Horizon Bancorp, Inc. Announces Record Profitability Including Diluted EPS of $0.52

MICHIGAN CITY, Ind., Oct. 27, 2021 (GLOBE NEWSWIRE) -- (NASDAQ GS: HBNC) — Horizon Bancorp, Inc. (“Horizon” or the “Company”) announced its unaudited financial results for the three and nine months ending September 30, 2021.

“Organic commercial and consumer loan growth, the extension of Horizon’s Michigan franchise with our branch acquisition completed last month, record net interest income, Horizon’s low–cost deposit franchise, and our efficient operations all contributed to significant growth in pre–tax, pre–provision net income and bottom–line earnings,” Chairman and CEO Craig M. Dwight said. “We continue to conservatively manage our balance sheet while generating meaningful returns on excess liquidity, and we remain well positioned for more significant loan growth in our attractive and business–friendly Midwestern markets, which are seeing significant economic activity and favorable trends in a still–recovering economy.”

Third Quarter 2021 Highlights

• On September 17, 2021, completed previously announced acquisition of 14 branches in 11 Michigan counties, approximately $206.8 million in loans and $846.4 million in deposits, in a transaction designed to further extend Horizon’s retail franchise and further enhance its low–cost core deposit and funding capability to support lending in its Midwestern growth markets.
  
  

• Net income grew to a record $23.1 million, up 4.0% from the linked quarter and 13.6% from the year–ago period. Diluted earnings per share (“EPS”) of $0.52 was up from $0.50 for the second quarter of 2021 and $0.46 for the third quarter of 2020.
  
  

• Pre–tax, pre–provision net income grew to a record $28.2 million, up 15.5% from the linked quarter and 5.8% from the year–ago period. This non–GAAP financial measure is utilized by banks to provide a greater understanding of pre–tax profitability before giving effect to credit loss expense. (See the “Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income” table below.)
  
  

• Non–interest expense was $34.3 million in the quarter, or 2.09% of average assets on an annualized basis, compared to $33.4 million, or 2.18%, in the second quarter of 2021 and $33.4 million, or 2.30%, in the third quarter of 2020. Acquisition–related expenses totaled approximately $799,000 in the third quarter of 2021 and $242,000 in the linked quarter.
  
  

• The efficiency ratio for the period was 54.88% compared to 57.73% for the second quarter of 2021 and 55.59% for the third quarter of 2020. The adjusted efficiency ratio was 56.16% compared to 57.45% for the second quarter of 2021 and 56.64% for the third quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below.)
  

• A previously disclosed consolidation of 10 retail locations was completed on August 27 as part of Horizon’s rigorous annual branch performance review process, with employees reassigned to support other staffing needs and growth initiatives. Operating cost saves are largely expected to be redeployed into continued digital banking and technology investments.
  
  

• Net interest income grew to a record $46.5 million for the quarter, up 9.2% from the second quarter of 2021 and 7.3% from the third quarter of 2020. Reported net interest margin (“NIM”) was 3.17% and adjusted NIM was 3.12%, with reported NIM increasing by three basis points and adjusted NIM decreasing by one basis point from the second quarter of 2021. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation of adjusted NIM.) Approximately 16 basis points of the NIM and adjusted NIM is attributed to Federal Paycheck Protection Program (“PPP”) lending, offset by an estimated 16 basis point compression attributed to excess liquidity during the quarter. During the third quarter, Horizon increased the average balance of its investment portfolio by $471.8 million to leverage capital and focus on increasing net interest income.
  
  

• Total non–interest income was $16.0 million, including the recovery of $876,000 from an acquired charged–off loan, as well as a $2.4 million gain from the sale of the Company’s ESOP trustee accounts at the end of the quarter. The sale of these accounts is not expected to have any significant impact to the bottom line due to the related costs saves the Company will incur as it exited these account relationships. Non–interest income was $15.2 million in the second quarter of 2021 and $16.7 million, including a $1.1 million securities sale gain, in the third quarter of 2020.
  
  

• Horizon’s in–market consumer and commercial deposit relationships, including those on–boarded as part of its branch acquisition during the quarter, combined with strategic pricing moves to manage deposit growth and runoff of higher–priced time deposits, contributed to continued improvement in the cost of interest bearing liabilities, which declined to 0.38% in the quarter, compared to 0.45% in the second quarter of 2021 and 0.67% in the third quarter of 2020.
  
