HORIZON BANCORP INC /IN/ - Quarter Report: 2023 June (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 June 30, 2023
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: 44,109,704 shares of Common Stock, no par value, at August 7, 2023.
2
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
| June 30, 2023 | December 31, 2022 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | 228,986 | $ | 123,505 | |||||||
| Interest earning time deposits | 2,452 | 2,812 | |||||||||
| Investment securities, available for sale | 905,813 | 997,558 | |||||||||
Investment securities, held to maturity (fair value of $1,668,229 and $1,681,309) | 1,983,496 | 2,022,748 | |||||||||
| Loans held for sale | 6,933 | 5,807 | |||||||||
Loans, net of allowance for credit losses of $49,976 and $50,464 | 4,216,284 | 4,107,534 | |||||||||
| Premises and equipment, net | 95,053 | 92,677 | |||||||||
| Federal Home Loan Bank stock | 34,509 | 26,677 | |||||||||
| Goodwill | 155,211 | 155,211 | |||||||||
| Other intangible assets | 15,433 | 17,239 | |||||||||
| Interest receivable | 37,536 | 35,294 | |||||||||
| Cash value of life insurance | 148,171 | 146,175 | |||||||||
| Other assets | 133,476 | 139,281 | |||||||||
| Total assets | $ | 7,963,353 | $ | 7,872,518 | |||||||
| Liabilities | |||||||||||
| Deposits | |||||||||||
| Non–interest bearing | $ | 1,170,055 | $ | 1,277,768 | |||||||
| Interest bearing | 4,539,277 | 4,580,006 | |||||||||
| Total deposits | 5,709,332 | 5,857,774 | |||||||||
| Borrowings | 1,352,039 | 1,142,949 | |||||||||
| Subordinated notes | 58,970 | 58,896 | |||||||||
| Junior subordinated debentures issued to capital trusts | 57,143 | 57,027 | |||||||||
| Interest payable | 12,739 | 5,380 | |||||||||
| Other liabilities | 63,887 | 73,117 | |||||||||
| Total liabilities | 7,254,110 | 7,195,143 | |||||||||
| 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 and Outstanding 44,112,816 and 43,937,889 shares | — | — | |||||||||
| Additional paid-in capital | 354,953 | 354,188 | |||||||||
| Retained earnings | 452,209 | 429,385 | |||||||||
| Accumulated other comprehensive loss | (97,919) | (106,198) | |||||||||
| Total stockholders’ equity | 709,243 | 677,375 | |||||||||
| Total liabilities and stockholders’ equity | $ | 7,963,353 | $ | 7,872,518 | |||||||
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 | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Interest Income | |||||||||||||||||||||||
| Loans receivable | $ | 60,594 | $ | 40,585 | $ | 115,958 | $ | 77,124 | |||||||||||||||
| Investment securities – taxable | 8,740 | 8,673 | 17,465 | 16,064 | |||||||||||||||||||
| Investment securities – tax exempt | 7,059 | 7,307 | 14,615 | 14,004 | |||||||||||||||||||
| Other | 475 | 43 | 628 | 158 | |||||||||||||||||||
| Total interest income | 76,868 | 56,608 | 148,666 | 107,350 | |||||||||||||||||||
| Interest Expense | |||||||||||||||||||||||
| Deposits | 18,958 | 1,677 | 33,777 | 3,173 | |||||||||||||||||||
| Borrowed funds | 9,718 | 1,450 | 19,489 | 2,530 | |||||||||||||||||||
| Subordinated notes | 881 | 881 | 1,761 | 1,761 | |||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 1,151 | 556 | 2,242 | 1,011 | |||||||||||||||||||
| Total interest expense | 30,708 | 4,564 | 57,269 | 8,475 | |||||||||||||||||||
| Net Interest Income | 46,160 | 52,044 | 91,397 | 98,875 | |||||||||||||||||||
| Credit loss expense (recovery) | 680 | 240 | 922 | (1,146) | |||||||||||||||||||
| Net Interest Income after Credit Loss Expense (Recovery) | 45,480 | 51,804 | 90,475 | 100,021 | |||||||||||||||||||
| Non–interest Income | |||||||||||||||||||||||
| Service charges on deposit accounts | 3,021 | 2,833 | 6,049 | 5,628 | |||||||||||||||||||
| Wire transfer fees | 116 | 170 | 225 | 329 | |||||||||||||||||||
| Interchange fees | 3,584 | 3,582 | 6,451 | 6,362 | |||||||||||||||||||
| Fiduciary activities | 1,247 | 1,405 | 2,522 | 2,908 | |||||||||||||||||||
| Gain (loss) on sale of investment securities | 20 | — | (480) | — | |||||||||||||||||||
| Gain on sale of mortgage loans | 1,005 | 2,501 | 1,790 | 4,528 | |||||||||||||||||||
| Mortgage servicing income, net | 640 | 319 | 1,353 | 3,808 | |||||||||||||||||||
| Increase in cash value of bank owned life insurance | 1,015 | 519 | 1,996 | 1,029 | |||||||||||||||||||
| Death benefit on bank owned life insurance | — | 644 | — | 644 | |||||||||||||||||||
| Other income | 349 | 461 | 711 | 1,353 | |||||||||||||||||||
| Total non–interest income | 10,997 | 12,434 | 20,617 | 26,589 | |||||||||||||||||||
| Non–interest Expense | |||||||||||||||||||||||
| Salaries and employee benefits | 20,162 | 19,957 | 38,874 | 39,692 | |||||||||||||||||||
| Net occupancy expenses | 3,249 | 3,190 | 6,812 | 6,751 | |||||||||||||||||||
| Data processing | 3,016 | 2,607 | 5,685 | 5,144 | |||||||||||||||||||
| Professional fees | 633 | 283 | 1,166 | 597 | |||||||||||||||||||
| Outside services and consultants | 2,515 | 2,485 | 5,232 | 5,010 | |||||||||||||||||||
| Loan expense | 1,397 | 1,533 | 2,515 | 2,738 | |||||||||||||||||||
| FDIC insurance expense | 840 | 775 | 1,380 | 1,500 | |||||||||||||||||||
| Core deposit intangible amortization | 903 | 925 | 1,806 | 1,851 | |||||||||||||||||||
| Other losses | 134 | 362 | 355 | 530 | |||||||||||||||||||
| Other expense | 3,413 | 3,287 | 6,961 | 6,861 | |||||||||||||||||||
| Total non–interest expense | 36,262 | 35,404 | 70,786 | 70,674 | |||||||||||||||||||
| Income Before Income Taxes | 20,215 | 28,834 | 40,306 | 55,936 | |||||||||||||||||||
| Income tax expense | 1,452 | 3,975 | 3,315 | 7,514 | |||||||||||||||||||
| Net Income | $ | 18,763 | $ | 24,859 | $ | 36,991 | $ | 48,422 | |||||||||||||||
| Basic Earnings Per Share | $ | 0.43 | $ | 0.57 | $ | 0.85 | $ | 1.11 | |||||||||||||||
| Diluted Earnings Per Share | 0.43 | 0.57 | 0.85 | 1.11 | |||||||||||||||||||
4
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Dollar Amounts in Thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Income | $ | 18,763 | $ | 24,859 | $ | 36,991 | $ | 48,422 | |||||||||||||||
| Other Comprehensive Income (Loss) | |||||||||||||||||||||||
| Change in fair value of derivative instruments: | |||||||||||||||||||||||
| Change in fair value of derivative instruments for the period | 35 | 1,043 | (523) | 3,789 | |||||||||||||||||||
| Reclassification adjustment for swap termination gain realized in income | (1,453) | — | (1,453) | — | |||||||||||||||||||
| Income tax effect | 299 | (219) | 415 | (796) | |||||||||||||||||||
| Changes from derivative instruments | (1,119) | 824 | (1,561) | 2,993 | |||||||||||||||||||
| Change in securities: | |||||||||||||||||||||||
| Unrealized gain (loss) for the period on available for sale securities | (5,795) | (48,333) | 12,349 | (129,157) | |||||||||||||||||||
| Reclassification of securities from available for sale to held to maturity | — | — | — | (794) | |||||||||||||||||||
| Amortization (accretion) from transfer of securities from available for sale to held to maturity securities | (219) | (1,181) | (373) | (938) | |||||||||||||||||||
| Reclassification adjustment for securities (gains) losses realized in income | (20) | — | 480 | — | |||||||||||||||||||
| Income tax effect | 1,266 | 10,398 | (2,616) | 27,487 | |||||||||||||||||||
| Unrealized gains (losses) on securities | (4,768) | (39,116) | 9,840 | (103,402) | |||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Tax | (5,887) | (38,292) | 8,279 | (100,409) | |||||||||||||||||||
| Comprehensive Income (Loss) | $ | 12,876 | $ | (13,433) | $ | 45,270 | $ | (51,987) | |||||||||||||||
See notes to condensed consolidated financial statements
5
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements 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 (Loss) | Total | ||||||||||||||||||||||||||||||
| Balances, April 1, 2022 | $ | — | $ | — | $ | 351,522 | $ | 380,700 | $ | (54,772) | $ | 677,450 | |||||||||||||||||||||||
| Net income | — | — | — | 24,859 | — | 24,859 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (38,292) | (38,292) | |||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 627 | — | — | 627 | |||||||||||||||||||||||||||||
| Net settlement of share awards | — | — | (25) | — | — | (25) | |||||||||||||||||||||||||||||
| Stock retirement plans | — | — | 288 | — | — | 288 | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.16 per share) | — | — | — | (7,042) | — | (7,042) | |||||||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | — | $ | — | $ | 352,412 | $ | 398,517 | $ | (93,064) | $ | 657,865 | |||||||||||||||||||||||
| Balances, April 1, 2023 | $ | — | $ | — | $ | 354,035 | $ | 440,556 | $ | (92,032) | $ | 702,559 | |||||||||||||||||||||||
| Net income | — | — | — | 18,763 | — | 18,763 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (5,887) | (5,887) | |||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 944 | — | — | 944 | |||||||||||||||||||||||||||||
| Net settlement of share awards | — | — | (26) | — | — | (26) | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.16 per share) | — | — | — | (7,110) | — | (7,110) | |||||||||||||||||||||||||||||
| Balances, June 30, 2023 | $ | — | $ | — | $ | 354,953 | $ | 452,209 | $ | (97,919) | $ | 709,243 | |||||||||||||||||||||||
See notes to condensed consolidated financial statements
6
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||
| Balances, January 1, 2022 | $ | — | $ | — | $ | 352,122 | $ | 363,742 | $ | 7,345 | $ | 723,209 | |||||||||||||||||||||||
| Net income | — | — | — | 48,422 | — | 48,422 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (100,409) | (100,409) | |||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 1,143 | — | — | 1,143 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | 94 | — | — | 94 | |||||||||||||||||||||||||||||
| Stock option expense | — | — | 13 | — | — | 13 | |||||||||||||||||||||||||||||
| Net settlement of share awards | — | — | (1,696) | — | — | (1,696) | |||||||||||||||||||||||||||||
| Stock retirement plans | — | — | 736 | — | — | 736 | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.31 per share) | — | — | — | (13,647) | — | (13,647) | |||||||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | — | $ | — | $ | 352,412 | $ | 398,517 | $ | (93,064) | $ | 657,865 | |||||||||||||||||||||||
| Balances, January 1, 2023 | $ | — | $ | — | $ | 354,188 | $ | 429,385 | $ | (106,198) | $ | 677,375 | |||||||||||||||||||||||
| Net income | — | — | — | 36,991 | — | 36,991 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 8,279 | 8,279 | |||||||||||||||||||||||||||||
| Amortization of unearned compensation | — | — | 1,703 | — | — | 1,703 | |||||||||||||||||||||||||||||
| Net settlement of share awards | — | — | (723) | — | — | (723) | |||||||||||||||||||||||||||||
| Stock retirement plans | — | — | (215) | — | — | (215) | |||||||||||||||||||||||||||||
Cash dividends on common stock ($0.32 per share) | — | — | — | (14,167) | — | (14,167) | |||||||||||||||||||||||||||||
| Balances, June 30, 2023 | $ | — | $ | — | $ | 354,953 | $ | 452,209 | $ | (97,919) | $ | 709,243 | |||||||||||||||||||||||
See notes to condensed consolidated financial statements
7
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar Amounts in Thousands)
| Six Months Ended | |||||||||||
| June 30 | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 36,991 | $ | 48,422 | |||||||
| Items not requiring (providing) cash | |||||||||||
| Credit loss expense (recovery) | 922 | (1,146) | |||||||||
| Depreciation and amortization | 5,268 | 5,205 | |||||||||
| Share based compensation | 1,703 | 1,156 | |||||||||
| Amortization of mortgage servicing rights | 547 | 1,394 | |||||||||
| Impairment (recovery) of mortgage servicing rights | — | (2,594) | |||||||||
| Premium amortization on securities, net | 5,265 | 6,126 | |||||||||
| Loss on sale of investment securities | 480 | — | |||||||||
| Gain on sale of mortgage loans | (1,790) | (4,528) | |||||||||
| Proceeds from sales of loans | 62,541 | 150,838 | |||||||||
| Loans originated for sale | (62,312) | (139,049) | |||||||||
| Gain on cash value life insurance | (1,996) | (1,029) | |||||||||
| Gain on sale of other real estate owned | (121) | (618) | |||||||||
| Net change in: | |||||||||||
| Interest receivable | (2,242) | (2,859) | |||||||||
| Interest payable | 7,359 | 167 | |||||||||
| Other assets | (299) | (5,458) | |||||||||
| Other liabilities | (8,202) | (578) | |||||||||
| Net cash provided by operating activities | 44,114 | 55,449 | |||||||||
| Investing Activities | |||||||||||
| Purchases of securities available for sale | (1,385) | (179,075) | |||||||||
| Proceeds from sales of securities available for sale | 88,194 | — | |||||||||
| Proceeds from maturities, calls and principal repayments of securities available for sale | 15,170 | 45,183 | |||||||||
| Purchases of securities held to maturity | (9,605) | (413,782) | |||||||||
| Proceeds from maturities, calls and principal repayments of securities held to maturity | 45,334 | 30,122 | |||||||||
| Net change in interest earning time deposits | 360 | 983 | |||||||||
| Purchase of FHLB stock | (7,832) | (2,435) | |||||||||
| Redemption of FHLB stock | — | 198 | |||||||||
| Purchase of loans | (62,489) | — | |||||||||
| Net change in loans | (48,049) | (298,478) | |||||||||
| Proceeds on the sale of OREO and repossessed assets | 1,188 | 3,017 | |||||||||
| Premises and equipment expenditures | (5,277) | (3,224) | |||||||||
| Proceeds from bank owned life insurance | — | 3,554 | |||||||||
| Net cash used in investing activities | 15,609 | (813,937) | |||||||||
| Financing Activities | |||||||||||
| Net change in deposits | (148,442) | 42,594 | |||||||||
| Proceeds from borrowings | 584,094 | 594,350 | |||||||||
| Repayment of borrowings | (378,790) | (360,763) | |||||||||
| Net change in repurchase agreements | 3,786 | 12,896 | |||||||||
| Net settlement of share awards | (723) | (1,696) | |||||||||
| Exercise of stock options | — | 94 | |||||||||
| Dividends paid on common stock | (14,167) | (13,647) | |||||||||
| Net cash provided by financing activities | 45,758 | 273,828 | |||||||||
| Net Change in Cash and Cash Equivalents | 105,481 | (484,660) | |||||||||
| Cash and Cash Equivalents, Beginning of Period | 123,505 | 593,508 | |||||||||
| Cash and Cash Equivalents, End of Period | $ | 228,986 | $ | 108,848 | |||||||
| Additional Supplemental Information | |||||||||||
8
HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar Amounts in Thousands)
| Interest paid | $ | 49,910 | $ | 8,308 | |||||||
| Income taxes paid | 1,554 | 650 | |||||||||
| Transfer of loans to other real estate and repossessed assets | 1,452 | 342 | |||||||||
| Transfer of available for sale securities to held to maturity securities | — | 120,881 | |||||||||
See notes to condensed consolidated financial statements
9
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 June 30, 2023 and June 30, 2022 are not necessarily indicative of the operating results for the full year of 2023 or 2022. 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 (“GAAP”) 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 the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on March 15, 2023 (the “2022 Annual Report on Form 10–K”). The condensed consolidated balance sheet of Horizon as of December 31, 2022 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 June 30, 2023, Horizon had repurchased a total of 803,349 shares at an average price per share of $16.89.
