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 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 and Six Months ended June 30, 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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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 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.
Second Quarter 2023 Highlights
• Increased net income to $18.8 million or $0.43 per diluted share, from $18.2 million or $0.42 in the first quarter of 2023.
• Net interest income of $46.2 million increased from $45.2 million in the linked quarter. Second quarter 2023 net interest income benefited from average total loan and earning asset growth over the linked quarter, as well as a $1.5 million gain on swap termination that contributed approximately $0.02 to diluted earnings per share.
• Non–interest income expanded to $11.0 million from $9.6 million in the linked quarter.
• Continued to manage non–interest expense as a percentage of average assets to less than 1.90% on an annualized basis, totaling $36.3 million, or 1.86%, compared to $34.5 million, or 1.79% in the linked quarter.
• Deposits remained resilient during the quarter, totaling $5.71 billion at period end, compared to $5.70 billion on March 31, 2023.
• Loans grew to $4.27 billion at period end, increasing by 2.2% annualized during the quarter and 5.3% annualized since December 31, 2022.
• Maintained consistent and sound asset quality with 30 to 89 days delinquent loans representing 0.26% of total loans and non–performing loans representing 0.52% of total loans at period end, as well as net charge–offs representing 0.01% of average loans during the quarter.
• Tangible common equity continued to improve to 6.91% of tangible assets on June 30, 2023, an improvement of 4 basis points during the quarter and 35 basis points since December 31, 2022.
• The Bank’s capital position was strong with leverage and risk based capital ratios of 8.90% and 13.64%, respectively.
• Horizon's annualized dividend yield was robust at 6.15% as of June 30, 2023, with cash maintained at the holding company level representing approximately eight quarters of dividend payments and fixed costs.
Financial Summary
For the Three Months Ended
June 30, March 31, June 30,
Net Interest Income and Net Interest Margin 2023 2023 2022
Net interest income $ 46,160 $ 45,237 $ 52,044
Net interest margin 2.69 % 2.67 % 3.13 %
Adjusted net interest margin (See “Use of Non–GAAP Financial Measures”) 2.57 % 2.65 % 3.06 %
For the Three Months Ended
June 30, March 31, June 30,
Asset Yields and Funding Costs 2023 2023 2022
Interest earning assets 4.39 % 4.17 % 3.39 %
Interest bearing liabilities 2.10 % 1.85 % 0.34 %
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income June 30, March 31, June 30,
2023 2023 2022
Total non–interest income $ 10,997 $ 9,620 $ 12,434
Gain on sale of mortgage loans 1,005 785 2,501
Mortgage servicing income net of impairment or recovery 640 713 319
For the Three Months Ended
June 30, March 31, June 30,
Non–interest Expense 2023 2023 2022
Total non–interest expense $ 36,262 $ 34,524 $ 35,404
Annualized non–interest expense to average assets 1.86 % 1.79 % 1.90 %
At or for the Three Months Ended
Credit Quality June 30, March 31, June 30,
2023 2023 2022
Allowance for credit losses to total loans 1.17 % 1.17 % 1.32 %
Non–performing loans to total loans 0.52 % 0.47 % 0.51 %
Percent of net charge–offs to average loans outstanding for the period 0.01 % 0.01 % 0.01 %
Allowance for June 30, Net Reserve December 31,
Credit Losses 2023 2Q23 1Q23 2022
Commercial $ 30,354 $ (802) $ (1,289) $ 32,445
Retail Mortgage 3,648 (799) (1,130) 5,577
Warehouse 893 95 (222) 1,020
Consumer 15,081 1,956 1,703 11,422
Allowance for Credit Losses (“ACL”)
$ 49,976 $ 450 (938) $ 50,464
ACL/Total Loans 1.17 % 1.21 %
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
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
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 June 30, 2023, Horizon had core deposit intangibles of $15.4 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 June 30, 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 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
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
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 assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.
