Horizon Bancorp, Inc. Announces Record Fourth Quarter 2020 Financial Results

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Horizon Bancorp, Inc.
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MICHIGAN CITY, Ind., Jan. 27, 2021 (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, 2020.

“Horizon closed 2020 with record quarterly top– and bottom–line results, supported by continued strength in mortgage lending and other fee–generating businesses, the benefits of our work to deleverage and optimize returns on total earning assets, and favorable deferral trends and credit quality metrics,” Chairman and CEO Craig M. Dwight said. “Entering the new year with strong liquidity, capital, and reserves, we see clear opportunities to enhance the bank’s operating efficiency, deepen in–market retail and commercial customer relationships, and help to strengthen our resilient Indiana and Michigan communities in 2021.”

Fourth Quarter 2020 Highlights

  • Earned record net income of $21.9 million, or $0.50 diluted earnings per share, compared to $20.3 million, or $0.46 diluted earnings per share, for the third quarter of 2020 and $18.5 million, or $0.41 diluted earnings per share, for the fourth quarter of 2019.

  • Grew pre–tax, pre–provision net income to a record $26.9 million for the quarter, compared to $26.7 million for the third quarter of 2020 and $22.8 million for the fourth quarter of 2019. 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 Net Income” table below.)

  • Grew net interest income to a record $43.6 million for the quarter, compared to $43.4 million for the third quarter of 2020 and $41.5 million for the fourth quarter of 2019. Adjusted net interest income for the quarter was $45.0 million compared to $41.9 million for the third quarter of 2020. (See the “Non–GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity” tables below.)

  • Reported return on average assets (“ROAA”) of 1.49% and return on average common equity (“ROACE”) of 12.79% in the quarter, as well as adjusted ROAA of 1.56% and adjusted ROACE of 13.33%, excluding the impact of gains on sale of investment securities and prepayment penalties on borrowings, net of tax. (See the “Non–GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity” tables below.)

  • Grew mortgage–related non–interest income by 8.5% from the linked quarter and 138.6% from the prior year period, with gain on mortgage loan sales of $7.8 million and net mortgage servicing income of $327,000. The bank originated $186.1 million in mortgage loans during the quarter, down 10.1% from the third quarter of 2020 and up 63.3% from the fourth quarter of 2019.

  • Total non–interest income, excluding securities gains, grew to a record $17.1 million, up 9.6% from the linked quarter and 43.5% from the prior year period, supported by increases in mortgage–related gains and servicing income, banking and fiduciary fees.

  • Reported net interest margin (“NIM”) of 3.34% and adjusted NIM of 3.44%, with reported NIM declining by 5 basis points and adjusted NIM increasing by 17 basis points from the third quarter of 2020. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation). An estimated 18 basis points attributed to PPP lending improved the margin, offset by an estimated 10 and 7 basis point compression, respectively, attributed to the subordinated notes and excess liquidity held during the quarter, for both NIM and adjusted NIM.

  • Increased the allowance for credit losses (“ACL”) by 1.3% during the quarter and 222.8% year–to–date to $57.0 million at period end, representing 1.47% of total loans, reflecting January 2020 implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the allocation for the Company’s identified stressed portfolios. ACL at period end also represented 1.55% of loans excluding $208.9 million in Federal Paycheck Protection Program (“PPP”) loans, and 212.7% of non–performing loans.

  • COVID–19 deferral levels improved to 3.5% of total loans at period end, compared to 4.1% on September 30, 2020 and 14.3% on June 30, 2020 and the bank experienced no material specific loan losses attributed to COVID–19 closures in 2020.

  • Maintained solid asset quality metrics, including non–performing and delinquent loans representing 0.69% and 0.19% of total loans, respectively, at December 31, 2020, while net charge–offs were 0.01% of average loans for the period.

  • The efficiency ratio for the period was 57.54% compared to 55.59% for the third quarter of 2020. The adjusted efficiency ratio was 56.48% compared to 56.64% for the third quarter of 2020. (See the “Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” tables below.)

  • Horizon’s tangible book value per share increased from $10.63 at December 31, 2019 to $11.78 at December 31, 2020, which includes the accounting adjustment for CECL as of January 1, 2020. This represents the highest tangible book value per share in the Company’s history. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” tables below.)

  • Maintained strong liquidity position including approximately $1.6 billion in cash and investment securities, which is approximately 26.3% of total assets, and approximately $1.0 billion in unused availability on lines of credit, at December 31, 2020.

  • Horizon has reported over thirty years of uninterrupted dividends and as of year–end had in excess of $127 million in cash at the holding company, which provides us with considerable future optionality to build shareholder value.

