisition expenses, total non–interest expense increased by $2.7 million in the second quarter when compared to the same period in 2020.
Annualized non–interest expense as a percent of average assets was 2.18% for the three months ended June 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.16% and 2.18% for the three months ended June 30, 2021 and 2020, respectively.
59
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
The following is a summary of changes in non–interest expense for the six months ending June 30, 2021 and 2020 (table dollar amounts in thousands):
Six Months Ended
June 30, June 30,
2021 2020 Adjusted
Actual Acquisition
Expenses Adjusted Actual Acquisition
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 34,601 $ — $ 34,601 $ 32,220 $ — $ 32,220 $ 2,381 7.4 %
Net occupancy expenses 6,402 — 6,402 6,442 — 6,442 (40) (0.6) %
Data processing 4,764 — 4,764 4,837 — 4,837 (73) (1.5) %
Professional fees 1,132 (51) 1,081 1,054 — 1,054 27 2.6 %
Outside services and consultants 3,922 (187) 3,735 3,674 — 3,674 61 1.7 %
Loan expense 5,929 — 5,929 4,791 — 4,791 1,138 23.8 %
FDIC deposit insurance 1,300 — 1,300 385 — 385 915 237.7 %
Other losses 289 — 289 313 — 313 (24) (7.7) %
Other expenses 7,221 (4) 7,217 7,865 — 7,865 (648) (8.2) %
Total non–interest expense $ 65,560 $ (242) $ 65,318 $ 61,581 $ — $ 61,581 $ 3,737 6.1 %
Annualized
Non–interest Exp. to Avg. Assets 2.19 % 2.18 % 2.28 % 2.28 %
Total non–interest expense was $4.0 million higher for the six–month period ended June 30, 2021 compared to the same period of 2020. Increases in salaries and employee benefits, loan expenses and FDIC insurance expense were offset in part by a decrease in other expense. Salaries and benefits expense for the six–month period ended June 30, 2020 did not include accruals related to annual bonus payments, while a normalized level of annual bonus accruals were recorded for the six–month period ended June 30, 2021. Excluding acquisition expenses, total non–interest expense increased $3.7 million for the six–month period ended June 30, 2021 compared to the same period of 2020.
Annualized non–interest expense as a percent of average assets was 2.19% and 2.28% for the six–month period ended June 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.18% and 2.28% for the six–month period ended June 30, 2021 and 2020, respectively.
Income Taxes
Income tax expense totaled $3.8 million for the second quarter of 2021, an increase of $1.8 million when compared to the second quarter of 2020. The increase in income tax expense in the second quarter of 2021 compared to the second quarter of 2020 was primarily due to an increase in income before taxes of $9.3 million.
Income tax expense totaled $7.2 million for the six–month period ended June 30, 2021, an increase of $3.6 million when compared to the same period of 2020. The increase in income tax expense was primarily due to an increase in income before taxes of $19.9 million.
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,
60
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At June 30, 2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $890.6 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $1.04 billion at December 31, 2020. The Bank had approximately $1.2 billion of unpledged investment securities at June 30, 2021 compared to $632.4 million at December 31, 2020.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2021. Stockholders’ equity totaled $710.4 million as of June 30, 2021, compared to $692.2 million as of December 31, 2020. For the six months ended June 30, 2021, the ratio of average stockholders’ equity to average assets was 11.62% compared to 11.82% for the twelve months ended December 31, 2020. The increase in stockholders’ equity during the period was the result of net income recorded during the period offset in part by a decrease in accumulated other comprehensive income and dividends declared.
Horizon paid common stock dividends in the amount of $0.25 per share during the first six months of 2021 and $0.24 per share for the same period of 2020. The dividend payout ratio (dividends as a percent of basic earnings per share) was 25.8% and 40.7% for the first six months of 2021 and 2020, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2020.
61
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
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.
