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;
• changes in federal or state government mandates regarding vaccination requirements which may impact our ability to retain or attract labor;
• our former role as a fiduciary trustee for corporate employee stock ownership plans (“ESOPs”) may expose us to increased risk of litigation due to heightened scrutiny of this role by the U.S. Department of Labor and the plaintiff’s bar;
• 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;
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
• 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;
• 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.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
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.
Third Quarter 2021 Highlights
• On September 17, 2021, completed previously announced acquisition of 14 branches in 11 Michigan counties, approximately $206.8 million in loans and $846.4 million in deposits, in a transaction designed to further extend Horizon’s retail franchise and further enhance its low–cost core deposit and funding capability to support lending in its Midwestern growth markets.
• Net income grew to a record $23.1 million, up 4.0% from the linked quarter and 13.6% from the year–ago period. Diluted earnings per share (“EPS”) of $0.52 was up from $0.50 for the second quarter of 2021 and $0.46 for the third quarter of 2020.
• Pre–tax, pre–provision net income grew to a record $28.2 million, up 15.5% from the linked quarter and 5.8% 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).
• Non–interest expense was $34.3 million in the quarter, or 2.09% of average assets on an annualized basis, compared to $33.4 million, or 2.18%, in the second quarter of 2021 and $33.4 million, or 2.30%, in the third quarter of 2020. Acquisition–related expenses totaled approximately $799,000 in the third quarter of 2021 and $242,000 in the linked quarter.
• The efficiency ratio for the period was 54.88% compared to 57.73% for the second quarter of 2021 and 55.59% for the third quarter of 2020. The adjusted efficiency ratio was 56.16% compared to 57.45% for the second quarter of 2021 and 56.64% for the third quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below).
• A previously disclosed consolidation of 10 retail locations was completed on August 27 as part of Horizon’s rigorous annual branch performance review process, with employees reassigned to support other staffing needs and growth initiatives. Operating cost saves are largely expected to be redeployed into continued digital banking and technology investments.
• Net interest income grew to a record $46.5 million for the quarter, up 9.2% from the second quarter of 2021 and 7.3% from the third quarter of 2020. Reported net interest margin (“NIM”) was 3.17% and adjusted NIM was 3.12%, with reported NIM increasing by three basis points and adjusted NIM decreasing by one basis point from the second quarter of 2021. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation of adjusted NIM.) Approximately 16 basis points of the NIM and adjusted NIM is attributed to Federal Paycheck Protection Program (“PPP”) lending, offset by an estimated 16 basis point compression attributed to excess liquidity during the quarter. During the third quarter, Horizon increased the average balance of its investment portfolio by $471.8 million to leverage capital and focus on increasing net interest income.
• Total non–interest income was $16.0 million, including the recovery of $876,000 from an acquired charged–off loan, as well as a $2.4 million gain from the sale of the Company’s ESOP trustee accounts at the end of the quarter. The sale of these accounts is not expected to have any significant impact to the bottom line due to the related costs saves the Company will incur as it exited these account relationships. Non–interest income was $15.2 million in the second quarter of 2021 and $16.7 million, including a $1.1 million securities sale gain, in the third quarter of 2020.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
• Horizon’s in–market consumer and commercial deposit relationships, including those on–boarded as part of its branch acquisition during the quarter, 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 0.38% in the quarter, compared to 0.45% in the second quarter of 2021 and 0.67% in the third quarter of 2020.
• Horizon recorded a quarterly provision expense of $1.1 million, reflecting a $2.0 million allocation for loans acquired in the Michigan branch acquisition, as well as, solid asset quality metrics at period end.
• Commercial loans, excluding PPP lending, grew by 2.3% organically and by 7.5% overall during the quarter to $2.1 billion at period end. Total loans, excluding PPP lending, grew organically 0.3% and 6.4% overall to $3.57 billion.
• Horizon’s book value per share increased to an all–time high of $16.28 while tangible book value per share decreased to $12.05. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.) The decrease in tangible book value was a result of the repurchase of shares for approximately $7.6 million and $12.4 million of goodwill and intangible assets recorded during the third quarter.
• Horizon announced an increase to cash dividends to be paid on October 22, 2021 of 15.4% to $0.15 per share. As of September 30, 2021, in excess of $120.9 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value. This is Horizon’s second dividend increase in 2021.
• During the quarter, the Company repurchased 430,026 shares at an average cost of $17.74 per share for a total cost of $7.6 million. This resulted in a reduction in tangible book value of approximately $0.18 per share and an increase in EPS of $0.01 per share for the third quarter.
Impact of the COVID–19 Pandemic
We continue to monitor the impact of COVID–19 is having on the markets in which we operate in and the uncertainty of the long–term ramifications to our customers and operations. Within our markets, vaccinations have become readily available, infection positivity rates are at moderate levels, and the restrictions on businesses have generally been fully lifted. However, the lasting effects of government aid programs are uncertain as stimulus packages taper, and the ultimate long–term impact of the business shutdowns that occurred as a result of COVID–19 remains uncertain in many sectors of the economy. In the third quarter of 2021, COVID–19 positivity rates and hospitalizations in our markets rose due to the impact of the Delta variant, but have now been falling for the last several weeks.
