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:
• current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, liquidity levels, and responses by the Federal Reserve, Department of the Treasury, and the Federal Deposit Insurance Corporation to address these issues;
• changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;
• the ability of the Company to remediate its material weaknesses in its internal control over financial reporting;
• continuing increases in inflation;
• loss of key Horizon personnel;
• economic conditions and their impact on Horizon and its customers, including local and global economic recovery from the pandemic;
• the increasing use of Bitcoin and other crypto currencies and/or stable coin and the possible impact these alternative currencies may have on deposit disintermediation and income derived from payment systems;
• the effect of low interest rates on net interest rate margin and their impact on mortgage loan volumes and the outflow of deposits;
• increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks, which may have been accelerated by the COVID–19 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 and acquisition 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;
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
• 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”) according to regulatory guidance;
• 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; and
• acts of terrorism, war and global conflicts, such as the Russia and Ukraine conflict, and the potential impact they may have on supply chains, the availability of commodities, commodity prices, inflationary pressure and the overall U.S. and global financial markets.
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 2022 Annual Report on Form 10–K, in Item 1A of Part II of this Quarterly Report on Form 10–Q, 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 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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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
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.
First Quarter 2023 Highlights
• Deposits totaled $5.70 billion at period end, declining $155.8 million during the quarter, primarily due to a $122.2 million reduction in balances by municipal and other public depositors that have otherwise largely maintained their banking relationship with Horizon.
• Consumer and commercial deposits totaled $4.28 billion at period end, declining just $33.6 million during the quarter.
• 75% of total deposits at period end were FDIC insured, collateralized, or third–party insured, and the average tenure of all deposit accounts with Horizon exceeded 10 years.
• The average deposit account balance at period end was less than $25,000 for consumer and commercial depositors and less than $195,000 for all accounts including those of large public depositors.
• Horizon's loan–to–deposit ratio was 74.5% at period end, as total loans increased by an annualized rate of 8.3% year–to–date and a rate of 2.1% quarter over quarter, fueled by growth in commercial, consumer and residential balances.
• Asset quality remained solid with total loan delinquency at 0.33% of total loans and net charge–offs to average loans of 0.01% during the quarter.
• Non–interest expense of $34.5 million in the first quarter declined 3.3% from the linked quarter and 2.1% from the prior year period. Non–interest expense in the first quarter represented 1.79% of average assets on an annualized basis, improving from 1.84%, in the linked quarter and 1.95% in the prior year period.
• Net income totaled $18.2 million, compared to $21.2 million in the fourth quarter of 2022 and $23.6 million in the prior year period. Diluted earnings per share (“EPS”) of $0.42 compared to $0.48 for the fourth quarter of 2022 and $0.54 for the first quarter of 2022.
• Deposit betas increased to 51% on total interest bearing deposits in the first quarter compared to a 32% deposit beta during the previous quarter.
• During the first quarter of 2023, unrealized losses on available for sale investments declined to $121.5 million compared to unrealized losses of $140.1 million at December 31, 2022. As a result, our tangible capital ratio increased from 6.56% at December 31, 2022 to 6.87% at March 31, 2023.
• Horizon's book value per share and tangible book value per share increased to $16.11 and $12.17 compared to $15.55 and $11.59 in the linked quarter and $15.55 and $11.54 in the first quarter of 2022, respectively.
• The Bank’s capital position was still robust with leverage and risk based capital ratios of 8.86% and 13.15%, respectively.
• Horizon's annualized dividend yield was 5.79% as of March 31, 2023.