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 | Six Months Ended | ||||||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Basic earnings per share | |||||||||||||||||||||||
| Net income | $ | 18,763 | $ | 24,859 | $ | 36,991 | $ | 48,422 | |||||||||||||||
| Weighted average common shares outstanding | 43,639,987 | 43,572,796 | 43,611,926 | 43,563,804 | |||||||||||||||||||
| Basic earnings per share | $ | 0.43 | $ | 0.57 | $ | 0.85 | $ | 1.11 | |||||||||||||||
| Diluted earnings per share | |||||||||||||||||||||||
| Net income | $ | 18,763 | $ | 24,859 | $ | 36,991 | $ | 48,422 | |||||||||||||||
| Weighted average common shares outstanding | 43,639,987 | 43,572,796 | 43,611,926 | 43,563,804 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Restricted stock | 102,046 | 77,296 | 136,693 | 107,122 | |||||||||||||||||||
| Stock options | 555 | 34,599 | 8,702 | 40,896 | |||||||||||||||||||
| Weighted average common shares outstanding | 43,742,588 | 43,684,691 | 43,757,321 | 43,711,822 | |||||||||||||||||||
| Diluted earnings per share | $ | 0.43 | $ | 0.57 | $ | 0.85 | $ | 1.11 | |||||||||||||||
10
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
There were 484,650 and 415,455 shares for the three and six months ended June 30, 2023 which were not included in the computation of diluted earnings per share because they were non–dilutive. There were 319,692 and 206,421 shares for the three and six months ended June 30, 2022 which were not included in the computation of diluted earnings per share because they were non–dilutive.
Reclassifications
Certain reclassifications have been made to the 2022 condensed consolidated financial statements to be comparable to 2023. These reclassifications were not material and had no effect on net income.
Revision of Previously Issued Financial Statements
We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10–Q related to immaterial errors. The errors relate to the amortization expense of the indirect loan dealer reserve asset not being reported as a reduction in interest income on loans and the non–cash transfer of available for sale securities to held to maturity securities. The correction of these errors resulted in a reduction in interest income on loans receivable and a reduction in non–interest loan expense on the Company's consolidated income statement and the disclosure of the transfer of available for sale securities to held to maturity securities in the statements of cash flows. This revision does not impact the Company's net income.
We evaluated the aggregate effects of these errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Quarterly Report on Form 10–Q for the three and six months ended June 30, 2022.
The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of the errors:
| Consolidated Statements of Income | |||||||||||||||||
| Three Months Ended June 30, 2022 | |||||||||||||||||
| As Reported | Indirect Loan Dealer Reserve Adjustment | As Revised | |||||||||||||||
| Interest income | |||||||||||||||||
| Loans receivable | $ | 41,549 | $ | (964) | $ | 40,585 | |||||||||||
| Total interest income | 57,572 | (964) | 56,608 | ||||||||||||||
| Net interest income | 53,008 | (964) | 52,044 | ||||||||||||||
| Net interest income after credit loss expense (recovery) | 52,768 | (964) | 51,804 | ||||||||||||||
| Non–interest expense | |||||||||||||||||
| Loan expense | 2,497 | (964) | 1,533 | ||||||||||||||
| Total non–interest expense | 36,368 | (964) | 35,404 | ||||||||||||||
| Net income | 24,859 | — | 24,859 | ||||||||||||||
11
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| Consolidated Statements of Income | |||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||
| As Reported | Indirect Loan Dealer Reserve Adjustment | As Revised | |||||||||||||||
| Interest income | |||||||||||||||||
| Loans receivable | $ | 79,428 | $ | (2,304) | $ | 77,124 | |||||||||||
| Total interest income | 109,654 | (2,304) | 107,350 | ||||||||||||||
| Net interest income | 101,179 | (2,304) | 98,875 | ||||||||||||||
| Net interest income after credit loss expense (recovery) | 102,325 | (2,304) | 100,021 | ||||||||||||||
| Non–interest expense | |||||||||||||||||
| Loan expense | 5,042 | (2,304) | 2,738 | ||||||||||||||
| Total non–interest expense | 72,978 | (2,304) | 70,674 | ||||||||||||||
| Net income | 48,422 | — | 48,422 | ||||||||||||||
Additional immaterial reclassifications made to the 2022 condensed consolidated financial statements to be comparable to 2023 are not included within the revision to the consolidated statement of cash flows noted below.
| Consolidated Statements of Cash Flows | |||||||||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||
| As Reported | Indirect Loan Dealer Reserve Adjustment | Transfer of AFS Securities to HTM Securities | As Revised | ||||||||||||||||||||
| Operating Activities | |||||||||||||||||||||||
| Net change in other assets | $ | (11,986) | $ | 4,153 | $ | — | $ | (7,833) | |||||||||||||||
| Net cash provided by operating activities | 51,381 | 4,153 | — | 55,534 | |||||||||||||||||||
| Investing activities | |||||||||||||||||||||||
| Net change in loans | (294,325) | (4,153) | — | (298,478) | |||||||||||||||||||
| Net cash used in investing activities | (809,869) | (4,153) | — | (814,022) | |||||||||||||||||||
| Net Change in Cash and Cash Equivalents | (484,660) | — | — | (484,660) | |||||||||||||||||||
| Additional Supplemental Information | |||||||||||||||||||||||
| Transfer of available for sale securities to held to maturity securities | — | — | 120,881 | 120,881 | |||||||||||||||||||
Adoption of New Accounting Standards
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
The FASB has issued ASU 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, in March 2022. These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial
12
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
difficulty. Additionally, these amendments require that an entity disclose current–period gross write–offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326–20. The guidance is effective for entities that have adopted ASU 2016–13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. If an entity elects to early adopt ASU 2022–02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted this standard during the first quarter of 2023 and it did not have a material impact on the consolidated financial statements.
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 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.
FASB ASU No. 2023–02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method
The FASB has issued ASU 2023–02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This guidance allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company is assessing ASU 2023–02 and its impact on its accounting and disclosures.
13
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 2 – Securities
The fair value of securities is as follows:
| June 30, 2023 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 294,640 | $ | — | $ | (25,805) | $ | 268,835 | |||||||||||||||
| State and municipal | 425,815 | 6 | (61,755) | 364,066 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 24,529 | — | (1,634) | 22,895 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 206,240 | — | (28,586) | 177,654 | |||||||||||||||||||
| Corporate notes | 81,904 | 314 | (9,855) | 72,363 | |||||||||||||||||||
| Total available for sale investment securities | $ | 1,033,128 | $ | 320 | $ | (127,635) | $ | 905,813 | |||||||||||||||
| Held to maturity | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 287,576 | $ | — | $ | (45,929) | $ | 241,647 | |||||||||||||||
| State and municipal | 1,110,945 | 514 | (173,391) | 938,068 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 54,067 | — | (8,601) | 45,466 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 333,767 | — | (53,147) | 280,620 | |||||||||||||||||||
| Private labeled mortgage-backed pools | 33,848 | — | (5,186) | 28,662 | |||||||||||||||||||
| Corporate notes | 163,293 | — | (29,527) | 133,766 | |||||||||||||||||||
| Total held to maturity investment securities | $ | 1,983,496 | $ | 514 | $ | (315,781) | $ | 1,668,229 | |||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 294,329 | $ | — | $ | (27,150) | $ | 267,179 | |||||||||||||||
| State and municipal | 505,006 | 140 | (71,602) | 433,544 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 33,011 | — | (1,796) | 31,215 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 220,963 | — | (30,307) | 190,656 | |||||||||||||||||||
| Corporate notes | 84,393 | 195 | (9,624) | 74,964 | |||||||||||||||||||
| Total available for sale investment securities | $ | 1,137,702 | $ | 335 | $ | (140,479) | $ | 997,558 | |||||||||||||||
| Held to maturity | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 295,250 | $ | — | $ | (49,237) | $ | 246,013 | |||||||||||||||
| State and municipal | 1,127,669 | 374 | (192,458) | 935,585 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 56,564 | — | (8,865) | 47,699 | |||||||||||||||||||
| Federal agency mortgage-backed pools | 343,953 | — | (56,714) | 287,239 | |||||||||||||||||||
| Private labeled mortgage-backed pools | 35,466 | — | (5,493) | 29,973 | |||||||||||||||||||
| Corporate notes | 163,846 | — | (29,046) | 134,800 | |||||||||||||||||||
| Total held to maturity investment securities | $ | 2,022,748 | $ | 374 | $ | (341,813) | $ | 1,681,309 | |||||||||||||||
14
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The Company elected to transfer 793 AFS securities with an aggregate fair value of $120.9 million to a classification of HTM on March 31, 2022. In accordance with FASB ASC 320–10–55–24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding loss of $814,000, net of tax, at the date of transfer was retained in accumulated other comprehensive income (loss), with the associated pre–tax amount retained in the carrying value of the HTM securities. Such amounts will be accreted to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at March 31, 2022.
The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2023 and December 31, 2022, 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.
| June 30, 2023 | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
| Available for sale | |||||||||||
| Within one year | $ | 3,978 | $ | 3,912 | |||||||
| One to five years | 355,057 | 324,602 | |||||||||
| Five to ten years | 195,305 | 164,194 | |||||||||
| After ten years | 248,019 | 212,556 | |||||||||
| 802,359 | 705,264 | ||||||||||
| Federal agency collateralized mortgage obligations | 24,529 | 22,895 | |||||||||
| Federal agency mortgage–backed pools | 206,240 | 177,654 | |||||||||
| Total available for sale investment securities | $ | 1,033,128 | $ | 905,813 | |||||||
| Held to maturity | |||||||||||
| Within one year | $ | 33,919 | $ | 33,698 | |||||||
| One to five years | 231,328 | 217,643 | |||||||||
| Five to ten years | 331,954 | 283,216 | |||||||||
| After ten years | 964,613 | 778,924 | |||||||||
| 1,561,814 | 1,313,481 | ||||||||||
| Federal agency collateralized mortgage obligations | 54,067 | 45,466 | |||||||||
| Federal agency mortgage–backed pools | 333,767 | 280,620 | |||||||||
| Private labeled mortgage–backed pools | 33,848 | 28,662 | |||||||||
| Total held to maturity investment securities | $ | 1,983,496 | $ | 1,668,229 | |||||||
15
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
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.
| June 30, 2023 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 1,948 | $ | (20) | $ | 508,535 | $ | (71,714) | $ | 510,483 | $ | (71,734) | |||||||||||||||||||||||
| State and municipal | 135,580 | (3,239) | 1,111,320 | (231,907) | 1,246,900 | (235,146) | |||||||||||||||||||||||||||||
| Federal agency collateralized mortgage obligations | 880 | (54) | 67,482 | (10,181) | 68,362 | (10,235) | |||||||||||||||||||||||||||||
| Federal agency mortgage–backed pools | 7,204 | (305) | 451,055 | (81,428) | 458,259 | (81,733) | |||||||||||||||||||||||||||||
| Private labeled mortgage–backed pools | — | — | 28,662 | (5,186) | 28,662 | (5,186) | |||||||||||||||||||||||||||||
| Corporate notes | 4,956 | (760) | 199,846 | (38,622) | 204,802 | (39,382) | |||||||||||||||||||||||||||||
| Total temporarily impaired securities | $ | 150,568 | $ | (4,378) | $ | 2,366,900 | $ | (439,038) | $ | 2,517,468 | $ | (443,416) | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 217,357 | $ | (16,692) | $ | 295,585 | $ | (59,695) | $ | 512,942 | $ | (76,387) | |||||||||||||||||||||||
| State and municipal | 533,871 | (45,881) | 757,061 | (218,179) | 1,290,932 | (264,060) | |||||||||||||||||||||||||||||
| Federal agency collateralized mortgage obligations | 40,301 | (2,881) | 38,613 | (7,780) | 78,914 | (10,661) | |||||||||||||||||||||||||||||
| Federal agency mortgage–backed pools | 49,633 | (3,211) | 428,243 | (83,810) | 477,876 | (87,021) | |||||||||||||||||||||||||||||
| Private labeled mortgage–backed pools | — | — | 29,973 | (5,493) | 29,973 | (5,493) | |||||||||||||||||||||||||||||
| Corporate notes | 38,906 | (6,787) | 169,921 | (31,883) | 208,827 | (38,670) | |||||||||||||||||||||||||||||
| Total temporarily impaired securities | $ | 880,068 | $ | (75,452) | $ | 1,719,396 | $ | (406,840) | $ | 2,599,464 | $ | (482,292) | |||||||||||||||||||||||
Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. As of June 30, 2023 and December 31, 2022, the Company had 2,655 and 2,828 securities, respectively, with market values below their cost basis. The total fair value of these investments at June 30, 2023 and December 31, 2022 was $2.5 billion and $2.6 billion, which is approximately 97.8% and 97.0%, respectively, of the Company's available for sale and held to maturity securities portfolio. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary.
No allowance for credit losses for available for sale debt securities or held to maturity securities was recorded at June 30, 2023 or December 31, 2022. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $16.7 million at June 30, 2023 and $17.8 million at December 31, 2022 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.
16
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities, private labeled mortgage–backed pools and corporate notes 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 | Six Months Ended | ||||||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Sales of securities available for sale | |||||||||||||||||||||||
| Proceeds | $ | 24,668 | $ | — | $ | 88,194 | $ | — | |||||||||||||||
| Gross gains | 86 | — | 215 | — | |||||||||||||||||||
| Gross losses | (66) | — | (695) | — | |||||||||||||||||||
Note 3 – 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. Residential construction loans are reviewed and rewritten prior to being originated as a term loan.
17
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 total loans outstanding by portfolio class, as of June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Commercial | |||||||||||
| Owner occupied real estate | $ | 619,649 | $ | 594,562 | |||||||
| Non–owner occupied real estate | 1,199,150 | 1,187,077 | |||||||||
| Residential spec homes | 13,116 | 10,838 | |||||||||
| Development & spec land | 27,370 | 27,358 | |||||||||
| Commercial and industrial | 646,994 | 647,587 | |||||||||
| Total commercial | 2,506,279 | 2,467,422 | |||||||||
| Real estate | |||||||||||
| Residential mortgage | 626,834 | 612,551 | |||||||||
| Residential construction | 47,917 | 40,741 | |||||||||
| Mortgage warehouse | 82,345 | 69,529 | |||||||||
| Total real estate | 757,096 | 722,821 | |||||||||
| Consumer | |||||||||||
| Direct installment | 54,914 | 56,614 | |||||||||
| Indirect installment | 477,938 | 500,549 | |||||||||
| Home equity | 470,033 | 410,592 | |||||||||
| Total consumer | 1,002,885 | 967,755 | |||||||||
| Total loans | 4,266,260 | 4,157,998 | |||||||||
| Allowance for credit losses | (49,976) | (50,464) | |||||||||
| Net loans | $ | 4,216,284 | $ | 4,107,534 | |||||||
Total loans include net deferred loan costs of $23.2 million at June 30, 2023 and $22.7 million at December 31, 2022, 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.
18
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
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 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.