The Federal Reserve, in response to the economic risks resulting from the COVID–19 pandemic, returned to a zero–interest rate policy in March 2020. This was after most broader market rates decreased significantly in response to evolving news about the COVID–19 pandemic. Many areas of consumer and business spending have rebounded in recent months, but there remains uncertainty about the longer lasting impact on local businesses as well as the travel, hospitality and entertainment industries results from the COVID–19 pandemic. This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain those recoveries in the long run. Inflation and supply shortages also pose risks to the economic recovery.
While positive economic indicators exist, we recognize that some of our commercial and individual customers are continuing to experience varying degrees of financial distress, which we expect to continue, through a lesser degree, through the end of 2021 and into early 2022. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID–19 pandemic, which may result in some customers’ inability to meet their loan obligations to us or seek deferrals on their obligations. In addition, the economic pressures and uncertainties related to the COVID–19 pandemic have seemingly resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hotel/lodging, restaurants, retail and commercial real estate, which have been significantly impacted by the COVID–19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID–19 pandemic. We continue to monitor these customers closely.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Financial Summary
For the Three Months Ended
September 30, June 30, September 30,
Net Interest Income and Net Interest Margin 2021 2021 2020
Net interest income $ 46,544 $ 42,632 $ 43,397
Net interest margin 3.17 % 3.14 % 3.39 %
Adjusted net interest margin 3.12 % 3.13 % 3.27 %
For the Three Months Ended
September 30, June 30, September 30,
Asset Yields and Funding Costs 2021 2021 2020
Interest earning assets 3.46 % 3.48 % 3.90 %
Interest bearing liabilities 0.38 % 0.45 % 0.67 %
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income September 30, June 30, September 30,
2021 2021 2020
Total non–interest income $ 16,044 $ 15,207 $ 16,700
Gain on sale of mortgage loans 4,088 5,612 8,813
Mortgage servicing income net of impairment 336 1,503 (1,308)
For the Three Months Ended
September 30, June 30, September 30,
Non–interest Expense 2021 2021 2020
Total non–interest expense $ 34,349 $ 33,388 $ 33,407
Annualized non–interest expense to average assets 2.09 % 2.18 % 2.30 %
At or for the Three Months Ended
Credit Quality September 30, June 30, September 30,
2021 2021 2020
Allowance for credit losses to total loans 1.55 % 1.58 % 1.39 %
Non–performing loans to total loans 0.80 % 0.63 % 0.72 %
Percent of net charge–offs to average loans outstanding for the period 0.00 % 0.00 % 0.02 %
Allowance for December 31, Net Reserve September 30,
Credit Losses 2020 1Q21 2Q21 3Q21 2021
Commercial $ 42,210 $ 770 $ (1,214) $ 1,355 $ 43,121
Retail Mortgage 4,620 (391) (121) (371) 3,737
Warehouse 1,267 (104) (8) (101) 1,054
Consumer 8,930 (116) (194) 247 8,867
Allowance for Credit Losses (“ACL”)
$ 57,027 $ 159 $ (1,537) 1,130 $ 56,779
ACL/Total Loans 1.47 % 1.55 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
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 September 30, 2021, Horizon had core deposit intangibles of $21.2 million subject to amortization and $162.8 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.
At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID–19, Horizon assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock and other relevant events. Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and stress testing performed. At the conclusion of the most recent qualitative assessment, the Company determined that as of September 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.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing–retained basis. Capitalized servicing rights are amortized into non–interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market–based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage–servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.
Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.
Derivative Instruments
As part of the Company’s asset/liability management program, Horizon utilizes, from time–to–time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.
Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815–10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non–interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Valuation Measurements
Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post–retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.
Financial Condition
On September 30, 2021, Horizon’s total assets were $7.5 billion, an increase of approximately $1.6 billion compared to December 31, 2020. The increase in total assets was primarily in cash and due from banks of $722.1 million, investments held to maturity of $600.6 million and investments available for sale of $535.6 million. These increases were offset by a decrease in net loans of $207.1 million.
Investment securities were comprised of the following as of (dollars in thousands):
September 30, 2021 December 31, 2020
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 119,159 $ 118,588 $ 19,750 $ 19,715
State and municipal 1,108,057 1,119,123 803,100 837,843
Federal agency collateralized mortgage obligations 73,922 75,525 144,022 147,453
Federal agency mortgage–backed pools 236,432 237,705 114,484 118,799
Private labeled mortgage–backed pools 32,948 32,937 — —
Corporate notes 84,672 85,756 9,007 10,215
Total available for sale investment securities $ 1,655,190 $ 1,669,634 $ 1,090,363 $ 1,134,025
Held to maturity
State and municipal $ 283,858 $ 289,119 $ 157,421 $ 168,456
Federal agency collateralized mortgage obligations 69,537 68,754 2,661 2,697
Federal agency mortgage–backed pools 215,873 212,498 8,594 8,837
Private labeled mortgage–backed pools 66,298 65,552 — —
Corporate notes 133,674 132,176 — —
Total held to maturity investment securities $ 769,240 $ 768,099 $ 168,676 $ 179,990
Investment securities available for sale increased $535.6 million since December 31, 2020 to $1.7 billion as of September 30, 2021 and investment securities held to maturity increased $600.6 million since December 31, 2020 to $769.2 million as of September 30, 2021. This increase was due to additional purchases to increase earning assets as the result of organic deposit growth and Horizon’s previously announced acquisition of 14 branches in 11 Michigan counties which increased deposits approximately $846.4 million on September 17, 2021.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Net loans decreased $207.1 million since December 31, 2020 to $3.7 billion as of September 30, 2021. Mortgage warehouse, commercial, residential mortgage and loans held for sale decreased $225.7 million, $19.1 million, $20.7 million and $8.7 million, respectively. These decreases were offset by an increase in consumer loans of $58.2 million. PPP loans decreased $116.6 million since December 31, 2020 to $92.3 million as of September 30, 2021. These decreases were offset by an increase in consumer loans of $58.2 million. The net loans acquired in the acquisition of 14 branches in 11 Michigan counties of approximately $206.8 million helped to partially offset the decrease in loans.