• On January 17, 2023, Horizon's Board of Directors approved the appointment of Thomas M. Prame to serve as the Chief Executive Officer of both Horizon and the Bank, effective June 1, 2023. Craig M. Dwight will retain the title of Chief Executive Officer until June 1, 2023 and retire as an employee from Horizon and the Bank effective July 3, 2023. Mr. Dwight will continue as the Chairman of the Board of Directors of both Horizon and the Bank.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Financial Summary
For the Three Months Ended
March 31, December 31, March 31,
Net Interest Income and Net Interest Margin 2023 2022 2022
Net interest income $ 45,237 $ 48,782 $ 46,831
Net interest margin 2.67 % 2.85 % 2.90 %
Adjusted net interest margin (See “Use of Non–GAAP Financial Measures”) 2.65 % 2.83 % 2.85 %
For the Three Months Ended
March 31, December 31, March 31,
Asset Yields and Funding Costs 2023 2022 2022
Interest earning assets 4.17 % 3.88 % 3.13 %
Interest bearing liabilities 1.85 % 1.29 % 0.30 %
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income March 31, December 31, March 31,
2023 2022 2022
Total non–interest income $ 9,620 $ 10,674 $ 14,155
Gain on sale of mortgage loans 785 1,196 2,027
Mortgage servicing income net of impairment or recovery 713 637 3,489
For the Three Months Ended
March 31, December 31, March 31,
Non–interest Expense 2023 2022 2022
Total non–interest expense $ 34,524 $ 35,711 $ 35,270
Annualized non–interest expense to average assets 1.79 % 1.84 % 1.95 %
At or for the Three Months Ended
Credit Quality March 31, December 31, March 31,
2023 2022 2022
Allowance for credit losses to total loans 1.17 % 1.21 % 1.41 %
Non–performing loans to total loans 0.47 % 0.52 % 0.54 %
Percent of net charge–offs to average loans outstanding for the period 0.01 % 0.01 % 0.00 %
Allowance for March 31, Net Reserve December 31,
Credit Losses 2023 1Q22 2022
Commercial $ 31,156 $ (1,289) $ 32,445
Retail Mortgage 4,447 (1,130) 5,577
Warehouse 798 (222) 1,020
Consumer 13,125 1,703 11,422
Allowance for Credit Losses (“ACL”)
$ 49,526 (938) $ 50,464
ACL/Total Loans 1.17 % 1.21 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s 2022 Annual Report on Form 10–K 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.
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 March 31, 2023, Horizon had core deposit intangibles of $16.3 million subject to amortization and $155.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.
At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding the interest rate environment, 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 March 31, 2023, it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the current banking environment, 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
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
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.
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
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
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 March 31, 2023, Horizon’s total assets were $7.9 billion, an increase of approximately $25.5 million compared to December 31, 2022. The increase in total assets was primarily growth in net loans of $89.9 million and an increase in cash and due from banks of $11.2 million. These increases were offset by decreases in investments available for sale of $54.1 million primarily due to sales during the first quarter and a decrease in other assets of $17.1 million.
Investment securities were comprised of the following as of (dollars in thousands):
March 31, 2023 December 31, 2022
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 294,218 $ 270,340 $ 294,329 $ 267,179
State and municipal 451,133 391,209 505,006 433,544
Federal agency collateralized mortgage obligations 25,919 24,559 33,011 31,215
Federal agency mortgage–backed pools 211,697 184,124 220,963 190,656
Corporate notes 81,974 73,209 84,393 74,964
Total available for sale investment securities $ 1,064,941 $ 943,441 $ 1,137,702 $ 997,558
Held to maturity
U.S. Treasury and federal agencies $ 295,200 $ 250,367 $ 295,250 $ 246,013
State and municipal 1,127,691 959,014 1,127,669 935,585
Federal agency collateralized mortgage obligations 55,379 47,376 56,564 47,699
Federal agency mortgage–backed pools 338,861 287,055 343,953 287,239
Private labeled mortgage–backed pools 34,835 29,649 35,466 29,973
Corporate notes 163,571 135,931 163,846 134,800
Total held to maturity investment securities $ 2,015,537 $ 1,709,392 $ 2,022,748 $ 1,681,309
Investment securities available for sale decreased $54.1 million since December 31, 2022 to $943.4 million as of March 31, 2023 primarily due to the sale of certain securities and investment securities held to maturity decreased $7.2 million since December 31, 2022 to $2.0 billion as of March 31, 2023. This decrease in investments held to maturity was due to cash flows received during the first quarter.
