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 Months ended March 31, 2024 and 2023
• 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 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-Ukraine and Israel-Hamas conflicts, 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 2023 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 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, and other affiliated entities. 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 Months ended March 31, 2024 and 2023
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 2024 Highlights
• Net interest margin increased to 2.50% compared to 2.43% in the linked quarter. Net interest income was $43.3 million compared to $42.3 million in the linked quarter. The net interest margin for the month ended March 31, 2024 was 2.53%.
• Commercial loans grew 11.2% annualized in the quarter, including $22.8 million in new equipment finance production and a $52.0 million increase in other commercial loans.
• Total loans were $4.62 billion at period end, increasing by 18.2% annualized during the quarter. Balances included the strategic deployment of excess liquidity into higher yielding and excellent credit quality residential mortgages of $94.7 million and consumer loans with credit protection of $59.1 million.
• Cash totaled $271.1 million at period end, providing significant flexibility to drive future net interest margin growth through deployment into higher yielding assets throughout 2024.
• Excellent asset quality with net charge-offs representing only 0.01% of average loans, as well as delinquent and non-performing loans representing 0.33% and 0.41%, respectively, at period end. The Company's first quarter credit loss expense of $805,000 was primarily attributable to loan growth and replacement of net charge-offs.
• Stable deposit base with continued pricing discipline. Deposits totaled $5.58 billion at quarter end, compared to $5.66 billion on December 31, 2023. Modest outflows were primarily attributed to public fund certificates of deposits.
• Solid fee income results, even with backdrop of lower BOLI income and mortgage seasonality. Expenses were well-managed in the quarter and at the lower end of guidance.
Financial Summary
For the Three Months Ended
March 31, December 31, March 31,
Net Interest Income and Net Interest Margin 2024 2023 2023
Net interest income $ 43,288 $ 42,257 $ 45,237
Net interest margin 2.50 % 2.43 % 2.67 %
Adjusted net interest margin (See “Use of Non–GAAP Financial Measures”) 2.50 % 2.42 % 2.65 %
For the Three Months Ended
March 31, December 31, March 31,
Asset Yields and Funding Costs 2024 2023 2023
Interest earning assets 4.82 % 4.69 % 4.17 %
Interest bearing liabilities 2.84 % 2.74 % 1.85 %
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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, 2024 and 2023
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income March 31, December 31, March 31,
2024 2023 2023
Total non–interest income $ 9,929 $ (20,449) $ 9,620
Gain on sale of mortgage loans 626 951 785
Mortgage servicing income net of impairment or recovery 439 724 713
For the Three Months Ended
March 31, December 31, March 31,
Non–interest Expense 2024 2023 2023
Total non–interest expense $ 37,107 $ 39,330 $ 34,524
Annualized non–interest expense to average assets 1.90 % 1.98 % 1.79 %
At or for the Three Months Ended
Credit Quality March 31, December 31, March 31,
2024 2023 2023
Allowance for credit losses to total loans 1.09 % 1.13 % 1.17 %
Non–performing loans to total loans 0.41 % 0.46 % 0.47 %
Percent of net charge–offs to average loans outstanding for the period 0.01 % 0.02 % 0.01 %
Allowance for March 31, Net Reserve December 31,
Credit Losses 2024 1Q24 2023
Commercial $ 30,514 $ 778 $ 29,736
Retail Mortgage 2,655 152 2,503
Warehouse 659 178 481
Consumer 16,559 (750) 17,309
Allowance for Credit Losses (“ACL”)
$ 50,387 358 $ 50,029
ACL/Total Loans 1.09 % 1.13 %
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s 2023 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
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2024 and 2023
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, 2024, Horizon had core deposit intangibles of $12.8 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, 2024, 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 result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model,
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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, 2024 and 2023
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 March 31, 2024, Horizon’s total assets were $7.9 billion, a decrease of approximately $84.8 million compared to December 31, 2023. The decrease in total assets was primarily due to decreases in cash and due from banks of $255.4 million, investments held to maturity of $19.9 million and investments available for sale of $11.9 million offset by growth in net loans of $200.2 million.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2024 and 2023
Investment securities were comprised of the following as of (dollars in thousands):
March 31, 2024 December 31, 2023
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 71,943 $ 62,926 $ 72,938 $ 64,377
State and municipal 352,738 299,255 353,299 304,030
Federal agency collateralized mortgage obligations 3,819 3,450 3,931 3,580
Federal agency mortgage–backed pools 157,812 133,142 161,130 137,297
Corporate notes 42,119 36,546 43,317 37,967
Total available for sale investment securities $ 628,431 $ 535,319 $ 634,615 $ 547,251
Held to maturity
U.S. Treasury and federal agencies $ 284,236 $ 241,037 $ 287,259 $ 245,960
State and municipal 1,078,388 911,630 1,088,499 939,361
Federal agency collateralized mortgage obligations 49,913 41,825 51,325 43,479
Federal agency mortgage–backed pools 319,181 268,852 323,649 275,028
Private labeled mortgage–backed pools 31,712 27,182 32,329 27,734
Corporate notes 162,453 137,327 162,734 137,196
Total held to maturity investment securities $ 1,925,883 $ 1,627,853 $ 1,945,795 $ 1,668,758
Investment securities available for sale decreased $11.9 million since December 31, 2023 to $535.3 million as of March 31, 2024 primarily due to principal repayments and the sale of certain securities and investment securities held to maturity decreased $19.9 million since December 31, 2023 to $1.9 billion as of March 31, 2024. This decrease in investments held to maturity was due to cash flows received during the first three months of 2023.