Financial Condition
On June 30, 2023, Horizon’s total assets were $8.0 billion, an increase of approximately $90.8 million compared to December 31, 2022. The increase in total assets was primarily growth in net loans of $108.8 million and an increase in cash and due from banks of $105.5 million. These increases were offset by decreases in investments available for sale of $91.7 million primarily due to sales during the first six months of 2023 and a decrease in investments held to maturity of $39.3 million.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Investment securities were comprised of the following as of (dollars in thousands):
June 30, 2023 December 31, 2022
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 294,640 $ 268,835 $ 294,329 $ 267,179
State and municipal 425,815 364,066 505,006 433,544
Federal agency collateralized mortgage obligations 24,529 22,895 33,011 31,215
Federal agency mortgage–backed pools 206,240 177,654 220,963 190,656
Corporate notes 81,904 72,363 84,393 74,964
Total available for sale investment securities $ 1,033,128 $ 905,813 $ 1,137,702 $ 997,558
Held to maturity
U.S. Treasury and federal agencies $ 287,576 $ 241,647 $ 295,250 $ 246,013
State and municipal 1,110,945 938,068 1,127,669 935,585
Federal agency collateralized mortgage obligations 54,067 45,466 56,564 47,699
Federal agency mortgage–backed pools 333,767 280,620 343,953 287,239
Private labeled mortgage–backed pools 33,848 28,662 35,466 29,973
Corporate notes 163,293 133,766 163,846 134,800
Total held to maturity investment securities $ 1,983,496 $ 1,668,229 $ 2,022,748 $ 1,681,309
Investment securities available for sale decreased $91.7 million since December 31, 2022 to $905.8 million as of June 30, 2023 primarily due to the sale of certain securities and investment securities held to maturity decreased $39.3 million since December 31, 2022 to $2.0 billion as of June 30, 2023. This decrease in investments held to maturity was due to cash flows received during the first six months of 2023.
Net loans increased $108.8 million since December 31, 2022 to $4.3 billion as of June 30, 2023. Commercial loans increased $38.9 million, consumer loans increased $35.1 million, residential mortgage loans increased $21.5 million and mortgage warehouse loans increased $12.8 million since December 31, 2022.
Total deposits decreased $148.4 million since December 31, 2022 to $5.7 billion as of June 30, 2023, primarily due to a reduction in consumer and commercial balances of $55.6 million and a $54.6 million, respectively, offset by an increase in balances by municipal and other public depositors of approximately $117.6 million during the first six months of 2023.
Total borrowings increased to $1.4 billion as of June 30, 2023 from $1.1 billion as of December 31, 2022, primarily due to the decrease in total deposits.
Stockholders’ equity totaled $709.2 million at June 30, 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 $8.3 million as unrealized losses on available for sale securities decreased to $127.3 million and the generation of net income, offset by the amount of dividends paid during the quarter. Book value per common share at June 30, 2023 increased to $16.25 compared to $16.11 at December 31, 2022.
Results of Operations
Overview
Consolidated net income for the three–month period ended June 30, 2023 was $18.8 million, or $0.43 diluted earnings per share, compared to $24.9 million, or $0.57 diluted earnings per share for the same period in 2022. The decrease in net income for the three–month period ended June 30, 2023 when compared to the same prior year period reflects a decrease in
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
net interest income of $5.9 million, an increase in credit loss expense of $440,000 a decrease in non–interest income of $1.4 million and an increase in non–interest expense of $858,000, offset by a decrease in income tax expense of $2.5 million.
Consolidated net income for the six–month period ended June 30, 2023 was $37.0 million, or $0.85 diluted earnings per share, compared to $48.4 million, or $1.11 diluted earnings per share for the same period in 2022. The decrease in net income for the six–month period ended June 30, 2023 when compared to the same prior year period reflects a decrease in net interest income of $7.5 million, an increase in credit loss expense of $2.1 million and a decrease in non–interest income of $6.0 million and an increase in non–interest expense of $112,000, offset by a decrease in income tax expense of $4.2 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 June 30, 2023 was $46.2 million, a decrease of $5.9 million from the $52.0 million earned during the same period in 2022. Yields on the Company’s interest earning assets increased by 100 basis points to 4.39% for the three months ended June 30, 2023 from 3.39% for the three months ended June 30, 2022. Interest income increased $20.3 million from $56.6 million for the three months ended June 30, 2022 to $76.9 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 $269.0 million during the three months ended June 30, 2023. Interest income from acquisition–related purchase accounting adjustments was $651,000 for the three months ended June 30, 2023 compared to $1.2 million for the same period in 2022.
Rates paid on interest bearing liabilities increased by 176 basis points for the three–month period ended June 30, 2023 compared to the same period in 2022. Interest expense increased $26.1 million when compared to the three–month period ended June 30, 2022 to $30.7 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 156 basis points while the cost of average borrowings increased 216 basis points. Average balances of interest bearing deposits decreased $95.9 million and average balances of borrowings increased $563.4 million for the three-month period ended June 30, 2023 when compared to the same period in 2022.