19
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Non–performing Loans
The following table presents non–accrual loans and loans past due over 90 days still on accrual by class of loans at June 30, 2023:
| June 30, 2023 | |||||||||||||||||||||||
| Non–accrual | Loans Past Due Over 90 Days Still Accruing | Total Non–performing Loans | Non–performing with no Allowance for Credit Losses | ||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Owner occupied real estate | $ | 3,288 | $ | — | $ | 3,288 | $ | 3,102 | |||||||||||||||
| Non–owner occupied real estate | 3,801 | — | 3,801 | 1,382 | |||||||||||||||||||
| Residential spec homes | 101 | — | 101 | — | |||||||||||||||||||
| Development & spec land | 803 | — | 803 | 803 | |||||||||||||||||||
| Commercial and industrial | 282 | — | 282 | 282 | |||||||||||||||||||
| Total commercial | 8,275 | — | 8,275 | 5,569 | |||||||||||||||||||
| Real estate | |||||||||||||||||||||||
| Residential mortgage | 7,927 | 241 | 8,168 | 8,168 | |||||||||||||||||||
| Residential construction | — | — | — | — | |||||||||||||||||||
| Mortgage warehouse | — | — | — | — | |||||||||||||||||||
| Total real estate | 7,927 | 241 | 8,168 | 8,168 | |||||||||||||||||||
| Consumer | |||||||||||||||||||||||
| Direct installment | 110 | 1 | 111 | 111 | |||||||||||||||||||
| Indirect installment | 1,040 | 417 | 1,457 | 1,457 | |||||||||||||||||||
| Home equity | 3,444 | 654 | 4,098 | 4,098 | |||||||||||||||||||
| Total consumer | 4,594 | 1,072 | 5,666 | 5,666 | |||||||||||||||||||
| Total | $ | 20,796 | $ | 1,313 | $ | 22,109 | $ | 19,403 | |||||||||||||||
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 non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructurings (“TDRs”) by class of loan at December 31, 2022:
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Non–accrual | Loans Past Due Over 90 Days Still Accruing | Non–performing TDRs | Performing TDRs | Total Non–performing Loans | Non–performing with no Allowance for Credit Losses | ||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 3,423 | $ | — | $ | — | $ | 568 | $ | 3,991 | $ | 3,805 | |||||||||||||||||||||||
| Non–owner occupied real estate | 3,866 | — | — | 269 | 4,135 | 2,211 | |||||||||||||||||||||||||||||
| Residential spec homes | 101 | — | — | — | 101 | 101 | |||||||||||||||||||||||||||||
| Development & spec land | 815 | — | — | — | 815 | 65 | |||||||||||||||||||||||||||||
| Commercial and industrial | 288 | — | — | — | 288 | 288 | |||||||||||||||||||||||||||||
| Total commercial | 8,493 | — | — | 837 | 9,330 | 6,470 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 5,479 | 43 | 1,210 | 1,391 | 8,123 | 8,123 | |||||||||||||||||||||||||||||
| Residential construction | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Mortgage warehouse | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total real estate | 5,479 | 43 | 1,210 | 1,391 | 8,123 | 8,123 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | 138 | 26 | — | — | 164 | 164 | |||||||||||||||||||||||||||||
| Indirect installment | 745 | 23 | — | — | 768 | 768 | |||||||||||||||||||||||||||||
| Home equity | 2,775 | — | 338 | 342 | 3,455 | 3,455 | |||||||||||||||||||||||||||||
| Total consumer | 3,658 | 49 | 338 | 342 | 4,387 | 4,387 | |||||||||||||||||||||||||||||
| Total | $ | 17,630 | $ | 92 | $ | 1,548 | $ | 2,570 | $ | 21,840 | $ | 18,980 | |||||||||||||||||||||||
There was no interest income recognized on non–accrual loans during the six months ended June 30, 2023 and 2022, respectively, while the loans were in non–accrual status.
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 $20.8 million at June 30, 2023:
| June 30, 2023 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 616,361 | $ | — | $ | — | $ | — | $ | — | $ | 616,361 | |||||||||||||||||||||||
| Non–owner occupied real estate | 1,195,349 | — | — | — | — | 1,195,349 | |||||||||||||||||||||||||||||
| Residential spec homes | 13,015 | — | — | — | — | 13,015 | |||||||||||||||||||||||||||||
| Development & spec land | 26,567 | — | — | — | — | 26,567 | |||||||||||||||||||||||||||||
| Commercial and industrial | 646,220 | 492 | — | — | 492 | 646,712 | |||||||||||||||||||||||||||||
| Total commercial | 2,497,512 | 492 | — | — | 492 | 2,498,004 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 617,330 | 1,336 | — | 241 | 1,577 | 618,907 | |||||||||||||||||||||||||||||
| Residential construction | 47,917 | — | — | — | — | 47,917 | |||||||||||||||||||||||||||||
| Mortgage warehouse | 82,345 | — | — | — | — | 82,345 | |||||||||||||||||||||||||||||
| Total real estate | 747,592 | 1,336 | — | 241 | 1,577 | 749,169 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | 54,572 | 168 | 63 | 1 | 232 | 54,804 | |||||||||||||||||||||||||||||
| Indirect installment | 470,932 | 4,832 | 717 | 417 | 5,966 | 476,898 | |||||||||||||||||||||||||||||
| Home equity | 462,630 | 2,685 | 620 | 654 | 3,959 | 466,589 | |||||||||||||||||||||||||||||
| Total consumer | 988,134 | 7,685 | 1,400 | 1,072 | 10,157 | 998,291 | |||||||||||||||||||||||||||||
| Total | $ | 4,233,238 | $ | 9,513 | $ | 1,400 | $ | 1,313 | $ | 12,226 | $ | 4,245,464 | |||||||||||||||||||||||
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 the payment status by class of loan, excluding non–accrual loans of $17.6 million and non–performing TDRs of $1.5 million at December 31, 2022:
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 590,870 | $ | 269 | $ | — | $ | — | $ | 269 | $ | 591,139 | |||||||||||||||||||||||
| Non–owner occupied real estate | 1,183,195 | 16 | — | — | 16 | 1,183,211 | |||||||||||||||||||||||||||||
| Residential spec homes | 10,737 | — | — | — | — | 10,737 | |||||||||||||||||||||||||||||
| Development & spec land | 26,513 | — | 30 | — | 30 | 26,543 | |||||||||||||||||||||||||||||
| Commercial and industrial | 646,792 | 507 | — | — | 507 | 647,299 | |||||||||||||||||||||||||||||
| Total commercial | 2,458,107 | 792 | 30 | — | 822 | 2,458,929 | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Residential mortgage | 603,630 | 1,980 | 209 | 43 | 2,232 | 605,862 | |||||||||||||||||||||||||||||
| Residential construction | 40,741 | — | — | — | — | 40,741 | |||||||||||||||||||||||||||||
| Mortgage warehouse | 69,529 | — | — | — | — | 69,529 | |||||||||||||||||||||||||||||
| Total real estate | 713,900 | 1,980 | 209 | 43 | 2,232 | 716,132 | |||||||||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||||||||
| Direct installment | 56,266 | 168 | 16 | 26 | 210 | 56,476 | |||||||||||||||||||||||||||||
| Indirect installment | 494,341 | 4,536 | 904 | 23 | 5,463 | 499,804 | |||||||||||||||||||||||||||||
| Home equity | 405,405 | 1,413 | 661 | — | 2,074 | 407,479 | |||||||||||||||||||||||||||||
| Total consumer | 956,012 | 6,117 | 1,581 | 49 | 7,747 | 963,759 | |||||||||||||||||||||||||||||
| Total | $ | 4,128,019 | $ | 8,889 | $ | 1,820 | $ | 92 | $ | 10,801 | $ | 4,138,820 | |||||||||||||||||||||||
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.
Modified Loans
The Company adopted ASU 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, during the first quarter of 2023. These amendments eliminated the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. During the first six months of 2023, the Company did not modify any loans.
Prior to the adoption of ASU 2022–02, loans modified as TDRs generally consisted 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 continued to accrue interest were individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it was probable that any remaining principal and interest payments due on the loan would not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default were individually evaluated for impairment at the time of default.
23
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 at December 31, 2022:
| December 31, 2022 | |||||||||||||||||
| Non–accrual | Accruing | Total | |||||||||||||||
| Commercial | |||||||||||||||||
| Owner occupied real estate | $ | — | $ | 568 | $ | 568 | |||||||||||
| Non–owner occupied real estate | — | 269 | 269 | ||||||||||||||
| Residential spec homes | — | — | — | ||||||||||||||
| Development & spec land | — | — | — | ||||||||||||||
| Commercial and industrial | — | — | — | ||||||||||||||
| Total commercial | — | 837 | 837 | ||||||||||||||
| Real estate | |||||||||||||||||
| Residential mortgage | 1,210 | 1,391 | 2,601 | ||||||||||||||
| Residential construction | — | — | — | ||||||||||||||
| Mortgage warehouse | — | — | — | ||||||||||||||
| Total real estate | 1,210 | 1,391 | 2,601 | ||||||||||||||
| Consumer | |||||||||||||||||
| Direct installment | — | — | — | ||||||||||||||
| Indirect installment | — | — | — | ||||||||||||||
| Home equity | 338 | 342 | 680 | ||||||||||||||
| Total consumer | 338 | 342 | 680 | ||||||||||||||
| Total | $ | 1,548 | $ | 2,570 | $ | 4,118 | |||||||||||
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.
24
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.
| June 30, 2023 | |||||||||||||||||||||||||||||
| Real Estate | Accounts Receivable/Equipment | Other | Total | ACL Allocation | |||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 3,715 | $ | 102 | $ | — | $ | 3,817 | $ | 63 | |||||||||||||||||||
| Non–owner occupied real estate | 4,061 | — | — | 4,061 | 840 | ||||||||||||||||||||||||
| Residential spec homes | 101 | — | — | 101 | 47 | ||||||||||||||||||||||||
| Development & spec land | 803 | — | — | 803 | — | ||||||||||||||||||||||||
| Commercial and industrial | — | 248 | 34 | 282 | — | ||||||||||||||||||||||||
| Total commercial | 8,680 | 350 | 34 | 9,064 | 950 | ||||||||||||||||||||||||
| Total collateral dependent loans | $ | 8,680 | $ | 350 | $ | 34 | $ | 9,064 | $ | 950 | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Real Estate | Accounts Receivable/Equipment | Other | Total | ACL Allocation | |||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Owner occupied real estate | $ | 3,905 | $ | 95 | $ | — | $ | 4,000 | $ | 215 | |||||||||||||||||||
| Non–owner occupied real estate | 4,135 | — | — | 4,135 | 988 | ||||||||||||||||||||||||
| Residential spec homes | 101 | — | — | 101 | — | ||||||||||||||||||||||||
| Development & spec land | 815 | — | — | 815 | 36 | ||||||||||||||||||||||||
| Commercial and industrial | — | 248 | 31 | 279 | — | ||||||||||||||||||||||||
| Total commercial | 8,956 | 343 | 31 | 9,330 | 1,239 | ||||||||||||||||||||||||
| Total collateral dependent loans | $ | 8,956 | $ | 343 | $ | 31 | $ | 9,330 | $ | 1,239 | |||||||||||||||||||
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 or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO 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.
25
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 modified loans 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.
26
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.
27
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.
28
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 June 30, 2023.
| June 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 38,438 | $ | 101,386 | $ | 77,423 | $ | 46,202 | $ | 48,716 | $ | 195,123 | $ | 87,724 | $ | 595,012 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | 497 | 8,904 | 160 | 5 | 1,931 | — | 11,497 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | 535 | 507 | — | 973 | 232 | 10,177 | 716 | 13,140 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total owner occupied real estate | $ | 38,973 | $ | 102,390 | $ | 86,327 | $ | 47,335 | $ | 48,953 | $ | 207,231 | $ | 88,440 | $ | 619,649 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | 54 | $ | 53 | $ | — | $ | — | $ | 2 | $ | — | $ | 109 | ||||||||||||||||||||||||||||||||||
| Non–owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 72,352 | $ | 214,876 | $ | 168,376 | $ | 106,711 | $ | 88,739 | $ | 320,884 | $ | 173,728 | $ | 1,145,666 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | 1,375 | 260 | 865 | 44,808 | — | 47,308 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | 216 | — | 5,960 | — | 6,176 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total non–owner occupied real estate | $ | 72,352 | $ | 214,876 | $ | 169,751 | $ | 107,187 | $ | 89,604 | $ | 371,652 | $ | 173,728 | $ | 1,199,150 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 9 | $ | — | $ | 9 | ||||||||||||||||||||||||||||||||||
| Residential spec homes | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 2 | $ | 5,079 | $ | 2,492 | $ | — | $ | — | $ | 1,353 | $ | 4,089 | $ | 13,015 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | 101 | 101 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential spec homes | $ | 2 | $ | 5,079 | $ | 2,492 | $ | — | $ | — | $ | 1,353 | $ | 4,190 | $ | 13,116 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| Development & spec land | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 2,248 | $ | 1,490 | $ | 1,104 | $ | 420 | $ | 259 | $ | 3,237 | $ | 17,700 | $ | 26,458 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | 172 | 740 | 912 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total development & spec land | $ | 2,248 | $ | 1,490 | $ | 1,104 | $ | 420 | $ | 259 | $ | 3,409 | $ | 18,440 | $ | 27,370 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 61,878 | $ | 196,956 | $ | 120,922 | $ | 26,908 | $ | 29,299 | $ | 141,602 | $ | 48,926 | $ | 626,491 | ||||||||||||||||||||||||||||||||||
| Special Mention | 1,542 | 774 | 307 | 2,056 | 384 | 7,219 | 900 | 13,182 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | 20 | 758 | 279 | 19 | 459 | 1,897 | 3,889 | 7,321 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total commercial & industrial | $ | 63,440 | $ | 198,488 | $ | 121,508 | $ | 28,983 | $ | 30,142 | $ | 150,718 | $ | 53,715 | $ | 646,994 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | 33 | $ | — | $ | 48 | $ | 8 | $ | 126 | $ | — | $ | 215 | ||||||||||||||||||||||||||||||||||
29
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| June 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 22,221 | $ | 118,296 | $ | 161,911 | $ | 88,172 | $ | 32,007 | $ | 196,059 | $ | — | $ | 618,666 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | 872 | 773 | 283 | 748 | 5,492 | — | 8,168 | ||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | $ | 22,221 | $ | 119,168 | $ | 162,684 | $ | 88,455 | $ | 32,755 | $ | 201,551 | $ | — | $ | 626,834 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 4 | $ | — | $ | 4 | ||||||||||||||||||||||||||||||||||
| Residential construction | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 47,917 | $ | 47,917 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential construction | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 47,917 | $ | 47,917 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 82,345 | $ | 82,345 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total mortgage warehouse | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 82,345 | $ | 82,345 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| June 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Direct installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 8,779 | $ | 17,042 | $ | 10,349 | $ | 5,605 | $ | 6,052 | $ | 6,967 | $ | 9 | $ | 54,803 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | 4 | 46 | — | 13 | 48 | — | 111 | ||||||||||||||||||||||||||||||||||||||||||
| Total direct installment | $ | 8,779 | $ | 17,046 | $ | 10,395 | $ | 5,605 | $ | 6,065 | $ | 7,015 | $ | 9 | $ | 54,914 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | 1 | $ | 6 | $ | 4 | $ | 7 | $ | — | $ | 15 | $ | — | $ | 33 | ||||||||||||||||||||||||||||||||||
| Indirect installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 66,271 | $ | 225,370 | $ | 98,309 | $ | 46,875 | $ | 24,319 | $ | 15,337 | $ | — | $ | 476,481 | ||||||||||||||||||||||||||||||||||
| Non–performing | 41 | 380 | 569 | 170 | 167 | 130 | — | 1,457 | ||||||||||||||||||||||||||||||||||||||||||
| Total indirect installment | $ | 66,312 | $ | 225,750 | $ | 98,878 | $ | 47,045 | $ | 24,486 | $ | 15,467 | $ | — | $ | 477,938 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | 35 | $ | 582 | $ | 227 | $ | 65 | $ | 27 | $ | 31 | $ | — | $ | 967 | ||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 55,974 | $ | 192,816 | $ | 75,132 | $ | 34,950 | $ | 23,844 | $ | 73,616 | $ | 9,603 | $ | 465,935 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | 617 | 16 | 61 | 137 | 951 | 2,316 | 4,098 | ||||||||||||||||||||||||||||||||||||||||||
| Total home equity | $ | 55,974 | $ | 193,433 | $ | 75,148 | $ | 35,011 | $ | 23,981 | $ | 74,567 | $ | 11,919 | $ | 470,033 | ||||||||||||||||||||||||||||||||||
| Gross charge–offs during period | $ | — | $ | 12 | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | 14 | ||||||||||||||||||||||||||||||||||
30
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, 2022.