Net loans increased $89.9 million since December 31, 2022 to $4.2 billion as of March 31, 2023. Commercial loans increased $38.0 million, consumer loans increased $58.3 million and residential mortgage loans increased $9.2 million since December 31, 2022. These increases were offset by decreases in mortgage warehouse loans of $16.6 million since December 31, 2022.
Other assets decreased $17.1 million since December 31, 2022 to $122.2 million as of March 31, 2023. This decrease was primarily due to a decrease in deferred tax assets related to the level of unrealized losses on available for sale securities of approximately $4.0 million and a decrease in the unrealized gain of fair value hedges of approximately $9.5 million.
Total deposits decreased $155.8 million since December 31, 2022 to $5.7 billion as of March 31, 2023, primarily due to a $122.2 million reduction in balances by municipal and other public depositors that have largely maintained banking relationships with Horizon and a reduction in consumer and commercial balances of $33.6 million during the quarter.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Total borrowings increased to $1.3 billion as of March 31, 2023 from $1.1 billion as of December 31, 2022, primarily due to the decrease in total deposits.
Stockholders’ equity totaled $702.6 million at March 31, 2023 compared to $677.4 million at December 31, 2022. The increase in stockholders’ equity during the period was primarily due to a decrease in accumulated other comprehensive loss of $14.2 million as unrealized losses on available for sale securities decreased to $121.5 million and the generation of net income, offset by the amount of dividends paid during the quarter. Book value per common share at March 31, 2023 increased to $16.11 compared to $15.55 at December 31, 2022.
Results of Operations
Overview
Consolidated net income for the three–month period ended March 31, 2023 was $18.2 million, or $0.42 diluted earnings per share, compared to $23.6 million, or $0.54 diluted earnings per share for the same period in 2022. The decrease in net income for the three–month period ended March 31, 2023 when compared to the same prior year period reflects a decrease in net interest income of $1.6 million, an increase in credit loss expense of $1.6 million and a decrease in non–interest income of $4.5 million, offset by a decrease in non–interest expense of $746,000 and a decrease in income tax expense of $1.7 million.
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, less 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 March 31, 2023 was $45.2 million, a decrease of $1.6 million from the $46.8 million earned during the same period in 2022. Yields on the Company’s interest earning assets increased by 104 basis points to 4.17% for the three months ended March 31, 2023 from 3.13% for the three months ended March 31, 2022. Interest income increased $21.1 million from $50.7 million for the three months ended March 31, 2022 to $71.8 million for the same period in 2023. The increase in interest income was due to higher yields earned on interest earning assets and an increase in average balances of interest earning assets of $386.5 million during the three months ended March 31, 2023. Interest income from acquisition–related purchase accounting adjustments was $367,000 for the three months ended March 31, 2023 compared to $916,000 for the same period in 2022.
Rates paid on interest bearing liabilities increased by 155 basis points for the three–month period ended March 31, 2023 compared to the same period in 2022. Interest expense increased $22.7 million when compared to the three–month period ended March 31, 2022 to $26.6 million for the same period in 2023. This increase was due to higher rates paid on interest bearing liabilities. The cost of average interest bearing deposits increased 119 basis points while the cost of average borrowings increased 273 basis points. Average balances of interest bearing deposits increased $23.6 million and average balances of borrowings increased $549.5 million for the three-month period ended March 31, 2023 when compared to the same period in 2022.