Summary

For the Three Months Ended

December 31,

September 30,

December 31,

Net Interest Income and Net Interest Margin

2020

2020

2019

Net interest income

$

43,622

$

43,397

$

41,519

Net interest margin

3.34

%

3.39

%

3.58

%

Adjusted net interest margin

3.44

%

3.27

%

3.49

%


For the Three Months Ended

December 31,

September 30,

December 31,

Asset Yields and Funding Costs

2020

2020

2019

Interest earning assets

4.05

%

3.90

%

4.57

%

Interest bearing liabilities

0.94

%

0.67

%

1.24

%

The yield on interest earning assets for the fourth quarter of 2020 was impacted by PPP loans and higher liquidity levels. Horizon estimates PPP loans increased the yield by 15 basis points and higher liquidity levels compressed the yield by 8 basis points. Horizon estimates PPP loans decreased the yield on interest earning assets by 6 basis point for the third quarter of 2020. The funding costs on interest bearing liabilities increased by an estimated 37 basis points for the fourth quarter of 2020 as a result of prepayment penalties on borrowings.

For the Three Months Ended

Non–interest Income and

December 31,

September 30,

December 31,

Mortgage Banking Income

2020

2020

2019

Total non–interest income

$

19,733

$

16,700

$

11,934

Gain on sale of mortgage loans

7,815

8,813

3,119

Mortgage servicing income net of impairment

327

(1,308

)

294


For the Three Months Ended

December 31,

September 30,

December 31,

Non–interest Expense

2020

2020

2019

Total non–interest expense

$

36,453

$

33,407

$

30,432

Annualized non–interest expense to average assets

2.47

%

2.30

%

2.32

%


For the Three Months Ended

December 31,

September 30,

December 31,

Credit Quality

2020

2020

2019

Allowance for credit losses to total loans

1.47

%

1.39

%

0.49

%

Non–performing loans to total loans

0.69

0.72

0.58

Percent of net charge–offs to average loans outstanding for the period

0.01

0.02

0.02


CECL Adoption

Allowance for

December 31,

January 1,

Net Reserve Build

December 31,

Credit Losses

2019

Impact

2020

1Q20

2Q20

3Q20

4Q20

2020

Commercial

$

11,996

$

13,618

$

25,614

$

6,936

$

6,597

$

648

$

2,415

$

42,210

Retail Mortgage

923

4,048

4,971

683

178

(368

)

(844

)

4,620

Warehouse

1,077

1,077

(22

)

135

60

17

1,267

Consumer

3,671

4,911

8,582

599

(260

)

889

(880

)

8,930

Allowance for Credit Losses (“ACL”)

$

17,667

$

22,577

$

40,244

$

8,196

$

6,650

$

1,229

$

708

$

57,027

ACL / Total Loans

0.49

%

1.10

%

1.47

%

Acquired Loan Discount (“ALD”)

$

20,228

$

(2,786

)

$

17,442

$

(1,436

)

$

(1,532

)

$

(1,541

)

$

(1,439

)

$

11,494

Horizon’s asset quality metrics continued to remain favorable through the fourth quarter, with low levels of delinquency and other real estate owned and a decrease in non–performing loans. Horizon’s reserve build reflects adoption of CECL on January 1, 2020 and the increase in the Company’s quarterly allocations to cover potential future loan losses related to economic factors and the nature and characteristics of its loan portfolios, primarily related to the impact on non–essential businesses caused by COVID–19 closures and the slow pace of reopening and economic recovery. Through December 31, 2020, Horizon has not recorded any material specific loan losses attributed to COVID–19 closures. Lower losses are attributable to Horizon working with its customers to provide payment modifications to help assist our customers as they manage through the economic slowdown due to the pandemic and the location of a high percentage of our retail and restaurant loans have benefited from the influx of Chicago residents into our markets. In addition, during the quarter Horizon made good progress on lowering its non–performing assets as a result of payoffs received on two non–performing credits.

During the fourth quarter, $2.0 million of the ACL related to the January 1, 2020, transfer of acquired loan discounts to the ACL was used in the payoff on two non–performing credits and a portion included with the $2.5 million of acquisition related income recognized during the quarter.

Income Statement Highlights

Net income for the fourth quarter of 2020 was $21.9 million, or $0.50 diluted earnings per share, compared to $20.3 million, or $0.46, for the linked quarter and $18.5 million, or $0.41, for the prior year period.

Adjusted net income for the fourth quarter of 2020 was $22.8 million, or $0.52 diluted earnings per share, compared to $19.4 million, or $0.45, for the linked quarter and $18.5 million, or $0.41, 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 fourth quarter of 2020 when compared to the third quarter of 2020 reflects an increase in non–interest income of $3.0 million, an increase of $225,000 in net interest income and a decrease in income tax expense of $2.4 million, offset by an increase in non–interest expense of $3.0 million and an increase in credit loss expense of $990,000.