Total deposits increased $1.4 billion since December 31, 2020 to $6.0 billion as of September 30, 2021. This increase was primarily due to Federal stimulus payments to consumers, funds from the origination of PPP loans and approximately $846.4 million in deposits from the acquisition of 14 branches in 11 Michigan counties.
Total borrowings increased from $475.0 million as of December 31, 2020 to $670.8 million as of September 30, 2021. At September 30, 2021, the Company had $195.2 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 $708.5 million at September 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, stock repurchases and a decrease in accumulated other comprehensive income during the period. Book value per common share at September 30, 2021 increased to $16.28 compared to $15.78 at December 31, 2020.
Results of Operations
Overview
Consolidated net income for the three–month period ended September 30, 2021 was $23.1 million, or $0.52 diluted earnings per share, compared to $20.3 million, or $0.46 diluted earnings per share for the same period in 2020. The increase in net income for the three–month period ended September 30, 2021 when compared to the same prior year period reflects an increase in net interest income of $3.1 million, a decrease in credit loss expense of $940,000 and a decrease in income tax expense of $270,000, offset by an increase in non–interest expense of $942,000 and a decrease in non–interest income of $656,000. Excluding acquisition expenses, credit loss expense acquired loans, gain on sale of ESOP trustee accounts, gain on sale of investment securities and death benefit on bank owned life insurance (“adjusted net income”), adjusted net income for the third quarter of 2021 was $23.0 million, or $0.52 diluted earnings per share, compared to $19.4 million, or $0.45 diluted earnings per share for the third quarter of 2020.
Consolidated net income for the nine–month period ended September 30, 2021 was $65.7 million, or $1.49 diluted earnings per share, compared to $46.6 million, or $1.06 diluted earnings per share for the same period in 2020. The increase in net income for the nine–month period ended September 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $5.2 million, an increase in net interest income of $4.4 million and a decrease in credit loss expense of $17.7 million, offset by increases in non–interest expense of $4.9 million and income tax expense of $3.4 million. Excluding acquisition expenses, credit loss expense acquired loans, gain on sale of ESOP trustee account, 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 nine–month period ended September 30, 2021 was $64.9 million, or $1.46 diluted earnings per share, compared to $45.0 million, or $1.02 diluted earnings per share for the nine–month period ended September 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.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Net interest income during the three months ended September 30, 2021 was $46.5 million, an increase of $3.1 million from the $43.4 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 44 basis points to 3.46% for the three months ended September 30, 2021 from 3.90% for the three months ended September 30, 2020. Interest income increased $722,000 from $50.1 million for the three months ended September 30, 2020 to $50.9 million for the same period in 2021. The increase in interest income was due to an increase in average balances of interest earning assets of $781,000 during the three months ended September 30, 2021. Interest income from acquisition–related purchase accounting adjustments was $875,000 for the three months ending September 30, 2021 compared to $1.5 million for the same period of 2020.
Rates paid on interest bearing liabilities decreased by 29 basis points for the three–month period ended September 30, 2021 compared to the same period in 2020. Interest expense decreased $2.4 million when compared to the three–month period ended September 30, 2020 to $4.3 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 24 basis points while the cost of average borrowings decreased 44 basis points. Average balances of interest bearing deposits increased $497.2 million and average balances of borrowings increased $20.9 million for the three-month period ended September 30, 2021 when compared to the same period in 2020.
The net interest margin decreased 22 basis points from 3.39% for the three–month period ended September 30, 2020 to 3.17% for the same period in 2021. The decrease in the margin for the three–month period ended September 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 (“adjusted net interest margin”), the margin would have been 3.12% for the three-month period ending September 30, 2021 compared to 3.27% for the same period in 2020.