The net interest margin decreased 44 basis points from 3.13% for the three–month period ended June 30, 2022 to 2.69% for the same period in 2023. The decrease in the margin for the three–month period ended June 30, 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 and the gain on swap termination recorded in interest expense (“adjusted net interest margin”), the margin would have been 2.57% for the three-month period ended June 30, 2023 compared to 3.06% for the same period in 2022. (See the “Non–GAAP Reconciliation of Net Interest Margin” table below.)
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 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
June 30, 2023 June 30, 2022
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 30,926 $ 376 4.88 % $ 7,083 $ 17 0.96 %
Interest earning deposits 9,002 99 4.41 % 15,661 26 0.67 %
Investment securities – taxable 1,706,761 8,740 2.05 % 1,770,816 8,673 1.96 %
Investment securities – non–taxable (1)
1,240,931 7,059 2.89 % 1,374,032 7,307 2.70 %
Loans receivable (2) (3)
4,225,020 60,594 5.78 % 3,776,041 40,585 4.33 %
Total interest earning assets 7,212,640 76,868 4.39 % 6,943,633 56,608 3.39 %
Non–interest earning assets
Cash and due from banks 102,935 98,040
Allowance for credit losses (49,481) (52,525)
Other assets 573,932 487,090
Total average assets $ 7,840,026 $ 7,476,238
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 4,445,074 $ 18,958 1.71 % $ 4,540,959 $ 1,677 0.15 %
Borrowings 1,176,702 9,035 3.08 % 613,282 1,409 0.92 %
Repurchase agreements 140,606 683 1.95 % 141,470 41 0.12 %
Subordinated notes 58,946 881 5.99 % 58,800 881 6.01 %
Junior subordinated debentures issued to capital trusts 57,110 1,151 8.08 % 56,870 556 3.92 %
Total interest bearing liabilities 5,878,438 30,708 2.10 % 5,411,381 4,564 0.34 %
Non–interest bearing liabilities
Demand deposits 1,186,520 1,335,779
Accrued interest payable and other liabilities 64,115 51,779
Stockholders’ equity 710,953 677,299
Total average liabilities and stockholders’ equity $ 7,840,026 $ 7,476,238
Net interest income/spread $ 46,160 2.29 % $ 52,044 3.05 %
Net interest income as a percent of average interest earning assets (1)
2.69 % 3.13 %
(1)
Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)
Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)
Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Net interest income during the six months ended June 30, 2023 was $91.4 million, a decrease of $7.5 million from the $98.9 million earned during the same period in 2022. Yields on the Company’s interest earning assets increased by 101 basis points to 4.28% for the six months ended June 30, 2023 from 3.27% for the six months ended June 30, 2022. Interest income increased $41.3 million from $107.4 million for the six months ended June 30, 2022 to $148.7 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 $327.4 million during the six months ended June 30, 2023. Interest income from acquisition–related purchase accounting adjustments was $1.0 million for the six months ended June 30, 2023 compared to $2.1 million for the same period in 2022.
Rates paid on interest bearing liabilities increased by 166 basis points for the six–month period ended June 30, 2023 compared to the same period in 2022. Interest expense increased $48.8 million when compared to the six–month period ended June 30, 2022 to $57.3 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 138 basis points while the cost of average borrowings increased 242 basis points. Average balances of interest bearing deposits decreased $37.4 million and average balances of borrowings increased $556.5 million for the six–month period ended June 30, 2023 when compared to the same period in 2022.
The net interest margin decreased 34 basis points from 3.02% for the six–month period ended June 30, 2022 to 2.68% for the same period in 2023. The decrease in the margin for the six–month period ended June 30, 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 and the gain on swap termination recorded in interest expense (“adjusted net interest margin”), the margin would have been 2.61% for the six–month period ended June 30, 2023 compared to 2.96%for the same period in 2022. (See the “Non–GAAP Reconciliation of Net Interest Margin” table below.)
