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;
• 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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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, 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.
Critical Accounting Estimates
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. The Company considers these policies to be its critical accounting estimates. Management has identified as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.
For additional information regarding critical accounting estimates, see Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes in the Company’s application of critical accounting estimates since 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 and Six Months ended June 30, 2024 and 2023
Results of Operations
Net Income
Net income declined $4.6 million to $14.1 million, or $0.32 per share, during the three months ended June 30, 2024 when compared to $18.8 million, or $0.43 per share, for the same period in 2023. The decrease from the year ago period was primarily driven by the increased provision for loan loss related to loan growth in the current period and non-interest expense growth compared to the year ago period. Additionally, net interest income, compared to the second quarter of last year, decreased by $0.9 million, or 1.9%, mainly due to an increase in interest expense on interest bearing deposits of $9 million and borrowings of $1.5 million. This increase in interest expense was mainly offset by an increase in interest income on loans receivable of $11.3 million.
Net income declined $8.9 million to $28.1 million, or $0.64 per share, during the six months ended June 30, 2024 when compared to $37.0 million, or $0.85 per share, for the same period in 2023. The decrease from the year ago period was primarily a result of growth in non-interest expense, a decline in the net interest income and increased provision for loan loss related to loan growth in the current period.
Net Interest Income
Net interest income decreased $0.9 million during the three months ended June 30, 2024, to $45.3 million, when compared to the same period in 2023. While average earning asset balances were relatively unchanged, the reported net FTE interest margin 1 decreased by 5 basis points, to 2.64% for the three months ended June 30, 2024 compared to the year ago period, which included a $1.5 million swap termination gain that did not recur. Additionally, the contribution from interest accretion on acquired loans declined by $0.7 million when compared to the year ago period, to an insignificant amount for the three months ended June 30, 2024.
Following are the average balance sheets for the three months ended (dollars in thousands):
1 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.
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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, 2024 and 2023
Average Balance Sheet
(Dollars in Thousands, Unaudited)
Three Months Ended
June 30, 2024 June 30, 2023
Average
Balance Interest (4)
Average
Rate (4)
Average
Balance Interest (4)
Average
Rate (4)
Assets
Interest earning assets
Federal funds sold $ 47,805 $ 645 5.43 % $ 30,926 $ 376 4.88 %
Interest earning deposits (7)
7,662 93 4.88 % 9,002 99 4.41 %
Federal Home Loan Bank stock (6)
53,827 1,521 11.36 % 33,322 508 6.11 %
Investment securities - taxable (1)
1,309,305 6,465 1.99 % 1,673,439 8,232 1.97 %
Investment securities - non-taxable (1)
1,132,065 8,072 2.87 % 1,240,931 8,935 2.89 %
Total investment securities 2,441,370 14,537 2.39 % 2,914,370 17,167 2.36 %
Loans receivable (2) (3)
4,662,124 72,208 6.23 % 4,225,020 60,843 5.78 %
Total interest earning assets 7,212,788 89,004 4.96 % 7,212,640 78,993 4.39 %
Non-interest earning assets
Cash and due from banks 108,319 102,935
Allowance for credit losses (50,334) (49,481)
Other assets 508,555 573,932
Total average assets $ 7,779,328 $ 7,840,026
Liabilities and Stockholders' Equity
Interest bearing liabilities
Interest bearing deposits $ 3,334,490 $ 16,814 2.03 % $ 3,329,899 $ 10,388 1.25 %
Time deposits 1,134,590 11,633 4.12 % 1,115,175 8,570 3.08 %
Borrowings 1,184,172 10,278 3.49 % 1,176,702 9,035 3.08 %
Repurchase agreements 125,144 935 3.00 % 140,606 683 1.95 %
Subordinated notes 55,647 829 5.99 % 58,946 881 5.99 %
Junior subordinated debentures issued to capital trusts 57,335 1,213 8.51 % 57,110 1,151 8.08 %
Total interest bearing liabilities 5,891,378 41,702 2.85 % 5,878,438 30,708 2.10 %
Non-interest bearing liabilities
Demand deposits 1,080,676 1,186,520
Accrued interest payable and other liabilities 80,942 64,115
Stockholders' equity 726,332 710,953
Total average liabilities and stockholders' equity $ 7,779,328 $ 7,840,026
Net FTE interest income (non-GAAP) (5)
$ 47,302 $ 48,285
Less FTE adjustments (4)
(2,023) (2,125)
Net Interest Income $ 45,279 $ 46,160
Net FTE interest margin (Non-GAAP) (4)(5)
2.64 % 2.69 %
(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.
