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Horizon Bancorp, Inc. Announces Record Quarterly and Year-to-Date Earnings

MICHIGAN CITY, Ind., Oct. 23, 2019 (GLOBE NEWSWIRE) -- (NASDAQ GS: HBNC) – Horizon Bancorp, Inc. (“Horizon” or the “Company”) today announced its unaudited financial results for the three-month and nine-month periods ended September 30, 2019. All share data has been adjusted to reflect Horizon’s three-for-two stock split effective June 15, 2018. 

SUMMARY:

  • Net income for the quarter ended September 30, 2019 was $20.5 million, or $0.46 diluted earnings per share, compared to $13.1 million, or $0.34 diluted earnings per share, for the quarter ended September 30, 2018. This represents the highest quarterly net income and diluted earnings per share in the Company’s history.

  • Core net income for the quarter ended September 30, 2019 increased 54.4% to $20.3 million, or $0.45 diluted earnings per share, compared to $13.2 million, or $0.34 diluted earnings per share, for the same period in 2018. This represents the highest quarterly core net income and core diluted earnings per share in the Company’s history. (See the “Non-GAAP Reconciliation of Net Income and Diluted Earnings per Share” table on page 4 for a description of the elements of core net income.)

  • Net income for the first nine months of 2019 was $48.0 million, or $1.11 diluted earnings per share, compared to $40.0 million, or $1.04 diluted earnings per share, for the first nine months of 2018. This represents the highest year-to-date net income and diluted earnings per share as of September 30th in the Company’s history.  

  • Core net income for the first nine months of 2019 was $52.1 million, or $1.21 diluted earnings per share, compared to $39.9 million, or $1.04 diluted earnings per share, for the first nine months of 2018. This represents the highest year-to-date core net income and core diluted earnings per share as of September 30th in the Company’s history. (See the “Non-GAAP Reconciliation of Net Income and Diluted Earnings per Share” table on page 4 for a description of the elements of core net income.)

  • Net interest margin for the quarter ended September 30, 2019 was 3.82% compared to 3.73% and 3.67% for the quarters ended June 30, 2019 and September 30, 2018, respectively. The increase in net interest margin from the second quarter of 2019 and third quarter of 2018 reflects an increase in the yield of interest-earning assets as loans continue to reprice upwards and a decrease in cost of borrowings, along with a stabilization in deposit pricing.

  • Core net interest margin for the quarter ended September 30, 2019 was 3.67% compared to 3.61% and 3.59% for the quarters ended June 30, 2019 and September 30, 2018, respectively. (See the “Non-GAAP Reconciliation of Net Interest Margin” table on page 5 for a description of the elements of core net interest margin.)

  • Return on average assets was 1.60% for the third quarter of 2019 compared to 1.26% for the third quarter of 2018. Return on average assets was 1.33% for both the first nine months of 2019 and 2018.

  • Core return on average assets for the third quarter of 2019 was 1.58% compared to 1.27% for the third quarter of 2018. Core return on average assets was 1.44% for the first nine months of 2019 compared to 1.32% for the first nine months of 2018. (See the “Non-GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity” table on page 11 for the description of core return on average assets.)

  • Return on average equity was 12.72% for the third quarter of 2019 compared to 10.87% for the third quarter of 2018. Return on average equity was 10.88% for the first nine months of 2019 compared to 11.43% for the first nine months of 2018.

  • Core return on average equity for the third quarter of 2019 was 12.59% compared to 10.95% for the third quarter of 2018. Core return on average equity was 11.83% for the first nine months of 2019 compared to 11.41% for the first nine months of 2018. (See the “Non-GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity” table on page 11 for the description of core return on average assets.)

  • Horizon’s tangible book value per share increased to $10.31 at September 30, 2019 compared to $9.91 and $9.04 at June 30, 2019 and September 30, 2018, respectively. This represents the highest tangible book value per share in the Company’s history.