The net interest margin was impacted due to PPP lending and high level of cash held during the third quarter of 2021. Horizon estimates that the PPP loans increased the net interest margin by 16 basis points for the third 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 16 basis points for the third 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.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 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
September 30, 2021 September 30, 2020
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 310,180 $ 119 0.15 % $ 45,307 $ 12 0.11 %
Interest earning deposits 26,352 39 0.59 % 28,428 53 0.74 %
Investment securities – taxable 1,063,177 4,407 1.64 % 447,762 1,639 1.46 %
Investment securities – non–taxable (1)
1,108,503 5,911 2.68 % 720,111 4,391 3.07 %
Loans receivable (2) (3)
3,524,876 40,392 4.56 % 4,010,003 44,051 4.39 %
Total interest earning assets 6,033,088 50,868 3.46 % 5,251,611 50,146 3.90 %
Non–interest earning assets
Cash and due from banks 87,799 94,039
Allowance for credit losses (55,703) (55,271)
Other assets 442,489 478,312
Total average assets $ 6,507,673 $ 5,768,691
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,831,632 $ 1,808 0.19 % $ 3,334,436 $ 3,616 0.43 %
Borrowings 598,327 1,075 0.71 % 577,447 1,662 1.15 %
Subordinated notes 58,689 880 5.95 % 58,716 895 6.06 %
Junior subordinated debentures issued to capital trusts 56,684 561 3.93 % 56,458 576 4.06 %
Total interest bearing liabilities 4,545,332 4,324 0.38 % 4,027,057 6,749 0.67 %
Non–interest bearing liabilities
Demand deposits 1,180,890 996,427
Accrued interest payable and other liabilities 57,039 76,410
Stockholders’ equity 724,412 668,797
Total average liabilities and stockholders’ equity $ 6,507,673 $ 5,768,691
Net interest income/spread $ 46,544 3.08 % $ 43,397 3.23 %
Net interest income as a percent of average interest earning assets (1)
3.17 % 3.39 %
(1)
Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)
Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)
Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Net interest income during the nine months ended September 30, 2021 was $131.7 million, an increase of $4.4 million from the $127.3 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 60 basis points to 3.53% for the nine months ended September 30, 2021 from 4.13% for the nine months ended September 30, 2020. Interest income decreased $6.3 million from $152.1 million for the nine months ended September 30, 2020 to $145.9 million for the same period in 2021. Average interest earning assets during the nine months ended September 30, 2021 increased $675.3 million to $5.7 billion compared to $5.0 billion during the nine months ended September 30, 2020. Interest income from acquisition–related purchase accounting adjustments was $2.7 million for the nine months ended September 30, 2021 compared to $4.5 million for the same period of 2020.
Rates paid on interest bearing liabilities decreased 40 basis points for the nine–month period ended September 30, 2021 compared to the same period in 2020. Interest expense decreased $10.7 million when compared to the nine–month period ended September 30, 2020 to $14.2 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 41 basis points while the cost of average borrowings decreased 43 basis points. Average balances of interest bearing deposits increased $393.3 million and average balances of borrowings decreased $66.0 million for the nine–month period ended September 30, 2021 when compared to the same period in 2020.
The net interest margin decreased 28 basis points from 3.48% for the nine–month period ended September 30, 2020 to 3.20% for the same period in 2021. The decrease in the margin for the nine–month period ended September 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 3.14% for the nine–month period ended September 30, 2021 compared to 3.36% for the same period in 2020.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2021 September 30, 2020
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 312,359 $ 284 0.12 % $ 44,375 $ 125 0.38 %
Interest earning deposits 27,157 128 0.63 % 25,083 216 1.15 %
Investment securities – taxable 708,519 8,229 1.55 % 476,735 6,582 1.84 %
Investment securities – non–taxable (1)
1,040,447 16,790 2.73 % 652,339 12,294 3.19 %
Loans receivable (2) (3)
3,624,393 120,446 4.46 % 3,839,008 132,927 4.64 %
Total interest earning assets 5,712,875 145,877 3.53 % 5,037,540 152,144 4.13 %
Non–interest earning assets
Cash and due from banks 85,855 85,511
Allowance for credit losses (56,885) (42,864)
Other assets 455,181 469,509
Total average assets $ 6,197,026 $ 5,549,696
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,679,970 $ 6,204 0.23 % $ 3,286,648 $ 15,838 0.64 %
Borrowings 510,264 3,640 0.95 % 576,288 5,974 1.38 %
Subordinated debentures 58,653 2,641 6.02 % 21,218 953 6.00 %
Junior subordinated debentures issued to capital trusts 56,628 1,678 3.96 % 56,398 2,061 4.88 %
Total interest bearing liabilities 4,305,515 14,163 0.44 % 3,940,552 24,826 0.84 %
Non–interest bearing liabilities
Demand deposits 1,128,173 879,840
Accrued interest payable and other liabilities 53,751 69,026
Stockholders’ equity 709,587 660,278
Total average liabilities and stockholders’ equity $ 6,197,026 $ 5,549,696
Net interest income/spread $ 131,714 3.09 % $ 127,318 3.29 %
Net interest income as a percent of average interest earning assets (1)
3.20 % 3.48 %
(1)
Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)
Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)
Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Credit Loss Expense
Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio. During the three–month period ended September 30, 2021, a provision expense of $1.1 million was required to reflect a $2.0 million allocation for loans acquired in the Michigan branch acquisition and the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $2.1 million for the same period of 2020. During the three–month period ended September 30, 2021, commercial loan net recoveries were $25,000, residential mortgage loan net recoveries were $29,000 and consumer loan net charge–offs were $36,000.
During the nine–month period ended September 30, 2021, a provision reversal of $13,000 was required which includes a $2.0 million allocation for loans acquired in the Michigan branch acquisition and the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $17.7 million for the same period of 2020. During the nine–month period ended September 30, 2021, commercial loan net charge–offs were $179,000, residential mortgage loan net recoveries were $117,000 and consumer net charge–offs were $173,000.
The ACL balance at September 30, 2021 was $56.8 million, or 1.55% 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 $116.6 million which do not require a related ACL balance.