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Net income as reported $ 22,173 $ 20,422 $ 21,893 $ 20,312 $ 14,639 $ 42,595 $ 26,294
Acquisition expenses 242 — — — — 242 —
Tax effect (51) — — — — (51) —
Net income excluding acquisition expenses 22,364 20,422 21,893 20,312 14,639 42,786 26,294
(Gain)/loss on sale of investment
securities — (914) (2,622) (1,088) (248) (914) (587)
Tax effect — 192 551 228 52 192 123
Net income excluding (gain)/loss on sale of investment securities 22,364 19,700 19,822 19,452 14,443 42,064 25,830
Death benefit on bank owned life insurance (“BOLI”) (266) — — (31) — (266) (233)
Net income excluding death benefit on BOLI 22,098 19,700 19,822 19,421 14,443 41,798 25,597
Prepayment penalties on borrowings 125 — 3,804 — — 125 —
Tax effect (26) — (799) — — (26) —
Net income excluding prepayment penalties on borrowings 22,197 19,700 22,827 19,421 14,443 41,897 25,597
Adjusted net income $ 22,197 $ 19,700 $ 22,827 $ 19,421 $ 14,443 $ 41,897 $ 25,597
62
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Diluted earnings per share (“EPS”) as reported $ 0.50 $ 0.46 $ 0.50 $ 0.46 $ 0.33 $ 0.97 $ 0.59
Acquisition expenses 0.01 — — — — 0.01 —
Tax effect — — — — — — —
Diluted EPS excluding acquisition expenses 0.51 0.46 0.50 0.46 0.33 0.98 0.59
(Gain)/loss on sale of investment securities — (0.02) (0.06) (0.02) (0.01) (0.02) (0.01)
Tax effect — — 0.01 0.01 — — —
Diluted EPS excluding (gain)/loss on investment securities 0.51 0.44 0.45 0.45 0.32 0.96 0.58
Death benefit on BOLI (0.01) — — — — (0.01) (0.01)
Diluted EPS excluding death benefit on BOLI 0.50 0.44 0.45 0.45 0.32 0.95 0.57
Prepayment penalties on borrowings — — 0.09 — — — —
Tax effect — — (0.02) — — — —
Diluted EPS excluding prepayment penalties on borrowings 0.50 0.44 0.52 0.45 0.32 0.95 0.57
Adjusted Diluted EPS $ 0.50 $ 0.44 $ 0.52 $ 0.45 $ 0.32 $ 0.95 $ 0.57
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Pre–tax income $ 25,943 $ 23,872 $ 23,860 $ 24,638 $ 16,632 $ 49,815 $ 29,871
Credit loss expense (reversal) (1,492) 367 3,042 2,052 7,057 (1,125) 15,657
Pre–tax, pre–provision net income $ 24,451 $ 24,239 $ 26,902 $ 26,690 $ 23,689 $ 48,690 $ 45,528
Pre–tax, pre–provision net income $ 24,451 $ 24,239 $ 26,902 $ 26,690 $ 23,689 $ 48,690 $ 45,528
Acquisition expenses 242 — — — — 242 —
(Gain)/loss on sale of investment securities — (914) (2,622) (1,088) (248) (914) (587)
Death benefit on bank owned life insurance (266) — — (31) — (266) (233)
Prepayment penalties on borrowings 125 — 3,804 — — 125 —
Adjusted pre–tax, pre–provision net income $ 24,552 $ 23,325 $ 28,084 $ 25,571 $ 23,441 $ 47,877 $ 44,708
63
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Net interest income as reported $ 42,632 $ 42,538 $ 43,622 $ 43,397 $ 42,996 $ 85,170 $ 83,921
Average interest earning assets 5,659,384 5,439,634 5,365,888 5,251,611 5,112,636 5,550,116 4,929,388
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 3.14 % 3.29 % 3.34 % 3.39 % 3.47 % 3.21 % 3.51 %
Net interest income as reported $ 42,632 $ 42,538 $ 43,622 $ 43,397 $ 42,996 $ 85,170 $ 83,921
Acquisition–related purchase accounting adjustments
(“PAUs”) (230) (1,579) (2,461) (1,488) (1,553) (1,809) (2,987)
Prepayment penalties on borrowings 125 — 3,804 — — 125 —
Adjusted net interest income $ 42,527 $ 40,959 $ 44,965 $ 41,909 $ 41,443 $ 83,486 $ 80,934
Adjusted net interest margin 3.13 % 3.17 % 3.44 % 3.27 % 3.35 % 3.15 % 3.39 %
Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
June 30, March 31, December 31, September 30, June 30,
2021 2021 2020 2020 2020
Total stockholders’ equity $ 710,374 $ 689,379 $ 692,216 $ 670,293 $ 652,206
Less: Intangible assets 172,398 173,296 174,193 175,107 176,020
Total tangible stockholders’ equity $ 537,976 $ 516,083 $ 518,023 $ 495,186 $ 476,186