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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 Six Months ended June 30, 2023 and 2022
The following are the average balance sheets for the six months ended (dollars in thousands):
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Six Months Ended Six Months Ended
June 30, 2023 June 30, 2022
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 19,411 $ 459 4.77 % $ 121,707 $ 108 0.18 %
Interest earning deposits 8,891 169 3.83 % 18,154 50 0.56 %
Investment securities – taxable 1,717,008 17,465 2.05 % 1,709,014 16,064 1.90 %
Investment securities – non–taxable (1)
1,277,328 14,615 2.92 % 1,326,819 14,004 2.69 %
Loans receivable (2) (3)
4,184,347 115,958 5.61 % 3,703,857 77,124 4.22 %
Total interest earning assets 7,206,985 148,666 4.28 % 6,879,551 107,350 3.27 %
Non–interest earning assets
Cash and due from banks 103,247 101,340
Allowance for credit losses (49,907) (53,411)
Other assets 574,707 463,868
Total average assets $ 7,835,032 $ 7,391,348
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 4,472,519 $ 33,777 1.52 % $ 4,509,962 $ 3,173 0.14 %
Borrowings 1,115,350 18,303 3.31 % 558,867 2,453 0.89 %
Repurchase agreements 139,683 1,186 1.71 % 140,610 77 0.11 %
Subordinated notes 58,928 1,761 6.03 % 58,782 1,761 6.04 %
Junior subordinated debentures issued to capital trusts 57,079 2,242 7.92 % 56,839 1,011 3.59 %
Total interest bearing liabilities 5,843,559 57,269 1.98 % 5,325,060 8,475 0.32 %
Non–interest bearing liabilities
Demand deposits 1,220,917 1,329,316
Accrued interest payable and other liabilities 67,893 39,968
Stockholders’ equity 702,663 697,004
Total average liabilities and stockholders’ equity $ 7,835,032 $ 7,391,348
Net interest income/spread $ 91,397 2.30 % $ 98,875 2.95 %
Net interest income as a percent of average interest earning assets (1)
2.68 % 3.02 %
(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 Six Months ended June 30, 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 June 30, 2023 vs.
Three Months Ended June 30, 2022 Six Months Ended June 30, 2023 vs.
Six Months Ended June 30, 2022
Total
Change Change
Due to
Volume Change
Due to
Rate Total
Change Change
Due to
Volume Change
Due to
Rate
Interest Income
Federal funds sold $ 359 $ 652 $ (293) $ 351 $ (334) $ 685
Interest earning deposits 73 (63) 136 119 (76) 195
Investment securities – taxable 67 (1,281) 1,348 1,401 153 1,248
Investment securities – non–taxable (248) (3,739) 3,491 611 (1,366) 1,977
Loans receivable 20,009 21,146 (1,137) 38,834 22,165 16,669
Total interest income $ 20,260 $ 16,715 $ 3,545 $ 41,316 $ 20,542 $ 20,774
Interest Expense
Interest bearing deposits $ 17,281 $ (147) $ 17,428 $ 30,604 $ (52) $ 30,656
Borrowings 7,626 8,355 (729) 15,850 8,563 7,287
Repurchase agreements 642 (1) 643 1,109 (1) 1,110
Subordinated notes — 9 (9) — 9 (9)
Junior subordinated debentures issued to capital trusts 595 9 586 1,231 9 1,222
Total interest expense 26,144 8,225 17,919 48,794 8,528 40,266
Net Interest Income $ (5,884) $ 8,490 $ (14,374) $ (7,478) $ 12,014 $ (19,492)
Credit Loss Expense
Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio. During the three–month period ended June 30, 2023, credit loss expense for loans totaled $741,000 compared to $240,000 for the same period in 2022. During the three–month period ended June 30, 2023, commercial loan net charge–offs were $101,000, residential mortgage loan net recoveries were $10,000 and consumer loan net charge–offs were $183,000.
During the six–month period ended June 30, 2023, credit loss expense for loans totaled $336,000 compared to a credit loss recovery of $1.1 million for the same period of 2022. During the six–month period ended June 30, 2023, commercial loan net charge–offs were $205,000, residential mortgage loan net recoveries were $16,000 and consumer loan net charge–offs were $464,000.
The ACL balance at June 30, 2023 was $50.0 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 0.52% of total loans at period end and net charge–offs to average loans represented 0.01% for the second quarter of 2023.
As of June 30, 2023, non–performing loans totaled $22.1 million, reflecting a $269,000 increase from $21.8 million in non–performing loans as of December 31, 2022. Non–performing commercial loans decreased by $1.1 million, non–performing real estate loans increased by $45,000 and non–performing consumer loans increased by $1.3 million at June 30, 2023 compared to 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 and Six Months ended June 30, 2023 and 2022
Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.7 million at June 30, 2023 compared to $2.1 million at December 31, 2022.