As of September 30, 2021, non–performing loans totaled $29.4 million, including approximately $7.3 million acquired in the Michigan branch acquisition, which reflects a $2.6 million increase from $26.8 million in non–performing loans as of December 31, 2020. Non–performing commercial loans increased by $1.8 million, non–performing real estate loans increased by $647,000 and non–performing consumer loans increased by $147,000 at September 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 September 30, 2021, the Bank modified loans totaling $29.2 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 7 $28.3 96.9 % 1.3 %
Mortgage (Retained Only) 4 $0.8 2.8 % 0.1 %
Indirect Auto 2 $0.0 0.0 % 0.0 %
Consumer Direct 2 $0.1 0.3 % 0.1 %
Consumer Revolving 0 $0.0 0.0 % 0.0 %
Total 15 $29.2 100.0 % 0.8 %
Mortgage (Serviced Only) 14
Other Real Estate Owned (“OREO”) and repossessed assets totaled $3.0 million at September 30, 2021 compared to $1.9 million at December 31, 2020. The increase was primarily due to several former branch locations totaling $1.8 million being moved to OREO during the third quarter after being closed.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–interest Income
The following is a summary of changes in non–interest income for the three months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
Three Months Ended
September 30, Amount Percent
2021 2020 Change Change
Non–interest Income
Service charges on deposit accounts $ 2,291 $ 2,154 $ 137 6.4 %
Wire transfer fees 210 298 (88) (29.5) %
Interchange fees 2,587 2,438 149 6.1 %
Fiduciary activities 2,124 2,105 19 0.9 %
Gain on sale of investment securities — 1,088 (1,088) (100.0) %
Gain on sale of mortgage loans 4,088 8,813 (4,725) (53.6) %
Mortgage servicing net of impairment 336 (1,308) 1,644 (125.7) %
Increase in cash surrender value of bank owned life insurance 534 566 (32) (5.7) %
Death benefit on bank owned life insurance 517 31 486 0.0 %
Other income 3,357 515 2,842 551.8 %
Total non–interest income $ 16,044 $ 16,700 $ (656) (3.9) %
Total non–interest income was $656,000 lower during the third quarter of 2021 compared to the same period of 2020. Residential mortgage loan activity during the third quarter of 2021 generated $4.1 million of income from the gain on sale of mortgage loans, down from $8.8 million for the same period in 2020 due to a lower volume of loans sold and a decrease in the percentage gain on loans sold. Mortgage servicing income, net of impairment, increased $1.6 million during the third quarter of 2021 compared to the same period of 2020 due to an impairment charge of $1.5 million recorded during the third quarter of 2020 offset by a reversal of $299,000 in impairment charges during the third quarter of 2021. Other income increased $2.8 million during the third quarter of 2021 primarily due to the gain on sale of ESOP trustee accounts totaling $2.3 million and the recovery of $876,000 from an acquired charged–off loan. Interchange fees, service charges on deposit accounts and death benefit on bank owned life insurance increased $149,000, $137,000, $486,000, respectively, when comparing the third quarter of 2021 to the same period of 2020.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
The following is a summary of changes in non–interest income for the nine months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
Nine Months Ended
September 30, Amount Percent
2021 2020 Change Change
Non–interest Income
Service charges on deposit accounts $ 6,682 $ 6,488 $ 194 3.0 %
Wire transfer fees 687 699 (12) (1.7) %
Interchange fees 7,819 6,661 1,158 17.4 %
Fiduciary activities 5,828 6,398 (570) (8.9) %
Gain on sale of investment securities 914 1,675 (761) (45.4) %
Gain on sale of mortgage loans 14,996 18,906 (3,910) (20.7) %
Mortgage servicing net of impairment 2,052 (4,043) 6,095 (150.8) %
Increase in cash surrender value of bank owned life insurance 1,547 1,677 (130) (7.8) %
Death benefit on bank owned life insurance 783 264 519 196.6 %
Other income 3,816 1,163 2,653 228.1 %
Total non–interest income $ 45,124 $ 39,888 $ 5,236 13.1 %
Total non–interest income was $5.2 million higher for the nine–month period ended September 30, 2021 compared to the same period of 2020. Residential mortgage loan activity during the nine–month period ended September 30, 2021 generated $15.0 million of income from the gain on sale of mortgage loans, down from $18.9 million for the same period in 2020 due to a decrease in the volume of loans sold. Mortgage servicing income, net of impairment, increased $6.1 million during the nine–month period ended September 30, 2021 compared to the same period of 2020 due to the reversal of $2.1 million in impairment charges during the nine–month period ended September 30, 2021 compared to impairment charges of $4.7 million during the same period in 2020. Other income increased $2.7 million during the nine–month period ended September 30, 2021 compared to the same period in 2020 primarily due to the gain on sale of ESOP trustee accounts totaling $2.3 million. Interchange fees increased $1.2 million during the nine–month period ended September 30, 2021 compared to the same period of 2020.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
Three Months Ended
September 30, September 30,
2021 2020 Adjusted
Actual Acquisition
Expenses Adjusted Actual Acquisition
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 18,901 $ (25) $ 18,876 $ 18,832 $ — $ 18,832 $ 44 0.2 %
Net occupancy expenses 2,935 (13) 2,922 3,107 — 3,107 (185) (6.0) %
Data processing 2,526 (17) 2,509 2,237 — 2,237 272 12.2 %
Professional fees 522 (53) 469 688 — 688 (219) (31.8) %
Outside services and consultants 2,330 (401) 1,929 1,561 — 1,561 368 23.6 %
Loan expense 2,645 — 2,645 2,876 — 2,876 (231) (8.0) %
FDIC deposit insurance 279 — 279 570 — 570 (291) (51.1) %
Other losses 69 (1) 68 114 — 114 (46) (40.4) %
Other expenses 4,142 (289) 3,853 3,422 — 3,422 431 12.6 %
Total non–interest expense $ 34,349 $ (799) $ 33,550 $ 33,407 $ — $ 33,407 $ 143 0.4 %
Annualized
Non–interest Exp. to Avg. Assets 2.09 % 2.05 % 2.30 % 2.30 %
Total non–interest expense was $942,000 higher for the third quarter of 2021 when compared to the third quarter of 2020. Increases in outside services and consultants, other expense and data processing were offset in part by decreases in FDIC deposit insurance and loan expense. Excluding acquisition expenses, total non–interest expense increased by $143,000 in the third quarter of 2021 when compared to the same period in 2020.