  

• Horizon recorded a quarterly provision expense of $1.1 million, reflecting a $2.0 million allocation for loans acquired in the Michigan branch acquisition, as well as, solid asset quality metrics at period end.
  
  

• Commercial loans, excluding PPP lending, grew by 2.3% organically and by 7.5% overall during the quarter to $2.1 billion at period end. Total loans, excluding PPP lending, grew organically 0.3% and 6.4% overall to $3.57 billion.
  
  

• Horizon’s book value per share increased to an all–time high of $16.28 while tangible book value per share decreased to $12.05. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.) The decrease in tangible book value was a result of the repurchase of shares for approximately $7.6 million and $12.4 million of goodwill and intangible assets recorded during the third quarter.
  
  

• Horizon announced an increase to cash dividends to be paid on October 22, 2021 of 15.4% to $0.15 per share. As of September 30, 2021, in excess of $120.9 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value. This is Horizon’s second dividend increase in 2021.
  
  

• During the quarter, the Company repurchased 430,026 shares at an average cost of $17.74 per share for a total cost of $7.6 million. This resulted in a reduction in tangible book value of approximately $0.18 per share and an increase in EPS of $0.01 per share for the third quarter.
  
  

Summary

		For the Three Months Ended
		September 30,				June 30,				September 30,
Net Interest Income and Net Interest Margin		2021				2021				2020
Net interest income		$	46,544			$	42,632			$	43,397
Net interest margin		3.17		%		3.14		%		3.39		%
Adjusted net interest margin		3.12		%		3.13		%		3.27		%

“Further improvement in our already low deposit and overall funding costs, coupled with higher average loan yields in the quarter, began to offset pressure from lower yielding investment securities, as evidenced in net interest margin expansion in the third quarter,” Mr. Dwight commented.

		For the Three Months Ended
		September 30,			June 30,			September 30,
Asset Yields and Funding Costs		2021			2021			2020
Interest earning assets		3.46	%		3.48	%		3.90	%
Interest bearing liabilities		0.38	%		0.45	%		0.67	%

		For the Three Months Ended
Non–interest Income and		September 30,				June 30,				September 30,
Mortgage Banking Income		2021				2021				2020
Total non–interest income		$	16,044			$	15,207			$	16,700
Gain on sale of mortgage loans		4,088				5,612				8,813
Mortgage servicing income net of impairment		336				1,503				(1,308		)

		For the Three Months Ended
		September 30,				June 30,				September 30,
Non–interest Expense		2021				2021				2020
Total non–interest expense		$	34,349			$	33,388			$	33,407
Annualized non–interest expense to average assets		2.09		%		2.18		%		2.30		%

		For the Three Months Ended
		September 30,			June 30,			September 30,
Credit Quality		2021			2021			2020
Allowance for credit losses to total loans		1.55	%		1.58	%		1.39	%
Non–performing loans to total loans		0.80	%		0.63	%		0.72	%
Percent of net charge–offs to average loans outstanding for the period		0.00	%		0.00	%		0.02	%

Allowance for		December 31,				Net Reserve												September 30,
Credit Losses		2020				1Q20				2Q20				3Q20				2021
Commercial		$	42,210			$	770			$	(1,214	)		$	1,355			$	43,121
Retail Mortgage		4,620				(391		)		(121		)		(371		)		3,737
Warehouse		1,267				(104		)		(8		)		(101		)		1,054
Consumer		8,930				(116		)		(194		)		247				8,867
Allowance for Credit Losses (“ACL”)		$	57,027			$	159			$	(1,537	)		$	1,130			$	56,779
ACL / Total Loans		1.47		%														1.55		%
Acquired Loan Discount (“ALD”)		$	11,494			$	(221	)		$	(815	)		$	(27	)		$	10,431

“The modest increase in non–performing, substandard and delinquent loans during the third quarter is fully attributed to the portfolio acquired as part of our September branch acquisition as total non–performing loans, excluding acquired loans, decreased $206,000 from June 30, 2021,” Mr. Dwight said. “In addition, we see opportunities to make significant progress on workouts on the acquired loan portfolio, by applying Horizon’s hands–on, personalized and attentive credit–management approach of working with these new borrowers and sponsors,” Mr. Dwight added.

Income Statement Highlights

Net income for the third quarter of 2021 was $23.1 million, or $0.52 diluted earnings per share, compared to $22.2 million, or $0.50, for the linked quarter and $20.3 million, or $0.46, for the prior year period. This represents the highest quarterly net income in the Company’s history.

