HORIZON BANCORP INC /IN/ - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from________to
Commission file number 0-10792
HORIZON BANCORP, INC.
(Exact name of registrant as specified in its charter)
| Indiana | 35-1562417 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
515 Franklin Street, Michigan City, Indiana 46360
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (219) 879-0211
Former name, former address and former fiscal year, if changed since last report: N/A
____________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||
| Common stock, no par value | HBNC | The NASDAQ Stock Market, LLC | |||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☒ | ||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 43,520,694 shares of Common Stock, no par value, at November 5, 2021.
2
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | 971,817 | $ | 249,711 | |||||||
| Interest earning time deposits | 5,767 | 8,965 | |||||||||
| Investment securities, available for sale | 1,669,634 | 1,134,025 | |||||||||
Investment securities, held to maturity (fair value of $768,099 and $179,990) | 769,240 | 168,676 | |||||||||
| Loans held for sale | 4,811 | 13,538 | |||||||||
Loans, net of allowance for credit losses of $56,779 and $57,027 | 3,603,302 | 3,810,356 | |||||||||
| Premises and equipment, net | 93,866 | 92,416 | |||||||||
| Federal Home Loan Bank stock | 24,440 | 23,023 | |||||||||
| Goodwill | 162,788 | 151,238 | |||||||||
| Other intangible assets | 21,150 | 22,955 | |||||||||
| Interest receivable | 24,762 | 21,396 | |||||||||
| Cash value of life insurance | 97,003 | 96,751 | |||||||||
| Other assets | 85,660 | 93,564 | |||||||||
| Total assets | $ | 7,534,240 | $ | 5,886,614 | |||||||
| Liabilities | |||||||||||
| Deposits | |||||||||||
| Non–interest bearing | $ | 1,324,757 | $ | 1,053,242 | |||||||
| Interest bearing | 4,655,142 | 3,477,891 | |||||||||
| Total deposits | 5,979,899 | 4,531,133 | |||||||||
| Borrowings | 670,753 | 475,000 | |||||||||
| Subordinated notes | 58,713 | 58,603 | |||||||||
| Junior subordinated debentures issued to capital trusts | 56,722 | 56,548 | |||||||||
| Interest payable | 1,427 | 2,712 | |||||||||
| Other liabilities | 58,184 | 70,402 | |||||||||
| Total liabilities | 6,825,698 | 5,194,398 | |||||||||
| Commitments and contingent liabilities | |||||||||||
| Stockholders’ Equity | |||||||||||
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares | — | — | |||||||||
Common stock, no par value, Authorized 99,000,000 shares | |||||||||||
Issued 43,609,536 and 43,905,631 shares, Outstanding 43,520,694 and 43,880,562 shares | — | — | |||||||||
| Additional paid-in capital | 351,954 | 362,945 | |||||||||
| Retained earnings | 348,943 | 301,419 | |||||||||
| Accumulated other comprehensive income | 7,645 | 27,852 | |||||||||
| Total stockholders’ equity | 708,542 | 692,216 | |||||||||
| Total liabilities and stockholders’ equity | $ | 7,534,240 | $ | 5,886,614 | |||||||
See notes to condensed consolidated financial statements
3
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Interest Income | |||||||||||||||||||||||
| Loans receivable | $ | 40,392 | $ | 44,051 | $ | 120,446 | $ | 132,927 | |||||||||||||||
| Investment securities – taxable | 4,565 | 1,704 | 8,641 | 6,923 | |||||||||||||||||||
| Investment securities – tax exempt | 5,911 | 4,391 | 16,790 | 12,294 | |||||||||||||||||||
| Total interest income | 50,868 | 50,146 | 145,877 | 152,144 | |||||||||||||||||||
| Interest Expense | |||||||||||||||||||||||
| Deposits | 1,808 | 3,616 | 6,204 | 15,838 | |||||||||||||||||||
| Borrowed funds | 1,075 | 1,662 | 3,640 | 5,974 | |||||||||||||||||||
| Subordinated notes | 880 | 895 | 2,641 | 953 | |||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 561 | 576 | 1,678 | 2,061 | |||||||||||||||||||
| Total interest expense | 4,324 | 6,749 | 14,163 | 24,826 | |||||||||||||||||||
| Net Interest Income | 46,544 | 43,397 | 131,714 | 127,318 | |||||||||||||||||||
| Credit loss expense (recovery) | 1,112 | 2,052 | (13) | 17,709 | |||||||||||||||||||
| Net Interest Income after Credit Loss Expense (Recovery) | 45,432 | 41,345 | 131,727 | 109,609 | |||||||||||||||||||
| Non–interest Income | |||||||||||||||||||||||
| Service charges on deposit accounts | 2,291 | 2,154 | 6,682 | 6,488 | |||||||||||||||||||
| Wire transfer fees | 210 | 298 | 687 | 699 | |||||||||||||||||||
| Interchange fees | 2,587 | 2,438 | 7,819 | 6,661 | |||||||||||||||||||
| Fiduciary activities | 2,124 | 2,105 | 5,828 | 6,398 | |||||||||||||||||||
Gains on sale of investment securities (includes $0 and $1,088 for the three months ended September 30, 2021 and 2020, respectively, and $914 and $1,675 for the nine months ended September 30, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications) | — | 1,088 | 914 | 1,675 | |||||||||||||||||||
| Gain on sale of mortgage loans | 4,088 | 8,813 | 14,996 | 18,906 | |||||||||||||||||||
| Mortgage servicing income net of impairment | 336 | (1,308) | 2,052 | (4,043) | |||||||||||||||||||
| Increase in cash value of bank owned life insurance | 534 | 566 | 1,547 | 1,677 | |||||||||||||||||||
| Death benefit on bank owned life insurance | 517 | 31 | 783 | 264 | |||||||||||||||||||
| Other income | 3,357 | 515 | 3,816 | 1,163 | |||||||||||||||||||
| Total non–interest income | 16,044 | 16,700 | 45,124 | 39,888 | |||||||||||||||||||
| Non–interest Expense | |||||||||||||||||||||||
| Salaries and employee benefits | 18,901 | 18,832 | 53,502 | 51,052 | |||||||||||||||||||
| Net occupancy expenses | 2,935 | 3,107 | 9,337 | 9,549 | |||||||||||||||||||
| Data processing | 2,526 | 2,237 | 7,290 | 7,074 | |||||||||||||||||||
| Professional fees | 522 | 688 | 1,654 | 1,742 | |||||||||||||||||||
| Outside services and consultants | 2,330 | 1,561 | 6,252 | 5,235 | |||||||||||||||||||
| Loan expense | 2,645 | 2,876 | 8,574 | 7,667 | |||||||||||||||||||
| FDIC insurance expense | 279 | 570 | 1,579 | 955 | |||||||||||||||||||
| Other losses | 69 | 114 | 358 | 427 | |||||||||||||||||||
| Other expense | 4,142 | 3,422 | 11,363 | 11,287 | |||||||||||||||||||
| Total non–interest expense | 34,349 | 33,407 | 99,909 | 94,988 | |||||||||||||||||||
| Income Before Income Taxes | 27,127 | 24,638 | 76,942 | 54,509 | |||||||||||||||||||
Income tax expense (includes $0 and $228 for the three months ended September 30, 2021 and 2020, respectively, and $192 and $352 for the nine months ended September 30, 2021 and 2020, respectively, related to income tax expense from reclassification items) | 4,056 | 4,326 | 11,276 | 7,903 | |||||||||||||||||||
| Net Income | $ | 23,071 | $ | 20,312 | $ | 65,666 | $ | 46,606 | |||||||||||||||
4
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)
| Basic Earnings Per Share | $ | 0.53 | $ | 0.46 | $ | 1.50 | $ | 1.06 | |||||||||||||||
| Diluted Earnings Per Share | 0.52 | 0.46 | 1.49 | 1.06 | |||||||||||||||||||
5
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollar Amounts in Thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net Income | $ | 23,071 | $ | 20,312 | $ | 65,666 | $ | 46,606 | |||||||||||||||
| Other Comprehensive Income | |||||||||||||||||||||||
| Change in fair value of derivative instruments: | |||||||||||||||||||||||
| Change in fair value of derivative instruments for the period | 555 | (359) | 3,590 | (4,459) | |||||||||||||||||||
| Income tax effect | (117) | 75 | (754) | 936 | |||||||||||||||||||
| Changes from derivative instruments | 438 | (284) | 2,836 | (3,523) | |||||||||||||||||||
| Change in securities: | |||||||||||||||||||||||
| Unrealized appreciation (depreciation) for the period on AFS securities | (14,488) | 4,019 | (28,304) | 27,518 | |||||||||||||||||||
| Accretion (amortization) from transfer of securities from available for sale to held to maturity securities | 19 | (31) | 50 | (60) | |||||||||||||||||||
| Reclassification adjustment for securities gains realized in income | — | (1,088) | (914) | (1,675) | |||||||||||||||||||
| Income tax effect | 3,038 | (608) | 6,125 | (5,414) | |||||||||||||||||||
| Unrealized gains (losses) on securities | (11,431) | 2,292 | (23,043) | 20,369 | |||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax | (10,993) | 2,008 | (20,207) | 16,846 | |||||||||||||||||||
| Comprehensive Income | $ | 12,078 | $ | 22,320 | $ | 45,459 | $ | 63,452 | |||||||||||||||
See notes to condensed consolidated financial statements
6
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||
| Balances, July 1, 2020 | $ | — | $ | — | $ | 361,087 | $ | 269,849 | $ | 21,270 | $ | 652,206 | |||||||||||||||||||||||
| Net income | — | — | — | 20,312 | — | 20,312 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 2,008 | 2,008 | |||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 335 | — | — | 335 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock option expense | — | — | 28 | — | — | 28 | |||||||||||||||||||||||||||||
| Stock issued stock plans | — | — | 730 | — | — | 730 | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.12 per share) | — | — | — | (5,326) | — | (5,326) | |||||||||||||||||||||||||||||
| Balances, September 30, 2020 | $ | — | $ | — | $ | 362,180 | $ | 284,835 | $ | 23,278 | $ | 670,293 | |||||||||||||||||||||||
| Balances, July 1, 2021 | $ | — | $ | — | $ | 359,227 | $ | 332,509 | $ | 18,638 | $ | 710,374 | |||||||||||||||||||||||
| Net income | — | — | — | 23,071 | — | 23,071 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (10,993) | (10,993) | |||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 449 | — | — | 449 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock option expense | — | — | 13 | — | — | 13 | |||||||||||||||||||||||||||||
| Repurchase of outstanding stock | — | — | (7,607) | — | — | (7,607) | |||||||||||||||||||||||||||||
| Stock retirement plans | — | — | (128) | — | — | (128) | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.15 per share) | — | — | — | (6,637) | — | (6,637) | |||||||||||||||||||||||||||||
| Balances, September 30, 2021 | $ | — | $ | — | $ | 351,954 | $ | 348,943 | $ | 7,645 | $ | 708,542 | |||||||||||||||||||||||
7
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||
| Balances, January 1, 2020 | $ | — | $ | — | $ | 379,853 | $ | 269,738 | $ | 6,432 | $ | 656,023 | |||||||||||||||||||||||
| Net income | — | — | — | 46,606 | — | 46,606 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 16,846 | 16,846 | |||||||||||||||||||||||||||||
| — | — | — | (15,635) | — | (15,635) | ||||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 457 | — | — | 457 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | 157 | — | — | 157 | |||||||||||||||||||||||||||||
| Stock option expense | — | — | 105 | — | — | 105 | |||||||||||||||||||||||||||||
| Stock issued stock plans | — | — | 1,244 | — | — | 1,244 | |||||||||||||||||||||||||||||
| Repurchase of outstanding stock | — | — | (19,636) | — | — | (19,636) | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.36 per share) | — | — | — | (15,874) | — | (15,874) | |||||||||||||||||||||||||||||
| Balances, September 30, 2020 | $ | — | $ | — | $ | 362,180 | $ | 284,835 | $ | 23,278 | $ | 670,293 | |||||||||||||||||||||||
| Balances, January 1, 2021 | $ | — | $ | — | $ | 362,945 | $ | 301,419 | $ | 27,852 | $ | 692,216 | |||||||||||||||||||||||
| Net income | — | — | — | 65,666 | — | 65,666 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (20,207) | (20,207) | |||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 1,233 | — | — | 1,233 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | 769 | — | — | 769 | |||||||||||||||||||||||||||||
| Stock option expense | — | — | 55 | — | — | 55 | |||||||||||||||||||||||||||||
| Stock awards vested | — | — | (1,347) | — | — | (1,347) | |||||||||||||||||||||||||||||
| Repurchase of outstanding stock | — | — | (7,607) | — | — | (7,607) | |||||||||||||||||||||||||||||
| Stock retirement plans | — | — | (4,094) | — | — | (4,094) | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.41 per share) | — | — | — | (18,142) | — | (18,142) | |||||||||||||||||||||||||||||
| Balances, September 30, 2021 | $ | — | $ | — | $ | 351,954 | $ | 348,943 | $ | 7,645 | $ | 708,542 | |||||||||||||||||||||||
See notes to condensed consolidated financial statements
8
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar Amounts in Thousands)
| Nine Months Ended | |||||||||||
| September 30 | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 65,666 | $ | 46,606 | |||||||
| Items not requiring (providing) cash | |||||||||||
| Provision for (recovery of) credit losses | (13) | 17,709 | |||||||||
| Depreciation and amortization | 8,085 | 7,539 | |||||||||
| Share based compensation | 55 | 105 | |||||||||
| Mortgage servicing rights income | 90 | (630) | |||||||||
| Mortgage servicing rights net impairment | (2,142) | 4,673 | |||||||||
| Premium amortization on securities, net | 7,279 | 6,649 | |||||||||
| Gain on sale of investment securities | (914) | (1,675) | |||||||||
| Gain on sale of mortgage loans | (14,996) | (18,906) | |||||||||
| Proceeds from sales of loans | 366,004 | 436,285 | |||||||||
| Loans originated for sale | (342,281) | (426,344) | |||||||||
| Change in cash value life insurance | (1,547) | (1,677) | |||||||||
| Gain on sale of other real estate owned | (76) | (119) | |||||||||
| Net change in: | |||||||||||
| Interest receivable | (2,847) | (1,628) | |||||||||
| Interest payable | (1,301) | (581) | |||||||||
| Other assets | 11,200 | (7,048) | |||||||||
| Other liabilities | (3,443) | 1,873 | |||||||||
| Net cash provided by operating activities | 88,819 | 62,831 | |||||||||
| Investing Activities | |||||||||||
| Purchases of securities available for sale | (820,485) | (396,133) | |||||||||
| Proceeds from sales, maturities, calls and principal repayments of securities available for sale | 250,808 | 237,645 | |||||||||
| Purchases of securities held to maturity | (625,397) | — | |||||||||
| Proceeds from maturities of securities held to maturity | 23,368 | 26,359 | |||||||||
| Net change in interest earning time deposits | 3,198 | (758) | |||||||||
| Change in FHLB stock | (1,417) | (576) | |||||||||
| Net change in loans | 412,873 | (394,167) | |||||||||
| Proceeds on the sale of OREO and repossessed assets | 1,119 | 1,426 | |||||||||
| Change in premises and equipment, net | (462) | (4,252) | |||||||||
| Death benefit on bank owned life insurance | 783 | 264 | |||||||||
| Repurchase of outstanding stock | (7,607) | (19,636) | |||||||||
| Net cash received in branch acquisition | 616,832 | — | |||||||||
| Net cash used in investing activities | (146,387) | (549,828) | |||||||||
| Financing Activities | |||||||||||
| Net change in: | |||||||||||
| Deposits | 602,357 | 405,287 | |||||||||
| Borrowings | 196,037 | 37,654 | |||||||||
| Net change from issuance of stock | (578) | 1,401 | |||||||||
| Net proceeds from issuance of subordinated notes | — | 58,824 | |||||||||
| Dividends paid on common stock | (18,142) | (15,874) | |||||||||
| Net cash provided by financing activities | 779,674 | 487,292 | |||||||||
9
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar Amounts in Thousands)
| Net Change in Cash and Cash Equivalents | 722,106 | 295 | |||||||||
| Cash and Cash Equivalents, Beginning of Period | 249,711 | 98,831 | |||||||||
| Cash and Cash Equivalents, End of Period | $ | 971,817 | $ | 99,126 | |||||||
| Additional Supplemental Information | |||||||||||
| Interest paid | $ | 15,448 | $ | 25,407 | |||||||
| Income taxes paid | 1,225 | 9,825 | |||||||||
| Transfer of loans to other real estate and repossessed assets | 964 | 1,795 | |||||||||
| Transfer of premises to other real estate | 1,753 | — | |||||||||
See notes to condensed consolidated financial statements
10
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 1 - Accounting Policies
The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp, Inc. (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”), which is an Indiana commercial bank. All inter–company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2021 and September 30, 2020 are not necessarily indicative of the operating results for the full year of 2021 or 2020. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.
Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10–K for 2020 filed with the Securities and Exchange Commission on February 26, 2021. The condensed consolidated balance sheet of Horizon as of December 31, 2020 has been derived from the audited balance sheet as of that date.
On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of September 30, 2021, Horizon had repurchased a total of 803,349 shares at an average price per share of $16.89. In addition to the stock repurchase program, Horizon agreed to repurchase 1,000,000 shares at a price per share of $15.19 from an individual shareholder on March 6, 2020.
Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted–average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
The following table shows computation of basic and diluted earnings per share.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Basic earnings per share | |||||||||||||||||||||||
| Net income | $ | 23,071 | $ | 20,312 | $ | 65,666 | $ | 46,606 | |||||||||||||||
| Weighted average common shares outstanding | 43,810,729 | 43,862,435 | 43,893,194 | 44,099,862 | |||||||||||||||||||
| Basic earnings per share | $ | 0.53 | $ | 0.46 | $ | 1.50 | $ | 1.06 | |||||||||||||||
| Diluted earnings per share | |||||||||||||||||||||||
| Net income | $ | 23,071 | $ | 20,312 | $ | 65,666 | $ | 46,606 | |||||||||||||||
| Weighted average common shares outstanding | 43,810,729 | 43,862,435 | 43,893,194 | 44,099,862 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Restricted stock | 99,666 | 8,246 | 102,446 | 32,574 | |||||||||||||||||||
| Stock options | 48,475 | 33,200 | 51,403 | 33,214 | |||||||||||||||||||
| Weighted average common shares outstanding | 43,958,870 | 43,903,881 | 44,047,043 | 44,165,650 | |||||||||||||||||||
| Diluted earnings per share | $ | 0.52 | $ | 0.46 | $ | 1.49 | $ | 1.06 | |||||||||||||||
11
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
There were 142,705 and 153,582 shares for the three and nine months ended September 30, 2021, which were not included in the computation of diluted earnings per share because they were non–dilutive. There were 492,273 and 273,776 shares for the three and nine months ended September 30, 2020, which were not included in the computation of diluted earnings per share because they were non–dilutive.