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 102,986 | $ | 78,420 | $ | 50,751 | $ | 50,807 | $ | 38,518 | $ | 168,574 | $ | 76,493 | $ | 566,549 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | 6,677 | — | 7 | — | 2,729 | 83 | 9,496 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | 1,016 | 253 | 983 | 834 | 3,116 | 9,439 | 2,876 | 18,517 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total owner occupied real estate | $ | 104,002 | $ | 85,350 | $ | 51,734 | $ | 51,648 | $ | 41,634 | $ | 180,742 | $ | 79,452 | $ | 594,562 | ||||||||||||||||||||||||||||||||||
| Non–owner occupied real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 186,272 | $ | 176,077 | $ | 134,395 | $ | 96,566 | $ | 57,382 | $ | 305,264 | $ | 182,681 | $ | 1,138,637 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | 1,415 | 265 | 883 | 39,239 | 617 | — | 42,419 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | 246 | — | 3,532 | 2,243 | — | 6,021 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total non–owner occupied real estate | $ | 186,272 | $ | 177,492 | $ | 134,906 | $ | 97,449 | $ | 100,153 | $ | 308,124 | $ | 182,681 | $ | 1,187,077 | ||||||||||||||||||||||||||||||||||
| Residential spec homes | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 379 | $ | 3,957 | $ | 146 | $ | — | $ | — | $ | 1,922 | $ | 4,334 | $ | 10,738 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | 100 | 100 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential spec homes | $ | 379 | $ | 3,957 | $ | 146 | $ | — | $ | — | $ | 1,922 | $ | 4,434 | $ | 10,838 | ||||||||||||||||||||||||||||||||||
| Development & spec land | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 1,586 | $ | 1,230 | $ | 449 | $ | 270 | $ | 5 | $ | 9,739 | $ | 13,008 | $ | 26,287 | ||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | 145 | — | 145 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | 178 | 748 | 926 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total development & spec land | $ | 1,586 | $ | 1,230 | $ | 449 | $ | 270 | $ | 5 | $ | 10,062 | $ | 13,756 | $ | 27,358 | ||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 207,019 | $ | 139,759 | $ | 32,997 | $ | 34,303 | $ | 41,044 | $ | 119,850 | $ | 49,859 | $ | 624,831 | ||||||||||||||||||||||||||||||||||
| Special Mention | 718 | 368 | 31 | 562 | 706 | 2,251 | — | 4,636 | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 2,720 | 2,216 | 532 | 1,618 | 5,517 | 5,517 | 18,120 | ||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total commercial & industrial | $ | 207,737 | $ | 142,847 | $ | 35,244 | $ | 35,397 | $ | 43,368 | $ | 127,618 | $ | 55,376 | $ | 647,587 | ||||||||||||||||||||||||||||||||||
| Total commercial | $ | 499,976 | $ | 410,876 | $ | 222,479 | $ | 184,764 | $ | 185,160 | $ | 628,468 | $ | 335,699 | $ | 2,467,422 | ||||||||||||||||||||||||||||||||||
31
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 107,224 | $ | 156,595 | $ | 91,314 | $ | 33,768 | $ | 36,147 | $ | 178,588 | $ | 792 | $ | 604,428 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | 493 | 285 | 623 | 631 | 6,091 | — | 8,123 | ||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | $ | 107,224 | $ | 157,088 | $ | 91,599 | $ | 34,391 | $ | 36,778 | $ | 184,679 | $ | 792 | $ | 612,551 | ||||||||||||||||||||||||||||||||||
| Residential construction | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 187 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 40,554 | $ | 40,741 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total residential construction | $ | 187 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 40,554 | $ | 40,741 | ||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 69,529 | $ | 69,529 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total mortgage warehouse | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 69,529 | $ | 69,529 | ||||||||||||||||||||||||||||||||||
| Total real estate | $ | 107,411 | $ | 157,088 | $ | 91,599 | $ | 34,391 | $ | 36,778 | $ | 184,679 | $ | 110,875 | $ | 722,821 | ||||||||||||||||||||||||||||||||||
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Direct installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 19,851 | $ | 12,708 | $ | 7,204 | $ | 7,682 | $ | 3,952 | $ | 5,044 | $ | 9 | $ | 56,450 | ||||||||||||||||||||||||||||||||||
| Non–performing | — | 50 | 13 | 65 | 25 | 11 | — | 164 | ||||||||||||||||||||||||||||||||||||||||||
| Total direct installment | $ | 19,851 | $ | 12,758 | $ | 7,217 | $ | 7,747 | $ | 3,977 | $ | 5,055 | $ | 9 | $ | 56,614 | ||||||||||||||||||||||||||||||||||
| Indirect installment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 259,446 | $ | 118,961 | $ | 60,062 | $ | 34,576 | $ | 19,062 | $ | 7,674 | $ | — | $ | 499,781 | ||||||||||||||||||||||||||||||||||
| Non–performing | 27 | 169 | 210 | 181 | 101 | 80 | — | 768 | ||||||||||||||||||||||||||||||||||||||||||
| Total indirect installment | $ | 259,473 | $ | 119,130 | $ | 60,272 | $ | 34,757 | $ | 19,163 | $ | 7,754 | $ | — | $ | 500,549 | ||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 160,124 | $ | 85,254 | $ | 41,438 | $ | 26,984 | $ | 21,606 | $ | 64,642 | $ | 7,089 | $ | 407,137 | ||||||||||||||||||||||||||||||||||
| Non–performing | 108 | 16 | 19 | 140 | 152 | 1,077 | 1,943 | 3,455 | ||||||||||||||||||||||||||||||||||||||||||
| Total home equity | $ | 160,232 | $ | 85,270 | $ | 41,457 | $ | 27,124 | $ | 21,758 | $ | 65,719 | $ | 9,032 | $ | 410,592 | ||||||||||||||||||||||||||||||||||
| Total consumer | $ | 439,556 | $ | 217,158 | $ | 108,946 | $ | 69,628 | $ | 44,898 | $ | 78,528 | $ | 9,041 | $ | 967,755 | ||||||||||||||||||||||||||||||||||
32
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 4 – 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 six months ended June 30, 2023 and 2022:
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 31,156 | $ | 4,447 | $ | 798 | $ | 13,125 | $ | 49,526 | ||||||||||||||||||||||
| Credit loss expense (recovery) | (684) | (809) | 95 | 2,139 | 741 | |||||||||||||||||||||||||||
| PCD loan charge–offs | (17) | — | — | — | (17) | |||||||||||||||||||||||||||
| Charge–offs | (196) | — | — | (472) | (668) | |||||||||||||||||||||||||||
| Recoveries | 95 | 10 | — | 289 | 394 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 30,354 | $ | 3,648 | $ | 893 | $ | 15,081 | $ | 49,976 | ||||||||||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 37,789 | $ | 4,351 | $ | 1,055 | $ | 9,313 | $ | 52,508 | ||||||||||||||||||||||
| Credit loss expense (recovery) | (2,948) | 111 | 12 | 3,065 | 240 | |||||||||||||||||||||||||||
| PCD loan charge–offs | (114) | — | — | — | (114) | |||||||||||||||||||||||||||
| Charge–offs | (57) | (58) | — | (726) | (841) | |||||||||||||||||||||||||||
| Recoveries | 132 | 18 | — | 407 | 557 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 34,802 | $ | 4,422 | $ | 1,067 | $ | 12,059 | $ | 52,350 | ||||||||||||||||||||||
| Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 32,445 | $ | 5,577 | $ | 1,020 | $ | 11,422 | $ | 50,464 | ||||||||||||||||||||||
| Credit loss expense (recovery) | (1,715) | (1,945) | (127) | 4,123 | 336 | |||||||||||||||||||||||||||
| PCD loan charge–offs | (171) | — | — | — | (171) | |||||||||||||||||||||||||||
| Charge–offs | (333) | (4) | — | (1,014) | (1,351) | |||||||||||||||||||||||||||
| Recoveries | 128 | 20 | — | 550 | 698 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 30,354 | $ | 3,648 | $ | 893 | $ | 15,081 | $ | 49,976 | ||||||||||||||||||||||
| Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Commercial | Real Estate | Mortgage Warehouse | Consumer | Total | ||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 40,775 | $ | 3,856 | $ | 1,059 | $ | 8,596 | $ | 54,286 | ||||||||||||||||||||||
| Credit loss expense (recovery) | (5,640) | 596 | 8 | 3,890 | (1,146) | |||||||||||||||||||||||||||
| PCD loan charge–offs | (370) | — | — | — | (370) | |||||||||||||||||||||||||||
| Charge–offs | (137) | (58) | — | (1,013) | (1,208) | |||||||||||||||||||||||||||
| Recoveries | 174 | 28 | — | 586 | 788 | |||||||||||||||||||||||||||
| Balance, end of period | $ | 34,802 | $ | 4,422 | $ | 1,067 | $ | 12,059 | $ | 52,350 | ||||||||||||||||||||||
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”).
33
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 2008 through the economic cycle, on a quarterly 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 econometrics, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and quantitative adjustments were utilized to reflect the forecast and other relevant factors. The forecasted loss rate then reverts to the historical base rate on a straight–line methodology for the remaining life of loan for each pool.
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 5 – 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 $1.491 billion and $1.532 billion at June 30, 2023 and December 31, 2022.
34
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
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. Mortgage servicing rights are included in other assets on the balance sheets as of June 30, 2023 and December 31, 2022.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||
| Balance, beginning of period | $ | 18,600 | $ | 18,592 | $ | 18,619 | $ | 17,780 | |||||||||||||||
| Servicing rights capitalized | 207 | 813 | 435 | 2,375 | |||||||||||||||||||
| Amortization of servicing rights | (300) | (644) | (547) | (1,394) | |||||||||||||||||||
| Balance, end of period | 18,507 | 18,761 | 18,507 | 18,761 | |||||||||||||||||||
| Impairment allowance | |||||||||||||||||||||||
| Balance, beginning of period | — | — | — | (2,594) | |||||||||||||||||||
| Additions | — | — | — | — | |||||||||||||||||||
| Reductions | — | — | — | 2,594 | |||||||||||||||||||
| Balance, end of period | — | — | — | — | |||||||||||||||||||
| Mortgage servicing rights, net | $ | 18,507 | $ | 18,761 | $ | 18,507 | $ | 18,761 | |||||||||||||||
| Fair value, beginning of period | $ | 18,600 | $ | 18,592 | $ | 18,619 | $ | 15,186 | |||||||||||||||
| Fair value, end of period | 18,507 | 18,761 | 18,507 | 18,761 | |||||||||||||||||||
Note 6 – Goodwill
The carrying amount of goodwill was $155.2 million as of June 30, 2023 and December 31, 2022, respectively. There were no changes in the carrying amount of goodwill for the three and six months ended June 30, 2023 and 2022. Goodwill is assessed for impairment annually, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment.
Goodwill was assessed for impairment using a qualitative analysis as of June 30, 2023 which resulted in no goodwill impairment charges for the six months ended June 30, 2023.
Note 7 – 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 tables show repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements:
35
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
| June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 141,656 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 141,656 | |||||||||||||||||||||||||||
| Securities pledged for Repurchase Agreements | |||||||||||||||||||||||||||||||||||||||||
| Federal agency collateralized mortgage obligations | $ | 10,687 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 10,687 | |||||||||||||||||||||||||||
| Federal agency mortgage–backed pools | 146,036 | — | — | — | — | — | 146,036 | ||||||||||||||||||||||||||||||||||
| Private labeled mortgage–backed pools | 8,909 | — | — | — | — | — | 8,909 | ||||||||||||||||||||||||||||||||||
| Total | $ | 165,632 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 165,632 | |||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 137,871 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 137,871 | |||||||||||||||||||||||||||
| Securities pledged for Repurchase Agreements | |||||||||||||||||||||||||||||||||||||||||
| Federal agency collateralized mortgage obligations | $ | 13,882 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 13,882 | |||||||||||||||||||||||||||
| Federal agency mortgage–backed pools | 137,646 | — | — | — | — | — | 137,646 | ||||||||||||||||||||||||||||||||||
| Private labeled mortgage–backed pools | 8,989 | — | — | — | — | — | 8,989 | ||||||||||||||||||||||||||||||||||
| Total | $ | 160,517 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 160,517 | |||||||||||||||||||||||||||
Note 8 – 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.
36
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
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.
Note 9 – 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 an interest rate swap agreement for a portion of its floating rate debt on July 20, 2018. 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 December 31, 2022. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. The Company terminated this interest rate swap agreement on May 23, 2023 and recorded a related gain of $1.5 million as a reduction of 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.
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 June 30, 2023, 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 non–interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material.
37
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
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 June 30, 2023, 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.
The following tables summarize the fair value of derivative financial instruments utilized by Horizon:
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2023 | ||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||
| Interest rate contracts – cash flow hedges | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Total derivatives designated as hedging instruments | — | — | — | — | |||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Interest rate contracts – fair value hedges | 523,396 | 39,146 | 523,396 | 39,146 | |||||||||||||||||||
| Mortgage loan contracts | — | — | 15,198 | 18 | |||||||||||||||||||
| Commitments to originate mortgage loans | 5,486 | 131 | — | — | |||||||||||||||||||
| Total derivatives not designated as hedging instruments | 528,882 | 39,277 | 538,594 | 39,164 | |||||||||||||||||||
| Total derivatives | $ | 528,882 | $ | 39,277 | $ | 538,594 | $ | 39,164 | |||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2022 | ||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||
| Interest rate contracts – cash flow hedges | $ | 50,000 | $ | 1,976 | $ | — | $ | — | |||||||||||||||
| Total derivatives designated as hedging instruments | 50,000 | 1,976 | — | — | |||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Interest rate contracts – fair value hedges | 514,551 | 42,619 | 514,551 | 42,619 | |||||||||||||||||||
| Mortgage loan contracts | — | — | 13,800 | 50 | |||||||||||||||||||
| Commitments to originate mortgage loans | 12,179 | 284 | — | — | |||||||||||||||||||
| Total derivatives not designated as hedging instruments | 526,730 | 42,903 | 528,351 | 42,669 | |||||||||||||||||||
| Total derivatives | $ | 576,730 | $ | 44,879 | $ | 528,351 | $ | 42,669 | |||||||||||||||
38
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The effect of the derivative instruments on the condensed consolidated statements of comprehensive income for the three and six–month periods ended June 30 is as follows:
| Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Derivatives in cash flow hedging relationship | |||||||||||||||||||||||
| Interest rate contracts | $ | (1,119) | $ | 824 | $ | (1,561) | $ | 2,993 | |||||||||||||||
The effect of the derivative designated as a hedging instrument on the condensed consolidated statements of income for the three and six–month periods ended June 30 is as follows:
| Location of gain (loss) recognized on derivative | Amount of Gain (Loss) Recognized on Derivative | ||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||||||||
| Derivative designated as hedging instruments | |||||||||||||||||||||||||||||
| Interest rate contracts – cash flow hedges | Interest expense – Borrowings | $ | 1,624 | $ | (275) | $ | 1,832 | $ | (615) | ||||||||||||||||||||
| Total | $ | 1,624 | $ | (275) | $ | 1,832 | $ | (615) | |||||||||||||||||||||
The effect of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and six–month periods ended June 30 is as follows:
| Location of gain (loss) recognized on derivative | Amount of Gain (Loss) Recognized on Derivative | ||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||
| Interest rate contracts – fair value hedge | Interest income – loans receivable | $ | 314 | $ | (52) | $ | 434 | $ | (164) | ||||||||||||||||||||
| Interest rate contracts – fair value hedge | Interest income – investment securities | 61 | (47) | 110 | (112) | ||||||||||||||||||||||||
| Mortgage loan contracts | Non–interest income – Gain on sale of loans | (119) | 434 | (32) | 87 | ||||||||||||||||||||||||
| Commitments to originate mortgage loans | Non–interest income – Gain on sale of loans | (88) | (81) | (153) | (756) | ||||||||||||||||||||||||
| Total | $ | 168 | $ | 254 | $ | 359 | $ | (945) | |||||||||||||||||||||
39
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 10 – 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 June 30, 2023. 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 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.
40
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 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:
| June 30, 2023 | |||||||||||||||||||||||
| 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 | $ | 268,835 | $ | — | $ | 268,835 | $ | — | |||||||||||||||
| State and municipal | 364,066 | — | 364,066 | — | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 22,895 | — | 22,895 | — | |||||||||||||||||||
| Federal agency mortgage–backed pools | 177,654 | — | 177,654 | — | |||||||||||||||||||
| Corporate notes | 72,363 | — | 72,363 | — | |||||||||||||||||||
| Total available for sale securities | 905,813 | — | 905,813 | — | |||||||||||||||||||
| Interest rate swap agreements asset | 39,146 | — | 39,146 | — | |||||||||||||||||||
| Commitments to originate mortgage loans | 131 | — | 131 | — | |||||||||||||||||||
| Interest rate swap agreements liability | (39,146) | — | (39,146) | — | |||||||||||||||||||
| Mortgage loan contracts | (18) | — | (18) | — | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| 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 | $ | 267,179 | $ | — | $ | 267,179 | $ | — | |||||||||||||||
| State and municipal | 433,544 | — | 433,544 | — | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 31,215 | — | 31,215 | — | |||||||||||||||||||
| Federal agency mortgage–backed pools | 190,656 | — | 190,656 | — | |||||||||||||||||||
| Corporate notes | 74,964 | — | 74,964 | — | |||||||||||||||||||
| Total available for sale securities | 997,558 | — | 997,558 | — | |||||||||||||||||||
| Interest rate swap agreements asset | 44,595 | — | 44,595 | — | |||||||||||||||||||
| Commitments to originate mortgage loans | 284 | — | 284 | — | |||||||||||||||||||
| Interest rate swap agreements liability | (42,619) | — | (42,619) | — | |||||||||||||||||||
| Mortgage loan contracts | (50) | — | (50) | — | |||||||||||||||||||
41
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
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) | ||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||
| Collateral dependent loans | $ | 8,114 | $ | — | $ | — | $ | 8,114 | |||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Collateral dependent loans | $ | 8,091 | $ | — | $ | — | $ | 8,091 | |||||||||||||||
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.