(2) Includes fees on loans held for sale and held for investment. 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.
(4) Management believes fully taxable equivalent, or FTE, interest income is useful to investors in evaluating the Company's performance as a comparison of the returns between a tax-free investment and a taxable alternative. The Company adjusts interest income and average rates for tax-exempt loans and securities to an FTE basis utilizing a 21% tax rate
(5) Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.
(6) Dividends on FHLB stock.
(7) Includes interest earning deposits and interest earning time deposits.
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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, 2024 and 2023
Net interest income decreased $2.8 million during the six months ended June 30, 2024, to $88.6 million, when compared to the same period in 2023. While average earning asset balances grew modestly, the reported net FTE interest margin 2 decreased by 11 basis points, to 2.57% for the six months ended June 30, 2024 compared to the year ago period. The primary driver of the decline in net interest income compared with the year ago period was the $1.5 million swap termination gain and $1.1 million of additional contribution from interest accretion on acquired loans in the year ago period. Following are the average balance sheets for the six months ended (dollars in thousands):
2 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.
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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, 2024 and 2023
Average Balance Sheet
(Dollars in Thousands, Unaudited)
Six Months Ended
June 30, 2024 June 30, 2023
Average
Balance Interest (4)
Average
Rate (4)
Average
Balance Interest (4)(6)
Average
Rate (4)
Assets
Interest earning assets
Federal funds sold $ 184,932 $ 5,032 5.47 % $ 19,411 $ 459 4.77 %
Interest earning deposits (7)
8,512 203 4.80 % 8,891 169 3.83 %
Federal Home Loan Bank stock (6)
45,888 2,304 10.10 % 32,096 912 5.73 %
Investment securities - taxable (1)
1,317,775 13,044 1.99 % 1,684,912 16,553 1.98 %
Investment securities - non-taxable (1)
1,141,011 16,238 2.86 % 1,277,328 18,500 2.92 %
Total investment securities 2,458,786 29,282 2.39 % 2,962,240 35,053 2.39 %
Loans receivable (2) (3)
4,555,224 139,515 6.16 % 4,184,347 116,443 5.61 %
Total interest earning assets 7,253,342 176,336 4.89 % 7,206,985 153,036 4.28 %
Non-interest earning assets
Cash and due from banks 107,057 103,247
Allowance for credit losses (50,147) (49,907)
Other assets 497,602 574,707
Total average assets $ 7,807,854 $ 7,835,032
Liabilities and Stockholders' Equity
Interest bearing liabilities
Interest bearing deposits $ 3,328,858 $ 32,703 1.98 % $ 3,409,970 $ 18,536 1.10 %
Time deposits 1,155,756 23,734 4.13 % 1,062,549 15,241 2.89 %
Borrowings 1,192,450 21,182 3.57 % 1,115,350 18,303 3.31 %
Repurchase agreements 131,598 1,961 3.00 % 139,683 1,186 1.71 %
Subordinated notes 55,602 1,660 6.00 % 58,928 1,761 6.03 %
Junior subordinated debentures issued to capital trusts 57,307 2,438 8.56 % 57,079 2,242 7.92 %
Total interest bearing liabilities 5,921,571 83,678 2.84 % 5,843,559 57,269 1.98 %
Non-interest bearing liabilities
Demand deposits 1,078,929 1,220,917
Accrued interest payable and other liabilities 81,478 67,893
Stockholders' equity 725,876 702,663
Total average liabilities and stockholders' equity $ 7,807,854 $ 7,835,032
Net FTE interest income (non-GAAP) (5)
$ 92,658 $ 95,767
Less FTE adjustments (4)
(4,091) (4,370)
Net Interest Income $ 88,567 $ 91,397
Net FTE interest margin (Non-GAAP) (4)(5)
2.57 % 2.68 %
(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.
(2) Includes fees on loans held for sale and held for investment. 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.
(4) Management believes fully taxable equivalent, or FTE, interest income is useful to investors in evaluating the Company's performance as a comparison of the returns between a tax-free investment and a taxable alternative. The Company adjusts interest income and average rates for tax-exempt loans and securities to an FTE basis utilizing a 21% tax rate
(5) Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.