The net interest margin decreased 23 basis points from 2.90% for the three–month period ended March 31, 2022 to 2.67% for the same period in 2023. The decrease in the margin for the three–month period ended March 31, 2023 compared to the same period in 2022 was due to an increase in the cost of interest bearing liabilities, offset by a increase in the yield on interest earning assets. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 2.65% for the three-month period ended March 31, 2023 compared to 2.85% for the same period in 2022.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
The following are the average balance sheets for the three months ended (dollars in thousands):
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Three Months Ended Three Months Ended
March 31, 2023 March 31, 2022
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 7,767 $ 83 4.33 % $ 237,605 $ 91 0.16 %
Interest earning deposits 8,780 70 3.23 % 20,673 24 0.47 %
Investment securities – taxable 1,727,369 8,725 2.05 % 1,646,525 7,391 1.82 %
Investment securities – non–taxable (1)
1,314,129 7,556 2.95 % 1,279,082 6,697 2.69 %
Loans receivable (2) (3)
4,143,221 55,364 5.44 % 3,630,871 36,539 4.10 %
Total interest earning assets 7,201,266 71,798 4.17 % 6,814,756 50,742 3.13 %
Non–interest earning assets
Cash and due from banks 103,563 104,676
Allowance for credit losses (50,337) (54,307)
Other assets 576,614 454,550
Total average assets $ 7,831,106 $ 7,319,675
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 4,502,199 $ 14,819 1.33 % $ 4,478,621 $ 1,496 0.14 %
Borrowings 1,053,317 9,268 3.57 % 503,846 1,043 0.84 %
Repurchase agreements 138,749 503 1.47 % 139,742 37 0.11 %
Subordinated notes 58,910 880 6.06 % 58,763 880 6.07 %
Junior subordinated debentures issued to capital trusts 57,048 1,091 7.76 % 56,807 455 3.25 %
Total interest bearing liabilities 5,810,223 26,561 1.85 % 5,237,779 3,911 0.30 %
Non–interest bearing liabilities
Demand deposits 1,255,697 1,322,781
Accrued interest payable and other liabilities 71,714 42,774
Stockholders’ equity 693,472 716,341
Total average liabilities and stockholders’ equity $ 7,831,106 $ 7,319,675
Net interest income/spread $ 45,237 2.32 % $ 46,831 2.83 %
Net interest income as a percent of average interest earning assets (1)
2.67 % 2.90 %
(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 Months ended March 31, 2023 and 2022
Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of interest earning assets and interest bearing liabilities and interest rates on net interest income for the periods indicated.
Three Months Ended March 31, 2023 vs.
Three Months Ended March 31, 2022
Total
Change Change
Due to
Volume Change
Due to
Rate
Interest Income
Federal funds sold $ (8) $ (711) $ 703
Interest earning deposits 46 (85) 131
Investment securities – taxable 1,334 1,523 (189)
Investment securities – non–taxable 859 963 (104)
Loans receivable 18,825 23,078 (4,253)
Total interest income $ 21,056 $ 24,768 $ (3,712)
Interest Expense
Interest bearing deposits $ 13,323 $ 33 $ 13,290
Borrowings 8,225 8,385 (160)
Repurchase agreements 466 (1) 467
Subordinated notes — 9 (9)
Junior subordinated debentures issued to capital trusts 636 8 628
Total interest expense 22,650 8,434 14,216
Net Interest Income $ (1,594) $ 16,334 $ (17,928)
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 March 31, 2023, credit loss expense totaled $242,000 compared to a credit loss recovery of $1.4 million for the same period in 2022. During the three–month period ended March 31, 2023, commercial loan net charge–offs were $104,000, residential mortgage loan net recoveries were $6,000 and consumer loan net charge–offs were $281,000.
The ACL balance at March 31, 2023 was $49.5 million, or 1.17% of total loans compared to an ACL balance of $50.5 million at December 31, 2022 or 1.21% of total loans. The decrease in the ACL to total loans ratio was primarily due to favorable asset quality with non–performing loans at 0.47% of total loans at period end and net charge–offs to average loans represented 0.01% for the first quarter of 2023.
