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;
• changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;
• the aggregate effects of elevated inflation levels in recent years;
• loss of key Horizon personnel;
• macroeconomic conditions and their impact on Horizon and its customers;
• 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;
• changes in prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;
• changes in 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;
• 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;
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
• 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.
Results of Operations
Net Income
Net income increased $2.0 million to $18.2 million, or $0.42 per share, during the three months ended September 30, 2024 when compared to $16.2 million, or $0.37 per share, for the same period in 2023. The increase from the year ago period was primarily driven by an increase in net interest income and a reduction in the effective tax rate in the current period, partially offset by an increase in non-interest expense when compared to the year ago period. Net interest income
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And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
increased by $4.8 million, or 11.5% when compared with the year ago period, driven by a modest increase in average earning assets and a 25 basis point increase in the net FTE interest margin 1 , to 2.66% in the current period.
Net income declined $6.9 million to $46.3 million, or $1.06 per share, during the nine months ended September 30, 2024 when compared to $53.2 million, or $1.22 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 non-interest income and increased provision for loan loss related to loan growth in the current period.
Net Interest Income
Net interest income increased $4.8 million during the three months ended September 30, 2024, to $46.9 million, when compared to the same period in 2023. While average earning asset growth was modest, the reported net FTE interest margin 1 increased by 25 basis points, to 2.66% for the three months ended September 30, 2024 compared to the year ago period, attributable to the favorable mix shift in both average interest earning assets toward higher-yielding loans and the funding mix toward lower cost deposit liabilities, in addition to a higher contribution to the net FTE interest margin 1 from interest-free funds. Interest accretion from the fair value of acquired loans did not contribute significantly to the third quarter net interest income, or net FTE interest margin 1 .
1 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
Following are the average balance sheets for the three months ended (dollars in thousands):
Average Balance Sheet
(Dollars in Thousands, Unaudited)
Three Months Ended
September 30, 2024 September 30, 2023
Average
Balance (8)
Interest (4)
Average
Rate (4)
Average
Balance (8)
Interest (4)
Average
Rate (4)
Assets
Interest earning assets
Federal funds sold $ 64,743 $ 860 5.28 % $ 92,305 $ 1,247 5.36 %
Interest earning deposits (7)
8,781 97 4.39 % 8,018 85 4.21 %
Federal Home Loan Bank stock (6)
53,826 1,607 11.88 % 34,509 618 7.10 %
Investment securities - taxable (1)
1,301,830 6,526 1.99 % 1,650,081 8,170 1.96 %
Investment securities - non-taxable (1)
1,125,295 7,987 2.82 % 1,220,998 8,863 2.88 %
Total investment securities 2,427,125 14,513 2.38 % 2,871,079 17,033 2.35 %
Loans receivable (2) (3)
4,775,788 75,828 6.32 % 4,280,700 63,254 5.86 %
Total interest earning assets 7,330,263 92,905 5.04 % 7,286,611 82,237 4.48 %
Non-interest earning assets
Cash and due from banks 108,609 100,331
Allowance for credit losses (52,111) (49,705)
Other assets 471,259 587,514
Total average assets $ 7,858,020 $ 7,924,751
Liabilities and Stockholders' Equity
Interest bearing liabilities
Interest bearing deposits $ 3,386,177 $ 18,185 2.14 % $ 3,267,594 $ 12,661 1.54 %
Time deposits 1,189,148 12,602 4.22 % 1,271,104 12,043 3.76 %
Borrowings 1,149,952 10,221 3.54 % 1,180,452 10,399 3.50 %
Repurchase agreements 123,524 910 2.93 % 136,784 825 2.39 %
Subordinated notes 55,681 830 5.93 % 58,983 880 5.92 %
Junior subordinated debentures issued to capital trusts 57,389 1,230 8.53 % 57,166 1,227 8.52 %
Total interest bearing liabilities 5,961,871 43,978 2.93 % 5,972,083 38,035 2.53 %
Non-interest bearing liabilities
Demand deposits 1,083,214 1,159,241
Accrued interest payable and other liabilities 74,563 77,942
Stockholders' equity 738,372 715,485
Total average liabilities and stockholders' equity $ 7,858,020 $ 7,924,751
Net FTE interest income (non-GAAP) (5)
$ 48,927 $ 44,202
Less FTE adjustments (4)
2,017 2,112
Net Interest Income $ 46,910 $ 42,090
Net FTE interest margin (Non-GAAP) (4)(5)
2.66 % 2.41 %
(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.