Non–interest Income
The following is a summary of changes in non–interest income for the three months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
Three Months Ended
June 30, Amount Percent
2023 2022 Change Change
Non–interest Income
Service charges on deposit accounts $ 3,021 $ 2,833 $ 188 6.6 %
Wire transfer fees 116 170 (54) (31.8) %
Interchange fees 3,584 3,582 2 0.1 %
Fiduciary activities 1,247 1,405 (158) (11.2) %
Gain on sale of investment securities 20 — 20 100.0 %
Gain on sale of mortgage loans 1,005 2,501 (1,496) (59.8) %
Mortgage servicing net of impairment 640 319 321 100.6 %
Increase in cash surrender value of bank owned life insurance 1,015 519 496 95.6 %
Death benefit on bank owned life insurance — 644 (644) 0.0 %
Other income 349 461 (112) (24.3) %
Total non–interest income $ 10,997 $ 12,434 $ (1,437) (11.6) %
Total non–interest income was $1.4 million lower during the second quarter of 2023 compared to the same period in 2022. The sale of $24.7 million of available for sale investments generated a $20,000 gain during the second quarter of 2023. Residential mortgage loan activity during the second quarter of 2023 generated $1.0 million of income from the gain on sale of mortgage loans, down from $2.5 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. The cash surrender value of bank owned life insurance increased $496,000 during the second quarter of 2023 compared to the same period in 2022, primarily due to the purchase of $50.0 million in additional life insurance during the third quarter of 2022. Mortgage servicing income, net of impairment or recovery, increased $321,000 during the second quarter of 2023 compared to the same period in 2022. Fiduciary activities income was $158,000 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 and Six Months ended June 30, 2023 and 2022
The following is a summary of changes in non–interest income for the six months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
Six Months Ended
June 30, Amount Percent
2023 2022 Change Change
Non–interest Income
Service charges on deposit accounts $ 6,049 $ 5,628 $ 421 7.5 %
Wire transfer fees 225 329 (104) (31.6) %
Interchange fees 6,451 6,362 89 1.4 %
Fiduciary activities 2,522 2,908 (386) (13.3) %
Gain on sale of investment securities (480) — (480) #DIV/0!
Gain on sale of mortgage loans 1,790 4,528 (2,738) (60.5) %
Mortgage servicing net of impairment 1,353 3,808 (2,455) (64.5) %
Increase in cash surrender value of bank owned life insurance 1,996 1,029 967 94.0 %
Death benefit on bank owned life insurance — 644 (644) (100.0) %
Other income 711 1,353 (642) (47.5) %
Total non–interest income $ 20,617 $ 26,589 $ (5,972) (22.5) %
Total non–interest income was $6.0 million lower during the six months ended June 30, 2023 compared to the same period in 2022. The sale of $88.2 million of available for sale investments generated a $480,000 net loss during the first six months of 2023. Residential mortgage loan activity generated $1.8 million of income from the gain on sale of mortgage loans, down from $4.5 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 $2.5 million during the first six months 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 $642,000 lower during the second 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 $386,000 lower during the first six months of 2023 compared to the same period in 2022. The cash surrender value of bank owned life insurance increased $967,000 during the six months ended June 30, 2023 compared to the same period in 2022, primarily due to the purchase of $50.0 million in additional life insurance during the third quarter of 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 and Six Months ended June 30, 2023 and 2022
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
Three Months Ended
June 30, June 30, QTD QTD
2023 2022 $ Change % Change
Non–interest Expense
Salaries and employee benefits $ 20,162 $ 19,957 $ 205 1.0 %
Net occupancy expenses 3,249 3,190 59 1.8 %
Data processing 3,016 2,607 409 15.7 %
Professional fees 633 283 350 123.7 %
Outside services and consultants 2,515 2,485 30 1.2 %
Loan expense 1,397 1,533 (136) (8.9) %
FDIC deposit insurance 840 775 65 8.4 %
Core deposit intangible amortization 903 925 (22) (2.4) %
Other losses 134 362 (228) (63.0) %
Other expenses 3,413 3,287 126 3.8 %
Total non–interest expense $ 36,262 $ 35,404 $ 858 2.4 %
Annualized Non–interest Exp. to Avg. Assets 1.86 % 1.90 %
Total non–interest expense was $858,000 higher during the second quarter of 2023 when compared to the second quarter of 2022 primarily due to increases in data processing of $409,000, professional fees of $350,000 and salaries and employee benefits expense of $205,000, offset by decreases of $228,000 in other losses and $136,000 in loan expense. Annualized non–interest expense to average assets decreased to 1.86% for the three months ended June 30, 2023 compared to 1.90% for the same period in 2022 as expense reductions from branch acquisitions were realized and investments in technology are being leveraged, resulting in this improvement.