Horizon has share–based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2020 Annual Report on Form 10–K. Also, the Company's shareholders approved the 2021 Omnibus Equity Incentive Plan at its Annual Meeting on May 6, 2021, adding 1.4 million additional shares to the plan and with no other significant changes from the Company's previous plan.
Accounting Guidance Issued But Not Yet Adopted
FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rates on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:
•A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria.
•When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.
The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022.
ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform.
The Company has been conducting monthly meetings to address contracts and hedge accounting relationships that reference LIBOR. All contracts referencing LIBOR as an interest rate have been identified and are in the process of being rewritten or refinanced by December 31, 2021, except for commercial loan interest rate swaps. Hedge accounting relationships referencing LIBOR will be modified by the counter parties. The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements.
12
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 2 – Acquisitions
On September 17, 2021, Horizon Bank completed the purchase and assumption of certain assets and liabilities of 14 former TCF National Bank (“TCF”) branches in 11 Michigan counties. Net cash of $618.2 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans of $206.3 million, fixed assets of $6.9 million, cash of $4.0 million and a 1.75% premium on deposits. Customer deposit balances were recorded at $846.4 million and a core deposit intangible of $887,000 was recorded in the transaction, which will be amortized over 10 years on a straight line basis. Goodwill of $11.5 million was generated in the transaction.
Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the TCF branches is detailed in the following table. Final estimates of fair value on the date of acquisition have not been received yet. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.
| Assets | Liabilities | |||||||||||||||||||
| Cash and due from banks | $ | 4,012 | Deposits | |||||||||||||||||
| Loans | Non-interest bearing | $ | 181,403 | |||||||||||||||||
| Commercial | 99,893 | NOW accounts | 303,050 | |||||||||||||||||
| Residential mortgage | 54,218 | Savings and money market | 262,488 | |||||||||||||||||
| Consumer | 52,224 | Certificates of deposit | 99,468 | |||||||||||||||||
| Total loans | 206,335 | Total deposits | 846,409 | |||||||||||||||||
| Premises and equipment, net | 6,901 | Interest payable | 16 | |||||||||||||||||
| Goodwill | 11,550 | Other liabilities | 2,206 | |||||||||||||||||
| Core deposit intangible | 887 | |||||||||||||||||||
| Interest receivable | 519 | |||||||||||||||||||
| Other assets | 260 | |||||||||||||||||||
| Total assets purchased | $ | 230,204 | Total liabilities assumed | $ | 848,631 | |||||||||||||||
| Net cash received | $ | (618,167) | ||||||||||||||||||
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past due and non–accrual status, borrower credit scores and recent loan–to–value percentages. Management continues to complete its evaluation to determine if any loans were purchased with credit deterioration.
13
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 3 – Securities
The fair value of securities is as follows:
| September 30, 2021 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 119,159 | $ | 136 | $ | (707) | $ | 118,588 | |||||||||||||||
| State and municipal | 1,108,057 | 22,276 | (11,210) | 1,119,123 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 73,922 | 1,607 | (4) | 75,525 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 236,432 | 2,341 | (1,068) | 237,705 | |||||||||||||||||||
| Private labeled mortgage-backed pools | 32,948 | 274 | (285) | 32,937 | |||||||||||||||||||
| Corporate notes | 84,672 | 1,201 | (117) | 85,756 | |||||||||||||||||||
| Total available for sale investment securities | $ | 1,655,190 | $ | 27,835 | $ | (13,391) | $ | 1,669,634 | |||||||||||||||
| Held to maturity | |||||||||||||||||||||||
| State and municipal | $ | 283,858 | $ | 8,170 | $ | (2,909) | $ | 289,119 | |||||||||||||||
| Federal agency collateralized mortgage obligations | 69,537 | 10 | (793) | 68,754 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 215,873 | 167 | (3,542) | 212,498 | |||||||||||||||||||
| Private labeled mortgage-backed pools | 66,298 | 7 | (753) | 65,552 | |||||||||||||||||||
| Corporate notes | 133,674 | — | (1,498) | 132,176 | |||||||||||||||||||
| Total held to maturity investment securities | $ | 769,240 | $ | 8,354 | $ | (9,495) | $ | 768,099 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 19,750 | $ | — | $ | (35) | $ | 19,715 | |||||||||||||||
| State and municipal | 803,100 | 35,014 | (271) | 837,843 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 144,022 | 3,448 | (17) | 147,453 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 114,484 | 4,315 | — | 118,799 | |||||||||||||||||||
| Corporate notes | 9,007 | 1,208 | — | 10,215 | |||||||||||||||||||
| Total available for sale investment securities | $ | 1,090,363 | $ | 43,985 | $ | (323) | $ | 1,134,025 | |||||||||||||||
| Held to maturity | |||||||||||||||||||||||
| State and municipal | $ | 157,421 | $ | 11,035 | $ | — | $ | 168,456 | |||||||||||||||
| Federal agency collateralized mortgage obligations | 2,661 | 36 | — | 2,697 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 8,594 | 243 | — | 8,837 | |||||||||||||||||||
| Total held to maturity investment securities | $ | 168,676 | $ | 11,314 | $ | — | $ | 179,990 | |||||||||||||||
The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2021 and December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
14
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||
| Within one year | $ | 28,888 | $ | 28,885 | $ | 44,206 | $ | 44,192 | |||||||||||||||
| One to five years | 133,651 | 134,899 | 61,594 | 63,006 | |||||||||||||||||||
| Five to ten years | 320,561 | 322,940 | 136,857 | 145,102 | |||||||||||||||||||
| After ten years | 828,788 | 836,743 | 589,200 | 615,473 | |||||||||||||||||||
| 1,311,888 | 1,323,467 | 831,857 | 867,773 | ||||||||||||||||||||
| Federal agency collateralized mortgage obligations | 73,922 | 75,525 | 144,022 | 147,453 | |||||||||||||||||||
| Federal agency mortgage–backed pools | 236,432 | 237,705 | 114,484 | 118,799 | |||||||||||||||||||
| Private labeled mortgage–backed pools | $ | 32,948 | $ | 32,937 | $ | — | $ | — | |||||||||||||||
| Total available for sale investment securities | $ | 1,655,190 | $ | 1,669,634 | $ | 1,090,363 | $ | 1,134,025 | |||||||||||||||
| Held to maturity | |||||||||||||||||||||||
| Within one year | $ | 4,612 | $ | 4,666 | $ | 7,302 | $ | 7,327 | |||||||||||||||
| One to five years | 45,148 | 46,573 | 42,742 | 44,358 | |||||||||||||||||||
| Five to ten years | 185,847 | 188,962 | 82,087 | 88,300 | |||||||||||||||||||
| After ten years | 181,925 | 181,094 | 25,290 | 28,471 | |||||||||||||||||||
| 417,532 | 421,295 | 157,421 | 168,456 | ||||||||||||||||||||
| Federal agency collateralized mortgage obligations | 69,537 | 68,754 | 2,661 | 2,697 | |||||||||||||||||||
| Federal agency mortgage–backed pools | 215,873 | 212,498 | 8,594 | 8,837 | |||||||||||||||||||
| Private labeled mortgage–backed pools | 66,298 | 65,552 | — | — | |||||||||||||||||||
| Total held to maturity investment securities | $ | 769,240 | $ | 768,099 | $ | 168,676 | $ | 179,990 | |||||||||||||||
The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
| September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Investment Securities | |||||||||||||||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 108,551 | $ | (688) | $ | 2,731 | $ | (19) | $ | 111,282 | $ | (707) | |||||||||||||||||||||||
| State and municipal | 680,184 | (13,892) | 5,316 | (227) | 685,500 | (14,119) | |||||||||||||||||||||||||||||
| Federal agency collateralized mortgage obligations | 57,191 | (797) | — | — | 57,191 | (797) | |||||||||||||||||||||||||||||
| Federal agency mortgage–backed pools | 363,453 | (4,610) | — | — | 363,453 | (4,610) | |||||||||||||||||||||||||||||
| Private labeled mortgage–backed pools | 77,208 | (1,038) | — | — | 77,208 | (1,038) | |||||||||||||||||||||||||||||
| Corporate notes | 144,177 | (1,615) | — | — | 144,177 | (1,615) | |||||||||||||||||||||||||||||
| Total temporarily impaired securities | $ | 1,430,764 | $ | (22,640) | $ | 8,047 | $ | (246) | $ | 1,438,811 | $ | (22,886) | |||||||||||||||||||||||
15
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Investment Securities | |||||||||||||||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 17,215 | $ | (35) | $ | — | $ | — | $ | 17,215 | $ | (35) | |||||||||||||||||||||||
| State and municipal | 56,287 | (242) | 1,245 | (29) | 57,532 | (271) | |||||||||||||||||||||||||||||
| Federal agency collateralized mortgage obligations | 6,358 | (17) | — | — | 6,358 | (17) | |||||||||||||||||||||||||||||
| Total temporarily impaired securities | $ | 79,860 | $ | (294) | $ | 1,245 | $ | (29) | $ | 81,105 | $ | (323) | |||||||||||||||||||||||
No allowance for credit losses for available for sale debt securities or held to maturity securities was needed at September 30, 2021 or December 31, 2020. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $13.1 million at September 30, 2021 and $8.1 million at December 31, 2020 and is excluded from the estimate of credit losses.
The U.S. government sponsored entities and agencies and mortgage–backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses.
Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities were due to changes in interest rates. Due to the contractual terms, the issuers of state and municipal securities are not allowed to settle for less than the amortized cost of the security. In addition, the Company does not intend to sell these securities prior to the recovery of the amortized cost, which may not occur until maturity.
Information regarding security proceeds, gross gains and gross losses are presented below.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Sales of securities available for sale | |||||||||||||||||||||||
| Proceeds | $ | — | $ | 17,012 | $ | 27,514 | $ | 54,194 | |||||||||||||||
| Gross gains | — | 1,094 | 914 | 1,731 | |||||||||||||||||||
| Gross losses | — | (6) | — | (56) | |||||||||||||||||||
16
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 4 – Loans
The table below identifies the Company’s loan portfolio segments and classes.
| Portfolio Segment | Class of Financing Receivable | |||||||
| Commercial | Owner occupied real estate | |||||||
| Non-owner occupied real estate | ||||||||
| Residential spec homes | ||||||||
| Development & spec land | ||||||||
| Commercial and industrial | ||||||||
| Real estate | Residential mortgage | |||||||
| Residential construction | ||||||||
| Mortgage warehouse | Mortgage warehouse | |||||||
| Consumer | Direct installment | |||||||
| Indirect installment | ||||||||
| Home equity | ||||||||
Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Class of financing receivable is defined as a group of financing receivables determined on the basis of both of the following, 1) risk characteristics of the financing receivable, and 2) an entity’s method for monitoring and assessing credit risk. Generally, the Bank does not move loans from a revolving loan to a term loan other than construction loans. Construction loans are reviewed and rewritten prior to being originated as a term loan.
The following table presents total loans outstanding by portfolio class, as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Commercial | |||||||||||
| Owner occupied real estate | $ | 521,186 | $ | 496,306 | |||||||
| Non–owner occupied real estate | 1,016,377 | 999,636 | |||||||||
| Residential spec homes | 10,142 | 10,070 | |||||||||
| Development & spec land | 31,957 | 26,372 | |||||||||
| Commercial and industrial | 593,538 | 659,887 | |||||||||
| Total commercial | 2,173,200 | 2,192,271 | |||||||||
| Real estate | |||||||||||
| Residential mortgage | 580,364 | 598,700 | |||||||||
| Residential construction | 23,176 | 25,586 | |||||||||
| Mortgage warehouse | 169,909 | 395,626 | |||||||||
| Total real estate | 773,449 | 1,019,912 | |||||||||
| Consumer | |||||||||||
| Direct installment | 67,176 | 38,046 | |||||||||
| Indirect installment | 365,756 | 357,511 | |||||||||
| Home equity | 280,500 | 259,643 | |||||||||
| Total consumer | 713,432 | 655,200 | |||||||||
| Total loans | 3,660,081 | 3,867,383 | |||||||||
| Allowance for credit losses | (56,779) | (57,027) | |||||||||
| Net loans | $ | 3,603,302 | $ | 3,810,356 | |||||||
17
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
As of September 30, 2021 and December 31, 2020, Federal Paycheck Protection Program (“PPP”) loans totaled approximately $92.3 million and $208.9 million, respectively, and are included with commercial loans. Total loans include net deferred loan costs of $316,000 at September 30, 2021 and net deferred loan fees of $1.7 million at December 31, 2020, respectively.
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short–term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company's commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner–occupied commercial real estate loans versus non–owner occupied loans.
Real Estate and Consumer
With respect to residential loans that are secured by 1–4 family residences and are generally owner occupied, the Company generally establishes a maximum loan–to–value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1–4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Mortgage Warehousing
Horizon's mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon's agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan
18
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.
Based on these agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.
Non–performing Loans
The following table presents non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructurings (“TDRs”) by class of loans:
| September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Non–accrual | Loans Past Due Over 90 Days Still Accruing | Non–performing TDRs | Performing TDRs | Total Non–performing Loans | Non–accrual with no Allowance for Credit Losses | ||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 8,651 | $ | — | $ | — | $ | 603 | $ | 9,254 | $ | 4,074 | |||||||||||||||||||||||
| Non–owner occupied real estate | 2,853 | — | 292 | — | 3,145 | 3,145 | |||||||||||||||||||||||||||||
| Residential spec homes | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Development & spec land | 964 | — | — | — | 964 | 964 | |||||||||||||||||||||||||||||
| Commercial and industrial | 2,758 | — | — | — | 2,758 | 2,021 | |||||||||||||||||||||||||||||
| Total commercial | 15,226 | — | 292 | 603 | 16,121 | 10,204 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 6,291 | — | 911 | 1,439 | 8,641 | 8,641 | |||||||||||||||||||||||||||||
| Residential construction | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Mortgage warehouse | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total real estate | 6,291 | — | 911 | 1,439 | 8,641 | 8,641 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | 16 | 3 | — | — | 19 | 19 | |||||||||||||||||||||||||||||
| Indirect installment | 817 | 56 | — | — | 873 | 873 | |||||||||||||||||||||||||||||
| Home equity | 2,787 | 141 | 401 | 391 | 3,720 | 3,720 | |||||||||||||||||||||||||||||
| Total consumer | 3,620 | 200 | 401 | 391 | 4,612 | 4,612 | |||||||||||||||||||||||||||||
| Total | $ | 25,137 | $ | 200 | $ | 1,604 | $ | 2,433 | $ | 29,374 | $ | 23,457 | |||||||||||||||||||||||
19
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Non–accrual | Loans Past Due Over 90 Days Still Accruing | Non–performing TDRs | Performing TDRs | Total Non–performing Loans | Non–accrual with no Allowance for Credit Losses | ||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 10,581 | $ | — | $ | 630 | $ | 168 | $ | 11,379 | $ | 6,305 | |||||||||||||||||||||||
| Non–owner occupied real estate | 237 | — | 330 | — | 567 | 567 | |||||||||||||||||||||||||||||
| Residential spec homes | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Development & spec land | 70 | — | — | — | 70 | 70 | |||||||||||||||||||||||||||||
| Commercial and industrial | 1,826 | — | 506 | — | 2,332 | 1,847 | |||||||||||||||||||||||||||||
| Total commercial | 12,714 | — | 1,466 | 168 | 14,348 | 8,789 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 5,674 | 17 | 922 | 1,381 | 7,994 | 7,097 | |||||||||||||||||||||||||||||
| Residential construction | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Mortgage warehouse | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total real estate | 5,674 | 17 | 922 | 1,381 | 7,994 | 7,097 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | 12 | 1 | — | — | 13 | 13 | |||||||||||||||||||||||||||||
| Indirect installment | 1,174 | 120 | — | — | 1,294 | 1,294 | |||||||||||||||||||||||||||||
| Home equity | 2,568 | 124 | 222 | 244 | 3,158 | 2,628 | |||||||||||||||||||||||||||||
| Total consumer | 3,754 | 245 | 222 | 244 | 4,465 | 3,935 | |||||||||||||||||||||||||||||
| Total | $ | 22,142 | $ | 262 | $ | 2,610 | $ | 1,793 | $ | 26,807 | $ | 19,821 | |||||||||||||||||||||||
There was no interest income recognized on non–accrual loans during the three and nine months ended September 30, 2021 and 2020, respectively, while the loans were in non–accrual status. Included in the $25.1 million of non–accrual loans and the $1.6 million of non–performing TDRs at September 30, 2021 were $2.2 million and $295,000, respectively, of loans acquired for which there were accretable yields recognized.