(8) Average balances are calculated on a daily average basis
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And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
Net interest income increased $2.0 million during the nine months ended September 30, 2024, to $135.5 million, when compared to the same period in 2023. Growth in average earning asset balances and a 1 basis point increase in the reported net FTE interest margin 2 , to 2.60% for the nine months ended September 30, 2024 compared to the year ago period drove the net interest income growth versus the year ago comparable period. The net FTE interest margin expansion over the nine months ended September 30, 2024 was modest, as the increased contribution from interest-free funds was largely offset by the contraction in the net spread between the yield on earning assets and interest-bearing liabilities.
2 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.
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And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
The following are the average balance sheets for the nine months ended (dollars in thousands):
Average Balance Sheet
(Dollars in Thousands, Unaudited)
Nine months ended
September 30, 2024 September 30, 2023
Average
Balance (8)
Interest (4)
Average
Rate (4)
Average
Balance (8)
Interest (4)
Average
Rate (4)
Assets
Interest earning assets
Federal funds sold $ 144,576 $ 5,892 5.44 % $ 43,976 $ 1,706 5.19 %
Interest earning deposits (7)
8,602 300 4.66 % 8,597 254 3.95 %
Federal Home Loan Bank stock (6)
48,553 3,911 10.76 % 32,909 1,531 6.22 %
Investment securities - taxable (1)
1,312,421 19,570 1.99 % 1,673,174 24,722 1.98 %
Investment securities - non-taxable (1)
1,135,734 24,225 2.85 % 1,258,345 27,363 2.91 %
Total investment securities 2,448,155 43,795 2.39 % 2,931,519 52,085 2.38 %
Loans receivable (2) (3)
4,629,363 215,343 6.21 % 4,216,817 179,697 5.70 %
Total interest earning assets 7,279,249 269,241 4.94 % 7,233,818 235,273 4.35 %
Non-interest earning assets
Cash and due from banks 107,578 102,264
Allowance for credit losses (50,806) (49,839)
Other assets 485,693 579,203
Total average assets $ 7,821,714 $ 7,865,446
Liabilities and Stockholders' Equity
Interest bearing liabilities
Interest bearing deposits $ 3,348,104 $ 50,889 2.03 % $ 3,362,006 $ 31,197 1.24 %
Time deposits 1,166,968 36,335 4.16 % 1,132,815 27,284 3.22 %
Borrowings 1,178,180 31,403 3.56 % 1,137,289 28,702 3.37 %
Repurchase agreements 128,887 2,871 2.98 % 138,706 2,011 1.94 %
Subordinated notes 55,629 2,490 5.98 % 58,947 2,641 5.99 %
Junior subordinated debentures issued to capital trusts 57,334 3,668 8.55 % 57,108 3,469 8.12 %
Total interest bearing liabilities 5,935,102 127,656 2.87 % 5,886,871 95,304 2.16 %
Non-interest bearing liabilities
Demand deposits 1,080,367 1,200,133
Accrued interest payable and other liabilities 79,154 71,280
Stockholders' equity 727,091 707,162
Total average liabilities and stockholders' equity $ 7,821,714 $ 7,865,446
Net FTE interest income (non-GAAP) (5)
$ 141,585 $ 139,969
Less FTE adjustments (4)
6,108 6,482
Net Interest Income $ 135,477 $ 133,487
Net FTE interest margin (Non-GAAP) (4)(5)
2.60 % 2.59 %
(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.