As of March 31, 2023, non–performing loans totaled $19.8 million, reflecting a $2.0 million decrease from $21.8 million in non–performing loans as of December 31, 2022. Non–performing commercial loans decreased by $807,000, non–performing real estate loans decreased by $1.2 million and non–performing consumer loans decreased by $39,000 at March 31, 2023 compared to December 31, 2022.
Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.8 million at March 31, 2023 compared to $2.1 million at December 31, 2022.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Non–interest Income
The following is a summary of changes in non–interest income for the three months ended March 31, 2023 and 2022 (table dollar amounts in thousands):
Three Months Ended
March 31, Amount Percent
2023 2022 Change Change
Non–interest Income
Service charges on deposit accounts $ 3,028 $ 2,795 $ 233 8.3 %
Wire transfer fees 109 159 (50) (31.4) %
Interchange fees 2,867 2,780 87 3.1 %
Fiduciary activities 1,275 1,503 (228) (15.2) %
Gain on sale of investment securities (500) — (500) 100.0 %
Gain on sale of mortgage loans 785 2,027 (1,242) (61.3) %
Mortgage servicing net of impairment 713 3,489 (2,776) (79.6) %
Increase in cash surrender value of bank owned life insurance 981 510 471 92.4 %
Other income 362 892 (530) (59.4) %
Total non–interest income $ 9,620 $ 14,155 $ (4,535) (32.0) %
Total non–interest income was $4.5 million lower during the first quarter of 2023 compared to the same period in 2022. The sale of $64.0 million of available for sale investments generated a $500,000 loss during the first quarter of 2023. Residential mortgage loan activity during the first quarter of 2023 generated $785,000 of income from the gain on sale of mortgage loans, down from $2.0 million for the same period in 2022 due to a lower volume of loans sold and a decrease in the percentage gain on loans sold. Mortgage servicing income, net of impairment or recovery, decreased $2.8 million during the first quarter of 2023 compared to the same period in 2022 due to an impairment recovery of $2.6 million recorded during the first quarter of 2022. Other income was $530,000 lower during the first quarter of 2023 compared to the same period in 2022 due to the gains from the sale of other real estate owned during the first quarter of 2022. Fiduciary activities income was $228,000 lower during the first quarter of 2023 compared to the same period in 2022.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ended March 31, 2023 and 2022 (table dollar amounts in thousands):
Three Months Ended
March 31, March 31, QTD QTD
2023 2022 $ Change % Change
Non–interest Expense
Salaries and employee benefits $ 18,712 $ 19,735 $ (1,023) (5.2) %
Net occupancy expenses 3,563 3,561 2 0.1 %
Data processing 2,669 2,537 132 5.2 %
Professional fees 533 314 219 69.7 %
Outside services and consultants 2,717 2,525 192 7.6 %
Loan expense 1,118 1,205 (87) (7.2) %
FDIC deposit insurance 540 725 (185) (25.5) %
Core deposit intangible amortization 903 926 (23) (2.5) %
Other losses 221 168 53 31.5 %
Other expenses 3,548 3,574 (26) (0.7) %
Total non–interest expense $ 34,524 $ 35,270 $ (746) (2.1) %
Annualized Non–interest Exp. to Avg. Assets 1.79 % 1.95 %
Total non–interest expense was $746,000 lower during the first quarter of 2023 when compared to the first quarter of 2022 primarily due to a decrease in salaries and employee benefits expense of $1.0 million from lower salary and incentive compensation expense and a decrease in FDIC insurance expense of $185,000, offset by increases of $219,000 in professional fees and $192,000 in outside services and consultants expense.
Annualized non–interest expense as a percent of average assets was 1.79% and 1.95% for the three months ended March 31, 2023 and 2022, respectively.
