Horizon Bancorp, Inc. Announces Record Earnings for 2021 and Fourth Quarter Results including Strong Profitability, Higher Net Interest Income, Growing Commercial and Consumer Loans, and Disciplined Expense Management

MICHIGAN CITY, Ind., Jan. 26, 2022 (GLOBE NEWSWIRE) -- (NASDAQ GS: HBNC) — Horizon Bancorp, Inc. (“Horizon” or the “Company”) announced its unaudited financial results for the three and twelve months ending December 31, 2021.

“Horizon capped 2021 with record annual earnings and net interest income, as well as continued growth in commercial and consumer loans through the fourth quarter, mortgage production well in–line with our expectations, strong asset quality metrics and continued disciplined expense management,” Chairman and CEO Craig M. Dwight said. “We enter 2022 with strong pipelines to support our loan growth goals for the year, successfully integrated a new team of advisors and customers onboarded through the September acquisition of 14 branches and low–cost deposits to expand Horizon’s Michigan franchise, and a balance sheet that is very well positioned for increasing short term interest rates.”

Fourth Quarter and Full Year 2021 Highlights

• Net income totaled $87.1 million, or $1.98 per diluted share for the 12 months of 2021 and $21.4 million, or $0.49 per diluted share in the fourth quarter. Adjusted diluted earnings per share was $0.54 for the fourth quarter of 2021 compared to $0.52 for the third quarter of 2021 and $0.52 for the fourth quarter of 2020. (See the “Non–GAAP Reconciliation of Diluted Earnings Per Share” table for the definition of this non–GAAP calculation of adjusted diluted earnings per share.)
  
  

• Net interest income grew to a record $50.0 million for the quarter, up 7.4% from the third quarter of 2021 and 14.6% from the fourth quarter of 2020. Reported net interest margin (“NIM”) was 2.97% and adjusted NIM was 2.86%, with reported NIM decreasing by 20 basis points and adjusted NIM decreasing by 26 basis points from the third 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 10 basis points of the NIM and adjusted NIM is attributed to Federal Paycheck Protection Program (“PPP”) lending, offset by an estimated 32 basis point compression attributed to excess liquidity during the quarter. During the fourth quarter, Horizon increased the average balance of its investment portfolio by $458.9 million to leverage capital and focus on increasing net interest income.
  
  

• The Company was asset sensitive as of December 31, 2021, resulting from the liquidity on the balance sheet, adjustable rate assets and the low beta's on deposit pricing based on expected deposit rates. Based on parallel rate shocks to the balance sheet, at a 100 basis point shock and 200 basis point shock, net interest income increases approximately $10.0 million and $20.0 million, respectively.
  
  

• Commercial loans, excluding PPP and acquired loans, grew by 2.4% during the quarter and 2.4% during 2021 to a record $2.13 billion at period end.
  
  

• Consumer loans, excluding acquired loans, grew by 1.9% during the fourth quarter and 2.7% during 2021 to a record $727.3 million at period end, with record production of $397.1 million.
  

• Residential mortgage loans, excluding acquired loans, declined in–line with expectations by 1.5% during the fourth quarter and 13.8% during 2021 to $594.4 million at period end, as the addition of new producers and the launch of a new jumbo mortgage product aimed at second home buyers in Horizon's very attractive second–home markets began to mitigate the impact of the industry–wide slowdown in mortgage lending from recent historic levels. Mortgage loan revenues only constituted 10.8% of total revenue in 2021.
  
  

• Non–interest expense was $39.4 million in the quarter, including ongoing operating expenses associated with the Michigan branch acquisition that closed on September 17. Excluding acquisition–related expenses and non–recurring Employee Stock Ownership Plan (“ESOP”) settlement expense, non–interest expense was $36.6 million, representing 1.95% of average assets on an annualized basis in the quarter, compared to $33.6 million, or 2.05%, in the third quarter of 2021 and $36.5 million, or 2.47%, in the fourth quarter of 2020. Acquisition–related expenses totaled approximately $884,000 in the fourth quarter of 2021 and $799,000 in the linked quarter. (See the “Non–GAAP Reconciliation of Non–Interest Expense” table for the definition of this non–GAAP calculation of adjusted non–interest expense.)
  