(8) Average balances are calculated on a daily average basis
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 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 September 30, 2024 vs.
Three Months Ended September 30, 2023 Nine Months Ended September 30, 2024 vs.
Nine Months Ended September 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 $ (387) $ (366) $ (21) $ 4,186 $ 4,096 $ 90
Interest earning deposits 12 8 4 46 — $ 46
Federal Home Loan Bank stock 989 451 538 2,380 938 $ 1,442
Investment securities - taxable (1,644) (1,744) 100 (5,152) (5,377) $ 225
Investment securities - non-taxable (692) (683) (9) (2,479) (2,623) $ 144
Loans receivable 12,485 7,646 4,839 35,361 18,412 $ 16,949
Total interest income $ 10,763 $ 5,312 $ 5,451 $ 34,342 $ 15,446 $ 18,896
Interest Expense
Interest bearing deposits 5,524 474 $ 5,050 $ 19,692 $ (130) $ 19,822
Time deposits 559 (2,027) 2,586 9,051 846 $ 8,205
Borrowings (178) (772) 594 2,701 1,055 $ 1,646
Repurchase agreements 85 (201) 286 860 (151) $ 1,011
Subordinated notes (50) (148) 98 (151) (149) $ (2)
Junior subordinated debentures issued to capital trusts 3 14 (11) 199 14 $ 185
Total interest expense 5,943 (2,660) 8,603 32,352 1,485 30,867
Net interest income $ 4,820 $ 7,972 $ (3,152) $ 1,990 $ 13,961 $ (11,971)
Non-Interest Income
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
(Dollars in Thousands) 2024 2023 2024 2023
Non-interest Income
Service charges on deposit accounts $ 3,320 $ 3,086 $ 9,664 $ 9,135
Wire transfer fees 123 120 337 345
Interchange fees 3,511 3,186 10,446 9,637
Fiduciary activities 1,394 1,206 4,081 3,728
Gains (losses) on sale of investment securities — — — (480)
Gain on sale of mortgage loans 1,622 1,582 3,144 3,372
Mortgage servicing income net of impairment 412 631 1,301 1,984
Increase in cash value of bank owned life insurance 349 1,055 965 3,051
Other income 780 964 1,987 1,675
Total non-interest income $ 11,511 $ 11,830 $ 31,925 $ 32,447
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
Total non-interest income declined $0.3 million for the three months ended September 30, 2024 compared to the same period in 2023, and declined $0.5 million for the nine months ended September 30, 2024 compared to the same period in 2023. Primary drivers of the periodic changes are noted below.
Service charges on deposit accounts increased $0.2 million for the three months ended September 30, 2024 and $0.5 million for the nine months ended September 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 $0.3 million for the three months ended September 30, 2024 and $0.8 million for the nine months ended September 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.
Mortgage servicing income decreased $0.2 million for the three months ended September 30, 2024 and $0.7 million for the nine months ended September 30, 2024, as compared to the same periods in 2023. The decrease was primarily driven by higher levels of amortization expense of mortgage servicing rights in the current period.
Cash value of bank owned life insurance decreased $0.7 million for the three months ended September 30, 2024 and $2.1 million for the nine months ended September 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 $0.3 million during the nine months ended September 30, 2024 primarily related to positive fair market value adjustments on certain marketable securities.
Non-Interest Expense
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
(Dollars in Thousands) 2024 2023 2024 2023
Non-interest Expense
Salaries and employee benefits $ 21,829 $ 20,058 $ 62,680 $ 58,932
Net occupancy expenses 3,207 3,283 9,945 10,095
Data processing 2,977 2,999 8,020 8,684
Professional fees 676 707 1,997 1,873
Outside services and consultants 3,677 2,316 10,094 7,548
Loan expense 1,034 1,120 2,791 3,635
FDIC insurance expense 1,204 1,300 3,839 2,680
Core deposit intangible amortization 844 903 2,560 2,709
Other losses 297 188 828 543
Other expense 3,527 3,294 11,147 10,255
Total non-interest expense $ 39,272 $ 36,168 $ 113,901 $ 106,954
Non-interest expense increased $3.1 million for the three months ended September 30, 2024 compared to the same period in 2023, primarily the result of higher expenses related to outside services and consultants, salaries and employee benefits, and other expenses, which was partially mitigated by lower expenses related to FDIC insurance expense and net occupancy expense. Non-interest expense increased $6.9 million for the nine months ended September 30, 2024 compared to the same period in 2023, primarily the result of higher expenses related to salaries and employee benefits, outside services and consultants, FDIC insurance, and other expense.