20
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents the payment status by class of loan, excluding non–accrual loans of $25.1 million and non–performing TDRs of $1.6 million at September 30, 2021:
| September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Current | 30–59 Days Past Due | 60–89 Days Past Due | 90 Days or Greater Past Due | Total Past Due Loans | Total Loans | ||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 512,306 | $ | 188 | $ | 41 | $ | — | $ | 229 | $ | 512,535 | |||||||||||||||||||||||
| Non–owner occupied real estate | 1,013,232 | — | — | — | — | 1,013,232 | |||||||||||||||||||||||||||||
| Residential spec homes | 10,142 | — | — | — | — | 10,142 | |||||||||||||||||||||||||||||
| Development & spec land | 30,993 | — | — | — | — | 30,993 | |||||||||||||||||||||||||||||
| Commercial and industrial | 590,559 | 39 | 182 | — | 221 | 590,780 | |||||||||||||||||||||||||||||
| Total commercial | 2,157,232 | 227 | 223 | — | 450 | 2,157,682 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 572,129 | 728 | 305 | — | 1,033 | 573,162 | |||||||||||||||||||||||||||||
| Residential construction | 23,176 | — | — | — | — | 23,176 | |||||||||||||||||||||||||||||
| Mortgage warehouse | 169,909 | — | — | — | — | 169,909 | |||||||||||||||||||||||||||||
| Total real estate | 765,214 | 728 | 305 | — | 1,033 | 766,247 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | 66,809 | 323 | 25 | 3 | 351 | 67,160 | |||||||||||||||||||||||||||||
| Indirect installment | 363,828 | 1,001 | 54 | 56 | 1,111 | 364,939 | |||||||||||||||||||||||||||||
| Home equity | 276,060 | 1,001 | 110 | 141 | 1,252 | 277,312 | |||||||||||||||||||||||||||||
| Total consumer | 706,697 | 2,325 | 189 | 200 | 2,714 | 709,411 | |||||||||||||||||||||||||||||
| Total | $ | 3,629,143 | $ | 3,280 | $ | 717 | $ | 200 | $ | 4,197 | $ | 3,633,340 | |||||||||||||||||||||||
| Percentage of total loans | 99.88 | % | 0.09 | % | 0.02 | % | 0.01 | % | 0.12 | % | 100.00 | % | |||||||||||||||||||||||
21
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents the payment status by class of loan, excluding non–accrual loans of $22.1 million and non–performing TDRs of $2.6 million at December 31, 2020:
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Current | 30–59 Days Past Due | 60–89 Days Past Due | 90 Days or Greater Past Due | Total Past Due Loans | Total | ||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 484,282 | $ | 683 | $ | 130 | $ | — | $ | 813 | $ | 485,095 | |||||||||||||||||||||||
| Non–owner occupied real estate | 997,816 | 599 | 654 | — | 1,253 | 999,069 | |||||||||||||||||||||||||||||
| Residential spec homes | 10,070 | — | — | — | — | 10,070 | |||||||||||||||||||||||||||||
| Development & spec land | 25,552 | — | 750 | — | 750 | 26,302 | |||||||||||||||||||||||||||||
| Commercial and industrial | 657,027 | 249 | 279 | — | 528 | 657,555 | |||||||||||||||||||||||||||||
| Total commercial | 2,174,747 | 1,531 | 1,813 | — | 3,344 | 2,178,091 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 590,944 | 905 | 238 | 17 | 1,160 | 592,104 | |||||||||||||||||||||||||||||
| Residential construction | 25,586 | — | — | — | — | 25,586 | |||||||||||||||||||||||||||||
| Mortgage warehouse | 395,626 | — | — | — | — | 395,626 | |||||||||||||||||||||||||||||
| Total real estate | 1,012,156 | 905 | 238 | 17 | 1,160 | 1,013,316 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | 37,965 | 69 | — | — | 69 | 38,034 | |||||||||||||||||||||||||||||
| Indirect installment | 354,655 | 1,356 | 206 | 120 | 1,682 | 356,337 | |||||||||||||||||||||||||||||
| Home equity | 255,908 | 554 | 266 | 125 | 945 | 256,853 | |||||||||||||||||||||||||||||
| Total consumer | 648,528 | 1,979 | 472 | 245 | 2,696 | 651,224 | |||||||||||||||||||||||||||||
| Total | $ | 3,835,431 | $ | 4,415 | $ | 2,523 | $ | 262 | $ | 7,200 | $ | 3,842,631 | |||||||||||||||||||||||
| Percentage of total loans | 99.81 | % | 0.11 | % | 0.07 | % | 0.01 | % | 0.19 | % | 100.00 | % | |||||||||||||||||||||||
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.
Troubled Debt Restructurings
Loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans' contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default.
At September 30, 2021, the types of concessions the Company has made on restructured loans have been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of September 30, 2021, the Company had $4.0 million in TDRs and $2.4 million were performing according to the restructured terms and $603,000 TDRs were returned to accrual status during 2021. There were no specific reserves allocated to TDRs at September 30, 2021 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
22
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents TDRs by class of loan:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Non–accrual | Accruing | Total | Non–accrual | Accruing | Total | ||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||
| Owner occupied real estate | $ | — | $ | 603 | $ | 603 | $ | 630 | $ | 168 | $ | 798 | |||||||||||||||||||||||
| Non–owner occupied real estate | 292 | — | 292 | 330 | — | 330 | |||||||||||||||||||||||||||||
| Residential spec homes | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Development & spec land | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Commercial and industrial | — | — | — | 506 | — | 506 | |||||||||||||||||||||||||||||
| Total commercial | 292 | 603 | 895 | 1,466 | 168 | 1,634 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 911 | 1,439 | 2,350 | 922 | 1,381 | 2,303 | |||||||||||||||||||||||||||||
| Residential construction | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Mortgage warehouse | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total real estate | 911 | 1,439 | 2,350 | 922 | 1,381 | 2,303 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Indirect installment | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Home equity | 401 | 391 | 792 | 222 | 244 | 466 | |||||||||||||||||||||||||||||
| Total consumer | 401 | 391 | 792 | 222 | 244 | 466 | |||||||||||||||||||||||||||||
| Total | $ | 1,604 | $ | 2,433 | $ | 4,037 | $ | 2,610 | $ | 1,793 | $ | 4,403 | |||||||||||||||||||||||
Loans Modified under the CARES Act
The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At September 30, 2021 and December 31, 2020, the Bank modified loans totaling $29.2 million and $126.7 million, respectively, which qualify for treatment under the CARES Act.
Collateral Dependent Financial Assets
A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent.
23
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses.
| September 30, 2021 | |||||||||||||||||||||||||||||
| Real Estate | Accounts Receivable/Equipment | Other | Total | ACL Allocation | |||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 12,386 | $ | 103 | $ | — | $ | 12,489 | $ | 1,179 | |||||||||||||||||||
| Non–owner occupied real estate | 3,172 | — | — | 3,172 | — | ||||||||||||||||||||||||
| Residential spec homes | — | — | — | — | — | ||||||||||||||||||||||||
| Development & spec land | 964 | — | — | 964 | — | ||||||||||||||||||||||||
| Commercial and industrial | 1,214 | 2,406 | — | 3,620 | 218 | ||||||||||||||||||||||||
| Total commercial | 17,736 | 2,509 | — | 20,245 | 1,397 | ||||||||||||||||||||||||
| Total collateral dependent loans | $ | 17,736 | $ | 2,509 | $ | — | $ | 20,245 | $ | 1,397 | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Real Estate | Accounts Receivable/Equipment | Other | Total | ACL Allocation | |||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 11,309 | $ | 114 | $ | — | $ | 11,423 | $ | 1,605 | |||||||||||||||||||
| Non–owner occupied real estate | 1,032 | — | — | 1,032 | — | ||||||||||||||||||||||||
| Residential spec homes | — | — | — | — | — | ||||||||||||||||||||||||
| Development & spec land | 70 | — | — | 70 | — | ||||||||||||||||||||||||
| Commercial and industrial | 2,245 | 210 | — | 2,455 | 252 | ||||||||||||||||||||||||
| Total commercial | 14,656 | 324 | — | 14,980 | 1,857 | ||||||||||||||||||||||||
| Total collateral dependent loans | $ | 14,656 | $ | 324 | $ | — | $ | 14,980 | $ | 1,857 | |||||||||||||||||||
Credit Quality Indicators
Horizon Bank's processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re–evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.
•For new and renewed commercial loans, the Bank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade of the loans. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective regions (ranging from $3,000,000 to $6,000,000) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (“CCBO”).
•Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO, Senior Commercial Credit Officer (“SCCO”) or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO, SCCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO or SCCO, however, lenders must present their factual information to either the Loan Committee, CCBO or SCCO when recommending an upgrade.
•The CCBO, or a designee, meets periodically with loan officers to discuss the status of past due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.
24
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
•Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management's analysis of the adequacy of the Allowance for Credit Losses.
For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non–accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non–accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.
Horizon Bank employs a nine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.
Risk Grade 1: Excellent (Pass)
Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges.
Risk Grade 2: Good (Pass)
Loans to businesses that have strong financial statements containing an unmodified opinion from a CPA firm and at least three years consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five years satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long–term debt ratings of Baa or better and meeting defined key financial metric ranges.
Risk Grade 3: Satisfactory (Pass)
Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered and meeting defined key financial metric ranges. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:
•At inception, the loan was properly underwritten, did not possess an unwanted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory.
•At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.
•The loan has exhibited or more years of satisfactory repayment with a reasonable reduction of the principal balance.
•During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.
25
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Risk Grade 4: Satisfactory/Monitored (Pass)
Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory rated loans and meet defined key financial metric ranges. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank's minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.
Risk Grade 4W: Management Watch (Pass)
Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion. Commercial construction loans are graded as 4W Management Watch until the projects are completed and stabilized.
Risk Grade 5: Special Mention
Loans which possess some temporary (normally less than one year) credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,“ impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength and must meet defined key financial metric ranges.
Risk Grade 6: Substandard
One or more of the following characteristics may be exhibited in loans classified Substandard:
•Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.
•Loans are inadequately protected by the current net worth and paying capacity of the obligor.
•The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.
•Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.
•Unusual courses of action are need to maintain a high probability of repayment.
•The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.
•The lender is forced into a subordinated or unsecured position due to flaws in documentation.
•Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.
•The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.
•There is a significant deterioration in market conditions to which the borrower is highly vulnerable.
•The borrower meets defined key financial metric ranges.
26
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Risk Grade 7: Doubtful
One or more of the following characteristics may be present in loans classified Doubtful:
•Loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of principal highly improbable.
•The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.
•The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.
•The borrower meets defined key financial metric ranges.
Risk Grade 8: Loss
Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all of a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
27
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following tables present loans by credit grades and origination year at September 30, 2021.
| September 30, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 51,502 | $ | 59,563 | $ | 66,358 | $ | 48,852 | $ | 46,074 | $ | 154,262 | $ | 45,993 | $ | 472,604 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | 77 | 735 | 2,396 | 8,567 | 7,539 | — | 19,314 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 1,007 | 1,201 | 3,989 | 3,956 | 15,220 | 3,895 | 29,268 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total owner occupied real estate | $ | 51,502 | $ | 60,647 | $ | 68,294 | $ | 55,237 | $ | 58,597 | $ | 177,021 | $ | 49,888 | $ | 521,186 | ||||||||||||||||||||||||||||||||||
| Non–owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 111,223 | $ | 110,627 | $ | 106,765 | $ | 61,794 | $ | 135,791 | $ | 269,509 | $ | 150,423 | $ | 946,132 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | 845 | 1,203 | 29,409 | 4,470 | 5,687 | 519 | 42,133 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | 15,240 | 1,390 | 429 | 8,683 | 2,370 | 28,112 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total non–owner occupied real estate | $ | 111,223 | $ | 111,472 | $ | 123,208 | $ | 92,593 | $ | 140,690 | $ | 283,879 | $ | 153,312 | $ | 1,016,377 | ||||||||||||||||||||||||||||||||||
| Residential spec homes | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 1,117 | $ | 758 | $ | 338 | $ | — | $ | — | $ | 913 | $ | 7,016 | $ | 10,142 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential spec homes | $ | 1,117 | $ | 758 | $ | 338 | $ | — | $ | — | $ | 913 | $ | 7,016 | $ | 10,142 | ||||||||||||||||||||||||||||||||||
| Development & spec land | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 1,520 | $ | 550 | $ | 512 | $ | 12 | $ | 1,849 | $ | 12,915 | $ | 12,640 | $ | 29,998 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | 184 | 358 | 542 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 17 | 651 | 749 | 1,417 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total development & spec land | $ | 1,520 | $ | 550 | $ | 512 | $ | 12 | $ | 1,866 | $ | 13,750 | $ | 13,747 | $ | 31,957 | ||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 214,792 | $ | 56,773 | $ | 50,106 | $ | 51,700 | $ | 68,635 | $ | 71,387 | $ | 37,613 | $ | 551,006 | ||||||||||||||||||||||||||||||||||
| Special Mention | 1,586 | 2,765 | 1,385 | 4,119 | 6,809 | 4,015 | 2,586 | 23,265 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | 1,546 | 146 | 3,242 | 5,748 | 2,400 | 1,582 | 4,603 | 19,267 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total commercial & industrial | $ | 217,924 | $ | 59,684 | $ | 54,733 | $ | 61,567 | $ | 77,844 | $ | 76,984 | $ | 44,802 | $ | 593,538 | ||||||||||||||||||||||||||||||||||
| Total commercial | $ | 383,286 | $ | 233,111 | $ | 247,085 | $ | 209,409 | $ | 278,997 | $ | 552,547 | $ | 268,765 | $ | 2,173,200 | ||||||||||||||||||||||||||||||||||
28
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| September 30, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 79,466 | $ | 111,732 | $ | 50,187 | $ | 58,431 | $ | 68,812 | $ | 203,095 | $ | — | $ | 571,723 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | 376 | 875 | — | 7,390 | — | 8,641 | ||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | $ | 79,466 | $ | 111,732 | $ | 50,563 | $ | 59,306 | $ | 68,812 | $ | 210,485 | $ | — | $ | 580,364 | ||||||||||||||||||||||||||||||||||
| Residential construction | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 23,176 | $ | 23,176 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential construction | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 23,176 | $ | 23,176 | ||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 169,909 | $ | 169,909 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total mortgage warehouse | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 169,909 | $ | 169,909 | ||||||||||||||||||||||||||||||||||
| Total real estate | $ | 79,466 | $ | 111,732 | $ | 50,563 | $ | 59,306 | $ | 68,812 | $ | 210,485 | $ | 193,085 | $ | 773,449 | ||||||||||||||||||||||||||||||||||
| September 30, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Direct installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 15,487 | $ | 14,385 | $ | 15,628 | $ | 8,051 | $ | 7,093 | $ | 6,358 | $ | 155 | $ | 67,157 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | 12 | 7 | — | 19 | ||||||||||||||||||||||||||||||||||||||||||
| Total direct installment | $ | 15,487 | $ | 14,385 | $ | 15,628 | $ | 8,051 | $ | 7,105 | $ | 6,365 | $ | 155 | $ | 67,176 | ||||||||||||||||||||||||||||||||||
| Indirect installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 121,665 | $ | 101,476 | $ | 67,748 | $ | 46,969 | $ | 20,871 | $ | 6,154 | $ | — | $ | 364,883 | ||||||||||||||||||||||||||||||||||
| Non–performing | 22 | 176 | 184 | 178 | 199 | 114 | — | 873 | ||||||||||||||||||||||||||||||||||||||||||
| Total indirect installment | $ | 121,687 | $ | 101,652 | $ | 67,932 | $ | 47,147 | $ | 21,070 | $ | 6,268 | $ | — | $ | 365,756 | ||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 51,598 | $ | 56,690 | $ | 36,628 | $ | 28,529 | $ | 24,523 | $ | 71,590 | $ | 7,222 | $ | 276,780 | ||||||||||||||||||||||||||||||||||
| Non–performing | 9 | 148 | 10 | 82 | 131 | 1,604 | 1,736 | 3,720 | ||||||||||||||||||||||||||||||||||||||||||
| Total home equity | $ | 51,607 | $ | 56,838 | $ | 36,638 | $ | 28,611 | $ | 24,654 | $ | 73,194 | $ | 8,958 | $ | 280,500 | ||||||||||||||||||||||||||||||||||
| Total consumer | $ | 188,781 | $ | 172,875 | $ | 120,198 | $ | 83,809 | $ | 52,829 | $ | 85,827 | $ | 9,113 | $ | 713,432 | ||||||||||||||||||||||||||||||||||
29
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following tables present loans by credit grades and origination year at December 31, 2020.