Income Taxes
Income tax expense totaled $1.9 million for the first quarter of 2023, a decrease of $1.7 million when compared to the first quarter of 2022 due to a decrease in income before taxes of $7.0 million.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
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 March 31, 2023, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.65 billion in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $438.0 million at December 31, 2022. The Bank had approximately $666.3 million of unpledged investment securities at March 31, 2023 compared to $2.1 billion at December 31, 2022.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2023. Stockholders’ equity totaled $702.6 million as of March 31, 2023, compared to $677.4 million as of December 31, 2022. For the three months ended March 31, 2023, the ratio of average stockholders’ equity to average assets was 8.86% compared to 9.07% for the twelve months ended December 31, 2022. The increase in stockholders’ equity during the period was due to an increase in accumulated other comprehensive income of $14.2 million and net income during the period, offset by the amount of dividends paid.
Horizon declared common stock dividends in the amount of $0.16 per share during the first three months of 2023 and $0.15 per share for the same period in 2022. The dividend payout ratio (dividends as a percent of basic earnings per share) was 38.1% and 27.8% for the first three months of 2023 and 2022, respectively. For additional information regarding dividends, see Horizon’s 2022 Annual Report on Form 10–K.
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, pre–tax pre–provision net income, net interest margin, tangible stockholders’ equity, tangible book value per share, efficiency ratio, the return on average assets, the return on average common equity, and the return on average tangible equity. 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 Months ended March 31, 2023 and 2022
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Net income as reported $ 18,228 $ 21,165 $ 23,821 $ 24,859 $ 23,563
(Gain)/loss on sale of investment
securities 500 — — — —
Tax effect (105) — — — —
Net income excluding (gain)/loss on sale of investment securities 18,623 21,165 23,821 24,859 23,563
Death benefit on bank owned life insurance (“BOLI”) — — — (644) —
Net income excluding death benefit on BOLI 18,623 21,165 23,821 24,215 23,563
Adjusted net income $ 18,623 $ 21,165 $ 23,821 $ 24,215 $ 23,563
Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Diluted earnings per share (“EPS”) as reported $ 0.42 $ 0.48 $ 0.55 $ 0.57 $ 0.54
(Gain)/loss on sale of investment securities 0.01 — — — —
Tax effect — — — — —
Diluted EPS excluding (gain)/loss on investment securities 0.43 0.48 0.55 0.57 0.54
Death benefit on BOLI — — — (0.01) —
Diluted EPS excluding death benefit on BOLI 0.43 0.48 0.55 0.56 0.54
Adjusted Diluted EPS $ 0.43 $ 0.48 $ 0.55 $ 0.56 $ 0.54
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Pre–tax income $ 20,091 $ 23,814 $ 25,834 $ 28,834 $ 27,102
Credit loss expense (recovery) 242 (69) (601) 240 (1,386)
Pre–tax, pre–provision net income $ 20,333 $ 23,745 $ 25,233 $ 29,074 $ 25,716
Pre–tax, pre–provision net income $ 20,333 $ 23,745 $ 25,233 $ 29,074 $ 25,716
(Gain)/loss on sale of investment securities 500 — — — —
Death benefit on bank owned life insurance — — — (644) —
Adjusted pre–tax, pre–provision net income $ 20,833 $ 23,745 $ 25,233 $ 28,430 $ 25,716
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Net interest income as reported $ 45,237 $ 48,782 $ 51,861 $ 52,044 $ 46,831
Average interest earning assets 7,201,266 7,091,980 7,056,208 6,943,633 6,814,756