Salaries and employee benefits expense increased by $1.8 million for the three months ended September 30, 2024 , and $3.7 million for the nine months ended September 30, 2024 , when compared to the same periods a year ago. The increase
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And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
in both periods is partially attributable to growth in salary expense related to ongoing hiring efforts in revenue generating roles in commercial lending, equipment finance and treasury management. In addition, the current period was unfavorably impacted by an expense related to a legacy benefits program and additional compensation-related accrual relative to the prior periods.
Outside services and consultant expense increased by $1.4 million for the three months ended September 30, 2024 , and $2.5 million for the nine months ended September 30, 2024 , when compared to the same periods a year ago. The increase in both periods is related to ongoing strategic initiatives .
FDIC insurance expense increased by $1.2 million in the nine months ended September 30, 2024 compared to the year ago period. The increase in the period related to higher incurred assessment rates.
Other expenses, which includes corporate and other service expenses, increased by $0.2 million for the three months ended September 30, 2024 when compared to the same period in 2023, and increased by $0.9 million for the nine months ended September 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 Nine Months Ended
September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023
Allowance for Credit Losses on Loans
Balance at beginning of period $ 52,215 $ 49,976 $ 50,029 $ 50,464
Provision for credit losses on loans 1,044 520 4,128 856
Net loan (charge-offs) recoveries:
Commercial $ 52 $ (217) $ 167 $ (593)
Residential Real estate 9 39 18 55
Mortgage warehouse — — — —
Consumer (439) (619) (1,461) (1,083)
Total net loan charge-offs $ (378) $ (797) $ (1,276) $ (1,621)
Balance at end of period $ 52,881 $ 49,699 $ 52,881 $ 49,699
Liability for Unfunded Lending Commitments
Balance at beginning of period $ 705 $ 989 $ 615 $ 403
Provision (reversal) for credit losses on unfunded lending commitments — (257) 90 329
Balance at end of period $ 705 $ 732 $ 705 $ 732
Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments $ 53,586 $ 50,431 $ 53,586 $ 50,431
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 third quarter of 2024, the Company recorded a provision for credit losses on loans of $1.0 million. This compares to a provision for credit losses on loans of $0.3 million during the third quarter of 2023. The increase in the provision for credit losses when compared to the year ago period was primarily attributable to changes in loan mix and in the economic forecast.
For the three months ended September 30, 2024, net loan charge-offs decreased by $0.4 million to $0.4 million, compared to $0.8 million in the third quarter of last year.
The provision for credit losses on loans of $4.2 million for the nine months ended September 30, 2024 increased by $3.0 million when compared to the prior year period, which is primarily attributable to loan growth and the change in loan mix.
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And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
For the nine months ended September 30, 2024, net loan charge-offs decreased by $0.3 million to $1.3 million compared to $1.6 million in the prior year period.
The Company’s allowance for credit losses as a percentage of period-end loans HFI was 1.10% at September 30, 2024, compared to 1.14% at September 30, 2023.
As of September 30, 2024, the liability for unfunded lending commitments was relatively unchanged at $0.7 million when compared to the third quarter of last year.
Income Taxes
The Company’s income tax expense for the third quarter of 2024 was $0.1 million c ompared to $1.3 million for the third quarter of 2023, resulting in effective tax rates of 0.4% and 7.3%, respectively. The decrease in the effective tax rate for the third quarter 2024 is primarily due to the increase in the net realizable tax credits for the current year .