(6) Dividends on FHLB stock.
(7) Includes interest earning deposits and interest earning time deposits.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2024 and 2023
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, 2024 vs.
Three Months Ended June 30, 2023 Six Months Ended June 30, 2024 vs.
Six Months Ended June 30, 2023
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 $ 269 $ 224 $ 45 $ 4,573 $ 4,494 $ 79
Interest earning deposits (1)
(6) (16) 10 34 (7) 41
Federal Home Loan Bank stock 1,013 425 588 1,392 500 892
Investment securities – taxable (1,767) (1,798) 31 (3,509) (3,633) 124
Investment securities – non–taxable (682) (777) 95 (1,787) (1,945) 158
Loans receivable 11,286 6,570 4,716 22,876 10,807 12,069
Total interest income 10,113 4,628 5,485 23,579 10,216 13,363
Interest Expense
Interest bearing deposits $ 6,426 $ 14 $ 6,412 $ 14,167 $ (451) $ 14,618
Time Deposits 3,063 282 2,781 8,493 1,434 7,059
Borrowings 1,243 124 1,119 2,879 1,312 1,567
Repurchase agreements 252 (142) 394 775 (73) 848
Subordinated notes (52) (99) 47 (101) (99) (2)
Junior subordinated debentures issued to capital trusts 62 9 53 196 9 187
Total interest expense 10,994 188 10,806 26,409 2,132 24,277
Net Interest Income $ (881) $ 4,440 $ (5,321) $ (2,830) $ 8,084 $ (10,914)
(1) Includes time deposits.
Non-Interest Income
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(Dollars in Thousands) 2024 2023 2024 2023
Non-interest Income
Service charges on deposit accounts $ 3,130 $ 3,021 $ 6,344 $ 6,049
Wire transfer fees 113 116 214 225
Interchange fees 3,826 3,584 6,935 6,451
Fiduciary activities 1,372 1,247 2,687 2,522
Gains (losses) on sale of investment securities — 20 — (480)
Gain on sale of mortgage loans 896 1,005 1,522 1,790
Mortgage servicing income net of impairment 450 640 889 1,353
Increase in cash value of bank owned life insurance 318 1,015 616 1,996
Other income 380 349 1,207 711
Total non-interest income $ 10,485 $ 10,997 $ 20,414 $ 20,617
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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, 2024 and 2023
Total non-interest income declined $0.5 million for the three months ended June 30, 2024 compared to the same period in 2023, and declined $0.2 million for the six months ended June 30, 2024 compared to the same period in 2023. Primary drivers of the periodic changes are noted below.
Service charges on deposit accounts increased $0.1 million for the three months ended June 30, 2024 and $0.3 million for the six months ended June 30, 2024, as compared to the same periods in 2023. The increases compared to the year ago periods were primarily a result of higher transaction-based fee activity in the current period.
Interchange fees, which include fees earned on qualified debit card volume and merchant processing fees, increased $0.2 million for the three months ended June 30, 2024 and $0.5 million for the six months ended June 30, 2024, as compared to the same periods in 2023. The increases were primarily driven by growth in qualified debit card volume for both periods.
Gain on sale of mortgage loans decreased $0.1 million for the three months ended June 30, 2024 and $0.3 million for the six months ended June 30, 2024, as compared to the same periods in 2023. The decrease was primarily driven by lower volumes of sold loans in both periods compared to the year ago periods.
Cash value of bank owned life insurance decreased $0.7 million for the three months ended June 30, 2024 and $1.4 million for the six months ended June 30, 2024, as compared to the same periods in 2023. The declines were due to the surrender of several policies during the fourth quarter of 2023.
Other income, which includes various miscellaneous income items as well as fair market value adjustments to certain other assets, increased by $0.5 million during the six months ended June 30, 2024 primarily related to positive fair market value adjustments on certain marketable securities.