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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 Six Months ended June 30, 2023 and 2022
The following is a summary of changes in non–interest expense for the six months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
Six Months Ended
June 30, June 30, YTD YTD
2023 2022 $ Change % Change
Non–interest Expense
Salaries and employee benefits $ 38,874 $ 39,692 $ (818) (2.1) %
Net occupancy expenses 6,812 6,751 61 0.9 %
Data processing 5,685 5,144 541 10.5 %
Professional fees 1,166 597 569 95.3 %
Outside services and consultants 5,232 5,010 222 4.4 %
Loan expense 2,515 2,738 (223) (8.1) %
FDIC deposit insurance 1,380 1,500 (120) (8.0) %
Core deposit intangible amortization 1,806 1,851 (45) (2.4) %
Other losses 355 530 (175) (33.0) %
Other expenses 6,961 6,861 100 1.5 %
Total non–interest expense $ 70,786 $ 70,674 $ 112 0.2 %
Annualized Non–interest Exp. to Avg. Assets 1.82 % 1.99 %
Total non–interest expense was $112,000 higher during the first six months of 2023 when compared to the same period of 2022 primarily due to increases of $569,000 in professional fees and $541,000 in data processing expense, offset by decreases in salaries and employee benefits expense of $818,000 and loan expense of $223,000. Annualized non–interest expense to average assets decreased to 1.82% during the first six months of 2023 compared to 1.99% for the same period in 2022 as expense reductions from branch consolidations were realized and investments in technology are being leveraged, resulting in this improvement.
Income Taxes
Income tax expense totaled $1.5 million for the second quarter of 2023, a decrease of $2.5 million when compared to the second quarter of 2022 due to a decrease in income before taxes of $8.6 million.
Income tax expense totaled $3.3 million for the first six months of 2023, a decrease of $4.2 million when compared to the same period of 2022 due to a decrease in income before taxes of $15.6 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 June 30, 2023, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.71 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 $650.7 million of unpledged investment securities at June 30, 2023 compared to $2.1 billion 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 and Six Months ended June 30, 2023 and 2022
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2023. Stockholders’ equity totaled $709.2 million as of June 30, 2023, compared to $677.4 million as of December 31, 2022. For the six months ended June 30, 2023, the ratio of average stockholders’ equity to average assets was 8.97% 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 $8.3 million and net income during the period, offset by the amount of dividends paid.
Horizon declared common stock dividends in the amount of $0.32 per share during the first six months of 2023 and $0.31 per share for the same period in 2022. The dividend payout ratio (dividends as a percent of basic earnings per share) was 37.7% and 27.9% for the first six 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 and swap termination fees, 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 Six Months ended June 30, 2023 and 2022
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Net income as reported $ 18,763 $ 18,228 $ 21,165 $ 23,821 $ 24,859 $ 36,991 $ 48,422
Gain on swap termination (1,453) — — — — (1,453) —
Tax effect 305 — — — — 305 —
Net income excluding gain on swap termination 17,615 18,228 21,165 23,821 24,859 35,843 48,422
(Gain)/loss on sale of investment
securities (20) 500 — — — 480 —
Tax effect 4 (105) — — — (101) —
Net income excluding (gain)/loss on sale of investment securities 17,599 18,623 21,165 23,821 24,859 36,222 48,422