The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill.
| June 30, 2023 | |||||||||||||||||||||||
| Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||
| Collateral dependent loans | $ | 8,114 | Collateral based measurement | Discount to reflect current market conditions and ultimate collectibility | 0.0%-65.7% (10.5%) | ||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||||||||||||||||
| Collateral dependent loans | $ | 8,091 | Collateral based measurement | Discount to reflect current market conditions and ultimate collectibility | 0.0%-100.0%(13.3%) | ||||||||||||||||||
Note 11 – 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.
42
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 June 30, 2023 and December 31, 2022. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheets 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.
43
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 estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall.
| June 30, 2023 | |||||||||||||||||||||||
| 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 | $ | 228,986 | $ | 228,986 | $ | — | $ | — | |||||||||||||||
| Interest–earning time deposits | 2,452 | — | 2,415 | — | |||||||||||||||||||
| Investment securities, held to maturity | 1,983,496 | — | 1,668,229 | — | |||||||||||||||||||
| Loans held for sale | 6,933 | — | — | 6,933 | |||||||||||||||||||
| Loans (excluding loan level hedges), net | 4,216,284 | — | — | 3,957,526 | |||||||||||||||||||
| Stock in FHLB | 34,509 | — | 34,509 | — | |||||||||||||||||||
| Interest receivable | 37,536 | — | 37,536 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Non–interest bearing deposits | $ | 1,170,055 | $ | 1,170,055 | $ | — | $ | — | |||||||||||||||
| Interest bearing deposits | 4,539,277 | — | 4,245,049 | — | |||||||||||||||||||
| Borrowings | 1,352,039 | — | 1,338,249 | — | |||||||||||||||||||
| Subordinated notes | 58,970 | — | 57,600 | — | |||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 57,143 | — | 50,569 | — | |||||||||||||||||||
| Interest payable | 12,739 | — | 12,739 | — | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| 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 | $ | 123,505 | $ | 123,505 | $ | — | $ | — | |||||||||||||||
| Interest–earning time deposits | 2,812 | — | 2,778 | — | |||||||||||||||||||
| Investment securities, held to maturity | 2,022,748 | — | 1,681,309 | — | |||||||||||||||||||
| Loans held for sale | 5,807 | — | — | 5,807 | |||||||||||||||||||
| Loans (excluding loan level hedges), net | 4,107,534 | — | — | 3,852,458 | |||||||||||||||||||
| Stock in FHLB | 26,677 | — | 26,677 | — | |||||||||||||||||||
| Interest receivable | 35,294 | — | 35,294 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Non–interest bearing deposits | $ | 1,277,768 | $ | 1,277,768 | $ | — | $ | — | |||||||||||||||
| Interest bearing deposits | 4,580,006 | — | 4,100,154 | — | |||||||||||||||||||
| Borrowings | 1,142,949 | — | 1,139,926 | — | |||||||||||||||||||
| Subordinated notes | 58,896 | — | 56,496 | — | |||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 57,027 | — | 51,327 | — | |||||||||||||||||||
| Interest payable | 5,380 | — | 5,380 | — | |||||||||||||||||||
44
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 12 – Accumulated Other Comprehensive Income (Loss)
| June 30, 2023 | December 31, 2022 | ||||||||||
| Unrealized gain (loss) on securities available for sale | $ | (127,315) | $ | (140,144) | |||||||
| Unamortized gain (loss) on securities held to maturity, previously transferred from AFS | 3,367 | 3,740 | |||||||||
| Unrealized gain (loss) on derivative instruments | — | 1,976 | |||||||||
| Tax effect | 26,029 | 28,230 | |||||||||
| Total accumulated other comprehensive income (loss) | $ | (97,919) | $ | (106,198) | |||||||
Note 13 – 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 June 30, 2023 and December 31, 2022, 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 second quarter of 2023 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well capitalized status for bank holding companies.
45
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 June 30, 2023 and December 31, 2022 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 | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 805,382 | 14.32 | % | $ | 449,915 | 8.00 | % | $ | 590,513 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
| Bank | 732,236 | 13.03 | % | 449,727 | 8.00 | % | 590,267 | 10.50 | % | $ | 562,159 | 10.00 | % | ||||||||||||||||||||||||||||||||||
Tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 755,406 | 13.43 | % | 337,436 | 6.00 | % | 478,035 | 8.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 681,271 | 12.12 | % | 337,295 | 6.00 | % | 477,835 | 8.50 | % | 449,727 | 8.00 | % | |||||||||||||||||||||||||||||||||||
Common equity tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 635,127 | 11.29 | % | 253,077 | 4.50 | % | 393,676 | 7.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 681,271 | 12.12 | % | 252,971 | 4.50 | % | 393,511 | 7.00 | % | 365,403 | 6.50 | % | |||||||||||||||||||||||||||||||||||
Tier 1 capital (to average assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 755,406 | 9.79 | % | 308,792 | 4.00 | % | 308,792 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 681,271 | 8.72 | % | 312,663 | 4.00 | % | 312,663 | 4.00 | % | 390,829 | 5.00 | % | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 776,390 | 14.37 | % | $ | 432,172 | 8.00 | % | $ | 567,226 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
| Bank | 726,339 | 13.59 | % | 427,456 | 8.00 | % | 561,036 | 10.50 | % | $ | 534,320 | 10.00 | % | ||||||||||||||||||||||||||||||||||
Tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 729,835 | 13.51 | % | 324,129 | 6.00 | % | 459,183 | 8.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 679,784 | 12.72 | % | 320,592 | 6.00 | % | 454,172 | 8.50 | % | 427,456 | 8.00 | % | |||||||||||||||||||||||||||||||||||
Common equity tier 1 capital (to risk–weighted assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 609,630 | 11.28 | % | 243,097 | 4.50 | % | 378,151 | 7.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 679,784 | 12.72 | % | 240,444 | 4.50 | % | 374,024 | 7.00 | % | 347,308 | 6.50 | % | |||||||||||||||||||||||||||||||||||
Tier 1 capital (to average assets)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 729,835 | 10.03 | % | 291,122 | 4.00 | % | 291,122 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Bank | 679,784 | 8.89 | % | 305,996 | 4.00 | % | 305,999 | 4.00 | % | 382,495 | 5.00 | % | |||||||||||||||||||||||||||||||||||
(1) As defined by regulatory agencies | |||||||||||||||||||||||||||||||||||||||||||||||
46
HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 14 – General Litigation
As of April 20, 2023, a putative class action lawsuit entitled Chad Key, et al. v. Horizon Bancorp, Inc., et al., Case No. 1:23-cv-02961 (”Securities Action”) was filed against the Company and two of its officers in the U.S. District Court for the Eastern District of New York. The Securities Action asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 alleging, among other things, the Company made materially false and misleading statements and failed to disclose material adverse facts which allegedly resulted in harm to a putative class of purchasers of our securities from March 9, 2022 and March 10, 2023.
We are still evaluating the complaint, which is subject to amendment, but based on current knowledge we believe that the claims are without merit. We believe the likelihood of loss is remote. Accordingly, no accrual has been made.
47
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward–Looking Statements
This report contains certain forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp, Inc. (“Horizon” or the “Company”) and Horizon Bank (the “Bank”). Horizon intends such forward–looking statements to be covered by the safe harbor provisions for forward–looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward–looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward–looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.
Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward–looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward–looking statement include but are not limited to:
•current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, liquidity levels, and responses by the Federal Reserve, Department of the Treasury, and the Federal Deposit Insurance Corporation to address these issues;
•changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;
•the ability of the Company to remediate its material weaknesses in its internal control over financial reporting;
•continuing increases in inflation;
•loss of key Horizon personnel;
•economic conditions and their impact on Horizon and its customers, including local and global economic recovery from the pandemic;
•the increasing use of Bitcoin and other crypto currencies and/or stable coin and the possible impact these alternative currencies may have on deposit disintermediation and income derived from payment systems;
•the effect of interest rates on net interest rate margin and their impact on mortgage loan volumes and the outflow of deposits;
•increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks, which may have been accelerated by the COVID–19 pandemic;
•potential loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g., Apple Pay or Bitcoin) take a greater market share of the payment systems;
•estimates of fair value of certain of Horizon’s assets and liabilities;
•volatility and disruption in financial markets;
•prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;
•sources of liquidity;
•potential risk of environmental liability related to lending and acquisition activities;
•changes in the competitive environment in Horizon’s market areas and among other financial service providers;
•legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular;
48
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
•changes in regulatory supervision and oversight, including monetary policy and capital requirements;
•changes in accounting policies or procedures as may be adopted and required by regulatory agencies;
•litigation, regulatory enforcement, tax, and legal compliance risk and costs, as applicable generally and specifically to the financial and fiduciary (generally and as an ESOP fiduciary) environment, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same;
•the effects and costs of governmental investigations or related actions by third parties;
•rapid technological developments and changes;
•the risks presented by cyber terrorism and data security breaches;
•the rising costs of effective cybersecurity;
•containing costs and expenses;
•the ability of the U.S. federal government to manage federal debt limits;
•the potential influence on the U.S. financial markets and economy from the effects of climate change and social justice initiatives;
•the potential influence on the U.S. financial markets and economy from material changes outside the U.S. or in overseas relations, including changes in the U.S. trade relations related to imposition of tariffs, Brexit and the phase out of the London Interbank Offered Rate (“LIBOR”) according to regulatory guidance;
•the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings; and
•acts of terrorism, war and global conflicts, such as the Russia and Ukraine conflict, and the potential impact they may have on supply chains, the availability of commodities, commodity prices, inflationary pressure and the overall U.S. and global financial markets.
The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward–looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward–looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward–looking statements, see “Risk Factors” in Item 1A of Part I of our 2022 Annual Report on Form 10–K, in Item 1A of Part II of this Quarterly Report on Form 10–Q, and in the subsequent reports we file with the SEC.
Overview
Horizon Bancorp, Inc. (“Horizon” or the “Company”) is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in northern and central Indiana and southern and central Michigan through its bank subsidiary, Horizon Bank (“Horizon Bank” or the “Bank”), and other affiliated entities and Horizon Risk Management, Inc. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. Horizon Bank was founded in 1873 as a national association, and it remained a national association until its conversion to an Indiana commercial bank effective June 23, 2017. The Bank is a full–service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly–owned subsidiary of Horizon.
49
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Over the last 20 years, Horizon has expanded its geographic reach and experienced financial growth through a combination of both organic expansion and mergers and acquisitions. Horizon's initial operations focused on northwest Indiana, but since then, the Company has developed a presence in new markets in southern and central Michigan and northeastern and central Indiana.
Second Quarter 2023 Highlights
•Increased net income to $18.8 million or $0.43 per diluted share, from $18.2 million or $0.42 in the first quarter of 2023.
•Net interest income of $46.2 million increased from $45.2 million in the linked quarter. Second quarter 2023 net interest income benefited from average total loan and earning asset growth over the linked quarter, as well as a $1.5 million gain on swap termination that contributed approximately $0.02 to diluted earnings per share.
•Non–interest income expanded to $11.0 million from $9.6 million in the linked quarter.
•Continued to manage non–interest expense as a percentage of average assets to less than 1.90% on an annualized basis, totaling $36.3 million, or 1.86%, compared to $34.5 million, or 1.79% in the linked quarter.
•Deposits remained resilient during the quarter, totaling $5.71 billion at period end, compared to $5.70 billion on March 31, 2023.
•Loans grew to $4.27 billion at period end, increasing by 2.2% annualized during the quarter and 5.3% annualized since December 31, 2022.
•Maintained consistent and sound asset quality with 30 to 89 days delinquent loans representing 0.26% of total loans and non–performing loans representing 0.52% of total loans at period end, as well as net charge–offs representing 0.01% of average loans during the quarter.
•Tangible common equity continued to improve to 6.91% of tangible assets on June 30, 2023, an improvement of 4 basis points during the quarter and 35 basis points since December 31, 2022.
•The Bank’s capital position was strong with leverage and risk based capital ratios of 8.90% and 13.64%, respectively.
•Horizon's annualized dividend yield was robust at 6.15% as of June 30, 2023, with cash maintained at the holding company level representing approximately eight quarters of dividend payments and fixed costs.
Financial Summary
| For the Three Months Ended | ||||||||||||||||||||
| June 30, | March 31, | June 30, | ||||||||||||||||||
| Net Interest Income and Net Interest Margin | 2023 | 2023 | 2022 | |||||||||||||||||
| Net interest income | $ | 46,160 | $ | 45,237 | $ | 52,044 | ||||||||||||||
| Net interest margin | 2.69 | % | 2.67 | % | 3.13 | % | ||||||||||||||
| Adjusted net interest margin (See “Use of Non–GAAP Financial Measures”) | 2.57 | % | 2.65 | % | 3.06 | % | ||||||||||||||
| For the Three Months Ended | ||||||||||||||||||||
| June 30, | March 31, | June 30, | ||||||||||||||||||
| Asset Yields and Funding Costs | 2023 | 2023 | 2022 | |||||||||||||||||
| Interest earning assets | 4.39 | % | 4.17 | % | 3.39 | % | ||||||||||||||
| Interest bearing liabilities | 2.10 | % | 1.85 | % | 0.34 | % | ||||||||||||||
50
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
| For the Three Months Ended | ||||||||||||||||||||
| Non–interest Income and Mortgage Banking Income | June 30, | March 31, | June 30, | |||||||||||||||||
| 2023 | 2023 | 2022 | ||||||||||||||||||
| Total non–interest income | $ | 10,997 | $ | 9,620 | $ | 12,434 | ||||||||||||||
| Gain on sale of mortgage loans | 1,005 | 785 | 2,501 | |||||||||||||||||
| Mortgage servicing income net of impairment or recovery | 640 | 713 | 319 | |||||||||||||||||
| For the Three Months Ended | ||||||||||||||||||||
| June 30, | March 31, | June 30, | ||||||||||||||||||
| Non–interest Expense | 2023 | 2023 | 2022 | |||||||||||||||||
| Total non–interest expense | $ | 36,262 | $ | 34,524 | $ | 35,404 | ||||||||||||||
| Annualized non–interest expense to average assets | 1.86 | % | 1.79 | % | 1.90 | % | ||||||||||||||
| At or for the Three Months Ended | ||||||||||||||||||||
| Credit Quality | June 30, | March 31, | June 30, | |||||||||||||||||
| 2023 | 2023 | 2022 | ||||||||||||||||||
| Allowance for credit losses to total loans | 1.17 | % | 1.17 | % | 1.32 | % | ||||||||||||||
| Non–performing loans to total loans | 0.52 | % | 0.47 | % | 0.51 | % | ||||||||||||||
| Percent of net charge–offs to average loans outstanding for the period | 0.01 | % | 0.01 | % | 0.01 | % | ||||||||||||||
| Allowance for | June 30, | Net Reserve | December 31, | |||||||||||||||||||||||
| Credit Losses | 2023 | 2Q23 | 1Q23 | 2022 | ||||||||||||||||||||||
| Commercial | $ | 30,354 | $ | (802) | $ | (1,289) | $ | 32,445 | ||||||||||||||||||
| Retail Mortgage | 3,648 | (799) | (1,130) | 5,577 | ||||||||||||||||||||||
| Warehouse | 893 | 95 | (222) | 1,020 | ||||||||||||||||||||||
| Consumer | 15,081 | 1,956 | 1,703 | 11,422 | ||||||||||||||||||||||
Allowance for Credit Losses (“ACL”) | $ | 49,976 | $ | 450 | (938) | $ | 50,464 | |||||||||||||||||||
| ACL/Total Loans | 1.17 | % | 1.21 | % | ||||||||||||||||||||||
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s 2022 Annual Report on Form 10–K contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.
Allowance for Credit Losses
The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.
The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast. Loan losses are estimated using the fair value of collateral for collateral–dependent loans, or
51
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged–off against the ACL. Recoveries of amounts previously charged–off are credited to the ACL. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates.
Goodwill and Intangible Assets
Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350–10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At June 30, 2023, Horizon had core deposit intangibles of $15.4 million subject to amortization and $155.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.
At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding the interest rate environment, Horizon assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock and other relevant events. Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and stress testing performed. At the conclusion of the most recent qualitative assessment, the Company determined that as of June 30, 2023, it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the current banking environment, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing–retained basis. Capitalized servicing rights are amortized into non–interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market–based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage–servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.
Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could
52
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.
Derivative Instruments
As part of the Company’s asset/liability management program, Horizon utilizes, from time–to–time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.
Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815–10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non–interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.
Valuation Measurements
Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post–retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.
Financial Condition
On June 30, 2023, Horizon’s total assets were $8.0 billion, an increase of approximately $90.8 million compared to December 31, 2022. The increase in total assets was primarily growth in net loans of $108.8 million and an increase in cash and due from banks of $105.5 million. These increases were offset by decreases in investments available for sale of $91.7 million primarily due to sales during the first six months of 2023 and a decrease in investments held to maturity of $39.3 million.