  

• Horizon accrued $1.9 million of expense in December for a mediation settlement related to a dispute with the U.S. Department of Labor (“DOL”) concerning valuations and sale transactions related to Horizon's ESOP trustee business. Horizon is no longer in the ESOP trustee business and sold all accounts to a third party on September 30, 2021 and recorded a $2.3 million gain on the sale in the third quarter.
  
  

• The efficiency ratio for the period was 62.69% compared to 54.88% for the third quarter of 2021 and 57.54% for the fourth quarter of 2020. The adjusted efficiency ratio, excluding acquisition–related expense and non–recurring settlement costs, was 58.25% compared to 56.16% for the third quarter of 2021 and 56.48% for the fourth quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below.)
  
  

• Horizon’s in–market consumer and commercial deposit relationships, including those on–boarded as part of its branch acquisition near the end of the third 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 0.31% in the quarter, compared to 0.38% in the third quarter of 2021 and 0.94% in the fourth quarter of 2020.
  
  

• Horizon recorded a provision release of $2.1 million in the quarter, compared to a provision expense of $1.1 million in the third quarter of 2021 and $3.0 million in the fourth quarter of 2020, as non–performing loans declined to $19.0 million, or 0.53% of total loans, on December 31, 2021.
  
  

• Horizon’s book value per share and tangible book value increased to all–time highs of $16.61 and $12.58. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.) Held to Maturity (“HTM”) securities were increased in the fourth quarter through a transfer from Available for Sale (“AFS”) securities and purchases to 57.2% of the investment portfolio. This increase in HTM securities will help manage the impact of unrealized losses to tangible capital in a rising rate environment.
  
  

• The integration of 14 branches purchased from TCF National Bank that closed on September 17, 2021 is complete and was very successful. The deposit runoff has stabilized at approximately 8% with the plan to begin to rebuild this runoff as we enter into 2022. The financial impact of this transaction to date is in line with management's projections.
  

Summary

		For the Three Months Ended
		December 31,				September 30,				December 31,
Net Interest Income and Net Interest Margin			2021				2021				2020
Net interest income		$	49,976			$	46,544			$	43,622
Net interest margin			2.97	%			3.17	%			3.34	%
Adjusted net interest margin			2.86	%			3.12	%			3.44	%

“Horizon's net interest income of approximately $50.0 million in the fourth quarter was an all–time high and was achieved despite margin compression during the quarter due to pressure from lower yielding investment securities and higher levels of cash,” Mr. Dwight commented. “We are well–positioned for a rising interest rate environment and believe that a 200 basis point increase in the federal funds rate would increase net interest income by approximately $20.0 million.”

		For the Three Months Ended
		December 31,			September 30,			December 31,
Asset Yields and Funding Costs		2021			2021			2020
Interest earning assets		3.20	%		3.46	%		4.05	%
Interest bearing liabilities		0.31	%		0.38	%		0.94	%

		For the Three Months Ended
Non–interest Income and		December 31,			September 30,			December 31,
Mortgage Banking Income		2021			2021			2020
Total non–interest income		$	12,828		$	16,044		$	19,733
Gain on sale of mortgage loans			4,167			4,088			7,815
Mortgage servicing income net of impairment			300			336			327

		For the Three Months Ended
		December 31,				September 30,				December 31,
Non–interest Expense		2021				2021				2020
Total non–interest expense		$	39,370			$	34,349			$	36,453
Annualized non–interest expense to average assets			2.09	%			2.09	%			2.47	%

		For the Three Months Ended
		December 31,			September 30,			December 31,
Credit Quality		2021			2021			2020
Allowance for credit losses to total loans		1.51	%		1.55	%		1.47	%
Non–performing loans to total loans		0.53	%		0.80	%		0.69	%
Percent of net charge–offs to average loans outstanding for the period		0.04	%		0.00	%		0.01	%

Allowance for		December 31,				Net Reserve																December 31,
Credit Losses			2020			1Q21				2Q21				3Q21				4Q21					2021
Commercial		$	42,210			$	770			$	(1,214	)		$	1,355			$	(2,346	)		$	40,775
Retail Mortgage			4,620				(391	)			(121	)			(371	)			119				3,856
Warehouse			1,267				(104	)			(8	)			(101	)			5				1,059
Consumer			8,930				(116	)			(194	)			247				(271	)			8,596
Allowance for Credit Losses (“ACL”)		$	57,027			$	159			$	(1,537	)		$	1,130			$	(2,493	)		$	54,286
ACL / Total Loans			1.47	%																			1.51	%
Acquired Loan Discount (“ALD”)		$	11,494			$	(221	)		$	(815	)		$	(27	)		$	(1,334	)		$	9,097

“We reported strong asset quality metrics, including reductions in non–performing loans from both the linked and year–ago quarter–ends, with non–performing loans making up just 0.53% of total loans at December 31, 2021,” Mr. Dwight said. “We were pleased to be able to make progress on workouts on loans acquired as part of our September branch acquisition and see continued opportunity to work with these new borrowers and sponsors through our hands–on credit–management.”