  • On July 16, 2019, Horizon’s Board of Directors 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 September 30, 2019, Horizon had repurchased a total of 99,407 shares at an average price per share of $16.04.

  • Horizon consolidated its two Midland, Michigan full-service branches into one location on September 6, 2019.

Craig Dwight, Chairman and CEO of Horizon, commented: “Horizon’s 2019 third quarter and year-to-date performance resulted in record earnings and demonstrate that our long range strategic plan to improve efficiency through an increase in mass and scale is working. Third quarter 2019 earnings increased to $20.5 million, or $0.46 diluted earnings per share, when compared to prior year period earnings of $13.1 million, or $0.34 diluted earnings per share. Year-to-date earnings increased to $48.0 million, or $1.11 diluted earnings per share, compared to $40.0 million, or $1.04 diluted earnings per share, for the prior year period.”

Dwight added, “Horizon’s growth story continues with total assets now reaching approximately $5.2 billion at September 30, 2019. In addition to the loans acquired from our acquisition of Salin Bank and Trust Company during the first quarter of 2019, which totaled approximately $568.9 million, we continue to experience year-to-date loan growth of $118.3 million from the markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo.”

Dwight concluded, “Horizon continues to maximize operational leverage through an increase in mass and scale as evident by the decrease in our adjusted efficiency ratio. Horizon’s adjusted efficiency ratio, excluding merger expenses, loss on sale of investment securities and death benefit on bank owned life insurance decreased to 54.89% for the third quarter of 2019 compared to 57.62% for the second quarter of 2019 and 60.17% for the third quarter of 2018. In addition, annualized non-interest expense to average assets, excluding merger expenses, fell to 2.34% for the third quarter of 2019 compared to 2.39% for the second quarter of 2019 and 2.48% for the third quarter of 2018. Our team continues to leverage new technologies and develop operational efficiencies. In addition, Horizon consolidated its two Midland, Michigan full-service branches into one location on September 6, 2019 in our continued efforts to improve branch efficiencies.”

Income Statement Highlights

Net income for the third quarter of 2019 was $20.5 million, or $0.46 diluted earnings per share, compared to $16.6 million, or $0.37 diluted earnings per share, for the second quarter of 2019 and $13.1 million, or $0.34 diluted earnings per share, for the third quarter of 2018. Excluding acquisition-related expenses, loss on sale of investment securities and death benefit on bank owned life insurance (“core net income”), core net income for the third quarter of 2019 was $20.3 million, or $0.46 diluted earnings per share, compared to $17.6 million, or $0.39 diluted earnings per share, for the second quarter of 2019 and $13.2 million, or $0.34 diluted earnings per share, for the third quarter of 2018.

The increase in net income and diluted earnings per share from the second quarter of 2019 to the third quarter of 2019 reflects increases in net interest income of $1.9 million and non-interest income of $616,000, in addition to decreases in non-interest expense of $1.5 million and provision for loan losses of $520,000, offset by an increase in income tax expense of $699,000.

The increase in net income from the third quarter of 2018 when compared to the same period of 2019 reflects increases in net interest income of $9.7 million and non-interest income of $2.8 million, in addition to a decrease in provision for loan losses of $800,000, offset by increases in non-interest expense of $4.4 million and income tax expense of $1.4 million.

Net income for the nine months ended September 30, 2019 was $48.0 million, or $1.11 diluted earnings per share, compared to $40.0 million, or $1.04 diluted earnings per share, for the nine months ended September 30, 2018. Core net income for the nine months ended September 30, 2019 was $52.1 million, or $1.21 diluted earnings per share, compared to $39.9 million, or $1.04 diluted earnings per share, for the nine months ended September 30, 2018. This represents a 16.3% increase in core diluted earnings per share for the first nine months of 2019 compared to the same period in 2018.