Common shares outstanding 43,950,720 43,949,189 43,880,562 43,874,353 43,821,878
Book value per common share $ 16.16 $ 15.69 $ 15.78 $ 15.28 $ 14.88
Tangible book value per common
share $ 12.24 $ 11.74 $ 11.81 $ 11.29 $ 10.87
64
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Non–interest expense as reported $ 33,388 $ 32,172 $ 36,453 $ 33,407 $ 30,432 $ 65,560 $ 61,581
Net interest income as reported 42,632 42,538 43,622 43,397 42,996 85,170 83,921
Non–interest income as reported $ 15,207 $ 13,873 $ 19,733 $ 16,700 $ 11,125 $ 29,080 $ 23,188
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 57.73 % 57.03 % 57.54 % 55.59 % 56.23 % 57.38 % 57.49 %
Non–interest expense as reported $ 33,388 $ 32,172 $ 36,453 $ 33,407 $ 30,432 $ 65,560 $ 61,581
Acquisition expenses (242) — — — — (242) —
Non–interest expense excluding acquisition expenses 33,146 32,172 36,453 33,407 30,432 65,318 61,581
Net interest income as reported 42,632 42,538 43,622 43,397 42,996 85,170 83,921
Prepayment penalties on borrowings 125 — 3,804 — — 125 —
Net interest income excluding prepayment penalties on borrowings 42,757 42,538 47,426 43,397 42,996 85,295 83,921
Non–interest income as reported 15,207 13,873 19,733 16,700 11,125 29,080 23,188
(Gain)/loss on sale of investment securities — (914) (2,622) (1,088) (248) (914) (587)
Death benefit on bank owned life insurance ("BOLI") (266) — — (31) — (266) (233)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI $ 14,941 $ 12,959 $ 17,111 $ 15,581 $ 10,877 $ 27,900 $ 22,368
Adjusted efficiency ratio 57.45 % 57.97 % 56.48 % 56.64 % 56.49 % 57.70 % 57.94 %
65
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Average assets $ 6,142,507 $ 5,936,149 $ 5,864,086 $ 5,768,691 $ 5,620,695 $ 6,039,897 $ 5,433,187
Return on average assets ("ROAA") as reported 1.45 % 1.40 % 1.49 % 1.40 % 1.05 % 1.42 % 0.97 %
Acquisition expenses 0.02 — — — — 0.01 —
Tax effect — — — — — — —
ROAA excluding acquisition expenses 1.47 1.40 1.49 1.40 1.05 1.43 0.97
(Gain)/loss on sale of investment securities — (0.06) (0.18) (0.08) (0.02) (0.03) (0.02)
Tax effect — 0.01 0.04 0.02 — 0.01 —
ROAA excluding (gain)/loss on sale of investment securities 1.47 1.35 1.35 1.34 1.03 1.41 0.95
Death benefit on bank owned life insurance ("BOLI") (0.02) — — — — (0.01) (0.01)
ROAA excluding death benefit on BOLI 1.45 1.35 1.35 1.34 1.03 1.40 0.94
Prepayment penalties on borrowings 0.01 — 0.26 — — — —
Tax effect — — (0.05) — — — —
ROAA excluding prepayment penalties on borrowings 1.46 1.35 1.56 1.34 1.03 1.40 0.94
Adjusted ROAA 1.46 % 1.35 % 1.56 % 1.34 % 1.03 % 1.40 % 0.94 %
66
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Average common equity $ 706,652 $ 697,401 $ 680,857 $ 668,797 $ 649,490 $ 702,052 $ 655,538
Return on average common equity ("ROACE") as reported 12.59 % 11.88 % 12.79 % 12.08 % 9.07 % 12.23 % 8.07 %
Merger expenses 0.14 — — — — 0.07 —
Tax effect (0.03) — — — — (0.01) —
ROACE excluding merger expenses 12.70 11.88 12.79 12.08 9.07 12.29 8.07
(Gain)/loss on sale of investment securities — (0.53) (1.53) (0.65) (0.15) (0.26) (0.18)
Tax effect — 0.11 0.32 0.14 0.03 0.06 0.04
ROACE excluding (gain)/loss on sale of investment securities 12.70 11.46 11.58 11.57 8.95 12.09 7.93
Death benefit on bank owned life insurance ("BOLI") (0.15) — — (0.02) — (0.08) (0.07)
ROACE excluding death benefit on BOLI 12.55 11.46 11.58 11.55 8.95 12.01 7.86
Prepayment penalties on borrowings 0.07 — 2.22 — — 0.04 —
Tax effect (0.01) — (0.47) — — (0.01) —
ROACE excluding prepayment penalties on borrowings 12.61 11.46 13.33 11.55 8.95 12.04 7.86
Adjusted ROACE 12.61 % 11.46 % 13.33 % 11.55 % 8.95 % 12.04 % 7.86 %
67
Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon’s 2020 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 2020 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.