| December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 57,726 | $ | 65,558 | $ | 49,455 | $ | 49,032 | $ | 47,480 | $ | 127,373 | $ | 40,027 | $ | 436,651 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | 1,081 | 5,928 | 10,205 | 4,207 | 12,787 | 325 | 34,533 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | 1,021 | 1,231 | 4,012 | 2,504 | 2,839 | 9,673 | 3,842 | 25,122 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total owner occupied real estate | $ | 58,747 | $ | 67,870 | $ | 59,395 | $ | 61,741 | $ | 54,526 | $ | 149,833 | $ | 44,194 | $ | 496,306 | ||||||||||||||||||||||||||||||||||
| Non–owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 115,667 | $ | 120,023 | $ | 73,669 | $ | 133,396 | $ | 99,674 | $ | 208,649 | $ | 166,986 | $ | 918,064 | ||||||||||||||||||||||||||||||||||
| Special Mention | 862 | 1,236 | 28,723 | 1,298 | 2,548 | 13,182 | 4,072 | 51,921 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 15,552 | 1,477 | 107 | 6,422 | 4,521 | 1,572 | 29,651 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total non–owner occupied real estate | $ | 116,529 | $ | 136,811 | $ | 103,869 | $ | 134,801 | $ | 108,644 | $ | 226,352 | $ | 172,630 | $ | 999,636 | ||||||||||||||||||||||||||||||||||
| Residential spec homes | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 737 | $ | 237 | $ | — | $ | 298 | $ | 368 | $ | 1,177 | $ | 7,253 | $ | 10,070 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential spec homes | $ | 737 | $ | 237 | $ | — | $ | 298 | $ | 368 | $ | 1,177 | $ | 7,253 | $ | 10,070 | ||||||||||||||||||||||||||||||||||
| Development & spec land | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 573 | $ | 736 | $ | 1,522 | $ | 2,461 | $ | 672 | $ | 11,971 | $ | 6,907 | $ | 24,842 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | 274 | — | 274 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | 506 | 750 | 1,256 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total development & spec land | $ | 573 | $ | 736 | $ | 1,522 | $ | 2,461 | $ | 672 | $ | 12,751 | $ | 7,657 | $ | 26,372 | ||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 253,953 | $ | 63,772 | $ | 58,978 | $ | 88,121 | $ | 26,044 | $ | 70,706 | $ | 30,845 | $ | 592,419 | ||||||||||||||||||||||||||||||||||
| Special Mention | 8,779 | 1,164 | 1,088 | 9,306 | 1,835 | 11,870 | 3,040 | 37,082 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | 4,233 | 7,079 | 11,072 | 1,660 | 636 | 3,322 | 2,384 | 30,386 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total commercial & industrial | $ | 266,965 | $ | 72,015 | $ | 71,138 | $ | 99,087 | $ | 28,515 | $ | 85,898 | $ | 36,269 | $ | 659,887 | ||||||||||||||||||||||||||||||||||
| Total commercial | $ | 443,551 | $ | 277,669 | $ | 235,924 | $ | 298,388 | $ | 192,725 | $ | 476,011 | $ | 268,003 | $ | 2,192,271 | ||||||||||||||||||||||||||||||||||
30
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 109,487 | $ | 68,556 | $ | 86,572 | $ | 89,051 | $ | 65,718 | $ | 171,322 | $ | — | $ | 590,706 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | 296 | 636 | 39 | 300 | 6,723 | — | 7,994 | ||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | $ | 109,487 | $ | 68,852 | $ | 87,208 | $ | 89,090 | $ | 66,018 | $ | 178,045 | $ | — | $ | 598,700 | ||||||||||||||||||||||||||||||||||
| Residential construction | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 25,586 | $ | 25,586 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential construction | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 25,586 | $ | 25,586 | ||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 395,626 | $ | 395,626 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total mortgage warehouse | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 395,626 | $ | 395,626 | ||||||||||||||||||||||||||||||||||
| Total real estate | $ | 109,487 | $ | 68,852 | $ | 87,208 | $ | 89,090 | $ | 66,018 | $ | 178,045 | $ | 421,212 | $ | 1,019,912 | ||||||||||||||||||||||||||||||||||
| December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Direct installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 12,552 | $ | 9,552 | $ | 5,828 | $ | 5,946 | $ | 2,124 | $ | 2,019 | $ | 12 | $ | 38,033 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | 5 | 3 | 5 | — | 13 | ||||||||||||||||||||||||||||||||||||||||||
| Total direct installment | $ | 12,552 | $ | 9,552 | $ | 5,828 | $ | 5,951 | $ | 2,127 | $ | 2,024 | $ | 12 | $ | 38,046 | ||||||||||||||||||||||||||||||||||
| Indirect installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 134,394 | $ | 97,408 | $ | 74,215 | $ | 36,763 | $ | 8,636 | $ | 4,801 | $ | — | $ | 356,217 | ||||||||||||||||||||||||||||||||||
| Non–performing | 84 | 223 | 392 | 361 | 80 | 154 | — | 1,294 | ||||||||||||||||||||||||||||||||||||||||||
| Total indirect installment | $ | 134,478 | $ | 97,631 | $ | 74,607 | $ | 37,124 | $ | 8,716 | $ | 4,955 | $ | — | $ | 357,511 | ||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 63,946 | $ | 42,762 | $ | 34,807 | $ | 27,553 | $ | 22,450 | $ | 59,503 | $ | 5,464 | $ | 256,485 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | 9 | 111 | 74 | 121 | 1,237 | 1,606 | 3,158 | ||||||||||||||||||||||||||||||||||||||||||
| Total home equity | $ | 63,946 | $ | 42,771 | $ | 34,918 | $ | 27,627 | $ | 22,571 | $ | 60,740 | $ | 7,070 | $ | 259,643 | ||||||||||||||||||||||||||||||||||
| Total consumer | $ | 210,976 | $ | 149,954 | $ | 115,353 | $ | 70,702 | $ | 33,414 | $ | 67,719 | $ | 7,082 | $ | 655,200 | ||||||||||||||||||||||||||||||||||
31
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 5 – Allowance for Credit and Loan Losses
The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 41,766 | $ | 4,108 | $ | 1,155 | $ | 8,620 | $ | 55,649 | ||||||||||||||||||||||
| Provision for credit losses on loans | 1,330 | (400) | (101) | 283 | 1,112 | |||||||||||||||||||||||||||
| PCD loan charge–offs | — | — | — | — | — | |||||||||||||||||||||||||||
| Charge–offs | (10) | — | — | (189) | (199) | |||||||||||||||||||||||||||
| Recoveries | 35 | 29 | — | 153 | 217 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 43,121 | $ | 3,737 | $ | 1,054 | $ | 8,867 | $ | 56,779 | ||||||||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 39,147 | $ | 5,832 | $ | 1,190 | $ | 8,921 | $ | 55,090 | ||||||||||||||||||||||
| Provision for credit losses on loans | 1,136 | (232) | 60 | 1,088 | 2,052 | |||||||||||||||||||||||||||
| Charge–offs | (502) | (144) | — | (510) | (1,156) | |||||||||||||||||||||||||||
| Recoveries | 14 | 8 | — | 311 | 333 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 39,795 | $ | 5,464 | $ | 1,250 | $ | 9,810 | $ | 56,319 | ||||||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 42,210 | $ | 4,620 | $ | 1,267 | $ | 8,930 | $ | 57,027 | ||||||||||||||||||||||
| Provision for credit losses on loans | 1,090 | (1,000) | (213) | 110 | (13) | |||||||||||||||||||||||||||
| PCD loan charge–offs | (6) | — | — | — | (6) | |||||||||||||||||||||||||||
| Charge–offs | (273) | — | — | (661) | (934) | |||||||||||||||||||||||||||
| Recoveries | 100 | 117 | — | 488 | 705 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 43,121 | $ | 3,737 | $ | 1,054 | $ | 8,867 | $ | 56,779 | ||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 11,996 | $ | 923 | $ | 1,077 | $ | 3,671 | $ | 17,667 | ||||||||||||||||||||||
| Impact of adopting ASC 326 | 10,832 | 4,048 | — | 4,911 | 19,791 | |||||||||||||||||||||||||||
| Initial PCD allowance | 2,786 | — | — | — | 2,786 | |||||||||||||||||||||||||||
| Provision for credit losses on loans | 14,655 | 670 | 173 | 2,211 | 17,709 | |||||||||||||||||||||||||||
| Charge–offs | (586) | (204) | — | (1,654) | (2,444) | |||||||||||||||||||||||||||
| Recoveries | 112 | 27 | — | 671 | 810 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 39,795 | $ | 5,464 | $ | 1,250 | $ | 9,810 | $ | 56,319 | ||||||||||||||||||||||
The Company utilized the Cumulative Loss Rate method in determining expected future credit losses. The loss rate method measures the amount of loan charge–offs, net of recoveries, (“loan losses”) recognized over the life of a pool and compares those loan losses to the outstanding loan balance of that pool as of a specific point in time (“pool date”).
32
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date.
The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look–back period includes January 2012 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.
Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit–related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.
The Company’s CECL estimate applies to a forecast that incorporates macroeconomic trends and other environmental factors. Management utilized National, Regional and Local Leading Economic Indexes, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and qualitative adjustments were utilized to reflect the forecast and other relevant factors.
The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, loan purpose, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of the borrower and concentrations, and historical or expected credit loss patterns.
Note 6 – Loan Servicing
Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1.5 billion and $1.5 billion at September 30, 2021 and December 31, 2020.
The aggregate fair value of capitalized mortgage servicing rights was approximately $14.9 million and $12.5 million at September 30, 2021 and December 31, 2020, compared to the carrying values of $14.9 million and $12.5 million at September 30, 2021 and December 31, 2020, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.
33
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Mortgage servicing rights | ||||||||||||||
| Balance, beginning of period | $ | 17,644 | $ | 15,046 | ||||||||||
| Servicing rights capitalized | 3,209 | 5,530 | ||||||||||||
| Amortization of servicing rights | (2,960) | (2,932) | ||||||||||||
| Balance, end of period | 17,893 | 17,644 | ||||||||||||
| Impairment allowance | ||||||||||||||
| Balance, beginning of period | (5,172) | (719) | ||||||||||||
| Additions | — | (5,106) | ||||||||||||
| Reductions | 2,142 | 653 | ||||||||||||
| Balance, end of period | (3,030) | (5,172) | ||||||||||||
| Mortgage servicing rights, net | $ | 14,863 | $ | 12,472 | ||||||||||
The Bank reduced impairment by approximately $2.1 million for the nine months ended September 30, 2021. The Bank recorded additional impairment of approximately $4.5 million for the year ended December 31, 2020.
Note 7 – Goodwill
The following table presents the Company’s carrying amount of goodwill as of September 30, 2021 and December 31, 2020.
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Balance, beginning of period | $ | 151,238 | $ | 151,238 | ||||||||||
| Goodwill acquired during the period | 11,550 | — | ||||||||||||
| Balance, end of period | $ | 162,788 | $ | 151,238 | ||||||||||
In accordance with ASC 350–20, the Company conducts a goodwill impairment test at least annually, or more frequently as events occur or circumstances change that would more–likely–than–not reduce the fair value below its carrying amount. In the second quarter of 2020, the onset of the COVID–19 pandemic prompted the Company to assess qualitative and quantitative factors to determine whether it was more–likely–than–not the fair value of the Company was less than the carrying amount. The Company assessed relevant events and circumstances, including macroeconomic conditions, industry and market considerations, overall financial performance, changes in the composition or carrying amount of assets and liabilities, the market price of the Company’s common stock and other relevant facts. The Company performed both a market capitalization approach and a discounted cash flow approach to determine the fair value of the Company during the second quarter of 2020 which resulted in no goodwill impairment.
The Company updated their analysis above during the third quarter of 2021 which resulted in no goodwill impairment charges for the nine months ended September 30, 2021.
The goodwill acquired during the period was calculated based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.
34
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 8 – Repurchase Agreements
The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Company’s control.
The following table shows repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements:
| September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | |||||||||||||||||||||||||||||||||||||||||
| Overnight and Continuous | Up to one year | One to three years | Three to five years | Five to ten years | Beyond ten years | Total | |||||||||||||||||||||||||||||||||||
| Repurchase Agreements and repurchase-to-maturity transactions | |||||||||||||||||||||||||||||||||||||||||
| Repurchase Agreements | $ | 145,164 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 145,164 | |||||||||||||||||||||||||||
| Securities pledged for Repurchase Agreements | |||||||||||||||||||||||||||||||||||||||||
| Federal agency collateralized mortgage obligations | $ | 38,641 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 38,641 | |||||||||||||||||||||||||||
| Federal agency mortgage–backed pools | 111,415 | — | — | — | — | — | 111,415 | ||||||||||||||||||||||||||||||||||
| Total | $ | 150,056 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 150,056 | |||||||||||||||||||||||||||
Note 9 – Subordinated Notes
On June 24, 2020, Horizon issued $60.0 million in aggregate principal amount of 5.625% fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625% per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the benchmark rate, which is expected to be Three–Month Term SOFR (the “Benchmark Rate”), plus 549 basis points, payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, commencing on October 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark Rate is less than zero, the Benchmark Rate shall be deemed to be zero.
Horizon may, at its option, beginning with the interest payment date of July 1, 2025 and on any interest payment date thereafter, redeem the Notes, in whole or in part. The Notes will not otherwise be redeemable by Horizon prior to maturity, unless certain events occur. The redemption price for any redemption is 100% of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations.
The Notes are unsecured subordinated obligations, and rank pari passu, or equally, with all of Horizon's future unsecured subordinated debt and are junior to all existing and future senior debt. The Notes are structurally subordinated to all existing and future liabilities of Horizon's subsidiaries, including the deposit liabilities and claims of other creditors of Horizon Bank, and are effectively subordinated to Horizon’s existing and future secured indebtedness. There is no sinking fund for the Notes. The Notes are obligations of Horizon only and are not obligations of, and are not guaranteed by, any of Horizon’s subsidiaries.
35
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 10 – Derivative Financial Instruments
Cash Flow Hedges – As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three months LIBOR and to pay interest to the counterparty at a fixed rate of 4.20% on a notional amount of $12.0 million at September 30, 2021 and December 31, 2020, respectively. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.
The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.62% on a notional amount of $10.0 million at December 31, 2020. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.
On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.81% on a notional amount of $50.0 million at September 30, 2021 and December 31, 2020. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.
Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At September 30, 2021, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.
Fair Value Hedges – Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At September 30, 2021, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.
The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan and security agreements being hedged were $478.2 million at September 30, 2021 and $442.7 million at December 31, 2020.
Other Derivative Instruments – The Company enters into non–hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At September 30, 2021, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.
The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.
36
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following tables summarize the fair value of derivative financial instruments utilized by Horizon:
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2021 | ||||||||||||||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||
| Interest rate contracts | Other assets | $ | 19,391 | Other liabilities | $ | 24,044 | |||||||||||||||||
| Total derivatives designated as hedging instruments | 19,391 | 24,044 | |||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Mortgage loan contracts | Other assets | 666 | Other liabilities | 333 | |||||||||||||||||||
| Total derivatives not designated as hedging instruments | 666 | 333 | |||||||||||||||||||||
| Total derivatives | $ | 20,057 | $ | 24,377 | |||||||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
| December 31, 2020 | December 31, 2020 | ||||||||||||||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||
| Interest rate contracts | Other assets | $ | 35,388 | Other liabilities | $ | 43,631 | |||||||||||||||||
| Total derivatives designated as hedging instruments | 35,388 | 43,631 | |||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Mortgage loan contracts | Other assets | 1,045 | Other liabilities | — | |||||||||||||||||||
| Total derivatives not designated as hedging instruments | 1,045 | — | |||||||||||||||||||||
| Total derivatives | $ | 36,433 | $ | 43,631 | |||||||||||||||||||
The effect of the derivative instruments on the condensed consolidated statements of income for the three and nine–month periods ending September 30 is as follows:
| Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | ||||||||||||||||||||
| Derivatives in cash flow hedging relationship | |||||||||||||||||||||||
| Interest rate contracts | $ | 438 | $ | (107) | $ | 2,836 | $ | (3,239) | |||||||||||||||
FASB Accounting Standards Codification (“ASC”) Topic 820–10–20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820–10–55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
37
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| Location of gain (loss) recognized on derivative | Amount of Gain (Loss) Recognized on Derivative | ||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | ||||||||||||||||||||||||||
| Derivative in fair value hedging relationship | |||||||||||||||||||||||||||||
| Interest rate contracts | Interest income - loans | $ | 3,302 | $ | (3,162) | $ | 15,997 | $ | (29,492) | ||||||||||||||||||||
| Interest rate contracts | Interest income - loans | (3,302) | 3,162 | (15,997) | 29,492 | ||||||||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||
| Location of gain (loss) recognized on derivative | Amount of Gain (Loss) Recognized on Derivative | ||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | ||||||||||||||||||||||||||
| Derivative not designated as hedging relationship | |||||||||||||||||||||||||||||
| Mortgage contracts | Other income - gain on sale of loans | $ | (167) | $ | (679) | $ | (712) | $ | 364 | ||||||||||||||||||||
Note 11 – Disclosures about Fair Value of Assets and Liabilities
The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:
Level 1 –Quoted prices in active markets for identical assets or liabilities
Level 2 –Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 –Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2021. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Available for sale securities
When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark
38
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.
Hedged loans
Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.
Interest rate swap agreements
The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:
| September 30, 2021 | |||||||||||||||||||||||
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Available for sale securities | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 118,588 | $ | — | $ | 118,588 | $ | — | |||||||||||||||
| State and municipal | 1,119,123 | — | 1,119,123 | — | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 75,525 | — | 75,525 | — | |||||||||||||||||||
| Federal agency mortgage–backed pools | 237,705 | — | 237,705 | — | |||||||||||||||||||
| Private labeled mortgage–backed pools | 32,937 | — | 32,937 | ||||||||||||||||||||
| Corporate notes | 85,756 | — | 85,756 | — | |||||||||||||||||||
| Total available for sale securities | 1,669,634 | — | 1,669,634 | — | |||||||||||||||||||
| Interest rate swap agreements asset | 19,391 | — | 19,391 | — | |||||||||||||||||||
| Forward sale commitments | 666 | — | 666 | — | |||||||||||||||||||
| Interest rate swap agreements liability | (24,044) | — | (24,044) | — | |||||||||||||||||||
| Commitments to originate loans | (333) | — | (333) | — | |||||||||||||||||||
39
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| December 31, 2020 | |||||||||||||||||||||||
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Available for sale securities | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 19,715 | $ | — | $ | 19,715 | $ | — | |||||||||||||||
| State and municipal | 837,843 | — | 837,843 | — | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 147,453 | — | 147,453 | — | |||||||||||||||||||
| Federal agency mortgage–backed pools | 118,799 | — | 118,799 | — | |||||||||||||||||||
| Corporate notes | 10,215 | — | 10,215 | — | |||||||||||||||||||
| Total available for sale securities | 1,134,025 | — | 1,134,025 | — | |||||||||||||||||||
| Interest rate swap agreements asset | 35,388 | — | 35,388 | — | |||||||||||||||||||
| Forward sale commitments | 1,045 | — | 1,045 | — | |||||||||||||||||||
| Interest rate swap agreements liability | (43,631) | — | (43,631) | — | |||||||||||||||||||
Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | ||||||||||||||||||||
| Non-interest Income | |||||||||||||||||||||||
| Total gains and losses from: | |||||||||||||||||||||||
| Hedged loans | $ | 3,302 | $ | (3,162) | $ | 15,997 | $ | (29,492) | |||||||||||||||
| Fair value interest rate swap agreements | (3,302) | 3,162 | (15,997) | 29,492 | |||||||||||||||||||
| Derivative loan commitments | (167) | (679) | (712) | 364 | |||||||||||||||||||
| $ | (167) | $ | (679) | $ | (712) | $ | 364 | ||||||||||||||||
Certain other assets are measured at fair value on a non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| September 30, 2021 | |||||||||||||||||||||||
| Collateral dependent loans | $ | 18,848 | $ | — | $ | — | $ | 18,848 | |||||||||||||||
| Mortgage servicing rights | 14,863 | — | — | 14,863 | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Collateral dependent loans | $ | 13,123 | $ | — | $ | — | $ | 13,123 | |||||||||||||||
| Mortgage servicing rights | 12,472 | — | — | 12,472 | |||||||||||||||||||
40
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month–end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment increased by $2.1 million during the first nine months of 2021 and decreased by $3.2 million during the first nine months of 2020.