Non-Interest Expense
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(Dollars in Thousands) 2024 2023 2024 2023
Non-interest Expense
Salaries and employee benefits $ 20,583 $ 20,162 $ 40,851 $ 38,874
Net occupancy expenses 3,192 3,249 6,738 6,812
Data processing 2,579 3,016 5,043 5,685
Professional fees 714 633 1,321 1,166
Outside services and consultants 3,058 2,515 6,417 5,232
Loan expense 1,038 1,397 1,757 2,515
FDIC insurance expense 1,315 840 2,635 1,380
Core deposit intangible amortization 844 903 1,716 1,806
Other losses 515 134 531 355
Other expense 3,684 3,413 7,620 6,961
Total non-interest expense $ 37,522 $ 36,262 $ 74,629 $ 70,786
Non-interest expense increased $ 1.3 million for the three months ended June 30, 2024 compared to the same period in 2023, primarily the result of higher expenses related to outside services and consultants, FDIC insurance, salaries and employee benefits and other losses, which was partially mitigated by lower expenses related to data processing and loan expense. Non-interest expense increased $ 3.8 million for the six months ended June 30, 2024 compared to the same period in 2023, primarily the result of higher expenses related to salaries and benefits, FDIC insurance, outside services and consulting and other expense.
Salaries and employee benefits expense increased by $ 0.4 million for the three months ended June 30, 2024, and $ 2.0 million for the six months ended June 30, 2024, when compared to the same periods a year ago. The increase in both
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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, 2024 and 2023
periods is primarily attributable to growth in salary expense related to ongoing hiring efforts in revenue generating roles in commercial lending, equipment finance and treasury management.
Outside services and consultant expense increased by $ 0.5 million for the three months ended June 30, 2024, and $ 1.2 million for the six months ended June 30, 2024, when compared to the same periods a year ago. The increase in both periods is partly attributable to hiring-related expense and other business development efforts.
FDIC insurance expense increased by $ 0.5 million for the three months ended June 30, 2024 when compared to the same period in 2023, and increased by $ 1.3 million in the six months ended June 30, 2024 compared to the year ago period. The increase in both periods related to higher incurred assessment rates.
Other expenses, which includes corporate and other service expenses, increased by $ 0.3 million for the three months ended June 30, 2024 when compared to the same period in 2023, and increased by $ 0.7 million for the six months ended June 30, 2024 when compared to the same period in 2023.
Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments
Three Months Ended Six Months Ended
June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023
Allowance for Credit Losses on Loans
Balance at beginning of period $ 50,387 $ 49,526 $ 50,029 $ 50,464
Provision for credit losses on loans 2,415 741 3,084 336
Net loan charge-offs (recoveries):
Commercial 57 118 $ (115) 376
Residential Real estate (4) (10) $ (9) (16)
Mortgage warehouse — — — —
Consumer 534 183 1,022 464
Total net loan charge-offs (recoveries) $ 587 $ 291 $ 898 $ 824
Balance at end of period $ 52,215 $ 49,976 $ 52,215 $ 49,976
Liability for Unfunded Lending Commitments
Balance at beginning of period 750 1,049 615 403
Provision for credit losses on unfunded lending commitments (45) (60) 90 586
Balance at end of period $ 705 $ 989 $ 705 $ 989
Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments $ 52,920 $ 50,965 $ 52,920 $ 50,965
Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio against various economic backdrops, which periodically change. During the second quarter of 2024, the Company recorded a provision for credit losses on loans of $2.4 million. This compares to a provision for credit losses on loans of $0.7 million during the second quarter of 2023. The increase in the provision for credit losses when compared to the year ago period was primarily attributable to loan growth during the quarter.
For the three months ended June 30, 2024, net loan charge-offs increased by $0.3 million to $0.6 million, compared to $0.3 million in the second quarter of last year.
The provision for credit losses on loans of $3.1 million for the six months ended June 30, 2024 increased by $2.7 million when compared to the prior year period, which is primarily attributable to loan growth
For the six months ended June 30, 2024, net loan charge-offs increased by $0.1 million to $0.9 million compared to $0.8 million in the prior year period. .
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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, 2024 and 2023
The Company’s allowance for credit losses as a percentage of period-end loans HFI was 1.08% at June 30, 2024, compared to 1.17% at June 30, 2023.
As of June 30, 2024, the allowance on unfunded lending commitments decreased by $0.3 million to $0.7 million, compared to $1.0 million in the second quarter of last year.
Income Taxes
The Company’s income tax expense for the second quarter of 2024 was $1.7 million compared to $1.5 million for the second quarter of 2023, resulting in effective tax rates of 10.9% and 7.2%, respectively. The increase in the effective tax rate for the second quarter 2024 is primarily due to the increase in the tax provision for the second quarter of 2024 to bring the year-to-date tax rate in line with the current estimated annual effective tax rate for the full year 2024, less tax-advantaged BOLI income related to the policies surrendered in the fourth quarter of 2023 and the impact of the adoption of ASU 2023-02, partially offset by a decrease in pre-tax income.