53
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Investment securities were comprised of the following as of (dollars in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 294,640 | $ | 268,835 | $ | 294,329 | $ | 267,179 | |||||||||||||||
| State and municipal | 425,815 | 364,066 | 505,006 | 433,544 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 24,529 | 22,895 | 33,011 | 31,215 | |||||||||||||||||||
| Federal agency mortgage–backed pools | 206,240 | 177,654 | 220,963 | 190,656 | |||||||||||||||||||
| Corporate notes | 81,904 | 72,363 | 84,393 | 74,964 | |||||||||||||||||||
| Total available for sale investment securities | $ | 1,033,128 | $ | 905,813 | $ | 1,137,702 | $ | 997,558 | |||||||||||||||
| Held to maturity | |||||||||||||||||||||||
| U.S. Treasury and federal agencies | $ | 287,576 | $ | 241,647 | $ | 295,250 | $ | 246,013 | |||||||||||||||
| State and municipal | 1,110,945 | 938,068 | 1,127,669 | 935,585 | |||||||||||||||||||
| Federal agency collateralized mortgage obligations | 54,067 | 45,466 | 56,564 | 47,699 | |||||||||||||||||||
| Federal agency mortgage–backed pools | 333,767 | 280,620 | 343,953 | 287,239 | |||||||||||||||||||
| Private labeled mortgage–backed pools | 33,848 | 28,662 | 35,466 | 29,973 | |||||||||||||||||||
| Corporate notes | 163,293 | 133,766 | 163,846 | 134,800 | |||||||||||||||||||
| Total held to maturity investment securities | $ | 1,983,496 | $ | 1,668,229 | $ | 2,022,748 | $ | 1,681,309 | |||||||||||||||
Investment securities available for sale decreased $91.7 million since December 31, 2022 to $905.8 million as of June 30, 2023 primarily due to the sale of certain securities and investment securities held to maturity decreased $39.3 million since December 31, 2022 to $2.0 billion as of June 30, 2023. This decrease in investments held to maturity was due to cash flows received during the first six months of 2023.
Net loans increased $108.8 million since December 31, 2022 to $4.3 billion as of June 30, 2023. Commercial loans increased $38.9 million, consumer loans increased $35.1 million, residential mortgage loans increased $21.5 million and mortgage warehouse loans increased $12.8 million since December 31, 2022.
Total deposits decreased $148.4 million since December 31, 2022 to $5.7 billion as of June 30, 2023, primarily due to a reduction in consumer and commercial balances of $55.6 million and a $54.6 million, respectively, offset by an increase in balances by municipal and other public depositors of approximately $117.6 million during the first six months of 2023.
Total borrowings increased to $1.4 billion as of June 30, 2023 from $1.1 billion as of December 31, 2022, primarily due to the decrease in total deposits.
Stockholders’ equity totaled $709.2 million at June 30, 2023 compared to $677.4 million at December 31, 2022. The increase in stockholders’ equity during the period was primarily due to a decrease in accumulated other comprehensive loss of $8.3 million as unrealized losses on available for sale securities decreased to $127.3 million and the generation of net income, offset by the amount of dividends paid during the quarter. Book value per common share at June 30, 2023 increased to $16.25 compared to $16.11 at December 31, 2022.
Results of Operations
Overview
Consolidated net income for the three–month period ended June 30, 2023 was $18.8 million, or $0.43 diluted earnings per share, compared to $24.9 million, or $0.57 diluted earnings per share for the same period in 2022. The decrease in net income for the three–month period ended June 30, 2023 when compared to the same prior year period reflects a decrease in
54
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
net interest income of $5.9 million, an increase in credit loss expense of $440,000 a decrease in non–interest income of $1.4 million and an increase in non–interest expense of $858,000, offset by a decrease in income tax expense of $2.5 million.
Consolidated net income for the six–month period ended June 30, 2023 was $37.0 million, or $0.85 diluted earnings per share, compared to $48.4 million, or $1.11 diluted earnings per share for the same period in 2022. The decrease in net income for the six–month period ended June 30, 2023 when compared to the same prior year period reflects a decrease in net interest income of $7.5 million, an increase in credit loss expense of $2.1 million and a decrease in non–interest income of $6.0 million and an increase in non–interest expense of $112,000, offset by a decrease in income tax expense of $4.2 million.
Net Interest Income
The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, less interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread, which affects the net interest margin. Volume refers to the average dollar levels of interest earning assets and interest bearing liabilities. Net interest spread refers to the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin refers to net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities.
Net interest income during the three months ended June 30, 2023 was $46.2 million, a decrease of $5.9 million from the $52.0 million earned during the same period in 2022. Yields on the Company’s interest earning assets increased by 100 basis points to 4.39% for the three months ended June 30, 2023 from 3.39% for the three months ended June 30, 2022. Interest income increased $20.3 million from $56.6 million for the three months ended June 30, 2022 to $76.9 million for the same period in 2023. The increase in interest income was due to higher yields earned on interest earning assets and an increase in average balances of interest earning assets of $269.0 million during the three months ended June 30, 2023. Interest income from acquisition–related purchase accounting adjustments was $651,000 for the three months ended June 30, 2023 compared to $1.2 million for the same period in 2022.
Rates paid on interest bearing liabilities increased by 176 basis points for the three–month period ended June 30, 2023 compared to the same period in 2022. Interest expense increased $26.1 million when compared to the three–month period ended June 30, 2022 to $30.7 million for the same period in 2023. This increase was due to higher rates paid on interest bearing liabilities. The cost of average interest bearing deposits increased 156 basis points while the cost of average borrowings increased 216 basis points. Average balances of interest bearing deposits decreased $95.9 million and average balances of borrowings increased $563.4 million for the three-month period ended June 30, 2023 when compared to the same period in 2022.
The net interest margin decreased 44 basis points from 3.13% for the three–month period ended June 30, 2022 to 2.69% for the same period in 2023. The decrease in the margin for the three–month period ended June 30, 2023 compared to the same period in 2022 was due to an increase in the cost of interest bearing liabilities, offset by a increase in the yield on interest earning assets. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments and the gain on swap termination recorded in interest expense (“adjusted net interest margin”), the margin would have been 2.57% for the three-month period ended June 30, 2023 compared to 3.06% for the same period in 2022. (See the “Non–GAAP Reconciliation of Net Interest Margin” table below.)
55
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
The following are the average balance sheets for the three months ended (dollars in thousands):
| Average Balance Sheets | ||||||||||||||||||||||||||||||||||||||
| (Dollar Amount in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Federal funds sold | $ | 30,926 | $ | 376 | 4.88 | % | $ | 7,083 | $ | 17 | 0.96 | % | ||||||||||||||||||||||||||
| Interest earning deposits | 9,002 | 99 | 4.41 | % | 15,661 | 26 | 0.67 | % | ||||||||||||||||||||||||||||||
| Investment securities – taxable | 1,706,761 | 8,740 | 2.05 | % | 1,770,816 | 8,673 | 1.96 | % | ||||||||||||||||||||||||||||||
Investment securities – non–taxable (1) | 1,240,931 | 7,059 | 2.89 | % | 1,374,032 | 7,307 | 2.70 | % | ||||||||||||||||||||||||||||||
Loans receivable (2) (3) | 4,225,020 | 60,594 | 5.78 | % | 3,776,041 | 40,585 | 4.33 | % | ||||||||||||||||||||||||||||||
| Total interest earning assets | 7,212,640 | 76,868 | 4.39 | % | 6,943,633 | 56,608 | 3.39 | % | ||||||||||||||||||||||||||||||
| Non–interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 102,935 | 98,040 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | (49,481) | (52,525) | ||||||||||||||||||||||||||||||||||||
| Other assets | 573,932 | 487,090 | ||||||||||||||||||||||||||||||||||||
| Total average assets | $ | 7,840,026 | $ | 7,476,238 | ||||||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Interest bearing deposits | $ | 4,445,074 | $ | 18,958 | 1.71 | % | $ | 4,540,959 | $ | 1,677 | 0.15 | % | ||||||||||||||||||||||||||
| Borrowings | 1,176,702 | 9,035 | 3.08 | % | 613,282 | 1,409 | 0.92 | % | ||||||||||||||||||||||||||||||
| Repurchase agreements | 140,606 | 683 | 1.95 | % | 141,470 | 41 | 0.12 | % | ||||||||||||||||||||||||||||||
| Subordinated notes | 58,946 | 881 | 5.99 | % | 58,800 | 881 | 6.01 | % | ||||||||||||||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 57,110 | 1,151 | 8.08 | % | 56,870 | 556 | 3.92 | % | ||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 5,878,438 | 30,708 | 2.10 | % | 5,411,381 | 4,564 | 0.34 | % | ||||||||||||||||||||||||||||||
| Non–interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Demand deposits | 1,186,520 | 1,335,779 | ||||||||||||||||||||||||||||||||||||
| Accrued interest payable and other liabilities | 64,115 | 51,779 | ||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 710,953 | 677,299 | ||||||||||||||||||||||||||||||||||||
| Total average liabilities and stockholders’ equity | $ | 7,840,026 | $ | 7,476,238 | ||||||||||||||||||||||||||||||||||
| Net interest income/spread | $ | 46,160 | 2.29 | % | $ | 52,044 | 3.05 | % | ||||||||||||||||||||||||||||||
Net interest income as a percent of average interest earning assets (1) | 2.69 | % | 3.13 | % | ||||||||||||||||||||||||||||||||||
(1) | Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis. | |||||||||||||||||||||||||||||||||||||
(2) | Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate. | |||||||||||||||||||||||||||||||||||||
(3) | Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis. | |||||||||||||||||||||||||||||||||||||
56
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Net interest income during the six months ended June 30, 2023 was $91.4 million, a decrease of $7.5 million from the $98.9 million earned during the same period in 2022. Yields on the Company’s interest earning assets increased by 101 basis points to 4.28% for the six months ended June 30, 2023 from 3.27% for the six months ended June 30, 2022. Interest income increased $41.3 million from $107.4 million for the six months ended June 30, 2022 to $148.7 million for the same period in 2023. The increase in interest income was due to higher yields earned on interest earning assets and an increase in average balances of interest earning assets of $327.4 million during the six months ended June 30, 2023. Interest income from acquisition–related purchase accounting adjustments was $1.0 million for the six months ended June 30, 2023 compared to $2.1 million for the same period in 2022.
Rates paid on interest bearing liabilities increased by 166 basis points for the six–month period ended June 30, 2023 compared to the same period in 2022. Interest expense increased $48.8 million when compared to the six–month period ended June 30, 2022 to $57.3 million for the same period in 2023. This increase was due to higher rates paid on interest bearing liabilities. The cost of average interest bearing deposits increased 138 basis points while the cost of average borrowings increased 242 basis points. Average balances of interest bearing deposits decreased $37.4 million and average balances of borrowings increased $556.5 million for the six–month period ended June 30, 2023 when compared to the same period in 2022.
The net interest margin decreased 34 basis points from 3.02% for the six–month period ended June 30, 2022 to 2.68% for the same period in 2023. The decrease in the margin for the six–month period ended June 30, 2023 compared to the same period in 2022 was due to an increase in the cost of interest bearing liabilities, offset by a increase in the yield on interest earning assets. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments and the gain on swap termination recorded in interest expense (“adjusted net interest margin”), the margin would have been 2.61% for the six–month period ended June 30, 2023 compared to 2.96%for the same period in 2022. (See the “Non–GAAP Reconciliation of Net Interest Margin” table below.)
57
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
The following are the average balance sheets for the six months ended (dollars in thousands):
| Average Balance Sheets | ||||||||||||||||||||||||||||||||||||||
| (Dollar Amount in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||
| Six Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Federal funds sold | $ | 19,411 | $ | 459 | 4.77 | % | $ | 121,707 | $ | 108 | 0.18 | % | ||||||||||||||||||||||||||
| Interest earning deposits | 8,891 | 169 | 3.83 | % | 18,154 | 50 | 0.56 | % | ||||||||||||||||||||||||||||||
| Investment securities – taxable | 1,717,008 | 17,465 | 2.05 | % | 1,709,014 | 16,064 | 1.90 | % | ||||||||||||||||||||||||||||||
Investment securities – non–taxable (1) | 1,277,328 | 14,615 | 2.92 | % | 1,326,819 | 14,004 | 2.69 | % | ||||||||||||||||||||||||||||||
Loans receivable (2) (3) | 4,184,347 | 115,958 | 5.61 | % | 3,703,857 | 77,124 | 4.22 | % | ||||||||||||||||||||||||||||||
| Total interest earning assets | 7,206,985 | 148,666 | 4.28 | % | 6,879,551 | 107,350 | 3.27 | % | ||||||||||||||||||||||||||||||
| Non–interest earning assets | ||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 103,247 | 101,340 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | (49,907) | (53,411) | ||||||||||||||||||||||||||||||||||||
| Other assets | 574,707 | 463,868 | ||||||||||||||||||||||||||||||||||||
| Total average assets | $ | 7,835,032 | $ | 7,391,348 | ||||||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Interest bearing deposits | $ | 4,472,519 | $ | 33,777 | 1.52 | % | $ | 4,509,962 | $ | 3,173 | 0.14 | % | ||||||||||||||||||||||||||
| Borrowings | 1,115,350 | 18,303 | 3.31 | % | 558,867 | 2,453 | 0.89 | % | ||||||||||||||||||||||||||||||
| Repurchase agreements | 139,683 | 1,186 | 1.71 | % | 140,610 | 77 | 0.11 | % | ||||||||||||||||||||||||||||||
| Subordinated notes | 58,928 | 1,761 | 6.03 | % | 58,782 | 1,761 | 6.04 | % | ||||||||||||||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 57,079 | 2,242 | 7.92 | % | 56,839 | 1,011 | 3.59 | % | ||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 5,843,559 | 57,269 | 1.98 | % | 5,325,060 | 8,475 | 0.32 | % | ||||||||||||||||||||||||||||||
| Non–interest bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Demand deposits | 1,220,917 | 1,329,316 | ||||||||||||||||||||||||||||||||||||
| Accrued interest payable and other liabilities | 67,893 | 39,968 | ||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 702,663 | 697,004 | ||||||||||||||||||||||||||||||||||||
| Total average liabilities and stockholders’ equity | $ | 7,835,032 | $ | 7,391,348 | ||||||||||||||||||||||||||||||||||
| Net interest income/spread | $ | 91,397 | 2.30 | % | $ | 98,875 | 2.95 | % | ||||||||||||||||||||||||||||||
Net interest income as a percent of average interest earning assets (1) | 2.68 | % | 3.02 | % | ||||||||||||||||||||||||||||||||||
(1) | Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis. | |||||||||||||||||||||||||||||||||||||
(2) | Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate. | |||||||||||||||||||||||||||||||||||||
(3) | Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis. | |||||||||||||||||||||||||||||||||||||
58
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of interest earning assets and interest bearing liabilities and interest rates on net interest income for the periods indicated.
| Three Months Ended June 30, 2023 vs. Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 vs. Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||
| Total Change | Change Due to Volume | Change Due to Rate | Total Change | Change Due to Volume | Change Due to Rate | ||||||||||||||||||||||||||||||
| Interest Income | |||||||||||||||||||||||||||||||||||
| Federal funds sold | $ | 359 | $ | 652 | $ | (293) | $ | 351 | $ | (334) | $ | 685 | |||||||||||||||||||||||
| Interest earning deposits | 73 | (63) | 136 | 119 | (76) | 195 | |||||||||||||||||||||||||||||
| Investment securities – taxable | 67 | (1,281) | 1,348 | 1,401 | 153 | 1,248 | |||||||||||||||||||||||||||||
| Investment securities – non–taxable | (248) | (3,739) | 3,491 | 611 | (1,366) | 1,977 | |||||||||||||||||||||||||||||
| Loans receivable | 20,009 | 21,146 | (1,137) | 38,834 | 22,165 | 16,669 | |||||||||||||||||||||||||||||
| Total interest income | $ | 20,260 | $ | 16,715 | $ | 3,545 | $ | 41,316 | $ | 20,542 | $ | 20,774 | |||||||||||||||||||||||
| Interest Expense | |||||||||||||||||||||||||||||||||||
| Interest bearing deposits | $ | 17,281 | $ | (147) | $ | 17,428 | $ | 30,604 | $ | (52) | $ | 30,656 | |||||||||||||||||||||||
| Borrowings | 7,626 | 8,355 | (729) | 15,850 | 8,563 | 7,287 | |||||||||||||||||||||||||||||
| Repurchase agreements | 642 | (1) | 643 | 1,109 | (1) | 1,110 | |||||||||||||||||||||||||||||
| Subordinated notes | — | 9 | (9) | — | 9 | (9) | |||||||||||||||||||||||||||||
| Junior subordinated debentures issued to capital trusts | 595 | 9 | 586 | 1,231 | 9 | 1,222 | |||||||||||||||||||||||||||||
| Total interest expense | 26,144 | 8,225 | 17,919 | 48,794 | 8,528 | 40,266 | |||||||||||||||||||||||||||||
| Net Interest Income | $ | (5,884) | $ | 8,490 | $ | (14,374) | $ | (7,478) | $ | 12,014 | $ | (19,492) | |||||||||||||||||||||||
Credit Loss Expense
Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio. During the three–month period ended June 30, 2023, credit loss expense for loans totaled $741,000 compared to $240,000 for the same period in 2022. During the three–month period ended June 30, 2023, commercial loan net charge–offs were $101,000, residential mortgage loan net recoveries were $10,000 and consumer loan net charge–offs were $183,000.