Annualized non–interest expense as a percent of average assets was 2.09% and 2.30% for the three months ended September 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.05% and 2.30% for the three months ended September 30, 2021 and 2020, respectively.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
The following is a summary of changes in non–interest expense for the nine months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
Nine Months Ended
September 30, September 30,
2021 2020 Adjusted
Actual Acquisition
Expenses Adjusted Actual Acquisition
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 53,502 $ (25) $ 53,477 $ 51,052 $ — $ 51,052 $ 2,425 4.8 %
Net occupancy expenses 9,337 (13) 9,324 9,549 — 9,549 (225) (2.4) %
Data processing 7,290 (17) 7,273 7,074 — 7,074 199 2.8 %
Professional fees 1,654 (104) 1,550 1,742 — 1,742 (192) (11.0) %
Outside services and consultants 6,252 (588) 5,664 5,235 — 5,235 429 8.2 %
Loan expense 8,574 — 8,574 7,667 — 7,667 907 11.8 %
FDIC deposit insurance 1,579 — 1,579 955 — 955 624 65.3 %
Other losses 358 (1) 357 427 — 427 (70) (16.4) %
Other expenses 11,363 (293) 11,070 11,287 — 11,287 (217) (1.9) %
Total non–interest expense $ 99,909 $ (1,041) $ 98,868 $ 94,988 $ — $ 94,988 $ 3,880 4.1 %
Annualized
Non–interest Exp. to Avg. Assets 2.16 % 2.13 % 2.29 % 2.29 %
Total non–interest expense was $4.9 million higher for the nine–month period ended September 30, 2021 compared to the same period of 2020. Increases in salaries and employee benefits, outside services and consultants, loan expense, FDIC insurance expense and data processing were offset in part by a decrease in net occupancy expense. Excluding acquisition expenses, total non–interest expense increased $3.9 million for the nine–month period ended September 30, 2021 compared to the same period of 2020.
Annualized non–interest expense as a percent of average assets was 2.16% and 2.29% for the nine–month period ended September 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.13% and 2.29% for the nine–month period ended September 30, 2021 and 2020, respectively.
Income Taxes
Income tax expense totaled $4.1 million for the third quarter of 2021, a decrease of $270,000 when compared to the third quarter of 2020.
Income tax expense totaled $11.3 million for the nine–month period ended September 30, 2021, an increase of $3.4 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 $22.4 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, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At September 30, 2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon,
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
the Bank had approximately $651.7 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 $1.7 billion of unpledged investment securities at September 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 September 30, 2021. Stockholders’ equity totaled $708.5 million as of September 30, 2021, compared to $692.2 million as of December 31, 2020. For the nine months ended September 30, 2021, the ratio of average stockholders’ equity to average assets was 11.45% 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, stock repurchases and dividends declared.
Horizon declared common stock dividends in the amount of $0.41 per share during the first nine months of 2021 and $0.36 per share for the same period of 2020. The dividend payout ratio (dividends as a percent of basic earnings per share) was 27.3% and 34.0% for the first nine months of 2021 and 2020, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 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 and financial results without giving effect to the purchase accounting impacts and other adjustments. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Net income as reported $ 23,071 $ 22,173 $ 20,422 $ 21,893 $ 20,312 $ 65,666 $ 46,606
Acquisition expenses 799 242 — — — 1,041 —
Tax effect (166) (51) — — — (217) —
Net income excluding acquisition expenses 23,704 22,364 20,422 21,893 20,312 66,490 46,606
Credit loss expense acquired loans 2,034 — — — — 2,034 —
Tax effect (427) — — — — (427) —
Net income excluding credit loss expense acquired loans 25,311 22,364 20,422 21,893 20,312 68,097 46,606
Gain on sale of ESOP trustee accounts (2,329) — — — — (2,329) —
Tax effect 489 — — — — 489 —