The Company’s income tax expense for the first six months of 2024 was $3.0 million compared to $3.3 million for the same period in 2023, resulting in effective tax rates of 9.8% and 8.2%, respectively. The increase in the effective tax rate for the first six months 2024 is primarily due to less tax-advantaged BOLI income related to the policies surrendered in the fourth quarter of 2023 and the impact of the adoption of ASU 2023-02, partially offset by a decrease in pre-tax income.
The effective income tax rates differed from the U.S. statutory federal income tax rates of 21% during the comparable periods primarily due to the effect of tax exempt income from securities, loans, and life insurance policies, and net tax benefits from tax credit investments.
Financial Condition
Total assets decreased by $28.0 million, or 0.4%, as of June 30, 2024, from $7.9 billion as of December 31, 2023. The decrease in total assets is primarily due to decreases in cash and cash equivalents of $380.4 million over the period, or 72.3%, to $146.1 million as of June 30, 2024, and a decrease in total securities balances of $61.6 million, to $2.4 billion, partially offset by growth in loans HFI of $403.0 million, or 9.2%, to $4.8 billion as of June 30, 2024.
Total investment securities decreased $61.6 million, or 2.5%, to $2.4 billion as of June 30, 2024 from $2.5 billion as of December 31, 2023, primarily as a result of scheduled amortization and maturities. There were no purchases of investment securities during the first six months of 2024.
Total loans HFI increased to $4.8 billion as of June 30, 2024 compared to $4.4 billion as of December 31, 2023, led by organic commercial loan growth of $229.6 million. The company continues to maintain a balanced growth profile across various geographies, products and industries, and holds a diverse lending portfolio consisting primarily of commercial real estate, consumer, residential and commercial and industrial portfolios.
Total deposit balances decreased by $34.7 million, or 0.6%, to $5.6 billion on June 30, 2024 when compared to balances as of December 31, 2023. The Company maintains a granular and tenured deposit base, with over 81% of balances insured or collateralized, with a continued focus on core commercial and consumer deposit gathering.
All other interest bearing liabilities at June 30, 2024, primarily comprised of Federal Home Loan Bank of Indianapolis advances, remained relatively stable when compared to balances as of December 31, 2023.
Investment securities were comprised of the following as of (dollars in thousands):
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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, 2024 and 2023
June 30, 2024 December 31, 2023
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 71,419 $ 62,665 $ 72,938 $ 64,377
State and municipal 352,223 294,836 353,299 304,030
Federal agency collateralized mortgage obligations 3,702 3,334 3,931 3,580
Federal agency mortgage–backed pools 154,479 130,318 161,130 137,297
Corporate notes 41,605 35,901 43,317 37,967
Total available for sale investment securities $ 623,428 $ 527,054 $ 634,615 $ 547,251
Held to maturity
U.S. Treasury and federal agencies $ 284,114 $ 242,197 $ 287,259 $ 245,960
State and municipal 1,064,638 886,408 1,088,499 939,361
Federal agency collateralized mortgage obligations 48,668 40,540 51,325 43,479
Federal agency mortgage–backed pools 314,069 264,814 323,649 275,028
Private labeled mortgage–backed pools 30,780 26,246 32,329 27,734
Corporate notes 162,170 136,782 162,734 137,196
Total held to maturity investment securities $ 1,904,439 $ 1,596,987 $ 1,945,795 $ 1,668,758
Investment securities available for sale decreased $20.2 million since December 31, 2023 to $527.1 million as of June 30, 2024 primarily due to principal repayments and maturities. Investment securities held to maturity decreased $41.4 million since December 31, 2023 to $1.9 billion as of June 30, 2024. This decrease in investments held to maturity was due to cash flows received during the first six months of 2024.
Credit Quality
The ACL balance at June 30, 2024 was $52.2 million, or 1.08% of period-end loans HFI compared to an ACL balance of $50.0 million at December 31, 2023 or 1.13% of loans HFI. The increase in the ACL was primarily due to the growth in commercial loans.