During the six–month period ended June 30, 2023, credit loss expense for loans totaled $336,000 compared to a credit loss recovery of $1.1 million for the same period of 2022. During the six–month period ended June 30, 2023, commercial loan net charge–offs were $205,000, residential mortgage loan net recoveries were $16,000 and consumer loan net charge–offs were $464,000.
The ACL balance at June 30, 2023 was $50.0 million, or 1.17% of total loans compared to an ACL balance of $50.5 million at December 31, 2022 or 1.21% of total loans. The decrease in the ACL to total loans ratio was primarily due to favorable asset quality with non–performing loans at 0.52% of total loans at period end and net charge–offs to average loans represented 0.01% for the second quarter of 2023.
As of June 30, 2023, non–performing loans totaled $22.1 million, reflecting a $269,000 increase from $21.8 million in non–performing loans as of December 31, 2022. Non–performing commercial loans decreased by $1.1 million, non–performing real estate loans increased by $45,000 and non–performing consumer loans increased by $1.3 million at June 30, 2023 compared to December 31, 2022.
59
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.7 million at June 30, 2023 compared to $2.1 million at December 31, 2022.
Non–interest Income
The following is a summary of changes in non–interest income for the three months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
| Three Months Ended | |||||||||||||||||||||||
| June 30, | Amount | Percent | |||||||||||||||||||||
| 2023 | 2022 | Change | Change | ||||||||||||||||||||
| Non–interest Income | |||||||||||||||||||||||
| Service charges on deposit accounts | $ | 3,021 | $ | 2,833 | $ | 188 | 6.6 | % | |||||||||||||||
| Wire transfer fees | 116 | 170 | (54) | (31.8) | % | ||||||||||||||||||
| Interchange fees | 3,584 | 3,582 | 2 | 0.1 | % | ||||||||||||||||||
| Fiduciary activities | 1,247 | 1,405 | (158) | (11.2) | % | ||||||||||||||||||
| Gain on sale of investment securities | 20 | — | 20 | 100.0 | % | ||||||||||||||||||
| Gain on sale of mortgage loans | 1,005 | 2,501 | (1,496) | (59.8) | % | ||||||||||||||||||
| Mortgage servicing net of impairment | 640 | 319 | 321 | 100.6 | % | ||||||||||||||||||
| Increase in cash surrender value of bank owned life insurance | 1,015 | 519 | 496 | 95.6 | % | ||||||||||||||||||
| Death benefit on bank owned life insurance | — | 644 | (644) | 0.0 | % | ||||||||||||||||||
| Other income | 349 | 461 | (112) | (24.3) | % | ||||||||||||||||||
| Total non–interest income | $ | 10,997 | $ | 12,434 | $ | (1,437) | (11.6) | % | |||||||||||||||
Total non–interest income was $1.4 million lower during the second quarter of 2023 compared to the same period in 2022. The sale of $24.7 million of available for sale investments generated a $20,000 gain during the second quarter of 2023. Residential mortgage loan activity during the second quarter of 2023 generated $1.0 million of income from the gain on sale of mortgage loans, down from $2.5 million for the same period in 2022 due to a lower volume of loans sold and a decrease in the percentage gain on loans sold. The cash surrender value of bank owned life insurance increased $496,000 during the second quarter of 2023 compared to the same period in 2022, primarily due to the purchase of $50.0 million in additional life insurance during the third quarter of 2022. Mortgage servicing income, net of impairment or recovery, increased $321,000 during the second quarter of 2023 compared to the same period in 2022. Fiduciary activities income was $158,000 lower during the first quarter of 2023 compared to the same period in 2022.
60
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
The following is a summary of changes in non–interest income for the six months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
| Six Months Ended | |||||||||||||||||||||||
| June 30, | Amount | Percent | |||||||||||||||||||||
| 2023 | 2022 | Change | Change | ||||||||||||||||||||
| Non–interest Income | |||||||||||||||||||||||
| Service charges on deposit accounts | $ | 6,049 | $ | 5,628 | $ | 421 | 7.5 | % | |||||||||||||||
| Wire transfer fees | 225 | 329 | (104) | (31.6) | % | ||||||||||||||||||
| Interchange fees | 6,451 | 6,362 | 89 | 1.4 | % | ||||||||||||||||||
| Fiduciary activities | 2,522 | 2,908 | (386) | (13.3) | % | ||||||||||||||||||
| Gain on sale of investment securities | (480) | — | (480) | #DIV/0! | |||||||||||||||||||
| Gain on sale of mortgage loans | 1,790 | 4,528 | (2,738) | (60.5) | % | ||||||||||||||||||
| Mortgage servicing net of impairment | 1,353 | 3,808 | (2,455) | (64.5) | % | ||||||||||||||||||
| Increase in cash surrender value of bank owned life insurance | 1,996 | 1,029 | 967 | 94.0 | % | ||||||||||||||||||
| Death benefit on bank owned life insurance | — | 644 | (644) | (100.0) | % | ||||||||||||||||||
| Other income | 711 | 1,353 | (642) | (47.5) | % | ||||||||||||||||||
| Total non–interest income | $ | 20,617 | $ | 26,589 | $ | (5,972) | (22.5) | % | |||||||||||||||
Total non–interest income was $6.0 million lower during the six months ended June 30, 2023 compared to the same period in 2022. The sale of $88.2 million of available for sale investments generated a $480,000 net loss during the first six months of 2023. Residential mortgage loan activity generated $1.8 million of income from the gain on sale of mortgage loans, down from $4.5 million for the same period in 2022 due to a lower volume of loans sold and a decrease in the percentage gain on loans sold. Mortgage servicing income, net of impairment or recovery, decreased $2.5 million during the first six months of 2023 compared to the same period in 2022 due to an impairment recovery of $2.6 million recorded during the first quarter of 2022. Other income was $642,000 lower during the second quarter of 2023 compared to the same period in 2022 due to the gains from the sale of other real estate owned during the first quarter of 2022. Fiduciary activities income was $386,000 lower during the first six months of 2023 compared to the same period in 2022. The cash surrender value of bank owned life insurance increased $967,000 during the six months ended June 30, 2023 compared to the same period in 2022, primarily due to the purchase of $50.0 million in additional life insurance during the third quarter of 2022.
61
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
| Three Months Ended | |||||||||||||||||||||||
| June 30, | June 30, | QTD | QTD | ||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Non–interest Expense | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 20,162 | $ | 19,957 | $ | 205 | 1.0 | % | |||||||||||||||
| Net occupancy expenses | 3,249 | 3,190 | 59 | 1.8 | % | ||||||||||||||||||
| Data processing | 3,016 | 2,607 | 409 | 15.7 | % | ||||||||||||||||||
| Professional fees | 633 | 283 | 350 | 123.7 | % | ||||||||||||||||||
| Outside services and consultants | 2,515 | 2,485 | 30 | 1.2 | % | ||||||||||||||||||
| Loan expense | 1,397 | 1,533 | (136) | (8.9) | % | ||||||||||||||||||
| FDIC deposit insurance | 840 | 775 | 65 | 8.4 | % | ||||||||||||||||||
| Core deposit intangible amortization | 903 | 925 | (22) | (2.4) | % | ||||||||||||||||||
| Other losses | 134 | 362 | (228) | (63.0) | % | ||||||||||||||||||
| Other expenses | 3,413 | 3,287 | 126 | 3.8 | % | ||||||||||||||||||
| Total non–interest expense | $ | 36,262 | $ | 35,404 | $ | 858 | 2.4 | % | |||||||||||||||
| Annualized Non–interest Exp. to Avg. Assets | 1.86 | % | 1.90 | % | |||||||||||||||||||
Total non–interest expense was $858,000 higher during the second quarter of 2023 when compared to the second quarter of 2022 primarily due to increases in data processing of $409,000, professional fees of $350,000 and salaries and employee benefits expense of $205,000, offset by decreases of $228,000 in other losses and $136,000 in loan expense. Annualized non–interest expense to average assets decreased to 1.86% for the three months ended June 30, 2023 compared to 1.90% for the same period in 2022 as expense reductions from branch acquisitions were realized and investments in technology are being leveraged, resulting in this improvement.
62
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
The following is a summary of changes in non–interest expense for the six months ended June 30, 2023 and 2022 (table dollar amounts in thousands):
| Six Months Ended | |||||||||||||||||||||||
| June 30, | June 30, | YTD | YTD | ||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Non–interest Expense | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 38,874 | $ | 39,692 | $ | (818) | (2.1) | % | |||||||||||||||
| Net occupancy expenses | 6,812 | 6,751 | 61 | 0.9 | % | ||||||||||||||||||
| Data processing | 5,685 | 5,144 | 541 | 10.5 | % | ||||||||||||||||||
| Professional fees | 1,166 | 597 | 569 | 95.3 | % | ||||||||||||||||||
| Outside services and consultants | 5,232 | 5,010 | 222 | 4.4 | % | ||||||||||||||||||
| Loan expense | 2,515 | 2,738 | (223) | (8.1) | % | ||||||||||||||||||
| FDIC deposit insurance | 1,380 | 1,500 | (120) | (8.0) | % | ||||||||||||||||||
| Core deposit intangible amortization | 1,806 | 1,851 | (45) | (2.4) | % | ||||||||||||||||||
| Other losses | 355 | 530 | (175) | (33.0) | % | ||||||||||||||||||
| Other expenses | 6,961 | 6,861 | 100 | 1.5 | % | ||||||||||||||||||
| Total non–interest expense | $ | 70,786 | $ | 70,674 | $ | 112 | 0.2 | % | |||||||||||||||
| Annualized Non–interest Exp. to Avg. Assets | 1.82 | % | 1.99 | % | |||||||||||||||||||
Total non–interest expense was $112,000 higher during the first six months of 2023 when compared to the same period of 2022 primarily due to increases of $569,000 in professional fees and $541,000 in data processing expense, offset by decreases in salaries and employee benefits expense of $818,000 and loan expense of $223,000. Annualized non–interest expense to average assets decreased to 1.82% during the first six months of 2023 compared to 1.99% for the same period in 2022 as expense reductions from branch consolidations were realized and investments in technology are being leveraged, resulting in this improvement.
Income Taxes
Income tax expense totaled $1.5 million for the second quarter of 2023, a decrease of $2.5 million when compared to the second quarter of 2022 due to a decrease in income before taxes of $8.6 million.
Income tax expense totaled $3.3 million for the first six months of 2023, a decrease of $4.2 million when compared to the same period of 2022 due to a decrease in income before taxes of $15.6 million.
Liquidity
The Bank maintains a stable base of core deposits provided by long–standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At June 30, 2023, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.71 billion in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $438.0 million at December 31, 2022. The Bank had approximately $650.7 million of unpledged investment securities at June 30, 2023 compared to $2.1 billion at December 31, 2022.
63
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2023. Stockholders’ equity totaled $709.2 million as of June 30, 2023, compared to $677.4 million as of December 31, 2022. For the six months ended June 30, 2023, the ratio of average stockholders’ equity to average assets was 8.97% compared to 9.07% for the twelve months ended December 31, 2022. The increase in stockholders’ equity during the period was due to an increase in accumulated other comprehensive income of $8.3 million and net income during the period, offset by the amount of dividends paid.
Horizon declared common stock dividends in the amount of $0.32 per share during the first six months of 2023 and $0.31 per share for the same period in 2022. The dividend payout ratio (dividends as a percent of basic earnings per share) was 37.7% and 27.9% for the first six months of 2023 and 2022, respectively. For additional information regarding dividends, see Horizon’s 2022 Annual Report on Form 10–K.
Use of Non–GAAP Financial Measures
Certain information set forth in this quarterly report on Form 10–Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non–GAAP financial measures relating to net income, diluted earnings per share, pre–tax pre–provision net income, net interest margin, tangible stockholders’ equity, tangible book value per share, efficiency ratio, the return on average assets, the return on average common equity, and the return on average tangible equity. In each case, we have identified special circumstances that we consider to be adjustments and have excluded them, to show the impact of such events as acquisition–related purchase accounting adjustments and swap termination fees, among others we have identified in our reconciliations. Horizon believes that these non–GAAP financial measures are helpful to investors and provide a greater understanding of our business and financial results without giving effect to the purchase accounting impacts and other adjustments. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.