The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill.
| September 30, 2021 | |||||||||||||||||||||||
| Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||
| Collateral dependent loans | $ | 18,848 | Collateral based measurement | Discount to reflect current market conditions and ultimate collectibility | 0.0%-65.0% (6.9%) | ||||||||||||||||||
| Mortgage servicing rights | 14,863 | Discounted cash flows | Discount rate, Constant prepayment rate, Probability of default | 8.0%-8.0% (8.0%), 9.5%-16.7% (12.7%), 0.0%-18.5%(0.4%) | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||
| Collateral dependent loans | $ | 13,123 | Collateral based measurement | Discount to reflect current market conditions and ultimate collectibility | 0.0%-72.0%(12.4%) | ||||||||||||||||||
| Mortgage servicing rights | 12,472 | Discounted cash flows | Discount rate, Constant prepayment rate, Probability of default | 7.8%-7.8% (7.8%), 11.5%-20.9%(17.5%), 0.0%-1.0%(0.8%) | |||||||||||||||||||
Note 12 – Fair Value of Financial Instruments
The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts.
41
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at September 30, 2021 and December 31, 2020. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off–balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Due from Banks – The carrying amounts approximate fair value.
Interest-earning time deposits – The fair values of the Company’s interest–earning time deposits are estimated using discounted cash flow analyses based on current rates for similar types of interest–earning time deposits.
Held–to–Maturity Securities – For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.
Loans Held for Sale – The carrying amounts approximate fair value.
Net Loans – The fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.
FHLB Stock – Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.
Interest Receivable/Payable – The carrying amounts approximate fair value.
Deposits – The fair value of demand deposits, savings accounts, interest–bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity.
Borrowings – Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings.
Subordinated Notes – The fair value of subordinated notes is based on discounted cash flows based on current borrowing rates for similar types of instruments.
Junior Subordinated Debentures Issued to Capital Trusts – Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.
Commitments to Extend Credit and Standby Letters of Credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed–rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short–term nature of these agreements, carrying amounts approximate fair value.
42
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall.
| September 30, 2021 | |||||||||||||||||||||||
| Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash and due from banks | $ | 971,817 | $ | 971,817 | $ | — | $ | — | |||||||||||||||
| Interest–earning time deposits | 5,767 | — | 5,881 | — | |||||||||||||||||||
| Investment securities, held to maturity | 769,240 | — | 768,099 | — | |||||||||||||||||||
| Loans held for sale | 4,811 | — | — | 4,811 | |||||||||||||||||||
| Loans (excluding loan level hedges), net | 3,603,302 | — | — | 3,518,194 | |||||||||||||||||||
| Stock in FHLB | 24,440 | — | 24,440 | — | |||||||||||||||||||
| Interest receivable | 24,762 | — | 24,762 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Non–interest bearing deposits | $ | 1,324,757 | $ | 1,324,757 | $ | — | $ | — | |||||||||||||||
| Interest bearing deposits | 4,655,142 | — | 4,603,849 | — | |||||||||||||||||||
| Borrowings | 670,753 | — | 669,517 | — | |||||||||||||||||||
| Subordinated notes | 58,713 | — | 58,176 | — | |||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 56,722 | — | 53,384 | — | |||||||||||||||||||
| Interest payable | 1,427 | — | 1,427 | — | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash and due from banks | $ | 249,711 | $ | 249,711 | $ | — | $ | — | |||||||||||||||
| Interest–earning time deposits | 8,965 | — | 9,136 | — | |||||||||||||||||||
| Investment securities, held to maturity | 168,676 | — | 179,990 | — | |||||||||||||||||||
| Loans held for sale | 13,538 | — | — | 13,538 | |||||||||||||||||||
| Loans (excluding loan level hedges), net | 3,810,356 | — | — | 3,767,348 | |||||||||||||||||||
| Stock in FHLB | 23,023 | — | 23,023 | — | |||||||||||||||||||
| Interest receivable | 21,396 | — | 21,396 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Non–interest bearing deposits | $ | 1,053,242 | $ | 1,053,242 | $ | — | $ | — | |||||||||||||||
| Interest bearing deposits | 3,477,891 | — | 3,466,522 | — | |||||||||||||||||||
| Borrowings | 475,000 | — | 483,245 | — | |||||||||||||||||||
| Subordinated notes | 58,603 | — | 57,626 | — | |||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 56,548 | — | 52,676 | — | |||||||||||||||||||
| Interest payable | 2,712 | — | 2,712 | — | |||||||||||||||||||
43
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 13 – Accumulated Other Comprehensive Income
| September 30, 2021 | December 31, 2020 | ||||||||||
| Unrealized gain on securities available for sale | $ | 14,444 | $ | 43,662 | |||||||
| Unamortized loss on securities held to maturity, previously transferred from AFS | (115) | (165) | |||||||||
| Unrealized loss on derivative instruments | (4,653) | (8,243) | |||||||||
| Tax effect | (2,031) | (7,402) | |||||||||
| Total accumulated other comprehensive income | $ | 7,645 | $ | 27,852 | |||||||
Note 14 – Regulatory Capital
Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital framework (known as “Basel III”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Company and Bank are subject to minimum regulatory capital requirements as defined and calculated in accordance with the Basel III–based regulations. As allowed under Basel III rules, the Company made the decision to opt–out of including accumulated other comprehensive income in regulatory capital. The minimum regulatory capital requirements are set forth in the table below.
In addition, to be categorized as well capitalized, the Company and Bank must maintain Total risk–based, Tier I risk–based, common equity Tier I risk–based and Tier I leverage ratios as set forth in the table below. As of September 30, 2021 and December 31, 2020, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the third quarter of 2021 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well capitalized status for bank holding companies.
In October 2019, the federal banking agencies finalized a new rule that will simplify capital requirements for qualified community banks that opt into the new community bank leverage ratio framework. The new framework was available to use in March 31, 2020 Call Reports or Forms FRY-9C (as applicable) for depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, among other qualifying criteria. Horizon did not elect the new community bank leverage ratio framework.
As of March 31, 2020, the Company and Bank elected the transition option of the 2019 CECL Rule which allows banking organizations to phase in over a three–year period the day–one adverse effects of CECL on their regulatory capital ratios.
44
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Horizon and the Bank’s actual and required capital ratios as of September 30, 2021 and December 31, 2020 were as follows:
| Actual | Required for Capital Adequacy Purposes(1) | Required For Capital Adequacy Purposes with Capital Buffer(1) | Well Capitalized Under Prompt Corrective Action Provisions(1) | ||||||||||||||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 678,665 | 15.27 | % | $ | 355,555 | 8.00 | % | $ | 466,666 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
| Bank | 575,693 | 12.97 | % | 355,092 | 8.00 | % | 466,058 | 10.50 | % | $ | 443,865 | 10.00 | % | ||||||||||||||||||||||||||||||||||
Tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 634,105 | 14.27 | % | 266,617 | 6.00 | % | 377,708 | 8.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 526,731 | 11.86 | % | 266,474 | 6.00 | % | 377,505 | 8.50 | % | 355,299 | 8.00 | % | |||||||||||||||||||||||||||||||||||
Common equity tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 518,670 | 11.67 | % | 200,001 | 4.50 | % | 311,113 | 7.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 526,731 | 11.86 | % | 199,856 | 4.50 | % | 310,887 | 7.00 | % | 288,681 | 6.50 | % | |||||||||||||||||||||||||||||||||||
Tier 1 capital (to average assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 634,105 | 10.03 | % | 252,883 | 4.00 | % | 252,883 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 526,731 | 8.38 | % | 251,423 | 4.00 | % | 251,423 | 4.00 | % | 314,279 | 5.00 | % | |||||||||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 648,804 | 14.91 | % | $ | 348,024 | 8.00 | % | $ | 456,782 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
| Bank | 532,315 | 12.21 | % | 348,810 | 8.00 | % | 457,813 | 10.50 | % | $ | 436,013 | 10.00 | % | ||||||||||||||||||||||||||||||||||
Tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 607,340 | 13.96 | % | 261,018 | 6.00 | % | 369,775 | 8.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 492,221 | 11.29 | % | 261,606 | 6.00 | % | 370,609 | 8.50 | % | 348,808 | 8.00 | % | |||||||||||||||||||||||||||||||||||
Common equity tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 491,281 | 11.29 | % | 195,764 | 4.50 | % | 304,522 | 7.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 492,221 | 11.29 | % | 196,205 | 4.50 | % | 305,207 | 7.00 | % | 283,407 | 6.50 | % | |||||||||||||||||||||||||||||||||||
Tier 1 capital (to average assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 607,340 | 10.68 | % | 227,507 | 4.00 | % | 227,507 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 492,221 | 8.71 | % | 226,158 | 4.00 | % | 226,158 | 4.00 | % | 282,697 | 5.00 | % | |||||||||||||||||||||||||||||||||||
(1) As defined by regulatory agencies | |||||||||||||||||||||||||||||||||||||||||||||||
Note 15 – General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operation and cash flows of the Company.
45
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, 2021 and 2020
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:
•COVID–19 related impact on Horizon and its customers, employees and vendors, which may depend on several factors, including the scope and continued duration of the pandemic, its influence on the financial markets, long–term and post–pandemic changes in the banking preferences and behaviors of customers, supply chain risks to the bank and its customers and actions taken by governmental authorities and other third parties in response to the pandemic;
•economic conditions and their impact on Horizon and its customers, including local and global economic recovery from the pandemic;
•changes to government regulations, including the CARES Act, on the accounting for modified loans;
•changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;
•the effect of low or negative interest rates on net interest rate margin and their impact on mortgage loan volumes and the outflow of deposits;
•loss of key Horizon personnel;
•changes in federal or state government mandates regarding vaccination requirements which may impact our ability to retain or attract labor;
•our former role as a fiduciary trustee for corporate employee stock ownership plans (“ESOPs”) may expose us to increased risk of litigation due to heightened scrutiny of this role by the U.S. Department of Labor and the plaintiff’s bar;
•increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks, which may have been accelerated by the 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 activities;
46
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, 2021 and 2020
•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;
•litigation, regulatory enforcement, tax, and legal compliance risk and costs, as applicable generally and specifically to the financial and fiduciary (generally and as an ESOP fiduciary) environment, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same;
•the effects and costs of governmental investigations or related actions by third parties;
•rapid technological developments and changes;
•the risks presented by cyber terrorism and data security breaches;
•the rising costs of effective cybersecurity;
•containing costs and expenses;
•the ability of the U.S. federal government to manage federal debt limits;
•the potential influence on the U.S. financial markets and economy from the effects of climate change and social justice initiatives;
•the potential influence on the U.S. financial markets and economy from material changes outside the U.S. or in overseas relations, including changes in the U.S. trade relations related to imposition of tariffs, Brexit and the phase out of the London Interbank Offered Rate (“LIBOR”), and the geopolitical risk related to the increasing tension with China, Taiwan, Russia, Iran and other countries which could lead to disruption in supply chains, logistics and overall markets; and
•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.
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 2020 Annual Report on Form 10–K and in the subsequent reports we file with the SEC.
Overview
Horizon Bancorp, Inc. (“Horizon” or the “Company”) is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in northern and central Indiana and southern and central Michigan through its bank subsidiary, Horizon Bank (“Horizon Bank” or the “Bank”) and other affiliated entities and Horizon Risk Management, Inc. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. Horizon Bank (formerly known as “Horizon Bank, N.A.”) 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.
47
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, 2021 and 2020
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.
Third Quarter 2021 Highlights
•On September 17, 2021, completed previously announced acquisition of 14 branches in 11 Michigan counties, approximately $206.8 million in loans and $846.4 million in deposits, in a transaction designed to further extend Horizon’s retail franchise and further enhance its low–cost core deposit and funding capability to support lending in its Midwestern growth markets.
•Net income grew to a record $23.1 million, up 4.0% from the linked quarter and 13.6% from the year–ago period. Diluted earnings per share (“EPS”) of $0.52 was up from $0.50 for the second quarter of 2021 and $0.46 for the third quarter of 2020.
•Pre–tax, pre–provision net income grew to a record $28.2 million, up 15.5% from the linked quarter and 5.8% from the year–ago period. This non–GAAP financial measure is utilized by banks to provide a greater understanding of pre–tax profitability before giving effect to credit loss expense. (See the “Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income” table below).
•Non–interest expense was $34.3 million in the quarter, or 2.09% of average assets on an annualized basis, compared to $33.4 million, or 2.18%, in the second quarter of 2021 and $33.4 million, or 2.30%, in the third quarter of 2020. Acquisition–related expenses totaled approximately $799,000 in the third quarter of 2021 and $242,000 in the linked quarter.
•The efficiency ratio for the period was 54.88% compared to 57.73% for the second quarter of 2021 and 55.59% for the third quarter of 2020. The adjusted efficiency ratio was 56.16% compared to 57.45% for the second quarter of 2021 and 56.64% for the third quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below).
•A previously disclosed consolidation of 10 retail locations was completed on August 27 as part of Horizon’s rigorous annual branch performance review process, with employees reassigned to support other staffing needs and growth initiatives. Operating cost saves are largely expected to be redeployed into continued digital banking and technology investments.
•Net interest income grew to a record $46.5 million for the quarter, up 9.2% from the second quarter of 2021 and 7.3% from the third quarter of 2020. Reported net interest margin (“NIM”) was 3.17% and adjusted NIM was 3.12%, with reported NIM increasing by three basis points and adjusted NIM decreasing by one basis point from the second quarter of 2021. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation of adjusted NIM.) Approximately 16 basis points of the NIM and adjusted NIM is attributed to Federal Paycheck Protection Program (“PPP”) lending, offset by an estimated 16 basis point compression attributed to excess liquidity during the quarter. During the third quarter, Horizon increased the average balance of its investment portfolio by $471.8 million to leverage capital and focus on increasing net interest income.
•Total non–interest income was $16.0 million, including the recovery of $876,000 from an acquired charged–off loan, as well as a $2.4 million gain from the sale of the Company’s ESOP trustee accounts at the end of the quarter. The sale of these accounts is not expected to have any significant impact to the bottom line due to the related costs saves the Company will incur as it exited these account relationships. Non–interest income was $15.2 million in the second quarter of 2021 and $16.7 million, including a $1.1 million securities sale gain, in the third quarter of 2020.
48
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, 2021 and 2020
•Horizon’s in–market consumer and commercial deposit relationships, including those on–boarded as part of its branch acquisition during the quarter, combined with strategic pricing moves to manage deposit growth and runoff of higher–priced time deposits, contributed to continued improvement in the cost of interest bearing liabilities, which declined to 0.38% in the quarter, compared to 0.45% in the second quarter of 2021 and 0.67% in the third quarter of 2020.
•Horizon recorded a quarterly provision expense of $1.1 million, reflecting a $2.0 million allocation for loans acquired in the Michigan branch acquisition, as well as, solid asset quality metrics at period end.
•Commercial loans, excluding PPP lending, grew by 2.3% organically and by 7.5% overall during the quarter to $2.1 billion at period end. Total loans, excluding PPP lending, grew organically 0.3% and 6.4% overall to $3.57 billion.
•Horizon’s book value per share increased to an all–time high of $16.28 while tangible book value per share decreased to $12.05. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.) The decrease in tangible book value was a result of the repurchase of shares for approximately $7.6 million and $12.4 million of goodwill and intangible assets recorded during the third quarter.
•Horizon announced an increase to cash dividends to be paid on October 22, 2021 of 15.4% to $0.15 per share. As of September 30, 2021, in excess of $120.9 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value. This is Horizon’s second dividend increase in 2021.
•During the quarter, the Company repurchased 430,026 shares at an average cost of $17.74 per share for a total cost of $7.6 million. This resulted in a reduction in tangible book value of approximately $0.18 per share and an increase in EPS of $0.01 per share for the third quarter.
Impact of the COVID–19 Pandemic
We continue to monitor the impact of COVID–19 is having on the markets in which we operate in and the uncertainty of the long–term ramifications to our customers and operations. Within our markets, vaccinations have become readily available, infection positivity rates are at moderate levels, and the restrictions on businesses have generally been fully lifted. However, the lasting effects of government aid programs are uncertain as stimulus packages taper, and the ultimate long–term impact of the business shutdowns that occurred as a result of COVID–19 remains uncertain in many sectors of the economy. In the third quarter of 2021, COVID–19 positivity rates and hospitalizations in our markets rose due to the impact of the Delta variant, but have now been falling for the last several weeks.
The Federal Reserve, in response to the economic risks resulting from the COVID–19 pandemic, returned to a zero–interest rate policy in March 2020. This was after most broader market rates decreased significantly in response to evolving news about the COVID–19 pandemic. Many areas of consumer and business spending have rebounded in recent months, but there remains uncertainty about the longer lasting impact on local businesses as well as the travel, hospitality and entertainment industries results from the COVID–19 pandemic. This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain those recoveries in the long run. Inflation and supply shortages also pose risks to the economic recovery.
While positive economic indicators exist, we recognize that some of our commercial and individual customers are continuing to experience varying degrees of financial distress, which we expect to continue, through a lesser degree, through the end of 2021 and into early 2022. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID–19 pandemic, which may result in some customers’ inability to meet their loan obligations to us or seek deferrals on their obligations. In addition, the economic pressures and uncertainties related to the COVID–19 pandemic have seemingly resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hotel/lodging, restaurants, retail and commercial real estate, which have been significantly impacted by the COVID–19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID–19 pandemic. We continue to monitor these customers closely.
