HORIZON BANCORP INC quarterly report, Q2 FY2021

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Horizon Bancorp, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Horizon is an Indiana bank holding company operating Horizon Bank, a commercial bank serving markets in Indiana and Michigan.

Financial performance and condition

  • Quarterly earnings: Net income was $22.2 million and diluted EPS was $0.50, versus $14.6 million and $0.33 in Q2 2020. Pretax, pre-provision net income, a non-GAAP measure, was $24.5 million.
  • Six-month earnings: Net income was $42.6 million and diluted EPS was $0.97, compared with $26.3 million and $0.59 in the first half of 2020.
  • Interest income and margin: Q2 net interest income was $42.6 million, down from $43.0 million a year earlier. Reported net interest margin was 3.14%, versus 3.47%; adjusted margin was 3.13%, versus 3.35%. For the first half, net interest income rose to $85.2 million from $83.9 million, while reported margin declined to 3.21% from 3.51%.
  • Other income and expenses: Q2 non-interest income increased 36.7% to $15.2 million, including $5.6 million from mortgage loan sales and $1.5 million of net mortgage servicing income. Non-interest expense rose 9.7% to $33.4 million. The reported efficiency ratio was 57.73%, compared with 56.23% in Q2 2020.
  • Assets, loans and deposits: Total assets were $6.11 billion at June 30, up $222.6 million from year-end 2020. Deposits increased $250.5 million to $4.78 billion; net loans declined $346.5 million to $3.46 billion. Available-for-sale securities increased $557.2 million to $1.69 billion, reflecting purchases to invest funds amid loan contraction.
  • Credit quality: The allowance for credit losses was $55.6 million, or 1.58% of total loans, versus $57.0 million, or 1.47%, at year-end. The company recorded a $1.5 million Q2 provision reversal, compared with $7.1 million of provision expense in Q2 2020. Nonperforming loans were $22.3 million, or 0.63% of loans, down from $26.8 million at year-end. Management reported Q2 net charge-offs of $39,000.
  • Liquidity and debt: Cash and due from banks was $304.2 million. Borrowings totaled $439.1 million, down from $475.0 million at year-end; deposits were the principal funding source. The Bank reported $890.6 million of unused credit lines and $1.2 billion of unpledged securities. Operating cash flow for the first half was $60.8 million; investing activities used $209.0 million and financing activities provided $202.7 million.
  • Capital: Stockholders’ equity was $710.4 million. The Bank’s total risk-based capital ratio was 14.09%, common equity Tier 1 ratio 12.80%, and Tier 1 leverage ratio 8.79%; the company reported that it and the Bank met applicable well-capitalized requirements.

Material changes and notable items

  • Year-over-year Q2 net income growth reflected higher non-interest income and substantially lower credit loss expense, partly offset by higher operating expenses and lower net interest income.
  • The lower margin reflected declining asset yields and excess liquidity: management estimated PPP lending added seven basis points to Q2 margin, while excess cash reduced it by 21 basis points. The cost of interest-bearing liabilities fell to 0.45% from 0.74% a year earlier.
  • Mortgage servicing income improved from a Q2 2020 loss of $2.8 million to income of $1.5 million, partly due to reversal of impairment. Q2 also included a $266,000 bank-owned life insurance death benefit, $242,000 of acquisition expenses, and a $125,000 prepayment penalty on borrowings.
  • Loans excluding PPP were $3.36 billion, down from $3.42 billion at March 31, 2021 and $3.69 billion a year earlier. PPP loans were $169.4 million at quarter-end; $276.5 million of the Bank’s approximately $450.1 million in originated PPP loans had been forgiven.
  • COVID-19-related loan modifications eligible for CARES Act treatment were $52.5 million, down from $126.7 million at year-end 2020. The filing states the Bank elected to suspend certain TDR accounting requirements for qualifying COVID-related modifications.

Outlook, strategy and risks

  • Horizon agreed to acquire 14 TCF National Bank branches in 11 Michigan counties, with approximately $976 million in deposits and $278 million in loans. Completion was expected by the end of Q3 2021, subject to regulatory approval and customary conditions. The filing provides no formal earnings or financial guidance.
  • The Board approved permanent closure of nine Indiana branches and one Michigan branch, scheduled for August 27, 2021; management did not expect related fixed-asset impairment to be material. The company reported more than $129 million in holding-company cash and increased the quarterly dividend 8.3% to $0.13 per share.
  • Key risks include the pandemic and economic recovery, credit performance and collateral values, interest rates and margin pressure, liquidity, competition and technology, cybersecurity, regulation, and acquisition integration and execution. Management reported no material change to previously disclosed risk factors and no expected material effect from ordinary-course litigation.
  • Management reported no goodwill impairment in the period. The filing also identifies LIBOR transition work, with most LIBOR-referencing contracts being rewritten or refinanced by December 31, 2021, except commercial loan interest-rate swaps.

Most important facts for investors to verify

  • Whether the TCF branch acquisition received approvals, closed as expected, and delivered the anticipated deposit and loan balances and integration benefits.
  • Whether loan and deposit trends, excess liquidity, PPP forgiveness, and lower asset yields continue to pressure net interest margin.
  • Whether credit quality and the allowance remain appropriate as COVID-related relief and loan modifications run off; assess the disclosed $52.5 million of qualifying modified loans.
  • How sustainable mortgage banking and servicing revenue is, given its contribution to non-interest income and sensitivity to volumes, rates, prepayments, and valuation assumptions.
  • Whether expense growth, branch closures, capital levels, liquidity resources, and dividend payments remain consistent with management’s stated priorities.