The increase in net income when comparing the first nine months of 2019 to the prior year period reflects increases in net interest income of $18.5 million and non-interest income of $5.2 million, in addition to a decrease in provision for loan losses of $742,000, offset by increases in non-interest expense of $15.0 million and income tax expense of $1.5 million.

 
Non-GAAP Reconciliation of Net Income and Diluted Earnings per Share
(Dollars in Thousands, Except per Share Data, Unaudited)
  Three Months Ended   Nine Months Ended
  September 30   June 30   September 30   September 30   September 30
    2019       2019       2018       2019       2018  
Non-GAAP Reconciliation of Net Income                  
Net income as reported $ 20,537     $ 16,642     $ 13,065     $ 47,995     $ 39,984  
Merger expenses   -       1,532       -       5,650       -  
Tax effect   -       (295 )     -       (987 )     -  
Net income excluding merger expenses   20,537       17,879       13,065       52,658       39,984  
                   
Loss on sale of investment securities   -       100       122       85       111  
Tax effect   -       (21 )     (25 )     (18 )     (23 )
Net income excluding loss on sale of investment securities   20,537       17,958       13,162       52,725       40,072  
                   
Death benefit on bank owned life insurance ("BOLI")   (213 )     (367 )     -       (580 )     (154 )
Net income excluding death benefit on BOLI   20,324       17,591       13,162       52,145       39,918  
                   
Core Net Income $ 20,324     $ 17,591     $ 13,162     $ 52,145     $ 39,918  
                   
Non-GAAP Reconciliation of Diluted Earnings per Share                  
Diluted earnings per share ("EPS") as reported $ 0.46     $ 0.37     $ 0.34     $ 1.11     $ 1.04  
Merger expenses   -       0.03       -       0.13       -  
Tax effect   -       -       -       (0.02 )     -  
Diluted EPS excluding merger expenses   0.46       0.40       0.34       1.22       1.04  
                   
Loss on sale of investment securities   -       -       -       -       -  
Tax effect   -       -       -       -       -  
Diluted EPS excluding loss on sale of investment securities   0.46       0.40       0.34       1.22       1.04  
                   
Death benefit on BOLI   (0.01 )     (0.01 )     -       (0.01 )     -  
Diluted EPS excluding death benefit on BOLI   0.45       0.39       0.34       1.21       1.04  
                   
Core Diluted EPS $ 0.45     $ 0.39     $ 0.34     $ 1.21     $ 1.04  
                   

Horizon’s net interest margin increased to 3.82% for the third quarter of 2019 when compared to 3.73% for the second quarter of 2019. The increase in net interest margin reflects an increase in the yield on interest-earning assets of six basis points as loans continued to reprice upwards along with an increase in commercial loan fees of $811,000 when compared to the second quarter of 2019. The cost of interest-bearing liabilities decreased by three basis points primarily from a decrease in the cost of borrowings. In addition, deposit pricing is reducing within the markets we serve in alignment with the recent decline in general market short-term interest rates.

Net interest margin increased to 3.82% for the third quarter of 2019 when compared to 3.67% for the third quarter of 2018. The increase in net interest margin was due to an increase in yield on interest-earning assets of 29 basis points, offset by an increase in the cost on interest-bearing liabilities of 22 basis points. The increase in the yield of interest-earning assets was primarily due to the increase in the yields on loans receivable of 34 basis points and non-taxable investment securities of 25 basis points. The increase in the yields on loans receivable was the result of loans repricing upwards along with an increase in commercial loan fees of $1.2 million when comparing the third quarter of 2019 to the third quarter of 2018. The cost of interest-bearing deposits increased by 33 basis points and was partially offset by a decrease in the cost on borrowings of 12 basis points.

Net interest margin decreased to 3.72% during the first nine months of 2019 when compared to 3.74% for the first nine months of 2018. This decrease reflects an increase in the cost of interest-bearing liabilities of 40 basis points, offset by an increase in the yield of interest-earning assets of 26 basis points. The increase in the cost of interest-bearing liabilities was due to an increase in the cost of interest-bearing deposits of 48 basis points and borrowings of 28 basis points. The increase in the yield of interest-earning assets was due to increases in the yields on loans receivable of 26 basis points, non-taxable investment securities of 37 basis points and taxable investment securities of 15 basis points.