As of June 30, 2024, total non-accrual loans decreased by $1.4 million, or 7.3%, from December 31, 2023, to 0.38% of total loans HFI. Total non-performing assets decreased $1.3 million, or 6.0%, to $20.5 million, compared to $21.8 million as of December 31, 2023. The ratio of non-performing assets to total assets decreased slightly compared to December 31, 2023.
As of June 30, 2024, net charge-offs decreased by $0.2 million to $0.6 million, compared to $0.8 million as of December 31, 2023, while remaining low at 0.05% annualized of average loan balances. Total non–performing loans decreased $1.0 million, or 4.8%, compared to $20.3 million as of 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 and Six Months ended June 30, 2024 and 2023
Credit Quality
(Dollars in Thousands Except Ratios, Unaudited)
Quarter Ended
June 30, December 31,
2024 2023
Non-accrual loans
Commercial $ 4,321 $ 7,362
Residential Real estate 8,489 8,058
Mortgage warehouse — —
Consumer 5,453 4,290
Total non-accrual loans $ 18,263 $ 19,710
90 days and greater delinquent - accruing interest $ 1,039 $ 559
Total non-performing loans $ 19,302 $ 20,269
Other real estate owned
Commercial $ 1,111 $ 1,124
Residential Real estate — 182
Mortgage warehouse — —
Consumer 57 205
Total other real estate owned $ 1,168 $ 1,511
Total non-performing assets $ 20,470 $ 21,780
Net charge-offs (recoveries)
Commercial $ 57 $ 233
Residential Real estate (4) 21
Mortgage warehouse — —
Consumer 534 531
Total net charge-offs $ 587 $ 785
Allowance for credit losses
Commercial $ 31,941 $ 29,736
Residential Real estate 2,588 2,503
Mortgage warehouse 736 481
Consumer 16,950 17,309
Total allowance for credit losses $ 52,215 $ 50,029
Credit quality ratios
Non-accrual loans to HFI loans 0.38 % 0.45 %
Non-performing assets to total assets 0.26 % 0.27 %
Annualized net charge-offs of average total loans 0.05 % 0.07 %
Allowance for credit losses to HFI loans 1.08 % 1.13 %
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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, 2024 and 2023
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, 2024, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.76 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 cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $380.4 million during the first six months of 2024, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $22.5 million and have historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $357.5 million due growth in the loan portfolio, which used cash of $407.0 million. Financing activities used cash of $45.4 million, largely resulting from net decreases in deposits of $34.7 million and $14.2 million in dividends paid on common stock during the first six months of 2024.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2024. Stockholders’ equity totaled $726.7 million as of June 30, 2024, compared to $718.8 million as of December 31, 2023. For the six months ended June 30, 2024, the ratio of average stockholders’ equity to average assets was 9.30% 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 $7.4 million and cash dividends paid to common shareholders.
As of June 30, 2024, the ratio of total stockholders’ equity to total assets is 9.18%. Book value per common share was $16.62, increasing $0.15 compared to December 31, 2023.
Tangible common equity 1 totaled $559.5 million at June 30, 2024, and the ratio of tangible common equity to tangible assets 1 was 7.22% at June 30, 2024. Tangible book value, which excludes intangible assets from total equity, per common share 1 was $12.80, increasing $0.20 compared to December 31, 2023.
Horizon declared common stock dividends in the amount of $0.32 per share during the first six months of 2024 and $0.32 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 37.7% for the first six months of 2024 and 2023, respectively. For additional information regarding dividends, see Horizon’s 2023 Annual Report on Form 10–K.
1 N on-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.
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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, 2024 and 2023
Use of Non-GAAP Financial Measures
Certain information set forth in this press release 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 and tangible book value per share, efficiency ratio, the return on average assets, the return on average common equity, and return on average tangible equity. In each case, we have identified special circumstances that we consider to be non-recurring and have excluded them. We believe that this shows 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 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 one-time costs of acquisitions and non–recurring items. 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 press release for reconciliations of the non-GAAP information identified herein and its most comparable GAAP measures.