Adjusted net income for the third quarter of 2021 was $23.0 million, or $0.52 diluted earnings per share, compared to $22.2 million, or $0.50, for the linked quarter and $19.4 million, or $0.45, for the prior year period. Adjusted net income, which is not calculated according to generally accepted accounting principles (“GAAP”), is a measure that Horizon uses to provide a greater understanding of operating profitability.

The increase in net income for the third quarter of 2021 when compared to the second quarter of 2021 reflects an increase in net interest income of $3.9 million and an increase in non–interest income of $837,000, offset by an increase in credit loss expense of $2.6 million, an increase non–interest expense of $961,000 and an increase in income tax expense of $286,000.

Interest income includes the recognition of PPP interest and net loan processing fees totaling $3.5 million in the third quarter of 2021, compared to $2.7 million in the linked quarter. On September 30, 2021, the Company had $2.5 million in net deferred PPP loan processing fees outstanding and $92.3 million in PPP loans outstanding. PPP net deferred fees and loans outstanding at June 30, 2021 were $5.7 million and $169.4 million, respectively. The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness.

Third quarter 2021 income from the gain on sale of mortgage loans totaled $4.1 million, down from $5.6 million in the linked quarter and down from $8.8 million in the prior year period.

Non–interest expense of $34.3 million in the third quarter of 2021 reflected a $1.2 million increase in salaries and employee benefits expense, an increase of $377,000 in other expense, an increase of $138,000 in data processing, an increase of $110,000 in outside services and consulting, and an increase of $63,000 in other losses, offset by a decrease in loan expense of $462,000, a decrease in FDIC deposit insurance expense of $221,000, a decrease in net occupancy expenses of $149,000 and a decrease in professional fees of $66,000, from the linked quarter. Acquisition related expenses in the third quarter of 2021 increased $557,000 from the linked quarter.

The increase in net income for the third quarter of 2021 when compared to the same prior year period reflects an increase in net interest income of $3.1 million, a decrease in credit loss expense of $940,000 and a decrease in income tax expense of $270,000, offset by an increase in non–interest expense of $942,000 and a decrease in non–interest income of $656,000.

Net income for the first nine months of 2021 was $65.7 million, or $1.49 diluted earnings per share, compared to $46.6 million, or $1.06 diluted earnings per share, for the first nine months of 2020. Adjusted net income for the first nine months of 2021 was $64.9 million, or $1.46 diluted earnings per share, compared to $45.0 million, or $1.02 diluted earnings per share, for the first nine months of 2020. The increase in net income for the first nine months of 2021 when compared to the same prior year period reflects a decrease in credit loss expense of $17.7 million, an increase in non–interest income of $5.2 million and an increase in net interest income of $4.4 million, offset by an increase in non–interest expense of $4.9 million and an increase in income tax expense of $3.4 million.

Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
	Three Months Ended																				Nine Months Ended
	September 30,				June 30,				March 31,				December 31,				September 30,				September 30,				September 30,
	2021				2021				2021				2020				2020				2021				2020
Net income as reported	$	23,071			$	22,173			$	20,422			$	21,893			$	20,312			$	65,666			$	46,606
Acquisition expenses	799				242				—				—				—				1,041				—
Tax effect	(166		)		(51		)		—				—				—				(217		)		—
Net income excluding acquisition expenses	23,704				22,364				20,422				21,893				20,312				66,490				46,606
Credit loss expense acquired loans	2,034				—				—				—				—				2,034				—
Tax effect	(427		)		—				—				—				—				(427		)		—
Net income excluding credit loss expense acquired loans	25,311				22,364				20,422				21,893				20,312				68,097				46,606
Gain on sale of ESOP trustee accounts	(2,329		)		—				—				—				—				(2,329		)		—
Tax effect	489				—				—				—				—				489				—
Net income excluding gain on sale of ESOP trustee accounts	23,471				22,364				20,422				21,893				20,312				66,257				46,606
(Gain) / loss on sale of investment securities	—				—				(914		)		(2,622		)		(1,088		)		(914		)		(1,675		)
Tax effect	—				—				192				551				228				192				352
Net income excluding (gain) / loss on sale of investment securities	23,471				22,364				19,700				19,822				19,452				65,535				45,283
Death benefit on bank owned life insurance (“BOLI”)	(517		)		(266		)		—				—				(31		)		(783		)		(264		)
Net income excluding death benefit on BOLI	22,954				22,098				19,700				19,822				19,421				64,752				45,019
Prepayment penalties on borrowings	—				125				—				3,804				—				125				—
Tax effect	—				(26		)		—				(799		)		—				(26		)		—
Net income excluding prepayment penalties on borrowings	22,954				22,197				19,700				22,827				19,421				64,851				45,019
Adjusted net income	$	22,954			$	22,197			$	19,700			$	22,827			$	19,421			$	64,851			$	45,019