Net interest margin, excluding acquisition-related purchase accounting adjustments (“core net interest margin”), was 3.67% for the third quarter of 2019 compared to 3.61% for the prior quarter and 3.59% for the third quarter of 2018. Interest income from acquisition-related purchase accounting adjustments was $1.7 million, $1.3 million and $789,000 for the three months ended September 30, 2019, June 30, 2019 and September 30, 2018, respectively. The increase in the core net interest margin during the third quarter of 2019 was due to a decrease of the cost on borrowings and an increase in the yield on earning assets from higher mortgage warehouse lending balances, loans continuing to reprice higher and the addition of acquired Salin loans.

 
Non-GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
  Three Months Ended   Nine Months Ended
  September 30   June 30   September 30   September 30   September 30
    2019       2019       2018       2019       2018  
Non-GAAP Reconciliation of Net Interest Margin                  
Net interest income as reported $ 43,463     $ 41,529     $ 33,772     $ 119,272     $ 100,733  
                   
Average interest-earning assets   4,623,985       4,566,674       3,717,139       4,376,841       3,610,277  
                   
Net interest income as a percentage of average interest-earning assets ("Net Interest Margin")   3.82 %     3.73 %     3.67 %     3.72 %     3.74 %
                   
Acquisition-related purchase accounting adjustments ("PAUs") $ (1,739 )   $ (1,299 )   $ (789 )   $ (4,548 )   $ (4,460 )
                   
Core net interest income $ 41,724     $ 40,230     $ 32,983     $ 114,724     $ 96,273  
                   
Core net interest margin   3.67 %     3.61 %     3.59 %     3.58 %     3.58 %
                   

Lending Activity

Total loans increased $653.3 million from $3.014 billion as of December 31, 2018 to $3.668 billion as of September 30, 2019. Excluding acquired loans, total loans increased $84.4 million during the first nine months of 2019 as consumer loans increased by $33.7 million and mortgage warehouse loans increased by $81.5 million, offset by a decrease in commercial loans of $28.2 million and residential mortgage loans of $2.7 million.

 
Loan Growth by Type, Excluding Acquired Loans
(Dollars in Thousands, Unaudited)
                       
  September 30   December 31   Amount   Acquired   Amount   Percent
    2019     2018   Change   Loans   Change   Change
Commercial $ 2,046,165   $ 1,721,590   $ 324,575   $ (352,798 )   $ (28,223 )   -1.6 %
Residential mortgage   796,497     668,141     128,356     (131,008 )     (2,652 )   -0.4 %
Consumer   668,332     549,481     118,851     (85,112 )     33,739     6.1 %
Subtotal   3,510,994     2,939,212     571,782     (568,918 )     2,864     0.1 %
Held for sale loans   1,060     1,038     22     -       22     2.1 %
Mortgage warehouse loans   155,631     74,120     81,511     -       81,511     110.0 %
Total loans $ 3,667,685   $ 3,014,370   $ 653,315   $ (568,918 )   $ 84,397     2.8 %
                       

During the first nine months of 2019, Horizon Bank (the “Bank”) originated approximately $299.5 million of commercial loans, which is a 17% increase compared to the same period in 2018; however, only 56.5%, or $169.1 million, of these loan originations had been funded as of September 30, 2019. These originations were offset by commercial loan payoffs totaling approximately $226.0 million during the first nine months of 2019, which is a 69% increase in payoffs compared to the same period in 2018, as there was an increase in clients moving projects that had reached stabilization into the long-term, fixed rate conduit financing market and properties being sold. During the first nine months of 2018, the Bank originated approximately $256.5 million of commercial loans; however, only 56.2%, or $144.1 million, of these loan originations had been funded as of September 30, 2018. These originations were offset by commercial loan payoffs totaling approximately $134.1 million during the first nine months of 2018.