Net income excluding gain on sale of ESOP trustee accounts 23,471 22,364 20,422 21,893 20,312 66,257 46,606
(Gain)/loss on sale of investment
securities — — (914) (2,622) (1,088) (914) (1,675)
Tax effect — — 192 551 228 192 352
Net income excluding (gain)/loss on sale of investment securities 23,471 22,364 19,700 19,822 19,452 65,535 45,283
Death benefit on bank owned life insurance (“BOLI”) (517) (266) — — (31) (783) (264)
Net income excluding death benefit on BOLI 22,954 22,098 19,700 19,822 19,421 64,752 45,019
Prepayment penalties on borrowings — 125 — 3,804 — 125 —
Tax effect — (26) — (799) — (26) —
Net income excluding prepayment penalties on borrowings 22,954 22,197 19,700 22,827 19,421 64,851 45,019
Adjusted net income $ 22,954 $ 22,197 $ 19,700 $ 22,827 $ 19,421 $ 64,851 $ 45,019
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Diluted earnings per share (“EPS”) as reported $ 0.52 $ 0.50 $ 0.46 $ 0.50 $ 0.46 $ 1.49 $ 1.06
Acquisition expenses 0.02 0.01 — — — 0.02 —
Tax effect — — — — — — —
Diluted EPS excluding acquisition expenses 0.54 0.51 0.46 0.50 0.46 1.51 1.06
Credit loss expense acquired loans 0.05 — — — — 0.05 —
Tax effect (0.01) — — — — (0.01) —
Diluted EPS excluding credit loss expense acquired loans 0.58 0.51 0.46 0.50 0.46 1.55 1.06
Gain on sale of ESOP trustee accounts (0.05) — — — — (0.05) —
Tax effect 0.01 — — — — 0.01 —
Diluted EPS excluding gain on sale of ESOP trustee accounts 0.54 0.51 0.46 0.50 0.46 1.51 1.06
(Gain)/loss on sale of investment securities — — (0.02) (0.06) (0.02) (0.02) (0.04)
Tax effect — — — 0.01 0.01 — 0.01
Diluted EPS excluding (gain)/loss on investment securities 0.54 0.51 0.44 0.45 0.45 1.49 1.03
Death benefit on BOLI (0.02) (0.01) — — — (0.03) (0.01)
Diluted EPS excluding death benefit on BOLI 0.52 0.50 0.44 0.45 0.45 1.46 1.02
Prepayment penalties on borrowings — — — 0.09 — — —
Tax effect — — — (0.02) — — —
Diluted EPS excluding prepayment penalties on borrowings 0.52 0.50 0.44 0.52 0.45 1.46 1.02
Adjusted Diluted EPS $ 0.52 $ 0.50 $ 0.44 $ 0.52 $ 0.45 $ 1.46 $ 1.02
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Pre–tax income $ 27,127 $ 25,943 $ 23,872 $ 23,860 $ 24,638 $ 76,942 $ 54,509
Credit loss expense (reversal) 1,112 (1,492) 367 3,042 2,052 (13) 17,709
Pre–tax, pre–provision net income $ 28,239 $ 24,451 $ 24,239 $ 26,902 $ 26,690 $ 76,929 $ 72,218
Pre–tax, pre–provision net income $ 28,239 $ 24,451 $ 24,239 $ 26,902 $ 26,690 $ 76,929 $ 72,218
Acquisition expenses 799 242 — — — 1,041 —
Gain on sale of ESOP trustee accounts (2,329) — — — — (2,329) —
(Gain)/loss on sale of investment securities — — (914) (2,622) (1,088) (914) (1,675)
Death benefit on bank owned life insurance (517) (266) — — (31) (783) (264)
Prepayment penalties on borrowings — 125 — 3,804 — 125 —
Adjusted pre–tax, pre–provision net income $ 26,192 $ 24,552 $ 23,325 $ 28,084 $ 25,571 $ 74,069 $ 70,279
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Net interest income as reported $ 46,544 $ 42,632 $ 42,538 $ 43,622 $ 43,397 $ 131,714 $ 127,318
Average interest earning assets 6,033,088 5,659,384 5,439,634 5,365,888 5,251,611 5,712,875 5,037,540
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 3.17 % 3.14 % 3.29 % 3.34 % 3.39 % 3.20 % 3.48 %
Net interest income as reported $ 46,544 $ 42,632 $ 42,538 $ 43,622 $ 43,397 $ 131,714 $ 127,318
Acquisition–related purchase accounting adjustments
(“PAUs”) (875) (230) (1,579) (2,461) (1,488) (2,684) (4,475)
Prepayment penalties on borrowings — 125 — 3,804 — 125 —
Adjusted net interest income $ 45,669 $ 42,527 $ 40,959 $ 44,965 $ 41,909 $ 129,155 $ 122,843
Adjusted net interest margin 3.12 % 3.13 % 3.17 % 3.44 % 3.27 % 3.14 % 3.36 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
September 30, June 30, March 31, December 31, September 30,
2021 2021 2021 2020 2020
Total stockholders’ equity $ 708,542 $ 710,374 $ 689,379 $ 692,216 $ 670,293
Less: Intangible assets 183,938 172,398 173,296 174,193 175,107
Total tangible stockholders’ equity $ 524,604 $ 537,976 $ 516,083 $ 518,023 $ 495,186
Common shares outstanding 43,520,694 43,950,720 43,949,189 43,880,562 43,874,353
Book value per common share $ 16.28 $ 16.16 $ 15.69 $ 15.78 $ 15.28
Tangible book value per common
share $ 12.05 $ 12.24 $ 11.74 $ 11.81 $ 11.29
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Non–interest expense as reported $ 34,349 $ 33,388 $ 32,172 $ 36,453 $ 33,407 $ 99,909 $ 94,988