The Company’s income tax expense for the first nine months of 2024 was $3.0 million compared to $4.6 million for the same period in 2023, resulting in effective tax rates of 6.0% and 8.0%, respectively. The decrease in the effective tax rate for the first nine months 2024 is primarily due to the increase in net realizable tax credits in the current period.
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 $13.0 million, or 0.2%, as of September 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 $291.7 million over the period, or 55.4%, to $234.8 million as of September 30, 2024, and a decrease in total securities balances of $63.3 million, to $2.4 billion, partially offset by growth in loans HFI of $383.5 million, or 8.8%, to $4.8 billion as of September 30, 2024.
Total investment securities decreased $63.3 million, or 2.5%, to $2.4 billion as of September 30, 2024 from $2.5 billion as of December 31, 2023, primarily as a result of amortization and maturities. There were no purchases of investment securities during the first nine months of 2024.
Total loans HFI increased to $4.8 billion as of September 30, 2024 compared to $4.4 billion as of December 31, 2023, led by organic commercial loan growth of $239.1 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 increased by $62.1 million, or 1.1%, to $5.7 billion on September 30, 2024 when compared to balances as of December 31, 2023. The Company maintains a granular and tenured deposit base, with a continued focus on core commercial and consumer deposit gathering.
Total borrowings decreased by $87.9 million, or 6.5%, to $1.3 billion as of September 30, 2024 when compared to balances as of December 31, 2023, primarily related to repayment of a portion of Federal Home Loan Bank advances in August.
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And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
Investment securities were comprised of the following as of (dollars in thousands):
September 30, 2024 December 31, 2023
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 69,421 $ 63,245 $ 72,938 $ 64,377
State and municipal 351,507 306,025 353,299 304,030
Federal agency collateralized mortgage obligations 3,413 3,152 3,931 3,580
Federal agency mortgage–backed pools 151,844 132,696 161,130 137,297
Corporate notes 40,559 36,052 43,317 37,967
Total available for sale investment securities $ 616,744 $ 541,170 $ 634,615 $ 547,251
Held to maturity
U.S. Treasury and federal agencies $ 283,851 $ 252,034 $ 287,259 $ 245,960
State and municipal 1,056,869 908,320 1,088,499 939,361
Federal agency collateralized mortgage obligations 47,232 40,791 51,325 43,479
Federal agency mortgage–backed pools 308,725 271,084 323,649 275,028
Private labeled mortgage–backed pools 29,975 26,539 32,329 27,734
Corporate notes 161,885 141,679 162,734 137,196
Total held to maturity investment securities $ 1,888,537 $ 1,640,447 $ 1,945,795 $ 1,668,758
Investment securities available for sale decreased $6.1 million since December 31, 2023 to $541.2 million as of September 30, 2024, and securities held to maturity decreased $57.3 million since December 31, 2023 to $1.9 billion as of September 30, 2024. The decrease in total investments was due to principal amortization and maturities, and there were no purchases of investment securities through the first nine months of 2024.
Credit Quality
The ACL balance at September 30, 2024 was $52.9 million, or 1.10% of period-end loans HFI compared to an ACL balance of $50.0 million at December 31, 2023 or 1.09% of loans HFI. The increase in the ACL was primarily due to the growth in commercial loans.
As of September 30, 2024, total non-accrual loans increased by $3.9 million, or 19.6%, from December 31, 2023, to 0.49% of total loans HFI. Total non-performing assets increased $3.8 million, or 17.4%, from December 31, 2023, to 0.32% of total assets.