Residential mortgage lending activity for the three months ended September 30, 2019 generated $2.7 million in income from the gain on sale of mortgage loans, an increase of $624,000 from the second quarter of 2019 and $863,000 from the third quarter of 2018. Total origination volume for the third quarter of 2019, including loans placed into portfolio, totaled $121.1 million, representing an increase of 8.7% from the second quarter of 2019 and an increase of 20.4% from the third quarter of 2018. Total origination volume for the third quarter of 2019 of loans sold to the secondary market totaled $95.0 million, representing an increase of 56.7% from the second quarter of 2019 and an increase of 60.3% from the third quarter of 2018.

Revenue derived from Horizon’s residential mortgage and warehouse lending activities was 5.8% of Horizon’s total revenue for the nine months ended September 30, 2019, which is comparable to the same prior year period.

The provision for loan losses totaled $376,000 for the third quarter of 2019 compared to $896,000 for the second quarter of 2019 and $1.2 million for the third quarter of 2018.

The provision for loan losses totaled $1.6 million for the first nine months of 2019 compared to $2.4 million for the first nine months of 2018.

The ratio of the allowance for loan losses to total loans decreased to 0.49% as of September 30, 2019 from 0.59% at December 31, 2018. The decrease in the ratio of the allowance for loan losses to total loans is primarily due to increased loan balances from the Salin acquisition. The ratio of the allowance for loan losses to total loans, excluding loans with credit-related purchase accounting adjustments, was 0.65% as of September 30, 2019 compared to 0.72% as of December 31, 2018. Loan loss reserves plus credit-related loan discounts on acquired loans as a percentage of total loans was 1.07% as of September 30, 2019 compared to 0.98% as of December 31, 2018.

 
Non-GAAP Allowance for Loan and Lease Loss Detail
As of September 30, 2019
(Dollars in Thousands, Unaudited)
                               
  Pre-discount
Loan
Balance
  Allowance
for Loan
Losses
(ALLL)
  Loan
Discount
  ALLL
+
Loan
Discount
  Loans,
net
  ALLL/
Pre-discount
Loan
Balance
  Loan
Discount/
Pre-discount
Loan
Balance
  ALLL + Loan
Discount/
Pre-discount
Loan
Balance
Horizon Legacy $ 2,779,961   $ 17,946   N/A   $ 17,946   $ 2,762,015   0.65 %   0.00 %   0.65 %
Heartland   5,244     -     589     589     4,655   0.00 %   11.23 %   11.23 %
Summit   16,191     -     987     987     15,204   0.00 %   6.10 %   6.10 %
Peoples   71,941     -     1,669     1,669     70,272   0.00 %   2.32 %   2.32 %
Kosciusko   30,580     -     528     528     30,052   0.00 %   1.73 %   1.73 %
LaPorte   70,442     10     2,461     2,471     67,971   0.01 %   3.49 %   3.50 %
CNB   3,498     -     88     88     3,410   0.00 %   2.52 %   2.52 %
Lafayette   63,805     -     519     519     63,286   0.00 %   0.81 %   0.81 %
Wolverine   136,829     -     729     729     136,100   0.00 %   0.53 %   0.53 %
Salin   489,194     -     13,797     13,797     475,397   0.00 %   2.82 %   2.82 %
Total $ 3,667,685   $ 17,956   $ 21,367   $ 39,323   $ 3,628,362   0.49 %   0.58 %   1.07 %
                               

As of September 30, 2019, non-performing loans totaled $19.2 million, which reflects a two basis point increase in non-performing loans to total loans, or a $4.0 million increase from $15.2 million in non-performing loans as of December 31, 2018. Compared to December 31, 2018, non-performing commercial loans increased by $1.3 million, non-performing real estate loans increased by $2.2 million and non-performing consumer loans increased by $485,000. Other real estate owned and repossessed assets totaled $4.0 million as of September 30, 2019 which is an increase of $2.0 million from December 31, 2018. The majority of this increase was due to other real estate owned properties acquired in the Salin transaction, including the closed branches, totaling $1.7 million.