49
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, 2021 and 2020
Financial Summary
| For the Three Months Ended | ||||||||||||||||||||
| September 30, | June 30, | September 30, | ||||||||||||||||||
| Net Interest Income and Net Interest Margin | 2021 | 2021 | 2020 | |||||||||||||||||
| Net interest income | $ | 46,544 | $ | 42,632 | $ | 43,397 | ||||||||||||||
| Net interest margin | 3.17 | % | 3.14 | % | 3.39 | % | ||||||||||||||
| Adjusted net interest margin | 3.12 | % | 3.13 | % | 3.27 | % | ||||||||||||||
| For the Three Months Ended | ||||||||||||||||||||
| September 30, | June 30, | September 30, | ||||||||||||||||||
| Asset Yields and Funding Costs | 2021 | 2021 | 2020 | |||||||||||||||||
| Interest earning assets | 3.46 | % | 3.48 | % | 3.90 | % | ||||||||||||||
| Interest bearing liabilities | 0.38 | % | 0.45 | % | 0.67 | % | ||||||||||||||
| For the Three Months Ended | ||||||||||||||||||||
| Non–interest Income and Mortgage Banking Income | September 30, | June 30, | September 30, | |||||||||||||||||
| 2021 | 2021 | 2020 | ||||||||||||||||||
| Total non–interest income | $ | 16,044 | $ | 15,207 | $ | 16,700 | ||||||||||||||
| Gain on sale of mortgage loans | 4,088 | 5,612 | 8,813 | |||||||||||||||||
| Mortgage servicing income net of impairment | 336 | 1,503 | (1,308) | |||||||||||||||||
| For the Three Months Ended | ||||||||||||||||||||
| September 30, | June 30, | September 30, | ||||||||||||||||||
| Non–interest Expense | 2021 | 2021 | 2020 | |||||||||||||||||
| Total non–interest expense | $ | 34,349 | $ | 33,388 | $ | 33,407 | ||||||||||||||
| Annualized non–interest expense to average assets | 2.09 | % | 2.18 | % | 2.30 | % | ||||||||||||||
| At or for the Three Months Ended | ||||||||||||||||||||
| Credit Quality | September 30, | June 30, | September 30, | |||||||||||||||||
| 2021 | 2021 | 2020 | ||||||||||||||||||
| Allowance for credit losses to total loans | 1.55 | % | 1.58 | % | 1.39 | % | ||||||||||||||
| Non–performing loans to total loans | 0.80 | % | 0.63 | % | 0.72 | % | ||||||||||||||
| Percent of net charge–offs to average loans outstanding for the period | 0.00 | % | 0.00 | % | 0.02 | % | ||||||||||||||
| Allowance for | December 31, | Net Reserve | September 30, | |||||||||||||||||||||||||||||
| Credit Losses | 2020 | 1Q21 | 2Q21 | 3Q21 | 2021 | |||||||||||||||||||||||||||
| Commercial | $ | 42,210 | $ | 770 | $ | (1,214) | $ | 1,355 | $ | 43,121 | ||||||||||||||||||||||
| Retail Mortgage | 4,620 | (391) | (121) | (371) | 3,737 | |||||||||||||||||||||||||||
| Warehouse | 1,267 | (104) | (8) | (101) | 1,054 | |||||||||||||||||||||||||||
| Consumer | 8,930 | (116) | (194) | 247 | 8,867 | |||||||||||||||||||||||||||
Allowance for Credit Losses (“ACL”) | $ | 57,027 | $ | 159 | $ | (1,537) | 1,130 | $ | 56,779 | |||||||||||||||||||||||
| ACL/Total Loans | 1.47 | % | 1.55 | % | ||||||||||||||||||||||||||||
50
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, 2021 and 2020
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2020 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.
Allowance for Credit Losses
The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.
The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast. Loan losses are estimated using the fair value of collateral for collateral–dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged–off against the ACL. Recoveries of amounts previously charged–off are credited to the ACL. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID–19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.
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 September 30, 2021, Horizon had core deposit intangibles of $21.2 million subject to amortization and $162.8 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 COVID–19, 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 September 30, 2021, it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the COVID–19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.
51
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, 2021 and 2020
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, 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.
52
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, 2021 and 2020
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 September 30, 2021, Horizon’s total assets were $7.5 billion, an increase of approximately $1.6 billion compared to December 31, 2020. The increase in total assets was primarily in cash and due from banks of $722.1 million, investments held to maturity of $600.6 million and investments available for sale of $535.6 million. These increases were offset by a decrease in net loans of $207.1 million.
Investment securities were comprised of the following as of (dollars in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 119,159 | $ | 118,588 | $ | 19,750 | $ | 19,715 | |||||||||||||||
| State and municipal | 1,108,057 | 1,119,123 | 803,100 | 837,843 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 73,922 | 75,525 | 144,022 | 147,453 | |||||||||||||||||||
| Federal agency mortgage–backed pools | 236,432 | 237,705 | 114,484 | 118,799 | |||||||||||||||||||
| Private labeled mortgage–backed pools | 32,948 | 32,937 | — | — | |||||||||||||||||||
| Corporate notes | 84,672 | 85,756 | 9,007 | 10,215 | |||||||||||||||||||
| Total available for sale investment securities | $ | 1,655,190 | $ | 1,669,634 | $ | 1,090,363 | $ | 1,134,025 | |||||||||||||||
| Held to maturity | |||||||||||||||||||||||
| State and municipal | $ | 283,858 | $ | 289,119 | $ | 157,421 | $ | 168,456 | |||||||||||||||
| Federal agency collateralized mortgage obligations | 69,537 | 68,754 | 2,661 | 2,697 | |||||||||||||||||||
| Federal agency mortgage–backed pools | 215,873 | 212,498 | 8,594 | 8,837 | |||||||||||||||||||
| Private labeled mortgage–backed pools | 66,298 | 65,552 | — | — | |||||||||||||||||||
| Corporate notes | 133,674 | 132,176 | — | — | |||||||||||||||||||
| Total held to maturity investment securities | $ | 769,240 | $ | 768,099 | $ | 168,676 | $ | 179,990 | |||||||||||||||
Investment securities available for sale increased $535.6 million since December 31, 2020 to $1.7 billion as of September 30, 2021 and investment securities held to maturity increased $600.6 million since December 31, 2020 to $769.2 million as of September 30, 2021. This increase was due to additional purchases to increase earning assets as the result of organic deposit growth and Horizon’s previously announced acquisition of 14 branches in 11 Michigan counties which increased deposits approximately $846.4 million on September 17, 2021.
53
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, 2021 and 2020
Net loans decreased $207.1 million since December 31, 2020 to $3.7 billion as of September 30, 2021. Mortgage warehouse, commercial, residential mortgage and loans held for sale decreased $225.7 million, $19.1 million, $20.7 million and $8.7 million, respectively. These decreases were offset by an increase in consumer loans of $58.2 million. PPP loans decreased $116.6 million since December 31, 2020 to $92.3 million as of September 30, 2021. These decreases were offset by an increase in consumer loans of $58.2 million. The net loans acquired in the acquisition of 14 branches in 11 Michigan counties of approximately $206.8 million helped to partially offset the decrease in loans.
Total deposits increased $1.4 billion since December 31, 2020 to $6.0 billion as of September 30, 2021. This increase was primarily due to Federal stimulus payments to consumers, funds from the origination of PPP loans and approximately $846.4 million in deposits from the acquisition of 14 branches in 11 Michigan counties.
Total borrowings increased from $475.0 million as of December 31, 2020 to $670.8 million as of September 30, 2021. At September 30, 2021, the Company had $195.2 million in short-term funds borrowed compared to $315.5 million at December 31, 2020. During the second quarter of 2021, the Bank paid–off $50.0 million in long–term Federal Home Loan Bank of Indianapolis advances which resulted in a prepayment penalty of $125,000.
Stockholders’ equity totaled $708.5 million at September 30, 2021 compared to $692.2 million at December 31, 2020. The increase in stockholders’ equity during the period was due to the generation of net income, offset by dividends paid, stock repurchases and a decrease in accumulated other comprehensive income during the period. Book value per common share at September 30, 2021 increased to $16.28 compared to $15.78 at December 31, 2020.
Results of Operations
Overview
Consolidated net income for the three–month period ended September 30, 2021 was $23.1 million, or $0.52 diluted earnings per share, compared to $20.3 million, or $0.46 diluted earnings per share for the same period in 2020. The increase in net income for the three–month period ended September 30, 2021 when compared to the same prior year period reflects an increase in net interest income of $3.1 million, a decrease in credit loss expense of $940,000 and a decrease in income tax expense of $270,000, offset by an increase in non–interest expense of $942,000 and a decrease in non–interest income of $656,000. Excluding acquisition expenses, credit loss expense acquired loans, gain on sale of ESOP trustee accounts, gain on sale of investment securities and death benefit on bank owned life insurance (“adjusted net income”), adjusted net income for the third quarter of 2021 was $23.0 million, or $0.52 diluted earnings per share, compared to $19.4 million, or $0.45 diluted earnings per share for the third quarter of 2020.
Consolidated net income for the nine–month period ended September 30, 2021 was $65.7 million, or $1.49 diluted earnings per share, compared to $46.6 million, or $1.06 diluted earnings per share for the same period in 2020. The increase in net income for the nine–month period ended September 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $5.2 million, an increase in net interest income of $4.4 million and a decrease in credit loss expense of $17.7 million, offset by increases in non–interest expense of $4.9 million and income tax expense of $3.4 million. Excluding acquisition expenses, credit loss expense acquired loans, gain on sale of ESOP trustee account, gain on sale of investment securities, death benefits on bank owned life insurance and prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the nine–month period ended September 30, 2021 was $64.9 million, or $1.46 diluted earnings per share, compared to $45.0 million, or $1.02 diluted earnings per share for the nine–month period ended September 30, 2020.
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, and 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.
54
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, 2021 and 2020
Net interest income during the three months ended September 30, 2021 was $46.5 million, an increase of $3.1 million from the $43.4 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 44 basis points to 3.46% for the three months ended September 30, 2021 from 3.90% for the three months ended September 30, 2020. Interest income increased $722,000 from $50.1 million for the three months ended September 30, 2020 to $50.9 million for the same period in 2021. The increase in interest income was due to an increase in average balances of interest earning assets of $781,000 during the three months ended September 30, 2021. Interest income from acquisition–related purchase accounting adjustments was $875,000 for the three months ending September 30, 2021 compared to $1.5 million for the same period of 2020.
Rates paid on interest bearing liabilities decreased by 29 basis points for the three–month period ended September 30, 2021 compared to the same period in 2020. Interest expense decreased $2.4 million when compared to the three–month period ended September 30, 2020 to $4.3 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 24 basis points while the cost of average borrowings decreased 44 basis points. Average balances of interest bearing deposits increased $497.2 million and average balances of borrowings increased $20.9 million for the three-month period ended September 30, 2021 when compared to the same period in 2020.
The net interest margin decreased 22 basis points from 3.39% for the three–month period ended September 30, 2020 to 3.17% for the same period in 2021. The decrease in the margin for the three–month period ended September 30, 2021 compared to the same period in 2020 was due to a decrease in the yield on interest earning assets, offset by a decrease in the cost of interest bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 3.12% for the three-month period ending September 30, 2021 compared to 3.27% for the same period in 2020.
The net interest margin was impacted due to PPP lending and high level of cash held during the third quarter of 2021. Horizon estimates that the PPP loans increased the net interest margin by 16 basis points for the third quarter of 2021. This assumes these PPP loans were not included in average interest earning assets or interest income and were primarily funded by the growth in non–interest bearing deposits. In addition, Horizon estimates that the high level of cash held on the balance sheet compressed the net interest margin by 16 basis points for the third quarter of 2021. This assumes that the high level of cash was not included in average interest earning assets or interest income and was excluded from non–interest bearing deposits.
55
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, 2021 and 2020
The following are the average balance sheets for the three months ending (dollars in thousands):
| Average Balance Sheets | ||||||||||||||||||||||||||||||||||||||
| (Dollar Amount in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Federal funds sold | $ | 310,180 | $ | 119 | 0.15 | % | $ | 45,307 | $ | 12 | 0.11 | % | ||||||||||||||||||||||||||
| Interest earning deposits | 26,352 | 39 | 0.59 | % | 28,428 | 53 | 0.74 | % | ||||||||||||||||||||||||||||||
| Investment securities – taxable | 1,063,177 | 4,407 | 1.64 | % | 447,762 | 1,639 | 1.46 | % | ||||||||||||||||||||||||||||||
Investment securities – non–taxable (1) | 1,108,503 | 5,911 | 2.68 | % | 720,111 | 4,391 | 3.07 | % | ||||||||||||||||||||||||||||||
Loans receivable (2) (3) | 3,524,876 | 40,392 | 4.56 | % | 4,010,003 | 44,051 | 4.39 | % | ||||||||||||||||||||||||||||||
| Total interest earning assets | 6,033,088 | 50,868 | 3.46 | % | 5,251,611 | 50,146 | 3.90 | % | ||||||||||||||||||||||||||||||
| Non–interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 87,799 | 94,039 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | (55,703) | (55,271) | ||||||||||||||||||||||||||||||||||||
| Other assets | 442,489 | 478,312 | ||||||||||||||||||||||||||||||||||||
| Total average assets | $ | 6,507,673 | $ | 5,768,691 | ||||||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Interest bearing deposits | $ | 3,831,632 | $ | 1,808 | 0.19 | % | $ | 3,334,436 | $ | 3,616 | 0.43 | % | ||||||||||||||||||||||||||
| Borrowings | 598,327 | 1,075 | 0.71 | % | 577,447 | 1,662 | 1.15 | % | ||||||||||||||||||||||||||||||
| Subordinated notes | 58,689 | 880 | 5.95 | % | 58,716 | 895 | 6.06 | % | ||||||||||||||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 56,684 | 561 | 3.93 | % | 56,458 | 576 | 4.06 | % | ||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 4,545,332 | 4,324 | 0.38 | % | 4,027,057 | 6,749 | 0.67 | % | ||||||||||||||||||||||||||||||
| Non–interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Demand deposits | 1,180,890 | 996,427 | ||||||||||||||||||||||||||||||||||||
| Accrued interest payable and other liabilities | 57,039 | 76,410 | ||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 724,412 | 668,797 | ||||||||||||||||||||||||||||||||||||
| Total average liabilities and stockholders’ equity | $ | 6,507,673 | $ | 5,768,691 | ||||||||||||||||||||||||||||||||||
| Net interest income/spread | $ | 46,544 | 3.08 | % | $ | 43,397 | 3.23 | % | ||||||||||||||||||||||||||||||
Net interest income as a percent of average interest earning assets (1) | 3.17 | % | 3.39 | % | ||||||||||||||||||||||||||||||||||
(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. | |||||||||||||||||||||||||||||||||||||
56
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, 2021 and 2020
Net interest income during the nine months ended September 30, 2021 was $131.7 million, an increase of $4.4 million from the $127.3 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 60 basis points to 3.53% for the nine months ended September 30, 2021 from 4.13% for the nine months ended September 30, 2020. Interest income decreased $6.3 million from $152.1 million for the nine months ended September 30, 2020 to $145.9 million for the same period in 2021. Average interest earning assets during the nine months ended September 30, 2021 increased $675.3 million to $5.7 billion compared to $5.0 billion during the nine months ended September 30, 2020. Interest income from acquisition–related purchase accounting adjustments was $2.7 million for the nine months ended September 30, 2021 compared to $4.5 million for the same period of 2020.
Rates paid on interest bearing liabilities decreased 40 basis points for the nine–month period ended September 30, 2021 compared to the same period in 2020. Interest expense decreased $10.7 million when compared to the nine–month period ended September 30, 2020 to $14.2 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 41 basis points while the cost of average borrowings decreased 43 basis points. Average balances of interest bearing deposits increased $393.3 million and average balances of borrowings decreased $66.0 million for the nine–month period ended September 30, 2021 when compared to the same period in 2020.
The net interest margin decreased 28 basis points from 3.48% for the nine–month period ended September 30, 2020 to 3.20% for the same period in 2021. The decrease in the margin for the nine–month period ended September 30, 2021 compared to the same period in 2020 was due to a decrease in the yield of interest earning assets, offset by a decrease in the cost of interest bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.14% for the nine–month period ended September 30, 2021 compared to 3.36% for the same period in 2020.
57
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, 2021 and 2020
| Average Balance Sheets | ||||||||||||||||||||||||||||||||||||||
| (Dollar Amount in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Federal funds sold | $ | 312,359 | $ | 284 | 0.12 | % | $ | 44,375 | $ | 125 | 0.38 | % | ||||||||||||||||||||||||||
| Interest earning deposits | 27,157 | 128 | 0.63 | % | 25,083 | 216 | 1.15 | % | ||||||||||||||||||||||||||||||
| Investment securities – taxable | 708,519 | 8,229 | 1.55 | % | 476,735 | 6,582 | 1.84 | % | ||||||||||||||||||||||||||||||
Investment securities – non–taxable (1) | 1,040,447 | 16,790 | 2.73 | % | 652,339 | 12,294 | 3.19 | % | ||||||||||||||||||||||||||||||
Loans receivable (2) (3) | 3,624,393 | 120,446 | 4.46 | % | 3,839,008 | 132,927 | 4.64 | % | ||||||||||||||||||||||||||||||
| Total interest earning assets | 5,712,875 | 145,877 | 3.53 | % | 5,037,540 | 152,144 | 4.13 | % | ||||||||||||||||||||||||||||||
| Non–interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 85,855 | 85,511 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | (56,885) | (42,864) | ||||||||||||||||||||||||||||||||||||
| Other assets | 455,181 | 469,509 | ||||||||||||||||||||||||||||||||||||
| Total average assets | $ | 6,197,026 | $ | 5,549,696 | ||||||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Interest bearing deposits | $ | 3,679,970 | $ | 6,204 | 0.23 | % | $ | 3,286,648 | $ | 15,838 | 0.64 | % | ||||||||||||||||||||||||||
| Borrowings | 510,264 | 3,640 | 0.95 | % | 576,288 | 5,974 | 1.38 | % | ||||||||||||||||||||||||||||||
| Subordinated debentures | 58,653 | 2,641 | 6.02 | % | 21,218 | 953 | 6.00 | % | ||||||||||||||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 56,628 | 1,678 | 3.96 | % | 56,398 | 2,061 | 4.88 | % | ||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 4,305,515 | 14,163 | 0.44 | % | 3,940,552 | 24,826 | 0.84 | % | ||||||||||||||||||||||||||||||
| Non–interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Demand deposits | 1,128,173 | 879,840 | ||||||||||||||||||||||||||||||||||||
| Accrued interest payable and other liabilities | 53,751 | 69,026 | ||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 709,587 | 660,278 | ||||||||||||||||||||||||||||||||||||
| Total average liabilities and stockholders’ equity | $ | 6,197,026 | $ | 5,549,696 | ||||||||||||||||||||||||||||||||||
| Net interest income/spread | $ | 131,714 | 3.09 | % | $ | 127,318 | 3.29 | % | ||||||||||||||||||||||||||||||
Net interest income as a percent of average interest earning assets (1) | 3.20 | % | 3.48 | % | ||||||||||||||||||||||||||||||||||
(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. | |||||||||||||||||||||||||||||||||||||
58
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, 2021 and 2020
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 September 30, 2021, a provision expense of $1.1 million was required to reflect a $2.0 million allocation for loans acquired in the Michigan branch acquisition and the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $2.1 million for the same period of 2020. During the three–month period ended September 30, 2021, commercial loan net recoveries were $25,000, residential mortgage loan net recoveries were $29,000 and consumer loan net charge–offs were $36,000.