Non–GAAP Reconciliation of Net Fully-Taxable Equivalent ("FTE") 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,
2024 2024 2023 2023 2023 2024 2023
Interest income (GAAP) (A) $ 86,981 $ 85,264 $ 83,514 $ 80,125 $ 76,868 172,246 148,666
Taxable-equivalent adjustment:
Investment securities - tax exempt (1) $ 1,695 $ 1,715 $ 1,799 $ 1,861 $ 1,876 $ 3,410 $ 3,885
Loan receivable (2) $ 328 $ 353 $ 314 $ 251 $ 249 $ 681 $ 485
Interest income (non-GAAP) (B) $ 89,004 $ 87,332 $ 85,627 $ 82,237 $ 78,993 $ 176,337 $ 153,036
Interest expense (GAAP) (C) $ 41,702 $ 41,976 $ 41,257 $ 38,035 $ 30,708 $ 83,678 $ 57,269
Net interest income (GAAP) (D) =(A) - (C) $ 45,279 $ 43,288 $ 42,257 $ 42,090 $ 46,160 $ 88,568 $ 91,397
Net FTE interest income (non-GAAP) (E) = (B) - (C) $ 47,302 $ 45,356 $ 44,370 $ 44,202 $ 48,285 $ 92,659 $ 95,767
Average interest earning assets (F) 7,212,788 7,293,559 7,239,034 7,286,611 7,212,640 7,253,342 7,206,985
Net FTE interest margin (non-GAAP) (G) = (E*) / (F) 2.64 % 2.50 % 2.43 % 2.41 % 2.69 % 2.57 % 2.68 %
(1) The following represents municipal securities interest income for investment securities classified as available-for-sale and held-to-maturity
(2) The following represents municipal loan interest income for loan receivables classified as held for sale and held for investment
*Annualized
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Non–GAAP Reconciliation of Return on Average Tangible 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,
2024 2024 2023 2023 2023 2024 2023
Net income (loss) (GAAP) (A) 14,140 13,991 (25,215) 16,205 18,763 $ 28,131 $ 36,991
Average stockholders' equity (B) $ 726,332 $ 725,083 $ 702,793 $ 715,485 $ 710,953 $ 725,876 $ 702,663
Average intangible assets (C) 167,659 168,519 169,401 170,301 171,177 $ 168,089 $ 171,655
Average tangible equity (Non-GAAP) (D) = (B) - (C) $ 558,673 $ 556,564 $ 533,392 $ 545,184 $ 539,776 $ 557,787 $ 531,008
Return on average tangible common equity ("ROACE") (non-GAAP) (E) = (A*) / (D) 10.18 % 10.11 % (18.76) % 11.79 % 13.94 % 10.14 % 14.05 %
*Annualized
Non–GAAP Reconciliation of Tangible Common Equity to Tangible Assets
(Dollars in Thousands, Unaudited)
Three Months Ended
June 30, March 31, December 31, September 30, June 30,
2024 2024 2023 2023 2023
Total stockholders' equity (GAAP) (A) $ 726,665 $ 721,250 $ 718,812 $ 693,369 $ 709,243
Intangible assets (end of period) (B) 167,121 167,965 168,837 169,741 170,644
Total tangible common equity (non-GAAP) (C) = (A) - (B) $ 559,544 $ 553,285 $ 549,975 $ 523,628 $ 538,599
Total assets (GAAP) (D) 7,912,527 7,855,707 7,940,485 7,959,434 7,963,353
Intangible assets (end of period) (B) 167,121 167,965 168,837 169,741 170,644
Total tangible assets (non-GAAP) (E) = (D) - (B) $ 7,745,406 $ 7,687,742 $ 7,771,648 $ 7,789,693 $ 7,792,709
Tangible common equity to tangible assets (Non-GAAP) (G) = (C) / (E) 7.22 % 7.20 % 7.08 % 6.72 % 6.91 %
Non–GAAP Reconciliation of Tangible Book Value Per Share
(Dollars in Thousands, Unaudited)
Three Months Ended
June 30, March 31, December 31, September 30, June 30,
2024 2024 2023 2023 2023
Total stockholders' equity (GAAP) (A) $ 726,665 $ 721,250 $ 718,812 $ 693,369 $ 709,243
Intangible assets (end of period) (B) 167,121 167,965 168,837 169,741 170,644
Total tangible common equity (non-GAAP) (C) = (A) - (B) $ 559,544 $ 553,285 $ 549,975 $ 523,628 $ 538,599
Common shares outstanding (D) 43,712,059 43,726,380 43,652,063 43,648,501 43,645,216
Tangible book value per common share (non-GAAP) (E) = (C) / (D) $ 12.80 $ 12.65 $ 12.60 $ 12.00 $ 12.34
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HORIZON BANCORP, INC. AND SUBSIDIARIES
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.