Net loans increased $200.2 million since December 31, 2023 to $4.6 billion as of March 31, 2024. Commercial loans increased $74.8 million, consumer loans increased $13.3 million, residential mortgage loans increased $100.9 million and mortgage warehouse loans increased $11.5 million since December 31, 2023.
Total deposits decreased $85.0 million since December 31, 2023 to $5.6 billion as of March 31, 2024, primarily due to a reduction municipal and other public depositors of approximately $148.8 million, offset by an increase in consumer and commercial balances of $61.2 million and $2.6 million, respectively during the first three months of 2023.
Total borrowings increased slightly by $6.1 million to $1.4 billion as of March 31, 2024.
Stockholders’ equity totaled $721.3 million at March 31, 2024 compared to $718.8 million at December 31, 2023. The increase in stockholders’ equity during the period was primarily due to the generation of net income, offset by a decrease in accumulated other comprehensive loss of $4.7 million as unrealized losses on available for sale securities increased to $93.1 million and the amount of dividends paid during the quarter. Book value per common share at March 31, 2024 increased to $16.49 compared to $16.47 at December 31, 2023.
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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, 2024 and 2023
Results of Operations
Overview
Consolidated net income for the three–month period ended March 31, 2024 was $14.0 million, or $0.32 diluted earnings per share, compared to $18.2 million, or $0.42 diluted earnings per share for the same period in 2023. The decrease in net income for the three–month period ended March 31, 2024 when compared to the same prior year period reflects a decrease in net interest income of $1.9 million, an increase in credit loss expense of $563,000 and an increase in non–interest expense of $2.6 million, offset by an increase in non–interest income of $309,000 and a decrease in income tax expense of $549,000.
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, 2024 was $43.3 million, a decrease of $1.9 million from the $45.2 million earned during the same period in 2023. Yields on the Company’s interest earning assets increased by 65 basis points to 4.82% for the three months ended March 31, 2024 from 4.17% for the three months ended March 31, 2023. Interest income increased $13.5 million from $71.8 million for the three months ended March 31, 2023 to $85.3 million for the same period in 2024. 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 $92.3 million during the three months ended March 31, 2024. Interest income from acquisition–related purchase accounting adjustments was $13,000 for the three months ended March 31, 2024 compared to $367,000 for the same period in 2023.
Rates paid on interest bearing liabilities increased by 99 basis points for the three–month period ended March 31, 2024 compared to the same period in 2023. Interest expense increased $15.4 million when compared to the three–month period ended March 31, 2023 to $42.0 million for the same period in 2024. This increase was due to higher rates paid on interest bearing liabilities. The cost of average interest bearing deposits increased 117 basis points while the cost of average borrowings increased 8 basis points. Average balances of interest bearing deposits decreased $2.1 million and average balances of borrowings increased $147.4 million for the three-month period ended March 31, 2024 when compared to the same period in 2023.