Income Statement Highlights

Net income for the fourth quarter of 2021 was $21.4 million, or $0.49 diluted earnings per share, compared to $23.1 million, or $0.52, for the linked quarter and $21.9 million, or $0.50, for the prior year period.

Adjusted net income for the fourth quarter of 2021 was $23.7 million, or $0.54 diluted earnings per share, compared to $23.0 million, or $0.52, for the linked quarter and $22.8 million, or $0.52, 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 decrease in net income for the fourth quarter of 2021 when compared to the third quarter of 2021 reflects an increase in non–interest expense of $5.0 million and a decrease in non–interest income of $3.2 million, offset by an increase in net interest income of $3.4 million and a decrease in credit loss expense of $3.2 million.

Interest income includes the recognition of PPP interest and net loan processing fees totaling $2.1 million in the fourth quarter of 2021, compared to $3.5 million in the linked quarter. On December 31, 2021, the Company had $561,000 in net deferred PPP loan processing fees outstanding and $25.8 million in PPP loans outstanding. PPP net deferred fees and loans outstanding at September 30, 2021 were $2.5 million and $92.3 million, respectively. The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness.

Fourth quarter 2021 income from the gain on sale of mortgage loans totaled $4.2 million, up from $4.1 million in the linked quarter and down from $7.8 million in the prior year period.

Non–interest expense of $39.4 million in the fourth quarter of 2021 reflected a $1.9 million increase in other losses, an increase of $1.6 million in salaries and employee benefits expense, an increase of $519,000 in FDIC deposit insurance expense, an increase of $518,000 in other expense, an increase of $269,000 in net occupancy expense, an increase of $158,000 in loan expense and an increase of $146,000 in data processing, offset by a decrease in outside services and consultants expense of $133,000, from the linked quarter. Acquisition related expenses in the fourth quarter of 2021 increased $85,000 from the linked quarter.

The decrease in net income for the fourth quarter of 2021 when compared to the same prior year period reflects a decrease in non–interest income of $6.9 million, an increase in non–interest expense of $2.9 million and an increase in income tax expense of $2.1 million, offset by an increase in net interest income of $6.4 million and a decrease in credit loss expense of $5.1 million.

Net income for the year ended December 31, 2021 was $87.1 million, or $1.98 diluted earnings per share, compared to $68.5 million, or $1.55 diluted earnings per share, for the year ended December 31, 2020. Adjusted net income for the year ended December 31, 2021 was $88.6 million, or $2.00 diluted earnings per share, compared to $67.8 million, or $1.53 diluted earnings per share, for the year ended December 31, 2020. The increase in net income for the year ended December 31, 2021 when compared to the same prior year period reflects a decrease in credit loss expense of $22.8 million and an increase in net interest income of $10.8 million, offset by an increase in non–interest expense of $7.8 million, an increase in income tax expense of $5.5 million and a decrease in non–interest income of $1.7 million.

Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
		Three Months Ended																				Twelve Months Ended
		December 31,				September 30,				June 30,				March 31,				December 31,				December 31,				December 31,
			2021				2021				2021				2021				2020				2021				2020
Net income as reported		$	21,425			$	23,071			$	22,173			$	20,422			$	21,893			$	87,091			$	68,499
Acquisition expenses			884				799				242				—				—				1,925				—
Tax effect			(184	)			(166	)			(51	)			—				—				(401	)			—
Net income excluding acquisition expenses			22,125				23,704				22,364				20,422				21,893				88,615				68,499
Credit loss expense acquired loans			—				2,034				—				—				—				2,034				—
Tax effect			—				(427	)			—				—				—				(427	)			—
Net income excluding credit loss expense acquired loans			22,125				25,311				22,364				20,422				21,893				90,222				68,499
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			22,125				23,471				22,364				20,422				21,893				88,382				68,499
ESOP settlement expenses			1,900				—				—				—				—				1,900				—
Tax effect			(315	)			—				—				—				—				(315	)			—
Net income excluding ESOP settlement expenses			23,710				23,471				22,364				20,422				21,893				89,967				68,499
(Gain) / loss on sale of investment securities			—				—				—				(914	)			(2,622	)			(914	)			(4,297	)
Tax effect			—				—				—				192				551				192				902
Net income excluding (gain) / loss on sale of investment securities			23,710				23,471				22,364				19,700				19,822				89,245				65,104
Death benefit on bank owned life insurance (“BOLI”)			—				(517	)			(266	)			—				—				(783	)			(264	)
Net income excluding death benefit on BOLI			23,710				22,954				22,098				19,700				19,822				88,462				64,840
Prepayment penalties on borrowings			—				—				125				—				3,804				125				3,804
Tax effect			—				—				(26	)			—				(799	)			(26	)			(799	)
Net income excluding prepayment penalties on borrowings			23,710				22,954				22,197				19,700				22,827				88,561				67,845
Adjusted net income		$	23,710			$	22,954			$	22,197			$	19,700			$	22,827			$	88,561			$	67,845

Non–GAAP Reconciliation of Diluted Earnings per Share
(Dollars in Thousands, Unaudited)
		Three Months Ended																				Twelve Months Ended
		December 31,				September 30,				June 30,				March 31,				December 31,				December 31,				December 31,
			2021				2021				2021				2021				2020				2021				2020
Diluted earnings per share (“EPS”) as reported		$	0.49			$	0.52			$	0.50			$	0.46			$	0.50			$	1.98			$	1.55
Acquisition expenses			0.02				0.02				0.01				—				—				0.04				—
Tax effect			—				—				—				—				—				—				—
Diluted EPS excluding acquisition expenses			0.51				0.54				0.51				0.46				0.50				2.02				1.55
Credit loss expense acquired loans			—				0.05				—				—				—				0.05				—
Tax effect			—				(0.01	)			—				—				—				(0.01	)			—
Diluted EPS excluding credit loss expense acquired loans			0.51				0.58				0.51				0.46				0.50				2.06				1.55
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			0.51				0.54				0.51				0.46				0.50				2.02				1.55
ESOP settlement expenses			0.04				—				—				—				—				0.04				—
Tax effect			(0.01	)			—				—				—				—				(0.01	)			—
Diluted EPS excluding ESOP settlement expenses			0.54				0.54				0.51				0.46				0.50				2.05				1.55
(Gain) / loss on sale of investment securities			—				—				—				(0.02	)			(0.06	)			(0.02	)			(0.10	)
Tax effect			—				—				—				—				0.01				—				0.02
Diluted EPS excluding (gain) / loss on sale of investment securities			0.54				0.54				0.51				0.44				0.45				2.03				1.47
Death benefit on bank owned life insurance (“BOLI”)			—				(0.02	)			(0.01	)			—				—				(0.03	)			(0.01	)
Diluted EPS excluding death benefit on BOLI			0.54				0.52				0.50				0.44				0.45				2.00				1.46
Prepayment penalties on borrowings			—				—				—				—				0.09				—				0.09
Tax effect			—				—				—				—				(0.02	)			—				(0.02	)
Diluted EPS excluding prepayment penalties on borrowings			0.54				0.52				0.50				0.44				0.52				2.00				1.53
Adjusted diluted EPS		$	0.54			$	0.52			$	0.50			$	0.44			$	0.52			$	2.00			$	1.53

Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income
(Dollars in Thousands, Unaudited)
		Three Months Ended																				Twelve Months Ended
		December 31,				September 30,				June 30,				March 31,				December 31,				December 31,				December 31,
			2021				2021				2021				2021				2020				2021				2020
Pre–tax income		$	25,505			$	27,127			$	25,943			$	23,872			$	23,860			$	102,447			$	78,369
Credit loss expense			(2,071	)			1,112				(1,492	)			367				3,042				(2,084	)			20,751
Pre–tax, pre–provision income		$	23,434			$	28,239			$	24,451			$	24,239			$	26,902			$	100,363			$	99,120
Pre–tax, pre–provision income		$	23,434			$	28,239			$	24,451			$	24,239			$	26,902			$	100,363			$	99,120
Acquisition expenses			884				799				242				—				—				1,925				—
Gain on sale of ESOP trustee accounts			—				(2,329	)			—				—				—				(2,329	)			—
ESOP settlement expenses			1,900				—				—				—				—				1,900				—
(Gain) / loss on sale of investment securities			—				—				—				(914	)			(2,622	)			(914	)			(4,297	)
Death benefit on BOLI			—				(517	)			(266	)			—				—				(783	)			(264	)
Prepayment penalties on borrowings			—				—				125				—				3,804				125				3,804
Adjusted pre–tax, pre–provision income		$	26,218			$	26,192			$	24,552			$	23,325			$	28,084			$	100,162			$	94,559

Horizon’s net interest margin decreased to 2.97% for the fourth quarter of 2021 compared to 3.17% for the third quarter of 2021. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 26 basis points, offset by a decrease in the cost of interest bearing liabilities of seven basis points. Interest income from acquisition–related purchase accounting adjustments was $944,000 higher during the fourth quarter of 2021 when compared to the third quarter of 2021.

Horizon’s net interest margin decreased to 2.97% for the fourth quarter of 2021 compared to 3.34% for the fourth quarter of 2020. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 85 basis points offset by a decrease in the cost of interest bearing liabilities of 63 basis points.

Horizon’s net interest margin decreased to 3.13% for the year ended December 31, 2021 compared to 3.44% for the same prior year period. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 68 basis points offset by a decrease in the cost of interest bearing liabilities of 95 basis points.

The net interest margin was impacted during the fourth and third quarters of 2021 by PPP loans that were originated. Horizon estimates that the PPP loans increased the net interest margin by 10 and 16 basis points for the fourth and third 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 fourth and third 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 32 and 16 basis points for the fourth and third 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																				Twelve Months Ended
		December 31,				September 30,				June 30,				March 31,				December 31,				December 31,				December 31,
			2021				2021				2021				2021				2020				2021				2020
Net interest income as reported		$	49,976			$	46,544			$	42,632			$	42,538			$	43,622			$	181,690			$	170,940
Average interest earning assets			6,938,258				6,033,088				5,659,384				5,439,634				5,365,888				6,021,740				5,120,106
Net interest income as a percentage of average interest earning assets (“Net Interest Margin”)			2.97	%			3.17	%			3.14	%			3.29	%			3.34	%			3.13	%			3.44	%
Net interest income as reported		$	49,976			$	46,544			$	42,632			$	42,538			$	43,622			$	181,690			$	170,940
Acquisition–related purchase accounting adjustments (“PAUs”)			(1,819	)			(875	)			(230	)			(1,579	)			(2,461	)			(4,503	)			(6,936	)
Prepayment penalties on borrowings			—				—				125				—				3,804				125				3,804
Adjusted net interest income		$	48,157			$	45,669			$	42,527			$	40,959			$	44,965			$	177,187			$	164,004
Adjusted net interest margin			2.86	%			3.12	%			3.13	%			3.17	%			3.44	%			3.06	%			3.38	%

Net interest margin, excluding acquisition–related purchase accounting adjustments (“adjusted net interest margin”), was 2.86% for the fourth quarter of 2021, compared to 3.12% for the linked quarter and 3.44% for the fourth quarter of 2020. Interest income from acquisition–related purchase accounting adjustments was $1.8 million, $875,000 and $2.5 million for the three months ended December 31, 2021, September 30, 2021 and December 31, 2020, respectively.

The adjusted net interest margin was 3.06% for the year ended December 31, 2021 compared to 3.38% for the same prior year period. Interest income from acquisition–related purchase accounting adjustments was $4.5 million and $6.9 million for the year ended December 31, 2021 and 2020, respectively.

Lending Activity

Total loan balances were $3.60 billion, or $3.57 billion excluding PPP loans, on December 31, 2021. Total loans were $3.66 billion, or $3.57 billion excluding PPP loans, on September 30, 2021. During the three months ended December 31, 2021, commercial loans, excluding PPP loans, increased $50.7 million, consumer loans increased $13.8 million and loans held for sale increased $7.8 million, offset by decreases in PPP loans of $66.4 million, mortgage warehouse loans of $60.9 million and residential mortgage loans of $9.2 million.

Loan Growth by Type, Excluding Acquired Loans