During the nine–month period ended September 30, 2021, a provision reversal of $13,000 was required which includes a $2.0 million allocation for loans acquired in the Michigan branch acquisition and the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $17.7 million for the same period of 2020. During the nine–month period ended September 30, 2021, commercial loan net charge–offs were $179,000, residential mortgage loan net recoveries were $117,000 and consumer net charge–offs were $173,000.
The ACL balance at September 30, 2021 was $56.8 million, or 1.55% of total loans compared to an ACL balance of $57.0 million at December 31, 2020 or 1.47% of total loans. The increase in the ACL to total loans ratio was primarily due to a decrease in loans from December 31, 2020, including a decrease in PPP loans of $116.6 million which do not require a related ACL balance.
As of September 30, 2021, non–performing loans totaled $29.4 million, including approximately $7.3 million acquired in the Michigan branch acquisition, which reflects a $2.6 million increase from $26.8 million in non–performing loans as of December 31, 2020. Non–performing commercial loans increased by $1.8 million, non–performing real estate loans increased by $647,000 and non–performing consumer loans increased by $147,000 at September 30, 2021 compared to December 31, 2020.
The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At September 30, 2021, the Bank modified loans totaling $29.2 million which qualify for treatment under the CARES Act. The following is a summary of loan modifications related to the COVID–19 pandemic by type of loan.
| Type of Loan | # | Net Balance | % of Total Modifications | % of Portfolio | ||||||||||||||||||||||
| Commercial | 7 | $28.3 | 96.9 | % | 1.3 | % | ||||||||||||||||||||
| Mortgage (Retained Only) | 4 | $0.8 | 2.8 | % | 0.1 | % | ||||||||||||||||||||
| Indirect Auto | 2 | $0.0 | 0.0 | % | 0.0 | % | ||||||||||||||||||||
| Consumer Direct | 2 | $0.1 | 0.3 | % | 0.1 | % | ||||||||||||||||||||
| Consumer Revolving | 0 | $0.0 | 0.0 | % | 0.0 | % | ||||||||||||||||||||
| Total | 15 | $29.2 | 100.0 | % | 0.8 | % | ||||||||||||||||||||
| Mortgage (Serviced Only) | 14 | |||||||||||||||||||||||||
Other Real Estate Owned (“OREO”) and repossessed assets totaled $3.0 million at September 30, 2021 compared to $1.9 million at December 31, 2020. The increase was primarily due to several former branch locations totaling $1.8 million being moved to OREO during the third quarter after being closed.
59
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, 2021 and 2020
Non–interest Income
The following is a summary of changes in non–interest income for the three months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
| Three Months Ended | |||||||||||||||||||||||
| September 30, | Amount | Percent | |||||||||||||||||||||
| 2021 | 2020 | Change | Change | ||||||||||||||||||||
| Non–interest Income | |||||||||||||||||||||||
| Service charges on deposit accounts | $ | 2,291 | $ | 2,154 | $ | 137 | 6.4 | % | |||||||||||||||
| Wire transfer fees | 210 | 298 | (88) | (29.5) | % | ||||||||||||||||||
| Interchange fees | 2,587 | 2,438 | 149 | 6.1 | % | ||||||||||||||||||
| Fiduciary activities | 2,124 | 2,105 | 19 | 0.9 | % | ||||||||||||||||||
| Gain on sale of investment securities | — | 1,088 | (1,088) | (100.0) | % | ||||||||||||||||||
| Gain on sale of mortgage loans | 4,088 | 8,813 | (4,725) | (53.6) | % | ||||||||||||||||||
| Mortgage servicing net of impairment | 336 | (1,308) | 1,644 | (125.7) | % | ||||||||||||||||||
| Increase in cash surrender value of bank owned life insurance | 534 | 566 | (32) | (5.7) | % | ||||||||||||||||||
| Death benefit on bank owned life insurance | 517 | 31 | 486 | 0.0 | % | ||||||||||||||||||
| Other income | 3,357 | 515 | 2,842 | 551.8 | % | ||||||||||||||||||
| Total non–interest income | $ | 16,044 | $ | 16,700 | $ | (656) | (3.9) | % | |||||||||||||||
Total non–interest income was $656,000 lower during the third quarter of 2021 compared to the same period of 2020. Residential mortgage loan activity during the third quarter of 2021 generated $4.1 million of income from the gain on sale of mortgage loans, down from $8.8 million for the same period in 2020 due to a lower volume of loans sold and a decrease in the percentage gain on loans sold. Mortgage servicing income, net of impairment, increased $1.6 million during the third quarter of 2021 compared to the same period of 2020 due to an impairment charge of $1.5 million recorded during the third quarter of 2020 offset by a reversal of $299,000 in impairment charges during the third quarter of 2021. Other income increased $2.8 million during the third quarter of 2021 primarily due to the gain on sale of ESOP trustee accounts totaling $2.3 million and the recovery of $876,000 from an acquired charged–off loan. Interchange fees, service charges on deposit accounts and death benefit on bank owned life insurance increased $149,000, $137,000, $486,000, respectively, when comparing the third quarter of 2021 to the same period of 2020.
60
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, 2021 and 2020
The following is a summary of changes in non–interest income for the nine months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
| Nine Months Ended | |||||||||||||||||||||||
| September 30, | Amount | Percent | |||||||||||||||||||||
| 2021 | 2020 | Change | Change | ||||||||||||||||||||
| Non–interest Income | |||||||||||||||||||||||
| Service charges on deposit accounts | $ | 6,682 | $ | 6,488 | $ | 194 | 3.0 | % | |||||||||||||||
| Wire transfer fees | 687 | 699 | (12) | (1.7) | % | ||||||||||||||||||
| Interchange fees | 7,819 | 6,661 | 1,158 | 17.4 | % | ||||||||||||||||||
| Fiduciary activities | 5,828 | 6,398 | (570) | (8.9) | % | ||||||||||||||||||
| Gain on sale of investment securities | 914 | 1,675 | (761) | (45.4) | % | ||||||||||||||||||
| Gain on sale of mortgage loans | 14,996 | 18,906 | (3,910) | (20.7) | % | ||||||||||||||||||
| Mortgage servicing net of impairment | 2,052 | (4,043) | 6,095 | (150.8) | % | ||||||||||||||||||
| Increase in cash surrender value of bank owned life insurance | 1,547 | 1,677 | (130) | (7.8) | % | ||||||||||||||||||
| Death benefit on bank owned life insurance | 783 | 264 | 519 | 196.6 | % | ||||||||||||||||||
| Other income | 3,816 | 1,163 | 2,653 | 228.1 | % | ||||||||||||||||||
| Total non–interest income | $ | 45,124 | $ | 39,888 | $ | 5,236 | 13.1 | % | |||||||||||||||
Total non–interest income was $5.2 million higher for the nine–month period ended September 30, 2021 compared to the same period of 2020. Residential mortgage loan activity during the nine–month period ended September 30, 2021 generated $15.0 million of income from the gain on sale of mortgage loans, down from $18.9 million for the same period in 2020 due to a decrease in the volume of loans sold. Mortgage servicing income, net of impairment, increased $6.1 million during the nine–month period ended September 30, 2021 compared to the same period of 2020 due to the reversal of $2.1 million in impairment charges during the nine–month period ended September 30, 2021 compared to impairment charges of $4.7 million during the same period in 2020. Other income increased $2.7 million during the nine–month period ended September 30, 2021 compared to the same period in 2020 primarily due to the gain on sale of ESOP trustee accounts totaling $2.3 million. Interchange fees increased $1.2 million during the nine–month period ended September 30, 2021 compared to the same period of 2020.
61
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, 2021 and 2020
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Adjusted | |||||||||||||||||||||||||||||||||||||||||||||
| Actual | Acquisition Expenses | Adjusted | Actual | Acquisition Expenses | Adjusted | Amount Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||
| Non–interest Expense | |||||||||||||||||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 18,901 | $ | (25) | $ | 18,876 | $ | 18,832 | $ | — | $ | 18,832 | $ | 44 | 0.2 | % | |||||||||||||||||||||||||||||||
| Net occupancy expenses | 2,935 | (13) | 2,922 | 3,107 | — | 3,107 | (185) | (6.0) | % | ||||||||||||||||||||||||||||||||||||||
| Data processing | 2,526 | (17) | 2,509 | 2,237 | — | 2,237 | 272 | 12.2 | % | ||||||||||||||||||||||||||||||||||||||
| Professional fees | 522 | (53) | 469 | 688 | — | 688 | (219) | (31.8) | % | ||||||||||||||||||||||||||||||||||||||
| Outside services and consultants | 2,330 | (401) | 1,929 | 1,561 | — | 1,561 | 368 | 23.6 | % | ||||||||||||||||||||||||||||||||||||||
| Loan expense | 2,645 | — | 2,645 | 2,876 | — | 2,876 | (231) | (8.0) | % | ||||||||||||||||||||||||||||||||||||||
| FDIC deposit insurance | 279 | — | 279 | 570 | — | 570 | (291) | (51.1) | % | ||||||||||||||||||||||||||||||||||||||
| Other losses | 69 | (1) | 68 | 114 | — | 114 | (46) | (40.4) | % | ||||||||||||||||||||||||||||||||||||||
| Other expenses | 4,142 | (289) | 3,853 | 3,422 | — | 3,422 | 431 | 12.6 | % | ||||||||||||||||||||||||||||||||||||||
| Total non–interest expense | $ | 34,349 | $ | (799) | $ | 33,550 | $ | 33,407 | $ | — | $ | 33,407 | $ | 143 | 0.4 | % | |||||||||||||||||||||||||||||||
| Annualized Non–interest Exp. to Avg. Assets | 2.09 | % | 2.05 | % | 2.30 | % | 2.30 | % | |||||||||||||||||||||||||||||||||||||||
Total non–interest expense was $942,000 higher for the third quarter of 2021 when compared to the third quarter of 2020. Increases in outside services and consultants, other expense and data processing were offset in part by decreases in FDIC deposit insurance and loan expense. Excluding acquisition expenses, total non–interest expense increased by $143,000 in the third quarter of 2021 when compared to the same period in 2020.
Annualized non–interest expense as a percent of average assets was 2.09% and 2.30% for the three months ended September 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.05% and 2.30% for the three months ended September 30, 2021 and 2020, respectively.
62
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, 2021 and 2020
The following is a summary of changes in non–interest expense for the nine months ending September 30, 2021 and 2020 (table dollar amounts in thousands):
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Adjusted | |||||||||||||||||||||||||||||||||||||||||||||
| Actual | Acquisition Expenses | Adjusted | Actual | Acquisition Expenses | Adjusted | Amount Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||
| Non–interest Expense | |||||||||||||||||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 53,502 | $ | (25) | $ | 53,477 | $ | 51,052 | $ | — | $ | 51,052 | $ | 2,425 | 4.8 | % | |||||||||||||||||||||||||||||||
| Net occupancy expenses | 9,337 | (13) | 9,324 | 9,549 | — | 9,549 | (225) | (2.4) | % | ||||||||||||||||||||||||||||||||||||||
| Data processing | 7,290 | (17) | 7,273 | 7,074 | — | 7,074 | 199 | 2.8 | % | ||||||||||||||||||||||||||||||||||||||
| Professional fees | 1,654 | (104) | 1,550 | 1,742 | — | 1,742 | (192) | (11.0) | % | ||||||||||||||||||||||||||||||||||||||
| Outside services and consultants | 6,252 | (588) | 5,664 | 5,235 | — | 5,235 | 429 | 8.2 | % | ||||||||||||||||||||||||||||||||||||||
| Loan expense | 8,574 | — | 8,574 | 7,667 | — | 7,667 | 907 | 11.8 | % | ||||||||||||||||||||||||||||||||||||||
| FDIC deposit insurance | 1,579 | — | 1,579 | 955 | — | 955 | 624 | 65.3 | % | ||||||||||||||||||||||||||||||||||||||
| Other losses | 358 | (1) | 357 | 427 | — | 427 | (70) | (16.4) | % | ||||||||||||||||||||||||||||||||||||||
| Other expenses | 11,363 | (293) | 11,070 | 11,287 | — | 11,287 | (217) | (1.9) | % | ||||||||||||||||||||||||||||||||||||||
| Total non–interest expense | $ | 99,909 | $ | (1,041) | $ | 98,868 | $ | 94,988 | $ | — | $ | 94,988 | $ | 3,880 | 4.1 | % | |||||||||||||||||||||||||||||||
| Annualized Non–interest Exp. to Avg. Assets | 2.16 | % | 2.13 | % | 2.29 | % | 2.29 | % | |||||||||||||||||||||||||||||||||||||||
Total non–interest expense was $4.9 million higher for the nine–month period ended September 30, 2021 compared to the same period of 2020. Increases in salaries and employee benefits, outside services and consultants, loan expense, FDIC insurance expense and data processing were offset in part by a decrease in net occupancy expense. Excluding acquisition expenses, total non–interest expense increased $3.9 million for the nine–month period ended September 30, 2021 compared to the same period of 2020.
Annualized non–interest expense as a percent of average assets was 2.16% and 2.29% for the nine–month period ended September 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.13% and 2.29% for the nine–month period ended September 30, 2021 and 2020, respectively.
Income Taxes
Income tax expense totaled $4.1 million for the third quarter of 2021, a decrease of $270,000 when compared to the third quarter of 2020.
Income tax expense totaled $11.3 million for the nine–month period ended September 30, 2021, an increase of $3.4 million when compared to the same period of 2020. The increase in income tax expense was primarily due to an increase in income before taxes of $22.4 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 September 30, 2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon,
63
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, 2021 and 2020
the Bank had approximately $651.7 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $1.04 billion at December 31, 2020. The Bank had approximately $1.7 billion of unpledged investment securities at September 30, 2021 compared to $632.4 million at December 31, 2020.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2021. Stockholders’ equity totaled $708.5 million as of September 30, 2021, compared to $692.2 million as of December 31, 2020. For the nine months ended September 30, 2021, the ratio of average stockholders’ equity to average assets was 11.45% compared to 11.82% for the twelve months ended December 31, 2020. The increase in stockholders’ equity during the period was the result of net income recorded during the period offset in part by a decrease in accumulated other comprehensive income, stock repurchases and dividends declared.
Horizon declared common stock dividends in the amount of $0.41 per share during the first nine months of 2021 and $0.36 per share for the same period of 2020. The dividend payout ratio (dividends as a percent of basic earnings per share) was 27.3% and 34.0% for the first nine months of 2021 and 2020, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2020.
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, net interest margin, the allowance for credit losses, tangible stockholders’ equity, tangible book value per share, the return on average assets, the return on average common equity, and pre–tax pre–provision net income. In each case, we have identified special circumstances that we consider to be adjustments and have excluded them, to show the impact of such events as acquisition–related purchase accounting adjustments, among others we have identified in our reconciliations. Horizon believes that these non–GAAP financial measures are helpful to investors and provide a greater understanding of our business and financial results without giving effect to the purchase accounting impacts and other adjustments. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.