The net interest margin decreased 17 basis points from 2.67% for the three–month period ended March 31, 2023 to 2.50% for the same period in 2024. The decrease in the margin for the three–month period ended March 31, 2024 compared to the same period in 2023 was due to an increase in the cost of interest bearing liabilities, offset by an 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 2.50% for the three-month period ended March 31, 2024 compared to 2.65% for the same period in 2023. (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 Months ended March 31, 2024 and 2023
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, 2024 March 31, 2023
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 322,058 $ 4,387 5.48 % $ 7,767 $ 83 4.33 %
Interest earning deposits 9,025 110 4.90 % 8,780 70 3.23 %
Investment securities – taxable 1,364,195 7,362 2.17 % 1,727,369 8,725 2.05 %
Investment securities – non–taxable (1)
1,149,957 6,451 2.86 % 1,314,129 7,556 2.95 %
Loans receivable (2) (3)
4,448,324 66,954 6.09 % 4,143,221 55,364 5.44 %
Total interest earning assets 7,293,559 85,264 4.82 % 7,201,266 71,798 4.17 %
Non–interest earning assets
Cash and due from banks 105,795 103,563
Allowance for credit losses (49,960) (50,337)
Other assets 486,652 576,614
Total average assets $ 7,836,046 $ 7,831,106
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 4,500,148 $ 27,990 2.50 % $ 4,502,199 $ 14,819 1.33 %
Borrowings 1,200,728 10,904 3.65 % 1,053,317 9,268 3.57 %
Repurchase agreements 138,052 1,026 2.99 % 138,749 503 1.47 %
Subordinated notes 55,558 831 6.02 % 58,910 880 6.06 %
Junior subordinated debentures issued to capital trusts 57,279 1,225 8.60 % 57,048 1,091 7.76 %
Total interest bearing liabilities 5,951,765 41,976 2.84 % 5,810,223 26,561 1.85 %
Non–interest bearing liabilities
Demand deposits 1,077,183 1,255,697
Accrued interest payable and other liabilities 82,015 71,714
Stockholders’ equity 725,083 693,472
Total average liabilities and stockholders’ equity $ 7,836,046 $ 7,831,106
Net interest income/spread $ 43,288 1.98 % $ 45,237 2.32 %
Net interest income as a percent of average interest earning assets (1)
2.50 % 2.67 %
(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 Months ended March 31, 2024 and 2023
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2024 and 2023
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, 2024 vs.
Three Months Ended March 31, 2023
Total
Change Change
Due to
Volume Change
Due to
Rate
Interest Income
Federal funds sold $ 4,304 $ 17,196 $ (12,892)
Interest earning deposits 40 8 32
Investment securities – taxable (1,363) (7,785) 6,422
Investment securities – non–taxable (1,105) (4,721) 3,616
Loans receivable 11,590 17,359 (5,769)
Total interest income $ 13,466 $ 22,057 $ (8,591)
Interest Expense
Interest bearing deposits $ 13,171 $ (27) $ 13,198
Borrowings 1,636 5,366 (3,730)
Repurchase agreements 523 (10) 533
Subordinated notes (49) (202) 153
Junior subordinated debentures issued to capital trusts 134 18 116
Total interest expense 15,415 5,145 10,270
Net Interest Income $ (1,949) $ 16,912 $ (18,861)
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, 2024, credit loss expense for loans totaled $669,000 compared to $242,000 for the same period in 2023. During the three–month period ended March 31, 2024, commercial loan net recoveries were $57,000, residential mortgage loan net recoveries were $5,000 and consumer loan net charge–offs were $488,000.
The ACL balance at March 31, 2024 was $50.4 million, or 1.09% of total loans compared to an ACL balance of $50.0 million at December 31, 2023 or 1.13% of total loans. The decrease in the ACL to total loans ratio was primarily due to the decrease in indirect consumer loans and continued favorable asset quality with non–performing loans at 0.41% of total loans at period end and net charge–offs to average loans represented 0.01% for the first quarter of 2024.
As of March 31, 2024, non–performing loans totaled $19.2 million, reflecting a $1.1 million decrease from $20.3 million in non–performing loans as of December 31, 2023. Non–performing commercial loans decreased by $1.9 million, non–performing real estate loans increased by $667,000 and non–performing consumer loans increased by $94,000 at March 31, 2024 compared to December 31, 2023.
Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.2 million at March 31, 2024 compared to $1.4 million at December 31, 2023.
