Horizon Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Horizon is an Indiana bank holding company operating through Horizon Bank in Indiana and Michigan. Financial amounts below are in millions unless stated otherwise; the filing presents most amounts in thousands.
Key financial results
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Net interest income | $43.4 | $43.5 | $127.3 | $119.3 |
| Credit loss expense | $2.1 | $0.4 | $17.7 | $1.6 |
| Non-interest income | $16.7 | $11.5 | $39.9 | $31.1 |
| Non-interest expense | $33.4 | $30.1 | $95.0 | $91.4 |
| Net income | $20.3 | $20.5 | $46.6 | $48.0 |
| Diluted EPS | $0.46 | $0.46 | $1.06 | $1.11 |
| Net interest margin | 3.39% | 3.82% | 3.48% | 3.72% |
Q3 return on average assets was 1.40%; return on average common equity was 12.08%. Q3 pre-tax, pre-provision net income, a non-GAAP measure, was $26.7 million. Q3 efficiency ratio was 55.59%.
Financial position, cash flow and capital
- At September 30, total assets were $5.79 billion, up $543 million from December 31, 2019. Net loans were $3.97 billion; deposits were $4.34 billion; total borrowings were $587 million.
- Cash and due from banks were $99.1 million. Management reported approximately $1.3 billion in cash and investment securities, about 22.4% of assets, plus $928 million of unused credit lines. Unpledged securities were approximately $517 million.
- For the first nine months, operating cash flow was $62.8 million, versus $164.5 million a year earlier; investing activities used $549.8 million, while financing activities provided $487.3 million. Cash and cash equivalents ended at $99.1 million.
- Stockholders’ equity was $670.3 million, versus $656.0 million at year-end 2019. Book value per share was $15.28 and tangible book value per share was $11.29. The company repurchased $19.6 million of stock and paid $15.9 million in dividends during the period.
- Horizon issued $60 million of 5.625% fixed-to-floating subordinated notes in June, maturing in 2030. The notes are unsecured and subordinated to senior debt and subsidiary liabilities. The company and bank met regulatory capital requirements; the bank was categorized as well capitalized.
Material changes and operating trends
- Q3 net income was broadly stable year over year, while nine-month net income declined 2.9%. For the nine-month comparison, higher credit loss expense and non-interest expense more than offset higher net interest income and non-interest income.
- Q3 non-interest income rose 45% year over year, led by mortgage loan sale gains of $8.8 million, up from $2.7 million. Mortgage servicing income, net of impairment, was a loss of $1.3 million; the company recorded $1.5 million of Q3 and $4.7 million of year-to-date mortgage servicing rights impairment.
- Q3 net interest margin fell 43 basis points year over year, reflecting lower yields on earning assets, partly offset by lower funding costs. Management estimated Q3 margin compression of 4 basis points from PPP lending and 8 basis points from the subordinated notes.
- Gross loans increased about $402 million from year-end, including approximately $311 million of PPP loans. Deposits increased about $405 million, supported in part by stimulus payments and PPP proceeds.
- Non-performing loans rose to $29.3 million from $21.2 million at year-end; they were 0.72% of loans. Delinquent loans were 0.15% of loans and Q3 net charge-offs were 0.02% of average loans. The allowance for credit losses reached $56.3 million, 1.39% of loans, compared with $17.7 million and 0.49% at year-end.
Outlook, risks and unusual items
- The filing gives no numerical earnings or margin guidance. Management emphasized uncertainty around the duration and effects of COVID-19; actual credit losses may differ materially from allowance estimates.
- COVID-19 deferrals declined to 4.1% of total loans at September 30 from 14.3% at June 30. The bank reported $160.1 million of qualifying CARES Act loan modifications, excluding mortgage loans serviced only. It elected the applicable relief from TDR accounting for qualifying COVID-related modifications.
- CECL adoption on January 1 reduced retained earnings by $15.6 million. The allowance increased further through provisions and a $2.8 million initial allowance for purchased credit-deteriorated loans. Management cited added reserves for selected commercial real estate sectors, including retail, leisure and hospitality, hotels and restaurants.
- Other principal risks identified include borrower repayment and collateral deterioration, PPP forgiveness and repayment risks, interest-rate and funding volatility, operational and cybersecurity risks, reliance on third parties, and uncertainty in economic recovery. Falling rates and faster mortgage prepayments may further impair mortgage servicing rights.
- Management reported no goodwill impairment after reviewing COVID-related indicators. Securities’ unrealized declines were considered temporary; management said it intended and was able to hold the securities until recovery or maturity. Ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How loan performance, deferrals, criticized commercial credits and charge-offs develop as COVID-related relief and PPP forgiveness progress.
- Whether the $56.3 million allowance adequately reflects future losses, including the assumptions and economic forecasts used under CECL.
- Whether mortgage banking gains and servicing-rights impairment persist, and how sustainable they are as an offset to margin pressure.
- How deposit growth, borrowing costs, subordinated debt and the lower-rate environment affect liquidity, net interest margin and capital.
- The effects of share repurchases, dividends and any further economic deterioration on tangible book value and regulatory capital.