64
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
| Non–GAAP Reconciliation of Net Income | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Net income as reported | $ | 18,763 | $ | 18,228 | $ | 21,165 | $ | 23,821 | $ | 24,859 | $ | 36,991 | $ | 48,422 | ||||||||||||||||||||||||||||||
| Gain on swap termination | (1,453) | — | — | — | — | (1,453) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 305 | — | — | — | — | 305 | — | |||||||||||||||||||||||||||||||||||||
| Net income excluding gain on swap termination | 17,615 | 18,228 | 21,165 | 23,821 | 24,859 | 35,843 | 48,422 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | (20) | 500 | — | — | — | 480 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 4 | (105) | — | — | — | (101) | — | |||||||||||||||||||||||||||||||||||||
| Net income excluding (gain)/loss on sale of investment securities | 17,599 | 18,623 | 21,165 | 23,821 | 24,859 | 36,222 | 48,422 | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance (“BOLI”) | — | — | — | — | (644) | — | (644) | |||||||||||||||||||||||||||||||||||||
| Net income excluding death benefit on BOLI | 17,599 | 18,623 | 21,165 | 23,821 | 24,215 | 36,222 | 47,778 | |||||||||||||||||||||||||||||||||||||
| Adjusted net income | $ | 17,599 | $ | 18,623 | $ | 21,165 | $ | 23,821 | $ | 24,215 | $ | 36,222 | $ | 47,778 | ||||||||||||||||||||||||||||||
| Non–GAAP Reconciliation of Diluted Earnings per Share | ||||||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share (“EPS”) as reported | $ | 0.43 | $ | 0.42 | $ | 0.48 | $ | 0.55 | $ | 0.57 | $ | 0.85 | $ | 1.11 | ||||||||||||||||||||||||||||||
| Gain on swap termination | (0.03) | — | — | — | — | (0.03) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 0.01 | — | — | — | — | 0.01 | — | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding gain on swap termination | 0.41 | 0.42 | 0.48 | 0.55 | 0.57 | 0.83 | 1.11 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | 0.01 | — | — | — | 0.01 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding (gain)/loss on investment securities | 0.41 | 0.43 | 0.48 | 0.55 | 0.57 | 0.84 | 1.11 | |||||||||||||||||||||||||||||||||||||
| Death benefit on BOLI | — | — | — | — | (0.01) | — | (0.01) | |||||||||||||||||||||||||||||||||||||
| Diluted EPS excluding death benefit on BOLI | 0.41 | 0.43 | 0.48 | 0.55 | 0.56 | 0.84 | 1.10 | |||||||||||||||||||||||||||||||||||||
| Adjusted Diluted EPS | $ | 0.41 | $ | 0.43 | $ | 0.48 | $ | 0.55 | $ | 0.56 | $ | 0.84 | $ | 1.10 | ||||||||||||||||||||||||||||||
65
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
| Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Pre–tax income | $ | 20,215 | $ | 20,091 | $ | 23,814 | $ | 25,834 | $ | 28,834 | $ | 40,306 | $ | 55,936 | ||||||||||||||||||||||||||||||
| Credit loss expense (recovery) | 680 | 242 | (69) | (601) | 240 | 922 | (1,146) | |||||||||||||||||||||||||||||||||||||
| Pre–tax, pre–provision net income | $ | 20,895 | $ | 20,333 | $ | 23,745 | $ | 25,233 | $ | 29,074 | $ | 41,228 | $ | 54,790 | ||||||||||||||||||||||||||||||
| Pre–tax, pre–provision net income | $ | 20,895 | $ | 20,333 | $ | 23,745 | $ | 25,233 | $ | 29,074 | $ | 41,228 | $ | 54,790 | ||||||||||||||||||||||||||||||
| Gain on swap termination | (1,453) | — | — | — | — | (1,453) | — | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | (20) | 500 | — | — | — | 480 | — | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance | — | — | — | — | (644) | — | (644) | |||||||||||||||||||||||||||||||||||||
| Adjusted pre–tax, pre–provision net income | $ | 19,422 | $ | 20,833 | $ | 23,745 | $ | 25,233 | $ | 28,430 | $ | 40,255 | $ | 54,146 | ||||||||||||||||||||||||||||||
| Non–GAAP Reconciliation of Net Interest Margin | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Net interest income as reported | $ | 46,160 | $ | 45,237 | $ | 48,782 | $ | 51,861 | $ | 52,044 | $ | 91,397 | $ | 98,875 | ||||||||||||||||||||||||||||||
| Average interest earning assets | 7,212,640 | 7,201,266 | 7,091,980 | 7,056,208 | 6,943,633 | 7,206,985 | 6,879,551 | |||||||||||||||||||||||||||||||||||||
| Net interest income as a percentage of average interest earning assets (“Net Interest Margin”) | 2.69 | % | 2.67 | % | 2.85 | % | 3.04 | % | 3.13 | % | 2.68 | % | 3.02 | % | ||||||||||||||||||||||||||||||
| Net interest income as reported | $ | 46,160 | $ | 45,237 | $ | 48,782 | $ | 51,861 | $ | 52,044 | $ | 91,397 | $ | 98,875 | ||||||||||||||||||||||||||||||
| Acquisition–related purchase accounting adjustments (“PAUs”) | (651) | (367) | (431) | (906) | (1,223) | (1,018) | (2,139) | |||||||||||||||||||||||||||||||||||||
| Gain on swap termination | (1,453) | — | — | — | — | (1,453) | — | |||||||||||||||||||||||||||||||||||||
| Adjusted net interest income | $ | 44,056 | $ | 44,870 | $ | 48,351 | $ | 50,955 | $ | 50,821 | $ | 88,926 | $ | 96,736 | ||||||||||||||||||||||||||||||
| Adjusted net interest margin | 2.57 | % | 2.65 | % | 2.83 | % | 2.99 | % | 3.06 | % | 2.61 | % | 2.96 | % | ||||||||||||||||||||||||||||||
| Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share | ||||||||||||||||||||||||||||||||
| (Dollars in Thousands Except per Share Data, Unaudited) | ||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | ||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | ||||||||||||||||||||||||||||
| Total stockholders’ equity | $ | 709,243 | $ | 702,559 | $ | 677,375 | $ | 644,993 | $ | 657,865 | ||||||||||||||||||||||
| Less: Intangible assets | 170,644 | 171,547 | 172,450 | 173,375 | 173,662 | |||||||||||||||||||||||||||
| Total tangible stockholders’ equity | $ | 538,599 | $ | 531,012 | $ | 504,925 | $ | 471,618 | $ | 484,203 | ||||||||||||||||||||||
| Common shares outstanding | 43,645,216 | 43,621,422 | 43,574,151 | 43,574,151 | 43,572,796 | |||||||||||||||||||||||||||
| Book value per common share | $ | 16.25 | $ | 16.11 | $ | 15.55 | $ | 14.80 | $ | 15.10 | ||||||||||||||||||||||
| Tangible book value per common share | $ | 12.34 | $ | 12.17 | $ | 11.59 | $ | 10.82 | $ | 11.11 | ||||||||||||||||||||||
66
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
| Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Non–interest expense as reported | $ | 36,262 | $ | 34,524 | $ | 35,711 | $ | 36,816 | $ | 35,404 | $ | 70,786 | $ | 70,674 | ||||||||||||||||||||||||||||||
| Net interest income as reported | 46,160 | 45,237 | 48,782 | 51,861 | 52,044 | 91,397 | 98,875 | |||||||||||||||||||||||||||||||||||||
| Non–interest income as reported | $ | 10,997 | $ | 9,620 | $ | 10,674 | $ | 10,188 | $ | 12,434 | $ | 20,617 | $ | 26,589 | ||||||||||||||||||||||||||||||
| Non–interest expense/(Net interest income + Non–interest income) ("Efficiency Ratio") | 63.44 | % | 62.93 | % | 60.06 | % | 59.33 | % | 54.91 | % | 63.19 | % | 56.33 | % | ||||||||||||||||||||||||||||||
| Non–interest expense as reported | $ | 36,262 | $ | 34,524 | $ | 35,711 | $ | 36,816 | $ | 35,404 | $ | 70,786 | $ | 70,674 | ||||||||||||||||||||||||||||||
| Net interest income as reported | 46,160 | 45,237 | 48,782 | 51,861 | 52,044 | 91,397 | 98,875 | |||||||||||||||||||||||||||||||||||||
| Gain on swap termination | (1,453) | — | — | — | — | (1,453) | — | |||||||||||||||||||||||||||||||||||||
| Net interest income excluding gain on swap termination | 44,707 | 45,237 | 48,782 | 51,861 | 52,044 | 89,944 | 98,875 | |||||||||||||||||||||||||||||||||||||
| Non–interest income as reported | 10,997 | 9,620 | 10,674 | 10,188 | 12,434 | 20,617 | 26,589 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | (20) | 500 | — | — | — | 480 | — | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance ("BOLI") | — | — | — | — | (644) | — | (644) | |||||||||||||||||||||||||||||||||||||
| Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI | $ | 10,977 | $ | 10,120 | $ | 10,674 | $ | 10,188 | $ | 11,790 | $ | 21,097 | $ | 25,945 | ||||||||||||||||||||||||||||||
| Adjusted efficiency ratio | 65.12 | % | 62.37 | % | 60.06 | % | 59.33 | % | 55.46 | % | 63.75 | % | 56.62 | % | ||||||||||||||||||||||||||||||
67
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
| Non–GAAP Reconciliation of Return on Average Assets | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Average assets | $ | 7,840,026 | $ | 7,831,106 | $ | 7,718,366 | $ | 7,635,102 | $ | 7,476,238 | $ | 7,835,032 | $ | 7,391,348 | ||||||||||||||||||||||||||||||
| Return on average assets ("ROAA") as reported | 0.96 | % | 0.94 | % | 1.09 | % | 1.24 | % | 1.33 | % | 0.95 | % | 1.32 | % | ||||||||||||||||||||||||||||||
| Gain on swap termination | (0.07) | — | — | — | — | (0.04) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 0.02 | — | — | — | — | 0.01 | — | |||||||||||||||||||||||||||||||||||||
| ROAA excluding gain on swap termination | 0.91 | 0.94 | 1.09 | 1.24 | 1.33 | 0.92 | 1.32 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | — | 0.03 | — | — | — | 0.01 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | (0.01) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| ROAA excluding (gain)/loss on sale of investment securities | 0.91 | 0.96 | 1.09 | 1.24 | 1.33 | 0.93 | 1.32 | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance ("BOLI") | — | — | — | — | (0.03) | — | (0.02) | |||||||||||||||||||||||||||||||||||||
| ROAA excluding death benefit on BOLI | 0.91 | 0.96 | 1.09 | 1.24 | 1.30 | 0.93 | 1.30 | |||||||||||||||||||||||||||||||||||||
| Adjusted ROAA | 0.91 | % | 0.96 | % | 1.09 | % | 1.24 | % | 1.30 | % | 0.93 | % | 1.30 | % | ||||||||||||||||||||||||||||||
| Non–GAAP Reconciliation of Return on Average Common Equity | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Average common equity | $ | 710,953 | $ | 693,472 | $ | 660,188 | $ | 680,376 | $ | 677,299 | $ | 702,663 | $ | 697,004 | ||||||||||||||||||||||||||||||
| Return on average common equity ("ROACE") as reported | 10.59 | % | 10.66 | % | 12.72 | % | 13.89 | % | 14.72 | % | 10.62 | % | 14.01 | % | ||||||||||||||||||||||||||||||
| Gain on swap termination | (0.82) | — | — | — | — | (0.41) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 0.17 | — | — | — | — | 0.09 | — | |||||||||||||||||||||||||||||||||||||
| ROACE excluding gain on swap termination | 9.94 | 10.66 | 12.72 | 13.89 | 14.72 | 10.30 | 14.01 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | (0.01) | 0.29 | — | — | — | 0.14 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | (0.06) | — | — | — | (0.03) | — | |||||||||||||||||||||||||||||||||||||
| ROACE excluding (gain)/loss on sale of investment securities | 9.93 | 10.89 | 12.72 | 13.89 | 14.72 | 10.41 | 14.01 | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance ("BOLI") | — | — | — | — | (0.38) | — | (0.19) | |||||||||||||||||||||||||||||||||||||
| ROACE excluding death benefit on BOLI | 9.93 | 10.89 | 12.72 | 13.89 | 14.34 | 10.41 | 13.82 | |||||||||||||||||||||||||||||||||||||
| Adjusted ROACE | 9.93 | % | 10.89 | % | 12.72 | % | 13.89 | % | 14.34 | % | 10.41 | % | 13.82 | % | ||||||||||||||||||||||||||||||
68
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2023 and 2022
| Non–GAAP Reconciliation of Return on Average Tangible Equity | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands, Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| June 30, | March 31, | December 31, | September 30, | June 30, | June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||
| Average common equity | $ | 710,953 | $ | 693,472 | $ | 660,188 | $ | 680,376 | $ | 677,299 | $ | 702,663 | $ | 697,004 | ||||||||||||||||||||||||||||||
| Less: Average intangible assets | 171,177 | 172,139 | 173,050 | 173,546 | 175,321 | 171,655 | 175,836 | |||||||||||||||||||||||||||||||||||||
| Average tangible equity | $ | 539,776 | $ | 521,333 | $ | 487,138 | $ | 506,830 | $ | 501,978 | $ | 531,008 | $ | 521,168 | ||||||||||||||||||||||||||||||
| Return on average common equity ("ROATE") | 13.94 | % | 14.18 | % | 17.24 | % | 18.65 | % | 19.86 | % | 14.05 | % | 18.74 | % | ||||||||||||||||||||||||||||||
| Gain on swap termination | (1.08) | — | — | — | — | (0.55) | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | 0.23 | — | — | — | — | 0.12 | — | |||||||||||||||||||||||||||||||||||||
| ROATE excluding gain on swap termination | 13.09 | 14.18 | 17.24 | 18.65 | 19.86 | 13.62 | 18.74 | |||||||||||||||||||||||||||||||||||||
| (Gain)/loss on sale of investment securities | (0.01) | 0.39 | — | — | — | 0.18 | — | |||||||||||||||||||||||||||||||||||||
| Tax effect | — | (0.08) | — | — | — | (0.04) | — | |||||||||||||||||||||||||||||||||||||
| ROATE excluding (gain)/loss on sale of investment securities | 13.08 | 14.49 | 17.24 | 18.65 | 19.86 | 13.76 | 18.74 | |||||||||||||||||||||||||||||||||||||
| Death benefit on bank owned life insurance ("BOLI") | — | — | — | — | (0.51) | — | (0.25) | |||||||||||||||||||||||||||||||||||||
| ROATE excluding death benefit on BOLI | 13.08 | 14.49 | 17.24 | 18.65 | 19.35 | 13.76 | 18.49 | |||||||||||||||||||||||||||||||||||||
| Adjusted ROATE | 13.08 | % | 14.49 | % | 17.24 | % | 18.65 | % | 19.35 | % | 13.76 | % | 18.49 | % | ||||||||||||||||||||||||||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon's 2022 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 2022 Annual Report on Form 10–K.
69
HORIZON BANCORP, INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation of disclosure controls and procedures as of June 30, 2023, 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 were not effective to ensure that the information required to be disclosed by Horizon in the reports Horizon files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, including that such information is accumulated and communicated to Horizon's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The conclusion that Horizon's disclosure controls and procedures were not effective was due to the presence of material weaknesses in Horizon's internal control over financial reporting, as that term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act, as previously disclosed in Part II, Item 9A of Horizon's Annual Report on Form 10–K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10–K”). In light of the material weaknesses identified by management, Horizon has performed additional analyses and procedures in order to conclude that its condensed financial statements as of and for the three and six months ended June 30, 2023 are fairly presented, in all material respects, in accordance with GAAP, as further described below.
Description of Material Weaknesses and Management's Remediation Initiatives
As previously disclosed in “Part II, Item 9A. Controls and Procedures” of Horizon's 2022 Annual Report on Form 10–K, management identified material weaknesses in internal control over financial reporting with respect to insufficient controls over the reporting, classification, and disclosure of loans, investments and individual cash flow line items and lack of sufficient controls around the financial reporting process that allows for the timely release of financial statements. As of the date of this report, Horizon's remediation efforts are in place related to each of the material weaknesses that Horizon has identified in its internal control over financial reporting as additional procedures and controls have been established to fully address these material weaknesses. Horizon has not been able to complete all actions necessary and test the remediated controls in a manner that would enable it to conclude that such controls are effective. Horizon is committed to implementing the necessary controls to remediate the material weaknesses described below, as and when resources permit.
As part of Horizon's efforts to remediate the material weaknesses described above, Horizon is in the process of hiring additional resources within our accounting and finance department for financial statement preparation and review, Horizon has provided additional training to implement and monitor our policies and procedures, and enhanced controls and procedures have been designed and implemented. The material weaknesses will not be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We estimate that the remediation of these material weaknesses will be completed prior to the end of fiscal 2023. Therefore, Horizon's Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2023, Horizon's disclosure controls and procedures were not effective. Despite the foregoing, Horizon's management has concluded the financial statements fairly present in all material respects, Horizon's financial position, results of operations and cash flows as of the dates, and for the periods presented in this Form 10–Q, in conformity with GAAP.
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 June 30, 2023, 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, other than the remediation activities described above and discussed in further detail in “Part II, Item 9A. Controls and Procedures” of Horizon's 2022 Annual Report on Form 10–K.
70
HORIZON BANCORP, INC. AND SUBSIDIARIES
Part II – Other Information
ITEM 1. LEGAL PROCEEDINGS
On April 20, 2023, a putative class action lawsuit entitled Chad Key, et al. v. Horizon Bancorp, Inc., et al., Case No. 1:23-cv-02961 (“Securities Action”) was filed against the Company and two of its officers in the U.S. District Court for the Eastern District of New York. The Securities Action asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 alleging, among other things, the Company made materially false and misleading statements and failed to disclose material adverse facts which allegedly resulted in harm to a putative class of purchasers of our securities from March 9, 2022 and March 10, 2023.
Based on our initial review of the complaint, management believes the lawsuit is without merit and intends to vigorously defend against it. As of June 30, 2023, no liability related to above matter was recorded because we have concluded such liabilities are not probable and the amounts of such liabilities are not reasonably estimable.
In addition to the matter described above, from time to time, 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
The disclosures below supplement the risk factors previously disclosed under Part I, Item 1A of the Company's 2022 Annual Report on Form 10–K.
Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system and could have a material effect on our operations and/or stock price.
The recent high–profile bank failures including Silicon Valley Bank, Signature Bank and First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. These market developments have negatively impacted customer confidence in the safety and soundness of financial institutions, as well as have caused significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These market developments have caused general uncertainty and concern regarding the liquidity adequacy of the banking industry and in particular, regional banks like Horizon. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short–term fixed income securities, all of which could materially adversely impact our liquidity, loan funding capacity, net interest margin, capital and results of operations. In connection with high–profile bank failures, uncertainty and concern has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including previously uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.
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: Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
71
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
Rule 10b5–1 Trading Plans
During the three months ended June 30, 2023, none of the Company's directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b–5c or any “non–Rule 10b5–1 trading arrangement,” as that term is used in the Securities and Exchange Commission regulations.
ITEM 6. EXHIBITS
(a) Exhibits
| Exhibit No. | Description | Location | ||||||
| 10.1 | Incorporated by reference to Exhibit 10.1 to Registrant's Form 8–K filed on May 18, 2023 | |||||||
| 10.2 | Incorporated by reference to Exhibit 10.2 to Registrant's Form 8–K filed on May 18, 2023 | |||||||
| 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 June 30, 2023, has been formatted in Inline XBRL | Within the Inline XBRL document | ||||||
72
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. | ||||||||
| August 8, 2023 | /s/ Thomas M. Prame | |||||||
| Date | Thomas M. Prame | |||||||
| Chief Executive Officer | ||||||||
| August 8, 2023 | /s/ Mark E. Secor | |||||||
| Date | Mark E. Secor | |||||||
| Chief Financial Officer | ||||||||
73