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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, 2024 and 2023
Non–interest Income
The following is a summary of changes in non–interest income for the three months ended March 31, 2024 and 2023 (table dollar amounts in thousands):
Three Months Ended
March 31, Amount Percent
2024 2023 Change Change
Non–interest Income
Service charges on deposit accounts $ 3,214 $ 3,028 $ 186 6.1 %
Wire transfer fees 101 109 (8) (7.3) %
Interchange fees 3,109 2,867 242 8.4 %
Fiduciary activities 1,315 1,275 40 3.1 %
Gain on sale of investment securities — (500) 500 (100.0) %
Gain on sale of mortgage loans 626 785 (159) (20.3) %
Mortgage servicing net of impairment 439 713 (274) (38.4) %
Increase in cash surrender value of bank owned life insurance 298 981 (683) (69.6) %
Other income 827 362 465 128.5 %
Total non–interest income $ 9,929 $ 9,620 $ 309 3.2 %
Total non–interest income was $309,000 higher during the first quarter of 2024 compared to the same period in 2023. Other income was $465,000 higher during the first quarter of 2024 compared to the same period of 2023. Interchange fees were $242,000 higher during the first quarter of 2024 when compared to the prior year period. The cash surrender value of bank owned life insurance decreased $683,000 during the first quarter of 2024 when compared to the same period in 2023 due to the surrender of several policies during the fourth quarter of 2023. Residential mortgage loan activity during the first quarter of 2024 generated $626,000 of income from the gain on sale of mortgage loans, down from $785,000 for the same period in 2023. Mortgage servicing income, net of impairment, decreased $274,000 during the first quarter of 2024 compared to the same period in 2023.
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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, 2024 and 2023
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ended March 31, 2024 and 2023 (table dollar amounts in thousands):
Three Months Ended
March 31, March 31, QTD QTD
2024 2023 $ Change % Change
Non–interest Expense
Salaries and employee benefits $ 20,268 $ 18,712 $ 1,556 8.3 %
Net occupancy expenses 3,546 3,563 (17) (0.5) %
Data processing 2,464 2,669 (205) (7.7) %
Professional fees 607 533 74 13.9 %
Outside services and consultants 3,359 2,717 642 23.6 %
Loan expense 719 1,118 (399) (35.7) %
FDIC deposit insurance 1,320 540 780 144.4 %
Core deposit intangible amortization 872 903 (31) (3.4) %
Other losses 16 221 (205) (92.8) %
Other expenses 3,936 3,548 388 10.9 %
Total non–interest expense $ 37,107 $ 34,524 $ 2,583 7.5 %
Annualized Non–interest Exp. to Avg. Assets 1.90 % 1.79 %
Total non–interest expense was $2.6 million higher during the first quarter of 2024 when compared to the first quarter of 2023 primarily due to increases in salaries and employee benefits expense of $1.6 million, FDIC deposit insurance of $780,000, outside services and consultants expense of $642,000 and other expenses of $388,000, offset by decreases in loan expense of $399,000, data processing of $205,000 and other losses of $205,000. Annualized non–interest expense to average assets was 1.90% for the three months ended March 31, 2024 compared to 1.79% for the same period in 2022.
Income Taxes
Income tax expense totaled $1.3 million for the first quarter of 2024, a decrease of $549,000 when compared to the first quarter of 2023 due to a decrease in income before taxes of $4.8 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 March 31, 2024, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.56 billion in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $1.41 billion at December 31, 2023. The Bank had approximately $581.1 million of unpledged investment securities at March 31, 2024 compared to $601.7 million at December 31, 2023.
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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, 2024 and 2023
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2024. Stockholders’ equity totaled $721.3 million as of March 31, 2024, compared to $718.8 million as of December 31, 2023. For the three months ended March 31, 2024, the ratio of average stockholders’ equity to average assets was 9.25% compared to 8.97% for the twelve months ended December 31, 2023. The increase in stockholders’ equity during the period was due to net income generated during the period, offset by a decrease in accumulated other comprehensive income of $4.7 million and the amount of dividends paid.