64
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, 2021 and 2020
| Non–GAAP Reconciliation of Net Income | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | June 30, | March 31, | December 31, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Net income as reported | $ | 23,071 | $ | 22,173 | $ | 20,422 | $ | 21,893 | $ | 20,312 | $ | 65,666 | $ | 46,606 | ||||||||||||||||||||||||||||||
| Acquisition expenses | 799 | 242 | — | — | — | 1,041 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | (166) | (51) | — | — | — | (217) | — | |||||||||||||||||||||||||||||||||||||
| Net income excluding acquisition expenses | 23,704 | 22,364 | 20,422 | 21,893 | 20,312 | 66,490 | 46,606 | |||||||||||||||||||||||||||||||||||||
| Credit loss expense acquired loans | 2,034 | — | — | — | — | 2,034 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | (427) | — | — | — | — | (427) | — | |||||||||||||||||||||||||||||||||||||
| Net income excluding credit loss expense acquired loans | 25,311 | 22,364 | 20,422 | 21,893 | 20,312 | 68,097 | 46,606 | |||||||||||||||||||||||||||||||||||||
| Gain on sale of ESOP trustee accounts | (2,329) | — | — | — | — | (2,329) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 489 | — | — | — | — | 489 | — | |||||||||||||||||||||||||||||||||||||
| Net income excluding gain on sale of ESOP trustee accounts | 23,471 | 22,364 | 20,422 | 21,893 | 20,312 | 66,257 | 46,606 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | — | (914) | (2,622) | (1,088) | (914) | (1,675) | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | 192 | 551 | 228 | 192 | 352 | |||||||||||||||||||||||||||||||||||||
| Net income excluding (gain)/loss on sale of investment securities | 23,471 | 22,364 | 19,700 | 19,822 | 19,452 | 65,535 | 45,283 | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance (“BOLI”) | (517) | (266) | — | — | (31) | (783) | (264) | |||||||||||||||||||||||||||||||||||||
| Net income excluding death benefit on BOLI | 22,954 | 22,098 | 19,700 | 19,822 | 19,421 | 64,752 | 45,019 | |||||||||||||||||||||||||||||||||||||
| Prepayment penalties on borrowings | — | 125 | — | 3,804 | — | 125 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | (26) | — | (799) | — | (26) | — | |||||||||||||||||||||||||||||||||||||
| Net income excluding prepayment penalties on borrowings | 22,954 | 22,197 | 19,700 | 22,827 | 19,421 | 64,851 | 45,019 | |||||||||||||||||||||||||||||||||||||
| Adjusted net income | $ | 22,954 | $ | 22,197 | $ | 19,700 | $ | 22,827 | $ | 19,421 | $ | 64,851 | $ | 45,019 | ||||||||||||||||||||||||||||||
65
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, 2021 and 2020
| Non–GAAP Reconciliation of Diluted Earnings per Share | ||||||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | June 30, | March 31, | December 31, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share (“EPS”) as reported | $ | 0.52 | $ | 0.50 | $ | 0.46 | $ | 0.50 | $ | 0.46 | $ | 1.49 | $ | 1.06 | ||||||||||||||||||||||||||||||
| Acquisition expenses | 0.02 | 0.01 | — | — | — | 0.02 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding acquisition expenses | 0.54 | 0.51 | 0.46 | 0.50 | 0.46 | 1.51 | 1.06 | |||||||||||||||||||||||||||||||||||||
| Credit loss expense acquired loans | 0.05 | — | — | — | — | 0.05 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | (0.01) | — | — | — | — | (0.01) | — | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding credit loss expense acquired loans | 0.58 | 0.51 | 0.46 | 0.50 | 0.46 | 1.55 | 1.06 | |||||||||||||||||||||||||||||||||||||
| Gain on sale of ESOP trustee accounts | (0.05) | — | — | — | — | (0.05) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 0.01 | — | — | — | — | 0.01 | — | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding gain on sale of ESOP trustee accounts | 0.54 | 0.51 | 0.46 | 0.50 | 0.46 | 1.51 | 1.06 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | — | (0.02) | (0.06) | (0.02) | (0.02) | (0.04) | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | — | 0.01 | 0.01 | — | 0.01 | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding (gain)/loss on investment securities | 0.54 | 0.51 | 0.44 | 0.45 | 0.45 | 1.49 | 1.03 | |||||||||||||||||||||||||||||||||||||
| Death benefit on BOLI | (0.02) | (0.01) | — | — | — | (0.03) | (0.01) | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding death benefit on BOLI | 0.52 | 0.50 | 0.44 | 0.45 | 0.45 | 1.46 | 1.02 | |||||||||||||||||||||||||||||||||||||
| Prepayment penalties on borrowings | — | — | — | 0.09 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | — | (0.02) | — | — | — | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding prepayment penalties on borrowings | 0.52 | 0.50 | 0.44 | 0.52 | 0.45 | 1.46 | 1.02 | |||||||||||||||||||||||||||||||||||||
| Adjusted Diluted EPS | $ | 0.52 | $ | 0.50 | $ | 0.44 | $ | 0.52 | $ | 0.45 | $ | 1.46 | $ | 1.02 | ||||||||||||||||||||||||||||||
66
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, 2021 and 2020
| Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | June 30, | March 31, | December 31, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Pre–tax income | $ | 27,127 | $ | 25,943 | $ | 23,872 | $ | 23,860 | $ | 24,638 | $ | 76,942 | $ | 54,509 | ||||||||||||||||||||||||||||||
| Credit loss expense (reversal) | 1,112 | (1,492) | 367 | 3,042 | 2,052 | (13) | 17,709 | |||||||||||||||||||||||||||||||||||||
| Pre–tax, pre–provision net income | $ | 28,239 | $ | 24,451 | $ | 24,239 | $ | 26,902 | $ | 26,690 | $ | 76,929 | $ | 72,218 | ||||||||||||||||||||||||||||||
| Pre–tax, pre–provision net income | $ | 28,239 | $ | 24,451 | $ | 24,239 | $ | 26,902 | $ | 26,690 | $ | 76,929 | $ | 72,218 | ||||||||||||||||||||||||||||||
| Acquisition expenses | 799 | 242 | — | — | — | 1,041 | — | |||||||||||||||||||||||||||||||||||||
| Gain on sale of ESOP trustee accounts | (2,329) | — | — | — | — | (2,329) | — | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | — | (914) | (2,622) | (1,088) | (914) | (1,675) | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance | (517) | (266) | — | — | (31) | (783) | (264) | |||||||||||||||||||||||||||||||||||||
| Prepayment penalties on borrowings | — | 125 | — | 3,804 | — | 125 | — | |||||||||||||||||||||||||||||||||||||
| Adjusted pre–tax, pre–provision net income | $ | 26,192 | $ | 24,552 | $ | 23,325 | $ | 28,084 | $ | 25,571 | $ | 74,069 | $ | 70,279 | ||||||||||||||||||||||||||||||
| Non–GAAP Reconciliation of Net 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, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Net interest income as reported | $ | 46,544 | $ | 42,632 | $ | 42,538 | $ | 43,622 | $ | 43,397 | $ | 131,714 | $ | 127,318 | ||||||||||||||||||||||||||||||
| Average interest earning assets | 6,033,088 | 5,659,384 | 5,439,634 | 5,365,888 | 5,251,611 | 5,712,875 | 5,037,540 | |||||||||||||||||||||||||||||||||||||
| Net interest income as a percentage of average interest earning assets (“Net Interest Margin”) | 3.17 | % | 3.14 | % | 3.29 | % | 3.34 | % | 3.39 | % | 3.20 | % | 3.48 | % | ||||||||||||||||||||||||||||||
| Net interest income as reported | $ | 46,544 | $ | 42,632 | $ | 42,538 | $ | 43,622 | $ | 43,397 | $ | 131,714 | $ | 127,318 | ||||||||||||||||||||||||||||||
| Acquisition–related purchase accounting adjustments (“PAUs”) | (875) | (230) | (1,579) | (2,461) | (1,488) | (2,684) | (4,475) | |||||||||||||||||||||||||||||||||||||
| Prepayment penalties on borrowings | — | 125 | — | 3,804 | — | 125 | — | |||||||||||||||||||||||||||||||||||||
| Adjusted net interest income | $ | 45,669 | $ | 42,527 | $ | 40,959 | $ | 44,965 | $ | 41,909 | $ | 129,155 | $ | 122,843 | ||||||||||||||||||||||||||||||
| Adjusted net interest margin | 3.12 | % | 3.13 | % | 3.17 | % | 3.44 | % | 3.27 | % | 3.14 | % | 3.36 | % | ||||||||||||||||||||||||||||||
67
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, 2021 and 2020
| Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share | ||||||||||||||||||||||||||||||||
| (Dollars in Thousands Except per Share Data, Unaudited) | ||||||||||||||||||||||||||||||||
| September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | ||||||||||||||||||||||||||||
| Total stockholders’ equity | $ | 708,542 | $ | 710,374 | $ | 689,379 | $ | 692,216 | $ | 670,293 | ||||||||||||||||||||||
| Less: Intangible assets | 183,938 | 172,398 | 173,296 | 174,193 | 175,107 | |||||||||||||||||||||||||||
| Total tangible stockholders’ equity | $ | 524,604 | $ | 537,976 | $ | 516,083 | $ | 518,023 | $ | 495,186 | ||||||||||||||||||||||
| Common shares outstanding | 43,520,694 | 43,950,720 | 43,949,189 | 43,880,562 | 43,874,353 | |||||||||||||||||||||||||||
| Book value per common share | $ | 16.28 | $ | 16.16 | $ | 15.69 | $ | 15.78 | $ | 15.28 | ||||||||||||||||||||||
| Tangible book value per common share | $ | 12.05 | $ | 12.24 | $ | 11.74 | $ | 11.81 | $ | 11.29 | ||||||||||||||||||||||
68
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, 2021 and 2020
| Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | June 30, | March 31, | December 31, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Non–interest expense as reported | $ | 34,349 | $ | 33,388 | $ | 32,172 | $ | 36,453 | $ | 33,407 | $ | 99,909 | $ | 94,988 | ||||||||||||||||||||||||||||||
| Net interest income as reported | 46,544 | 42,632 | 42,538 | 43,622 | 43,397 | 131,714 | 127,318 | |||||||||||||||||||||||||||||||||||||
| Non–interest income as reported | $ | 16,044 | $ | 15,207 | $ | 13,873 | $ | 19,733 | $ | 16,700 | $ | 45,124 | $ | 39,888 | ||||||||||||||||||||||||||||||
| Non–interest expense/(Net interest income + Non–interest income) ("Efficiency Ratio") | 54.88 | % | 57.73 | % | 57.03 | % | 57.54 | % | 55.59 | % | 56.50 | % | 56.81 | % | ||||||||||||||||||||||||||||||
| Non–interest expense as reported | $ | 34,349 | $ | 33,388 | $ | 32,172 | $ | 36,453 | $ | 33,407 | $ | 99,909 | $ | 94,988 | ||||||||||||||||||||||||||||||
| Acquisition expenses | (799) | (242) | — | — | — | (1,041) | — | |||||||||||||||||||||||||||||||||||||
| Non–interest expense excluding acquisition expenses | 33,550 | 33,146 | 32,172 | 36,453 | 33,407 | 98,868 | 94,988 | |||||||||||||||||||||||||||||||||||||
| Net interest income as reported | 46,544 | 42,632 | 42,538 | 43,622 | 43,397 | 131,714 | 127,318 | |||||||||||||||||||||||||||||||||||||
| Prepayment penalties on borrowings | — | 125 | — | 3,804 | — | 125 | — | |||||||||||||||||||||||||||||||||||||
| Net interest income excluding prepayment penalties on borrowings | 46,544 | 42,757 | 42,538 | 47,426 | 43,397 | 131,839 | 127,318 | |||||||||||||||||||||||||||||||||||||
| Non–interest income as reported | 16,044 | 15,207 | 13,873 | 19,733 | 16,700 | 45,124 | 39,888 | |||||||||||||||||||||||||||||||||||||
| Gain on sale of ESOP trustee accounts | (2,329) | — | — | — | — | (2,329) | — | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | — | (914) | (2,622) | (1,088) | (914) | (1,675) | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance ("BOLI") | (517) | (266) | — | — | (31) | (783) | (264) | |||||||||||||||||||||||||||||||||||||
| Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI | $ | 13,198 | $ | 14,941 | $ | 12,959 | $ | 17,111 | $ | 15,581 | $ | 41,098 | $ | 37,949 | ||||||||||||||||||||||||||||||
| Adjusted efficiency ratio | 56.16 | % | 57.45 | % | 57.97 | % | 56.48 | % | 56.64 | % | 57.17 | % | 57.48 | % | ||||||||||||||||||||||||||||||
69
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, 2021 and 2020
| Non–GAAP Reconciliation of Return on Average Assets | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | June 30, | March 31, | December 31, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Average assets | $ | 6,507,673 | $ | 6,142,507 | $ | 5,936,149 | $ | 5,864,086 | $ | 5,768,691 | $ | 6,197,026 | $ | 5,549,696 | ||||||||||||||||||||||||||||||
| Return on average assets ("ROAA") as reported | 1.41 | % | 1.45 | % | 1.40 | % | 1.49 | % | 1.40 | % | 1.42 | % | 1.12 | % | ||||||||||||||||||||||||||||||
| Acquisition expenses | 0.05 | 0.02 | — | — | — | 0.02 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | (0.01) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| ROAA excluding acquisition expenses | 1.45 | 1.47 | 1.40 | 1.49 | 1.40 | 1.44 | 1.12 | |||||||||||||||||||||||||||||||||||||
| Credit loss expense acquired loans | 0.12 | — | — | — | — | 0.04 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | (0.03) | — | — | — | — | (0.01) | — | |||||||||||||||||||||||||||||||||||||
| ROAA excluding credit loss expense acquired loans | 1.54 | 1.47 | 1.40 | 1.49 | 1.40 | 1.47 | 1.12 | |||||||||||||||||||||||||||||||||||||
| Gain on sale of ESOP trustee accounts | (0.14) | — | — | — | — | (0.05) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 0.03 | — | — | — | — | 0.01 | — | |||||||||||||||||||||||||||||||||||||
| ROAA excluding gain on sale of ESOP trustee accounts | 1.43 | 1.47 | 1.40 | 1.49 | 1.40 | 1.43 | 1.12 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | — | (0.06) | (0.18) | (0.08) | (0.02) | (0.04) | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | 0.01 | 0.04 | 0.02 | — | 0.01 | |||||||||||||||||||||||||||||||||||||
| ROAA excluding (gain)/loss on sale of investment securities | 1.43 | 1.47 | 1.35 | 1.35 | 1.34 | 1.41 | 1.09 | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance ("BOLI") | (0.03) | (0.02) | — | — | — | (0.02) | (0.01) | |||||||||||||||||||||||||||||||||||||
| ROAA excluding death benefit on BOLI | 1.40 | 1.45 | 1.35 | 1.35 | 1.34 | 1.39 | 1.08 | |||||||||||||||||||||||||||||||||||||
| Prepayment penalties on borrowings | — | 0.01 | — | 0.26 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | — | (0.05) | — | — | — | |||||||||||||||||||||||||||||||||||||
| ROAA excluding prepayment penalties on borrowings | 1.40 | 1.46 | 1.35 | 1.56 | 1.34 | 1.39 | 1.08 | |||||||||||||||||||||||||||||||||||||
| Adjusted ROAA | 1.40 | % | 1.46 | % | 1.35 | % | 1.56 | % | 1.34 | % | 1.39 | % | 1.08 | % | ||||||||||||||||||||||||||||||
70
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, 2021 and 2020
| Non–GAAP Reconciliation of Return on Average 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, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||
| Average common equity | $ | 724,412 | $ | 706,652 | $ | 697,401 | $ | 680,857 | $ | 668,797 | $ | 709,587 | $ | 660,278 | ||||||||||||||||||||||||||||||
| Return on average common equity ("ROACE") as reported | 12.64 | % | 12.59 | % | 11.88 | % | 12.79 | % | 12.08 | % | 12.37 | % | 9.43 | % | ||||||||||||||||||||||||||||||
| Acquisition expenses | 0.44 | 0.14 | — | — | — | 0.20 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | (0.09) | (0.03) | — | — | — | (0.04) | — | |||||||||||||||||||||||||||||||||||||
| ROACE excluding acquisition expenses | 12.99 | 12.70 | 11.88 | 12.79 | 12.08 | 12.53 | 9.43 | |||||||||||||||||||||||||||||||||||||
| Credit loss expense acquired loans | 1.11 | — | — | — | — | 0.38 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | (0.23) | — | — | — | — | (0.08) | — | |||||||||||||||||||||||||||||||||||||
| ROACE excluding credit loss expense acquired loans | 13.87 | 12.70 | 11.88 | 12.79 | 12.08 | 12.83 | 9.43 | |||||||||||||||||||||||||||||||||||||
| Gain on sale of ESOP trustee accounts | (1.28) | — | — | — | — | (0.44) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 0.27 | — | — | — | — | 0.09 | — | |||||||||||||||||||||||||||||||||||||
| ROACE excluding gain on sale of ESOP trustee accounts | 12.86 | 12.70 | 11.88 | 12.79 | 12.08 | 12.48 | 9.43 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | — | (0.53) | (1.53) | (0.65) | (0.17) | (0.34) | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | 0.11 | 0.32 | 0.14 | 0.04 | 0.07 | |||||||||||||||||||||||||||||||||||||
| ROACE excluding (gain)/loss on sale of investment securities | 12.86 | 12.70 | 11.46 | 11.58 | 11.57 | 12.35 | 9.16 | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance ("BOLI") | (0.29) | (0.15) | — | — | (0.02) | (0.15) | (0.05) | |||||||||||||||||||||||||||||||||||||
| ROACE excluding death benefit on BOLI | 12.57 | 12.55 | 11.46 | 11.58 | 11.55 | 12.20 | 9.11 | |||||||||||||||||||||||||||||||||||||
| Prepayment penalties on borrowings | — | 0.07 | — | 2.22 | — | 0.02 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | (0.01) | — | (0.47) | — | — | — | |||||||||||||||||||||||||||||||||||||
| ROACE excluding prepayment penalties on borrowings | 12.57 | 12.61 | 11.46 | 13.33 | 11.55 | 12.22 | 9.11 | |||||||||||||||||||||||||||||||||||||
| Adjusted ROACE | 12.57 | % | 12.61 | % | 11.46 | % | 13.33 | % | 11.55 | % | 12.22 | % | 9.11 | % | ||||||||||||||||||||||||||||||
71
HORIZON BANCORP, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon’s 2020 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 2020 Annual Report on Form 10–K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation of disclosure controls and procedures as of September 30, 2021, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a–15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended September 30, 2021, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.
72
HORIZON BANCORP, INC. AND SUBSIDIARIES
Part II – Other Information
ITEM 1. LEGAL PROCEEDINGS
Horizon and its subsidiaries are involved in various legal proceedings incidental to the conduct of their business. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form 10–K for the fiscal year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)Unregistered Sales of Equity Securities: Not Applicable
(b)Use of Proceeds: Not Applicable
(c)Repurchase of Our Equity Securities
The following table presents information relating to our purchases of equity securities during the three months ended September 30, 2021.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as part of Publicly announced Plans or Programs (1) | Maximum Number of Shares that may yet be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| July 1–31, 2021 | — | $ | — | 373,323 | 1,876,677 | |||||||||||||||||||||
| August 1–31, 2021 | 275,894 | 17.71 | 649,217 | 1,600,783 | ||||||||||||||||||||||
| September 1–30, 2021 | 154,132 | 17.65 | 803,349 | 1,446,651 | ||||||||||||||||||||||
| Total | 430,026 | $ | 17.69 | 803,349 | 1,446,651 | |||||||||||||||||||||
(1) On July 16, 2019, the Board of Directors authorized a stock repurchase program for up to 2,250,000 shares of Horizon common stock, without par value. Horizon announced the program publicly on July 17, 2019. The program will continue until otherwise modified, suspended or terminated by the Board of Directors in its sole discretion and without notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
73
ITEM 6. EXHIBITS
(a) Exhibits
| Exhibit No. | Description | Location | ||||||
| 31.1 | Attached | |||||||
| 31.2 | Attached | |||||||
| 32 | Attached | |||||||
| 101 | Inline Interactive Data Files | Attached | ||||||
| 104 | The cover page from the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 2021, has been formatted in Inline XBRL | Within the Inline XBRL document | ||||||
74
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HORIZON BANCORP, INC. | ||||||||
| November 8, 2021 | /s/ Craig M. Dwight | |||||||
| Date | Craig M. Dwight | |||||||
| Chief Executive Officer | ||||||||
| November 8, 2021 | /s/ Mark E. Secor | |||||||
| Date | Mark E. Secor | |||||||
| Chief Financial Officer | ||||||||
75