During the three months ended September 30, 2024, net charge-offs were $0.4 million, or 3 basis points annualized of average loans in the period, down from $0.7 million, or 7 basis point annualized of average loans in the year ago comparable period. During the nine months ended September 30, 2024, net charge-offs were $1.3 million, or 4 basis points annualized of average loans in the period, compared with $1.6 million, or 4 basis point annualized of average loans in the year ago comparable period.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
Credit Quality
(Dollars in Thousands Except Ratios, Unaudited)
Quarter Ended
September 30, December 31,
2024 2023
Non-accrual loans
Commercial $ 6,830 $ 7,362
Residential Real estate 9,529 8,058
Mortgage warehouse — —
Consumer 7,208 4,290
Total non-accrual loans $ 23,567 $ 19,710
90 days and greater delinquent - accruing interest $ 819 $ 559
Total non-performing loans $ 24,386 $ 20,269
Other real estate owned
Commercial $ 1,158 $ 1,124
Residential Real estate — 182
Mortgage warehouse — —
Consumer 36 205
Total other real estate owned $ 1,194 $ 1,511
Total non-performing assets $ 25,580 $ 21,780
Net charge-offs (recoveries)
Commercial $ (52) $ 233
Residential Real estate (9) 21
Mortgage warehouse — —
Consumer 439 531
Total net charge-offs $ 378 $ 785
Allowance for credit losses
Commercial $ 32,854 $ 29,736
Residential Real estate 2,675 2,503
Mortgage warehouse 862 481
Consumer 16,490 17,309
Total allowance for credit losses $ 52,881 $ 50,029
Credit quality ratios
Non-accrual loans to HFI loans 0.49 % 0.45 %
Non-performing assets to total assets 0.32 % 0.27 %
Annualized net charge-offs of average total loans 0.03 % 0.07 %
Allowance for credit losses to HFI loans 1.10 % 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 Nine Months ended September 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 September 30, 2024, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.52 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 $291.7 million during the first nine 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 $54.7 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 $322.4 million mainly due to growth in the loan portfolio, which used cash of $413.4 million. Financing activities used cash of $24.0 million, largely resulting from the repayment of long-term borrowings of $563.1 million and $21.3 million in dividends paid on common stock during the first nine months of 2024.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2024. Stockholders’ equity totaled $754.8 million as of September 30, 2024, compared to $718.8 million as of December 31, 2023. For the nine months ended September 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 and the improved market value of securities available for sale, offset by cash dividends paid to common shareholders.
As of September 30, 2024, the ratio of total stockholders’ equity to total assets is 9.52%. Book value per common share was $17.27, increasing $0.80 compared to December 31, 2023.
Tangible common equity 1 totaled $588.5 million at September 30, 2024, and the ratio of tangible common equity to tangible assets 1 was 7.58% at September 30, 2024. Tangible book value, which excludes intangible assets from total equity, per common share 1 was $13.46, increasing $0.87 compared to December 31, 2023.
Horizon declared common stock dividends in the amount of $0.48 per share during the first nine months of 2024 and $0.48 per share for the same period in 2023. The dividend payout ratio (dividends as a percent of basic earnings per share) was 45.3% and 39.3% for the first nine 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 Nine Months ended September 30, 2024 and 2023