As of September 30, 2019, substandard loans totaled $62.1 million, which is an increase of $14.4 million from June 30, 2019. This increase in substandard loans was primarily due to four unrelated relationships, each from a different industry, being downgraded during the quarter. We do not believe this increase to be an indication of the overall quality of our loan portfolio as evident by our steady non-performing loans to total loans ratio of 0.52% as of September 30, 2019 and other non-performing and substandard relationships showing improvement. 

Expense Management

Total non-interest expense was $1.5 million lower in the third quarter of 2019 when compared to the second quarter of 2019. FDIC insurance, other expense, professional fees, and outside services and consultants decreased by $638,000, $572,000, $263,000 and $103,000, respectively. Offsetting these decreases was an increase in loan expense of $150,000. FDIC insurance decreased due to assessment credits the Bank received during the third quarter of 2019 as the FDIC reserve is currently overfunded. Excluding merger expenses, total non-interest expense held steady at $30.1 million when comparing the third quarter of 2019 to the second quarter of 2019.

           
  Three Months Ended        
  September 30   June 30        
    2019       2019     Adjusted
                             
Non-interest Expense Actual   Merger
Expenses
  Adjusted   Actual   Merger
Expenses
  Adjusted
    Amount
Change
  Percent
Change
Salaries and employee benefits $ 16,948     $ -   $ 16,948     $ 16,951     $ (482 )   $ 16,469     $ 479     2.9 %
Net occupancy expenses   3,131       -     3,131       3,148       (75 )     3,073       58     1.9 %
Data processing   2,140       -     2,140       2,139       (68 )     2,071       69     3.3 %
Professional fees   335       -     335       598       (153 )     445       (110 )   -24.7 %
Outside services and consultants   1,552       -     1,552       1,655       (176 )     1,479       73     4.9 %
Loan expense   2,198       -     2,198       2,048       (2 )     2,046       152     7.4 %
FDIC deposit insurance   (273 )     -     (273 )     365       -       365       (638 )   -174.8 %
Other losses   90       -     90       169       (69 )     100       (10 )   -10.0 %
Other expenses   3,939       -     3,939       4,511       (507 )     4,004       (65 )   -1.6 %
Total non-interest expense $ 30,060     $ -   $ 30,060     $ 31,584     $ (1,532 )   $ 30,052     $ 8     0.0 %
Annualized Non-interest Exp. to Avg. Assets   2.34 %         2.34 %     2.51 %         2.39 %        
                                               

Total non-interest expense was $4.4 million higher during the third quarter of 2019 compared to the same period of 2018. Salaries and employee benefits, other expense, net occupancy expense, loan expense, data processing and outside services and consultants increased $2.6 million, $836,000, $636,000, $476,000, $381,000 and $348,000, respectively. These increases were offset by a decrease of $669,000 in FDIC insurance and $102,000 in professional fees. FDIC insurance decreased due to assessment credits the Bank received during the third quarter of 2019 as the FDIC reserve is currently overfunded.

           
  Three Months Ended        
  September 30   September 30        
    2019       2018     Adjusted
Non-interest Expense Actual   Merger
Expenses
  Adjusted   Actual   Merger
Expenses
  Adjusted Amount
Change
  Percent
Change
Salaries and employee benefits $ 16,948     $ -   $ 16,948     $ 14,343     $ -   $ 14,343     $ 2,605     18.2 %
Net occupancy expenses   3,131       -     3,131       2,495       -     2,495       636     25.5 %
Data processing   2,140       -     2,140       1,759       -     1,759       381 null