Death benefit on bank owned life insurance (“BOLI”) — — — — (644) — (644)
Net income excluding death benefit on BOLI 17,599 18,623 21,165 23,821 24,215 36,222 47,778
Adjusted net income $ 17,599 $ 18,623 $ 21,165 $ 23,821 $ 24,215 $ 36,222 $ 47,778
Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Diluted earnings per share (“EPS”) as reported $ 0.43 $ 0.42 $ 0.48 $ 0.55 $ 0.57 $ 0.85 $ 1.11
Gain on swap termination (0.03) — — — — (0.03) —
Tax effect 0.01 — — — — 0.01 —
Diluted EPS excluding gain on swap termination 0.41 0.42 0.48 0.55 0.57 0.83 1.11
(Gain)/loss on sale of investment securities — 0.01 — — — 0.01 —
Tax effect — — — — — — —
Diluted EPS excluding (gain)/loss on investment securities 0.41 0.43 0.48 0.55 0.57 0.84 1.11
Death benefit on BOLI — — — — (0.01) — (0.01)
Diluted EPS excluding death benefit on BOLI 0.41 0.43 0.48 0.55 0.56 0.84 1.10
Adjusted Diluted EPS $ 0.41 $ 0.43 $ 0.48 $ 0.55 $ 0.56 $ 0.84 $ 1.10
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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 Six Months ended June 30, 2023 and 2022
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Pre–tax income $ 20,215 $ 20,091 $ 23,814 $ 25,834 $ 28,834 $ 40,306 $ 55,936
Credit loss expense (recovery) 680 242 (69) (601) 240 922 (1,146)
Pre–tax, pre–provision net income $ 20,895 $ 20,333 $ 23,745 $ 25,233 $ 29,074 $ 41,228 $ 54,790
Pre–tax, pre–provision net income $ 20,895 $ 20,333 $ 23,745 $ 25,233 $ 29,074 $ 41,228 $ 54,790
Gain on swap termination (1,453) — — — — (1,453) —
(Gain)/loss on sale of investment securities (20) 500 — — — 480 —
Death benefit on bank owned life insurance — — — — (644) — (644)
Adjusted pre–tax, pre–provision net income $ 19,422 $ 20,833 $ 23,745 $ 25,233 $ 28,430 $ 40,255 $ 54,146
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Net interest income as reported $ 46,160 $ 45,237 $ 48,782 $ 51,861 $ 52,044 $ 91,397 $ 98,875
Average interest earning assets 7,212,640 7,201,266 7,091,980 7,056,208 6,943,633 7,206,985 6,879,551
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 2.69 % 2.67 % 2.85 % 3.04 % 3.13 % 2.68 % 3.02 %
Net interest income as reported $ 46,160 $ 45,237 $ 48,782 $ 51,861 $ 52,044 $ 91,397 $ 98,875
Acquisition–related purchase accounting adjustments
(“PAUs”) (651) (367) (431) (906) (1,223) (1,018) (2,139)
Gain on swap termination (1,453) — — — — (1,453) —
Adjusted net interest income $ 44,056 $ 44,870 $ 48,351 $ 50,955 $ 50,821 $ 88,926 $ 96,736
Adjusted net interest margin 2.57 % 2.65 % 2.83 % 2.99 % 3.06 % 2.61 % 2.96 %
Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
June 30, March 31, December 31, September 30, June 30,
2023 2023 2022 2022 2022
Total stockholders’ equity $ 709,243 $ 702,559 $ 677,375 $ 644,993 $ 657,865
Less: Intangible assets 170,644 171,547 172,450 173,375 173,662
Total tangible stockholders’ equity $ 538,599 $ 531,012 $ 504,925 $ 471,618 $ 484,203
Common shares outstanding 43,645,216 43,621,422 43,574,151 43,574,151 43,572,796
Book value per common share $ 16.25 $ 16.11 $ 15.55 $ 14.80 $ 15.10
Tangible book value per common share $ 12.34 $ 12.17 $ 11.59 $ 10.82 $ 11.11
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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 Six Months ended June 30, 2023 and 2022
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Non–interest expense as reported $ 36,262 $ 34,524 $ 35,711 $ 36,816 $ 35,404 $ 70,786 $ 70,674
Net interest income as reported 46,160 45,237 48,782 51,861 52,044 91,397 98,875
Non–interest income as reported $ 10,997 $ 9,620 $ 10,674 $ 10,188 $ 12,434 $ 20,617 $ 26,589
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 63.44 % 62.93 % 60.06 % 59.33 % 54.91 % 63.19 % 56.33 %
Non–interest expense as reported $ 36,262 $ 34,524 $ 35,711 $ 36,816 $ 35,404 $ 70,786 $ 70,674