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 2.67 % 2.85 % 3.04 % 3.13 % 2.90 %
Net interest income as reported $ 45,237 $ 48,782 $ 51,861 $ 52,044 $ 46,831
Acquisition–related purchase accounting adjustments
(“PAUs”) (367) (431) (906) (1,223) (916)
Adjusted net interest income $ 44,870 $ 48,351 $ 50,955 $ 50,821 $ 45,915
Adjusted net interest margin 2.65 % 2.83 % 2.99 % 3.06 % 2.85 %
Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Total stockholders’ equity $ 702,559 $ 677,375 $ 644,993 $ 657,865 $ 677,450
Less: Intangible assets 171,547 172,450 173,375 173,662 174,588
Total tangible stockholders’ equity $ 531,012 $ 504,925 $ 471,618 $ 484,203 $ 502,862
Common shares outstanding 43,621,422 43,574,151 43,574,151 43,572,796 43,572,796
Book value per common share $ 16.11 $ 15.55 $ 14.80 $ 15.10 $ 15.55
Tangible book value per common
share $ 12.17 $ 11.59 $ 10.82 $ 11.11 $ 11.54
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Non–interest expense as reported $ 34,524 $ 35,711 $ 36,816 $ 35,404 $ 35,270
Net interest income as reported 45,237 48,782 51,861 52,044 46,831
Non–interest income as reported $ 9,620 $ 10,674 $ 10,188 $ 12,434 $ 14,155
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 62.93 % 60.06 % 59.33 % 54.91 % 57.83 %
Non–interest expense as reported $ 34,524 $ 35,711 $ 36,816 $ 35,404 $ 35,270
Net interest income as reported 45,237 48,782 51,861 52,044 46,831
Non–interest income as reported 9,620 10,674 10,188 12,434 14,155
(Gain)/loss on sale of investment securities 500 — — — —
Death benefit on bank owned life insurance ("BOLI") — — — (644) —
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI $ 10,120 $ 10,674 $ 10,188 $ 11,790 $ 14,155
Adjusted efficiency ratio 62.37 % 60.06 % 59.33 % 55.46 % 57.83 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Average assets $ 7,831,106 $ 7,718,366 $ 7,635,102 $ 7,476,238 $ 7,319,675
Return on average assets ("ROAA") as reported 0.94 % 1.09 % 1.24 % 1.33 % 1.31 %
(Gain)/loss on sale of investment securities 0.03 — — — —
Tax effect (0.01) — — — —
ROAA excluding (gain)/loss on sale of investment securities 0.96 1.09 1.24 1.33 1.31
Death benefit on bank owned life insurance ("BOLI") — — — (0.03) —
ROAA excluding death benefit on BOLI 0.96 1.09 1.24 1.30 1.31
Adjusted ROAA 0.96 % 1.09 % 1.24 % 1.30 % 1.31 %
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Average common equity $ 693,472 $ 660,188 $ 680,376 $ 677,299 $ 716,341
Return on average common equity ("ROACE") as reported 10.66 % 12.72 % 13.89 % 14.72 % 13.34 %
(Gain)/loss on sale of investment securities 0.29 — — — —
Tax effect (0.06) — — — —
ROACE excluding (gain)/loss on sale of investment securities 10.89 12.72 13.89 14.72 13.34
Death benefit on bank owned life insurance ("BOLI") — — — (0.38) —
ROACE excluding death benefit on BOLI 10.89 12.72 13.89 14.34 13.34
Adjusted ROACE 10.89 % 12.72 % 13.89 % 14.34 % 13.34 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2023 and 2022
Non–GAAP Reconciliation of Return on Average Tangible Equity
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Average common equity $ 693,472 $ 660,188 $ 680,376 $ 677,299 $ 716,341
Less: Average intangible assets 172,139 173,050 173,546 175,321 176,356
Average tangible equity $ 521,333 $ 487,138 $ 506,830 $ 501,978 $ 539,985
Return on average common equity ("ROATE") 14.18 % 17.24 % 18.65 % 19.86 % 17.70 %
(Gain)/loss on sale of investment securities 0.39 — — — —
Tax effect (0.08) — — — —
ROATE excluding (gain)/loss on sale of investment securities 14.49 17.24 18.65 19.86 17.70
Death benefit on bank owned life insurance ("BOLI") — — — (0.51) —
ROATE excluding death benefit on BOLI 14.49 17.24 18.65 19.35 17.70
Adjusted ROATE 14.49 % 17.24 % 18.65 % 19.35 % 17.70 %
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.