Horizon Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; financial statements are unaudited. Horizon is an Indiana-based commercial bank holding company operating in Indiana and Michigan.
Financial performance and position
- Q3 earnings: Net income was $23.1 million, up 13.6% from $20.3 million a year earlier. Diluted EPS was $0.52 versus $0.46. For the first nine months, net income was $65.7 million versus $46.6 million, and diluted EPS was $1.49 versus $1.06.
- Interest income and margins: Q3 net interest income rose 7.3% year over year to $46.5 million. Net interest margin was 3.17%, down from 3.39%; adjusted NIM was 3.12%, versus 3.27%. Management attributed an estimated 16 basis points of Q3 margin to PPP lending, offset by 16 basis points of compression from excess liquidity. Nine-month net interest income was $131.7 million versus $127.3 million; NIM was 3.20% versus 3.48%.
- Other income and expenses: Q3 non-interest income was $16.0 million, compared with $16.7 million; lower mortgage-sale gains were partly offset by a $2.3 million ESOP-account sale gain and an $876,000 recovery on an acquired charged-off loan. Non-interest expense was $34.3 million versus $33.4 million, including $799,000 of acquisition costs. Q3 efficiency ratio was 54.88% (56.16% adjusted).
- Credit costs and quality: Q3 credit-loss expense was $1.1 million versus $2.1 million, including a $2.0 million allocation for acquired loans. Nine-month credit-loss expense was a $13,000 recovery versus $17.7 million expense in 2020. ACL was $56.8 million, or 1.55% of loans. Non-performing loans were $29.4 million, 0.80% of loans, versus $26.8 million at year-end 2020; approximately $7.3 million was acquired in the branch transaction.
- Balance sheet and funding: Total assets were $7.53 billion, up from $5.89 billion at year-end 2020. Deposits were $5.98 billion versus $4.53 billion; borrowings were $670.8 million versus $475.0 million. Cash and due from banks totaled $971.8 million. Net loans were $3.60 billion versus $3.81 billion; the decline included a $116.6 million reduction in PPP loans and a sharp decrease in mortgage warehouse balances.
- Cash flow and capital: Nine-month operating cash flow was $88.8 million versus $62.8 million; ending cash and cash equivalents were $971.8 million. Stockholders’ equity was $708.5 million. The consolidated total risk-based capital ratio was 15.27%, and common equity tier 1 was 11.67%; the Company and Bank met applicable well-capitalized requirements. Book value per share was $16.28; tangible book value per share was $12.05.
- Liquidity: The Bank reported $651.7 million of unused credit lines and $1.7 billion of unpledged investment securities at quarter-end. Management also cited more than $120.9 million of cash at the holding company.
Material changes and notable items
- On September 17, Horizon completed its acquisition of 14 former TCF branches in 11 Michigan counties. The transaction added approximately $846.4 million of deposits and $206.3 million of loans, generated $11.5 million of preliminary goodwill, and remains subject to final purchase-price valuation.
- Q3 results included the $2.3 million gain from selling ESOP trustee accounts, a $517,000 bank-owned life insurance death benefit, the acquired-loan recovery, and acquisition expenses. Management said the ESOP-account exit was not expected to have a significant bottom-line effect after related cost savings.
- Horizon repurchased 430,026 shares in Q3 for approximately $7.6 million, at an average price of $17.69. The quarterly dividend increased 15.4% to $0.15 per share, payable October 22, 2021.
- The Company completed the consolidation of 10 retail locations on August 27. Management expects much of the resulting cost savings to be redeployed to digital banking and technology investments.
- Unrealized securities losses reduced other comprehensive income: Q3 other comprehensive loss was $11.0 million, and nine-month loss was $20.2 million.
Outlook, risks, and contingencies
The filing provides no specific numerical earnings or growth guidance. Management described continued uncertainty from COVID-19 and its economic aftereffects, including customer repayment capacity, loan demand, inflation and supply shortages. It highlighted exposure to sectors such as lodging, restaurants, retail, and commercial real estate, as well as interest-rate and margin sensitivity, deposit behavior, cybersecurity, regulatory and litigation risks, and acquisition integration and credit quality.
Management stated that interest-rate sensitivity had not changed significantly from the 2020 Form 10-K. It considered the allowance for credit losses adequate, while noting actual losses may differ from estimates. The Bank had $29.2 million of COVID-related modified loans receiving CARES Act treatment at September 30. Management did not expect ordinary-course legal proceedings to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the TCF branch acquisition’s preliminary fair values, goodwill, and acquired-loan credit estimates change as the purchase-price allocation is finalized.
- Whether deposit growth and excess cash can be deployed profitably without further pressure on NIM, and how PPP runoff and interest rates affect earnings.
- Whether non-performing loans, COVID-related modifications, and the 1.55% ACL remain appropriate as economic conditions evolve.
- How recurring earnings compare with reported results after considering the ESOP sale gain, acquired-loan recovery, death benefit, acquisition costs, and other identified adjustments.
- Whether repurchases, dividends, branch consolidation, and technology investment support per-share value while preserving capital and liquidity.