Horizon declared common stock dividends in the amount of $0.16 per share during the first three months of 2024 and $0.16 per share for the same period in 2023. The dividend payout ratio (dividends as a percent of basic earnings per share) was 50.0% and 38.1% for the first three months of 2024 and 2023, respectively. For additional information regarding dividends, see Horizon’s 2023 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 Months ended March 31, 2024 and 2023
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2024 2023 2023 2023 2023
Net income as reported $ 13,991 $ (25,215) $ 16,205 $ 18,763 $ 18,228
Gain on swap termination — — — (1,453) —
Tax effect — — — 305 —
Net income excluding gain on swap termination 13,991 (25,215) 16,205 17,615 18,228
(Gain)/loss on sale of investment
securities — 31,572 — (20) 500
Tax effect — (6,630) — 4 (105)
Tax valuation reserve — 5,201 — — —
Net income excluding (gain)/loss on sale of investment securities 13,991 4,928 16,205 17,599 18,623
Extraordinary expenses — 705 — — —
Tax effect — (148) — — —
Net income excluding extraordinary expenses 13,991 5,485 16,205 17,599 18,623
BOLI tax expense and excise tax — 8,597 — — —
Net income excluding BOLI tax expense and excise tax 13,991 14,082 16,205 17,599 18,623
Adjusted net income $ 13,991 $ 14,082 $ 16,205 $ 17,599 $ 18,623
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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, 2024 and 2023
Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2024 2023 2023 2023 2023
Diluted earnings per share (“EPS”) as reported $ 0.32 $ (0.58) $ 0.37 $ 0.43 $ 0.42
Gain on swap termination — — — (0.03) —
Tax effect — — — 0.01 —
Diluted EPS excluding gain on swap termination 0.32 (0.58) 0.37 0.41 0.42
(Gain)/loss on sale of investment securities — 0.72 — — 0.01
Tax effect — (0.15) — — —
Tax valuation reserve — 0.12 — — —
Diluted EPS excluding (gain)/loss on investment securities 0.32 0.11 0.37 0.41 0.43
Extraordinary expenses — 0.02 — — —
Tax effect — — — — —
Diluted EPS excluding extraordinary expenses 0.32 0.13 0.37 0.41 0.43
BOLI tax expense and excise tax — 0.20 — — —
Diluted EPS excluding BOLI tax expense and excise tax 0.32 0.33 0.37 0.41 0.43
Adjusted Diluted EPS $ 0.32 $ 0.33 $ 0.37 $ 0.41 $ 0.43
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,
2024 2023 2023 2023 2023
Pre–tax income $ 15,305 $ (18,796) $ 17,489 $ 20,215 $ 20,091
Credit loss expense (recovery) 805 1,274 263 680 242
Pre–tax, pre–provision net income $ 16,110 $ (17,522) $ 17,752 $ 20,895 $ 20,333
Pre–tax, pre–provision net income $ 16,110 $ (17,522) $ 17,752 $ 20,895 $ 20,333
Gain on swap termination — — — (1,453) —
(Gain)/loss on sale of investment securities — 31,572 — (20) 500
Extraordinary expenses — 705 — — —
Adjusted pre–tax, pre–provision net income $ 16,110 $ 14,755 $ 17,752 $ 19,422 $ 20,833
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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, 2024 and 2023
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2024 2023 2023 2023 2023
Net interest income as reported $ 43,288 $ 42,257 $ 42,090 $ 46,160 $ 45,237
Average interest earning assets 7,293,559 7,239,034 7,286,611 7,212,640 7,201,266
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 2.50 % 2.43 % 2.41 % 2.69 % 2.67 %
Net interest income as reported $ 43,288 $ 42,257 $ 42,090 $ 46,160 $ 45,237
Acquisition–related purchase accounting adjustments
(“PAUs”) (13) (175) (435) (651) (367)
Gain on swap termination — — — (1,453) —
Prepayment penalties on borrowings — — — — —
Adjusted net interest income $ 43,275 $ 42,082 $ 41,655 $ 44,056 $ 44,870
Adjusted net interest margin 2.50 % 2.42 % 2.38 % 2.57 % 2.65 %
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,
2024 2023 2023 2023 2023
Total stockholders’ equity $ 721,250 $ 718,812 $ 693,369 $ 709,243 $ 702,559
Less: Intangible assets 167,965 168,837 169,741 170,644 171,547
Total tangible stockholders’ equity $ 553,285 $ 549,975 $ 523,628 $ 538,599 $ 531,012
Common shares outstanding 43,726,380 43,652,063 43,648,501 43,645,216 43,621,422
Book value per common share $ 16.49 $ 16.47 $ 15.89 $ 16.25 $ 16.11
Tangible book value per common share $ 12.65 $ 12.60 $ 12.00 $ 12.34 $ 12.17
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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, 2024 and 2023
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,
2024 2023 2023 2023 2023