Net interest income as reported 46,160 45,237 48,782 51,861 52,044 91,397 98,875
Gain on swap termination (1,453) — — — — (1,453) —
Net interest income excluding gain on swap termination 44,707 45,237 48,782 51,861 52,044 89,944 98,875
Non–interest income as reported 10,997 9,620 10,674 10,188 12,434 20,617 26,589
(Gain)/loss on sale of investment securities (20) 500 — — — 480 —
Death benefit on bank owned life insurance ("BOLI") — — — — (644) — (644)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI $ 10,977 $ 10,120 $ 10,674 $ 10,188 $ 11,790 $ 21,097 $ 25,945
Adjusted efficiency ratio 65.12 % 62.37 % 60.06 % 59.33 % 55.46 % 63.75 % 56.62 %
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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 Six Months ended June 30, 2023 and 2022
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Average assets $ 7,840,026 $ 7,831,106 $ 7,718,366 $ 7,635,102 $ 7,476,238 $ 7,835,032 $ 7,391,348
Return on average assets ("ROAA") as reported 0.96 % 0.94 % 1.09 % 1.24 % 1.33 % 0.95 % 1.32 %
Gain on swap termination (0.07) — — — — (0.04) —
Tax effect 0.02 — — — — 0.01 —
ROAA excluding gain on swap termination 0.91 0.94 1.09 1.24 1.33 0.92 1.32
(Gain)/loss on sale of investment securities — 0.03 — — — 0.01 —
Tax effect — (0.01) — — — — —
ROAA excluding (gain)/loss on sale of investment securities 0.91 0.96 1.09 1.24 1.33 0.93 1.32
Death benefit on bank owned life insurance ("BOLI") — — — — (0.03) — (0.02)
ROAA excluding death benefit on BOLI 0.91 0.96 1.09 1.24 1.30 0.93 1.30
Adjusted ROAA 0.91 % 0.96 % 1.09 % 1.24 % 1.30 % 0.93 % 1.30 %
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Average common equity $ 710,953 $ 693,472 $ 660,188 $ 680,376 $ 677,299 $ 702,663 $ 697,004
Return on average common equity ("ROACE") as reported 10.59 % 10.66 % 12.72 % 13.89 % 14.72 % 10.62 % 14.01 %
Gain on swap termination (0.82) — — — — (0.41) —
Tax effect 0.17 — — — — 0.09 —
ROACE excluding gain on swap termination 9.94 10.66 12.72 13.89 14.72 10.30 14.01
(Gain)/loss on sale of investment securities (0.01) 0.29 — — — 0.14 —
Tax effect — (0.06) — — — (0.03) —
ROACE excluding (gain)/loss on sale of investment securities 9.93 10.89 12.72 13.89 14.72 10.41 14.01
Death benefit on bank owned life insurance ("BOLI") — — — — (0.38) — (0.19)
ROACE excluding death benefit on BOLI 9.93 10.89 12.72 13.89 14.34 10.41 13.82
Adjusted ROACE 9.93 % 10.89 % 12.72 % 13.89 % 14.34 % 10.41 % 13.82 %
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Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Non–GAAP Reconciliation of Return on Average Tangible Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2023 2023 2022 2022 2022 2023 2022
Average common equity $ 710,953 $ 693,472 $ 660,188 $ 680,376 $ 677,299 $ 702,663 $ 697,004
Less: Average intangible assets 171,177 172,139 173,050 173,546 175,321 171,655 175,836
Average tangible equity $ 539,776 $ 521,333 $ 487,138 $ 506,830 $ 501,978 $ 531,008 $ 521,168
Return on average common equity ("ROATE") 13.94 % 14.18 % 17.24 % 18.65 % 19.86 % 14.05 % 18.74 %
Gain on swap termination (1.08) — — — — (0.55) —
Tax effect 0.23 — — — — 0.12 —
ROATE excluding gain on swap termination 13.09 14.18 17.24 18.65 19.86 13.62 18.74
(Gain)/loss on sale of investment securities (0.01) 0.39 — — — 0.18 —
Tax effect — (0.08) — — — (0.04) —
ROATE excluding (gain)/loss on sale of investment securities 13.08 14.49 17.24 18.65 19.86 13.76 18.74
Death benefit on bank owned life insurance ("BOLI") — — — — (0.51) — (0.25)
ROATE excluding death benefit on BOLI 13.08 14.49 17.24 18.65 19.35 13.76 18.49
Adjusted ROATE 13.08 % 14.49 % 17.24 % 18.65 % 19.35 % 13.76 % 18.49 %
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.