Non–GAAP Reconciliation of Diluted Earnings per Share
(Dollars in Thousands, Unaudited)
	Three Months Ended																				Nine Months Ended
	September 30,				June 30,				March 31,				December 31,				September 30,				September 30,				September 30,
	2021				2021				2021				2020				2020				2021				2020
Diluted earnings per share (“EPS”) as reported	$	0.52			$	0.50			$	0.46			$	0.50			$	0.46			$	1.49			$	1.06
Acquisition expenses	0.02				0.01				—				—				—				0.02				—
Tax effect	—				—				—				—				—				—				—
Diluted EPS excluding acquisition expenses	0.54				0.51				0.46				0.50				0.46				1.51				1.06
Credit loss expense acquired loans	0.05				—				—				—				—				0.05				—
Tax effect	(0.01		)		—				—				—				—				(0.01		)		—
Diluted EPS excluding credit loss expense acquired loans	0.58				0.51				0.46				0.50				0.46				1.55				1.06
Gain on sale of ESOP trustee accounts	(0.05		)		—				—				—				—				(0.05		)		—
Tax effect	0.01				—				—				—				—				0.01				—
Diluted EPS excluding gain on sale of ESOP trustee accounts	0.54				0.51				0.46				0.50				0.46				1.51				1.06
(Gain) / loss on sale of investment securities	—				—				(0.02		)		(0.06		)		(0.02		)		(0.02		)		(0.04		)
Tax effect	—				—				—				0.01				0.01				—				0.01
Diluted EPS excluding (gain) / loss on sale of investment securities	0.54				0.51				0.44				0.45				0.45				1.49				1.03
Death benefit on bank owned life insurance (“BOLI”)	(0.02		)		(0.01		)		—				—				—				(0.03		)		(0.01		)
Diluted EPS excluding death benefit on BOLI	0.52				0.50				0.44				0.45				0.45				1.46				1.02
Prepayment penalties on borrowings	—				—				—				0.09				—				—				—
Tax effect	—				—				—				(0.02		)		—				—				—
Diluted EPS excluding prepayment penalties on borrowings	0.52				0.50				0.44				0.52				0.45				1.46				1.02
Adjusted diluted EPS	$	0.52			$	0.50			$	0.44			$	0.52			$	0.45			$	1.46			$	1.02

Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income
(Dollars in Thousands, Unaudited)
	Three Months Ended																				Nine Months Ended
	September 30,				June 30,				March 31,				December 31,				September 30,				September 30,				September 30,
	2021				2021				2021				2020				2020				2021				2020
Pre–tax income	$	27,127			$	25,943			$	23,872			$	23,860			$	24,638			$	76,942			$	54,509
Credit loss expense	1,112				(1,492		)		367				3,042				2,052				(13		)		17,709
Pre–tax, pre–provision income	$	28,239			$	24,451			$	24,239			$	26,902			$	26,690			$	76,929			$	72,218
Pre–tax, pre–provision income	$	28,239			$	24,451			$	24,239			$	26,902			$	26,690			$	76,929			$	72,218
Acquisition expenses	799				242				—				—				—				1,041				—
Gain on sale of ESOP trustee accounts	(2,329		)		—				—				—				—				(2,329		)		—
(Gain) / loss on sale of investment securities	—				—				(914		)		(2,622		)		(1,088		)		(914		)		(1,675		)
Death benefit on BOLI	(517		)		(266		)		—				—				(31		)		(783		)		(264		)
Prepayment penalties on borrowings	—				125				—				3,804				—				125				—
Adjusted pre–tax, pre–provision income	$	26,192			$	24,552			$	23,325			$	28,084			$	25,571			$	73,944			$	70,279

Horizon’s net interest margin increased to 3.17% for the third quarter of 2021 compared to 3.14% for the second quarter of 2021. The increase in net interest margin reflects a decrease in the cost of interest bearing liabilities of seven basis points, offset by a decrease in the yield on interest earning assets of two basis points. Interest income from acquisition–related purchase accounting adjustments was $645,000 higher during the third quarter of 2021 when compared to the second quarter of 2021.