Non–interest expense as reported $ 37,107 $ 39,330 $ 36,168 $ 36,262 $ 34,524
Net interest income as reported 43,288 42,257 42,090 46,160 45,237
Non–interest income as reported $ 9,929 $ (20,449) $ 11,830 $ 10,997 $ 9,620
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 69.73 % 180.35 % 67.08 % 63.44 % 62.93 %
Non–interest expense as reported $ 37,107 $ 39,330 $ 36,168 $ 36,262 $ 34,524
Extraordinary expenses — (705) — — —
Non–interest expense excluding acquisition expenses and DOL ESOP settlement expenses 37,107 38,625 36,168 36,262 34,524
Net interest income as reported 43,288 42,257 42,090 46,160 45,237
Gain on swap termination — — — (1,453) —
Net interest income excluding gain on swap termination 43,288 42,257 42,090 44,707 45,237
Non–interest income as reported 9,929 (20,449) 11,830 10,997 9,620
(Gain)/loss on sale of investment securities — 31,572 — (20) 500
Non–interest income excluding (gain)/loss on sale of investment securities $ 9,929 $ 11,123 $ 11,830 $ 10,977 $ 10,120
Adjusted efficiency ratio 69.73 % 72.36 % 67.08 % 65.12 % 62.37 %
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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, 2024 and 2023
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,
2024 2023 2023 2023 2023
Average assets $ 7,836,046 $ 7,880,816 $ 7,924,751 $ 7,840,026 $ 7,831,106
Return on average assets ("ROAA") as reported 0.72 % (1.27) % 0.81 % 0.96 % 0.94 %
Gain on swap termination — — — (0.07) —
Tax effect — — — 0.02 —
ROAA excluding gain on swap termination 0.72 (1.27) 0.81 0.91 0.94
(Gain)/loss on sale of investment securities — 1.59 — — 0.03
Tax effect — (0.33) — — (0.01)
Tax valuation reserve — 0.26 — — —
ROAA excluding (gain)/loss on sale of investment securities 0.72 0.25 0.81 0.91 0.96
Extraordinary expenses — 0.04 — — —
Tax effect — (0.01) — — —
ROAA excluding extraordinary expenses 0.72 0.28 0.81 0.91 0.96
BOLI tax expense and excise tax — 0.43 — — —
ROAA excluding BOLI tax expense and excise tax 0.72 0.71 0.81 0.91 0.96
Adjusted ROAA 0.72 % 0.71 % 0.81 % 0.91 % 0.96 %
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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, 2024 and 2023
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,
2024 2023 2023 2023 2023
Average common equity $ 725,083 $ 702,793 $ 715,485 $ 710,953 $ 693,472
Return on average common equity ("ROACE") as reported 7.76 % (14.23) % 8.99 % 10.59 % 10.66 %
Gain on swap termination — — — (0.82) —
Tax effect — — — 0.17 —
ROACE excluding gain on swap termination 7.76 (14.23) 8.99 9.94 10.66
(Gain)/loss on sale of investment securities — 17.82 — (0.01) 0.29
Tax effect — (3.74) — — (0.06)
Tax valuation reserve — 2.94 — — —
ROACE excluding (gain)/loss on sale of investment securities 7.76 2.79 8.99 9.93 10.89
Extraordinary expenses — 0.40 — — —
Tax effect — (0.08) — — —
ROACE excluding extraordinary expenses 7.76 3.11 8.99 9.93 10.89
BOLI tax expense and excise tax — 4.85 — — —
ROACE excluding BOLI tax expense and excise tax 7.76 7.96 8.99 9.93 10.89
Adjusted ROACE 7.76 % 7.96 % 8.99 % 9.93 % 10.89 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
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,
2024 2023 2023 2023 2023
Average common equity $ 725,083 $ 702,793 $ 715,485 $ 710,953 $ 693,472
Less: Average intangible assets 168,519 169,401 170,301 171,177 172,139
Average tangible equity $ 556,564 $ 533,392 $ 545,184 $ 539,776 $ 521,333
Return on average common equity ("ROATE") 10.11 % (18.76) % 11.79 % 13.94 % 14.18 %
Gain on swap termination — — — (1.08) —
Tax effect — — — 0.23 —
ROATE excluding gain on swap termination 10.11 (18.76) 11.79 13.09 14.18
(Gain)/loss on sale of investment securities — 23.48 — (0.01) 0.39
Tax effect — (4.93) — — (0.08)
Tax valuation reserve — 3.87 — — —
ROATE excluding (gain)/loss on sale of investment securities 10.11 3.66 11.79 13.08 14.49
Extraordinary expenses — 0.52 — — —
Tax effect — (0.11) — — —
ROATE excluding extraordinary expenses 10.11 4.07 11.79 13.08 14.49
BOLI tax expense and excise tax — 6.39 — — —
ROATE excluding BOLI tax expense and excise tax 10.11 10.46 11.79 13.08 14.49
Adjusted ROATE 10.11 % 10.46 % 11.79 % 13.08 % 14.49 %
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon's 2023 Annual Report on Form 10–K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2023 Annual Report on Form 10–K.
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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.