Use of Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, this document refers to non-GAAP financial measures, which Horizon believes are helpful to investors and provide a greater understanding of our business and financial results without the impact of items or events that may obscure trends in the Company’s underlying performance. 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 document 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 Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2024 2024 2024 2023 2023 2024 2023
Interest income (GAAP) (A) $ 90,888 $ 86,981 $ 85,264 $ 83,514 $ 80,125 $ 263,133 $ 228,791
Taxable-equivalent adjustment:
Investment securities - tax exempt (1)
$ 1,677 $ 1,695 $ 1,715 $ 1,799 $ 1,861 5,087 5,746
Loan receivable (2)
340 328 353 314 251 1,021 736
Total taxable-equivalent adjustment (3)
$ 2,017 $ 2,023 $ 2,068 $ 2,113 $ 2,112 $ 6,108 $ 6,482
Interest income (non-GAAP) (B) $ 92,905 $ 89,004 $ 87,332 $ 85,627 $ 82,237 $ 269,241 $ 235,273
Interest expense (GAAP) (C) $ 43,978 $ 41,702 $ 41,976 $ 41,257 $ 38,035 $ 127,656 $ 95,304
Net interest income (GAAP) (D) =(A) - (C) $ 46,910 $ 45,279 $ 43,288 $ 42,257 $ 42,090 $ 135,477 $ 133,487
Net FTE interest income (non-GAAP) (E) = (B) - (C) $ 48,927 $ 47,302 $ 45,356 $ 44,370 $ 44,202 $ 141,585 $ 139,969
Average interest earning assets (F) $ 7,330,263 $ 7,212,788 $ 7,293,559 $ 7,239,034 $ 7,286,611 $ 7,279,249 $ 7,233,818
Net FTE interest margin (non-GAAP) (G) = (E*) / (F) 2.66 % 2.64 % 2.50 % 2.43 % 2.41 % 2.60 % 2.59 %
(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
(3) 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 for tax-exempt loans and securities to an FTE basis utilizing a 21% tax rate
*Annualized
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2024 and 2023
Non–GAAP Reconciliation of Return on Average Tangible Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2024 2024 2024 2023 2023 2024 2023
Net income (loss) (GAAP) (A) $ 18,180 $ 14,140 $ 13,991 $ (25,215) $ 16,205 $ 46,311 $ 53,196
Average stockholders' equity (B) $ 738,372 $ 726,332 $ 725,083 $ 702,793 $ 715,485 $ 727,091 $ 707,162
Average intangible assets (C) 166,819 167,659 168,519 169,401 170,301 $ 167,663 $ 171,199
Average tangible equity (Non-GAAP) (D) = (B) - (C) $ 571,553 $ 558,673 $ 556,564 $ 533,392 $ 545,184 $ 559,428 $ 535,963
Return on average tangible common equity ("ROACE") (non-GAAP) (E) = (A*) / (D) 12.65 % 10.18 % 10.11 % (18.76) % 11.79 % 11.06 % 13.27 %
*Annualized
Non–GAAP Reconciliation of Tangible Common Equity to Tangible Assets
(Dollars in Thousands, Unaudited)
Three Months Ended
September 30, June 30, March 31, December 31, September 30,
2024 2024 2024 2023 2023
Total stockholders' equity (GAAP) (A) $ 754,822 $ 726,665 $ 721,250 $ 718,812 $ 693,369
Intangible assets (end of period) (B) 166,278 167,121 167,965 168,837 169,741
Total tangible common equity (non-GAAP) (C) = (A) - (B) $ 588,544 $ 559,544 $ 553,285 $ 549,975 $ 523,628
Total assets (GAAP) (D) 7,927,457 7,912,527 7,855,707 7,940,485 7,959,434
Intangible assets (end of period) (B) 166,278 167,121 167,965 168,837 169,741
Total tangible assets (non-GAAP) (E) = (D) - (B) $ 7,761,179 $ 7,745,406 $ 7,687,742 $ 7,771,648 $ 7,789,693
Tangible common equity to tangible assets (Non-GAAP) (G) = (C) / (E) 7.58 % 7.22 % 7.20 % 7.08 % 6.72 %
Non–GAAP Reconciliation of Tangible Book Value Per Share
(Dollars in Thousands, Unaudited)
Three Months Ended
September 30, June 30, March 31, December 31, September 30,
2024 2024 2024 2023 2023
Total stockholders' equity (GAAP) (A) $ 754,822 $ 726,665 $ 721,250 $ 718,812 $ 693,369
Intangible assets (end of period) (B) 166,278 167,121 167,965 168,837 169,741
Total tangible common equity (non-GAAP) (C) = (A) - (B) $ 588,544 $ 559,544 $ 553,285 $ 549,975 $ 523,628
Common shares outstanding (D) 43,712,059 43,712,059 43,726,380 43,652,063 43,648,501
Tangible book value per common share (non-GAAP) (E) = (C) / (D) $ 13.46 $ 12.80 $ 12.65 $ 12.60 $ 12.00
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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.