Horizon’s net interest margin decreased to 3.17% for the third quarter of 2021 compared to 3.39% for the third quarter of 2020. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 44 basis points offset by a decrease in the cost of interest bearing liabilities of 29 basis points.

Horizon’s net interest margin decreased to 3.20% for the first nine months of 2021 compared to 3.48% for the same prior year period. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 60 basis points offset by a decrease in the cost of interest bearing liabilities of 40 basis points.

The net interest margin was impacted during the third and second quarters of 2021 by PPP loans that were originated. Horizon estimates that the PPP loans increased the net interest margin by 16 and seven basis points for the third and second quarters of 2021, respectively. This assumes these PPP loans were not included in average interest earning assets or interest income and were primarily funded by the growth in non–interest bearing deposits.

The net interest margin was also impacted during the third and second quarters of 2021 by excess liquidity carried on the balance sheet through increased deposits. Horizon estimates that the excess liquidity compressed the net interest margin by 16 and 21 basis points for the third and second quarters of 2021, respectively. This assumes that the excess liquidity was not included in average interest earning assets or interest income and was excluded from non–interest bearing deposits.

Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
	Three Months Ended																				Nine Months Ended
	September 30,				June 30,				March 31,				December 31,				September 30,				September 30,				September 30,
	2021				2021				2021				2020				2020				2021				2020
Net interest income as reported	$	46,544			$	42,632			$	42,538			$	43,622			$	43,397			$	131,714			$	127,318
Average interest earning assets	6,033,088				5,659,384				5,439,634				5,365,888				5,251,611				5,712,875				5,037,540
Net interest income as a percentage of average interest earning assets (“Net Interest Margin”)	3.17		%		3.14		%		3.29		%		3.34		%		3.39		%		3.20		%		3.48		%
Net interest income as reported	$	46,544			$	42,632			$	42,538			$	43,622			$	43,397			$	131,714			$	127,318
Acquisition–related purchase accounting adjustments (“PAUs”)	(875		)		(230		)		(1,579		)		(2,461		)		(1,488		)		(2,684		)		(4,475		)
Prepayment penalties on borrowings	—				125				—				3,804				—				125				—
Adjusted net interest income	$	45,669			$	42,527			$	40,959			$	44,965			$	41,909			$	129,030			$	122,843
Adjusted net interest margin	3.12		%		3.13		%		3.17		%		3.44		%		3.27		%		3.14		%		3.36		%

Net interest margin, excluding acquisition–related purchase accounting adjustments (“adjusted net interest margin”), was 3.12% for the third quarter of 2021, compared to 3.13% for the linked quarter and 3.27% for the third quarter of 2020. Interest income from acquisition–related purchase accounting adjustments was $875,000, $230,000 and $1.5 million for the three months ended September 30, 2021, June 30, 2021 and September 30, 2020, respectively.

The adjusted net interest margin was 3.14% for the first nine months of 2021 compared to 3.36% for the same prior year period. Interest income from acquisition–related purchase accounting adjustments was $2.7 million and $4.5 million for the nine months ended September 30, 2021 and 2020, respectively.

Lending Activity

Total loan balances were $3.66 billion, or $3.57 billion excluding PPP loans, on September 30, 2021. Total loans were $3.53 billion, or $3.36 billion excluding PPP loans, on June 30, 2021. During the three months ended September 30, 2021, consumer loans, excluding acquired loans, increased $11.1 million and commercial loans, excluding PPP loans and acquired loans, increased $45.3 million, offset by decreases in PPP loans of $77.2 million, mortgage warehouse loans of $35.4 million, residential mortgage loans, excluding acquired loans, of $10.1 million and loans held for sale of $2.4 million.

Loan Growth by Type, Excluding Acquired Loans
(Dollars in Thousands, Unaudited)
	September 30,				June 30,				Amount				Acquired				Amount				QTD		Annualized
	2021				2021				Change				Loans				Change				% Change		% Change
Commercial, excluding PPP loans	$	2,080,943			$	1,935,187			$	145,756			$	(100,406	)		$	45,350			2.3%		9.3%
PPP loans	92,257				169,440				(77,183		)		—				)		(45.6)%		(180.7)%
Residential mortga...