Net interest income as reported 46,544 42,632 42,538 43,622 43,397 131,714 127,318
Non–interest income as reported $ 16,044 $ 15,207 $ 13,873 $ 19,733 $ 16,700 $ 45,124 $ 39,888
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 54.88 % 57.73 % 57.03 % 57.54 % 55.59 % 56.50 % 56.81 %
Non–interest expense as reported $ 34,349 $ 33,388 $ 32,172 $ 36,453 $ 33,407 $ 99,909 $ 94,988
Acquisition expenses (799) (242) — — — (1,041) —
Non–interest expense excluding acquisition expenses 33,550 33,146 32,172 36,453 33,407 98,868 94,988
Net interest income as reported 46,544 42,632 42,538 43,622 43,397 131,714 127,318
Prepayment penalties on borrowings — 125 — 3,804 — 125 —
Net interest income excluding prepayment penalties on borrowings 46,544 42,757 42,538 47,426 43,397 131,839 127,318
Non–interest income as reported 16,044 15,207 13,873 19,733 16,700 45,124 39,888
Gain on sale of ESOP trustee accounts (2,329) — — — — (2,329) —
(Gain)/loss on sale of investment securities — — (914) (2,622) (1,088) (914) (1,675)
Death benefit on bank owned life insurance ("BOLI") (517) (266) — — (31) (783) (264)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI $ 13,198 $ 14,941 $ 12,959 $ 17,111 $ 15,581 $ 41,098 $ 37,949
Adjusted efficiency ratio 56.16 % 57.45 % 57.97 % 56.48 % 56.64 % 57.17 % 57.48 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Average assets $ 6,507,673 $ 6,142,507 $ 5,936,149 $ 5,864,086 $ 5,768,691 $ 6,197,026 $ 5,549,696
Return on average assets ("ROAA") as reported 1.41 % 1.45 % 1.40 % 1.49 % 1.40 % 1.42 % 1.12 %
Acquisition expenses 0.05 0.02 — — — 0.02 —
Tax effect (0.01) — — — — — —
ROAA excluding acquisition expenses 1.45 1.47 1.40 1.49 1.40 1.44 1.12
Credit loss expense acquired loans 0.12 — — — — 0.04 —
Tax effect (0.03) — — — — (0.01) —
ROAA excluding credit loss expense acquired loans 1.54 1.47 1.40 1.49 1.40 1.47 1.12
Gain on sale of ESOP trustee accounts (0.14) — — — — (0.05) —
Tax effect 0.03 — — — — 0.01 —
ROAA excluding gain on sale of ESOP trustee accounts 1.43 1.47 1.40 1.49 1.40 1.43 1.12
(Gain)/loss on sale of investment securities — — (0.06) (0.18) (0.08) (0.02) (0.04)
Tax effect — — 0.01 0.04 0.02 — 0.01
ROAA excluding (gain)/loss on sale of investment securities 1.43 1.47 1.35 1.35 1.34 1.41 1.09
Death benefit on bank owned life insurance ("BOLI") (0.03) (0.02) — — — (0.02) (0.01)
ROAA excluding death benefit on BOLI 1.40 1.45 1.35 1.35 1.34 1.39 1.08
Prepayment penalties on borrowings — 0.01 — 0.26 — — —
Tax effect — — — (0.05) — — —
ROAA excluding prepayment penalties on borrowings 1.40 1.46 1.35 1.56 1.34 1.39 1.08
Adjusted ROAA 1.40 % 1.46 % 1.35 % 1.56 % 1.34 % 1.39 % 1.08 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2021 and 2020
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2021 2021 2021 2020 2020 2021 2020
Average common equity $ 724,412 $ 706,652 $ 697,401 $ 680,857 $ 668,797 $ 709,587 $ 660,278
Return on average common equity ("ROACE") as reported 12.64 % 12.59 % 11.88 % 12.79 % 12.08 % 12.37 % 9.43 %
Acquisition expenses 0.44 0.14 — — — 0.20 —
Tax effect (0.09) (0.03) — — — (0.04) —
ROACE excluding acquisition expenses 12.99 12.70 11.88 12.79 12.08 12.53 9.43
Credit loss expense acquired loans 1.11 — — — — 0.38 —
Tax effect (0.23) — — — — (0.08) —
ROACE excluding credit loss expense acquired loans 13.87 12.70 11.88 12.79 12.08 12.83 9.43
Gain on sale of ESOP trustee accounts (1.28) — — — — (0.44) —
Tax effect 0.27 — — — — 0.09 —
ROACE excluding gain on sale of ESOP trustee accounts 12.86 12.70 11.88 12.79 12.08 12.48 9.43
(Gain)/loss on sale of investment securities — — (0.53) (1.53) (0.65) (0.17) (0.34)
Tax effect — — 0.11 0.32 0.14 0.04 0.07
ROACE excluding (gain)/loss on sale of investment securities 12.86 12.70 11.46 11.58 11.57 12.35 9.16
Death benefit on bank owned life insurance ("BOLI") (0.29) (0.15) — — (0.02) (0.15) (0.05)
ROACE excluding death benefit on BOLI 12.57 12.55 11.46 11.58 11.55 12.20 9.11
Prepayment penalties on borrowings — 0.07 — 2.22 — 0.02 —
Tax effect — (0.01) — (0.47) — — —
ROACE excluding prepayment penalties on borrowings 12.57 12.61 11.46 13.33 11.55 12.22 9.11
Adjusted ROACE 12.57 % 12.61 % 11.46 % 13.33 % 11.55 % 12.22 % 9.11 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
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.