Interest income includes the recognition of PPP loan processing fees totaling $4.6 million in the fourth quarter of 2020, compared to $2.2 million in the linked quarter. On December 31, 2020, the Company had $4.0 million in deferred PPP loan processing fees outstanding and $208.9 million in PPP loans outstanding. PPP deferred fees and loans outstanding at September 30, 2020 were $8.0 million and $310.8 million, respectively. The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness.

Fourth quarter 2020 income from the gain on sale of mortgage loans, totaled $7.8 million in the fourth quarter of 2020, down from $8.8 million in the linked quarter and up from $3.1 million in the prior year period.

Non–interest expense of $36.5 million in the fourth quarter of 2020 reflected a $1.2 million increase in salaries and employee benefits expense from the linked quarter. The increase in salaries and employee benefits expense reflected higher performance–based compensation accruals due to the record 2020 net interest income, non–interest income revenues and other key performance metrics. The increase in other losses included mostly one–time items including losses on liquidation of bank owned real estate held from previous branch closings.

The increase in net income for the fourth quarter of 2020 when compared to the prior year period reflects an increase in net interest income of $2.1 million, an increase in non–interest income of $7.8 million and a decrease in income tax expense of $2.0 million, offset by an increase in non–interest expense of $5.8 million and an increase in credit loss expense of $2.7 million.

Net income for the year ended December 31, 2020 was $68.5 million, or $1.55 diluted earnings per share, compared to $66.5 million, or $1.53 diluted earnings per share, for the year ended December 31, 2019. Adjusted net income for the year ended December 31, 2020 was $67.8 million, or $1.53 diluted earnings per share, compared to $70.7 million, or $1.63 diluted earnings per share for the year ended December 31, 2019. The increase in net income for the year ended December 31, 2020 when compared to the prior year reflects an increase in net interest income of $10.1 million, an increase in non–interest income of $16.6 million and a decrease in income tax expense of $3.4 million, offset by an increase in the provision for credit loss expense of $18.8 million and an increase in non–interest expense of $9.4 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,

2020

2020

2020

2020

2019

2020

2019

Net income as reported

$

21,893

$

20,312

$

14,639

$

11,655

$

18,543

$

68,499

$

66,538

Merger expenses

5,650

Tax effect

(987

)

Net income excluding merger expenses

21,893

20,312

14,639

11,655

18,543

68,499

71,201

(Gain) / loss on sale of investment securities

(2,622

)

(1,088

)

(248

)

(339

)

(10

)

(4,297

)

75

Tax effect

551

228

52

71

2

902

(16

)

Net income excluding (gain) / loss on sale of investment securities

19,822

19,452

14,443

11,387

18,535

65,104

71,260

Death benefit on bank owned life insurance (“BOLI”)

(31

)

(233

)

(264

)

(580

)

Net income excluding death benefit on BOLI

19,822

19,421

14,443

11,154

18,535

64,840

70,680

Prepayment penalties on borrowings

3,804

3,804

Tax effect

(799

)

(799

)

Net income excluding prepayment penalties on borrowings

22,827

19,421

14,443

11,154

18,535

67,845

70,680

Adjusted net income

$

22,827

$

19,421

$

14,443

$

11,154

$

18,535

$

67,845

$

70,680


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,

2020

2020

2020

2020

2019

2020

2019

Diluted earnings per share (“EPS”) as reported

$

0.50

$

0.46

$

0.33

$

0.26

$

0.41

$

1.55

$

1.53

Merger expenses

0.13

Tax effect

(0.02

)

Diluted EPS excluding merger expenses

0.50

0.46

0.33

0.26

0.41

1.55

1.64

(Gain) / loss on sale of investment securities

(0.06

)

(0.02

)

(0.01

)

(0.01

)

(0.10

)

Tax effect

0.01

0.01

0.02

Diluted EPS excluding (gain) / loss on sale of investment securities

0.45

0.45

0.32

0.25

0.41

1.47

1.64

Death benefit on bank owned life insurance (“BOLI”)

(0.01

)

(0.01

)

(0.01

)

Diluted EPS excluding death benefit on BOLI

0.45

0.45

0.32

0.24

0.41

1.46

1.63

Prepayment penalties on borrowings

0.09

0.09

Tax effect

(0.02

)

(0.02

)

Diluted EPS excluding prepayment penalties on borrowings

0.52

0.45

0.32

0.24

0.41

1.53

1.63

Adjusted diluted EPS

$

0.52

$

0.45

$

0.32

$

0.24

$

0.41

$

1.53

$

1.63


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,

2020

2020

2020

2020

2019

2020

2019

Pre–tax income

$

23,860

$

24,638

$

16,632

$

13,239

$

22,463

$

78,369

$

79,841

Credit loss expense

3,042

2,052

7,057

8,600

340

20,751

1,976

Pre–tax, pre–provision income

$

26,902

$

26,690

$

23,689

$

21,839

$

22,803

$

99,120

$

81,817

Pre–tax, pre–provision income

$

26,902

$

26,690

$

23,689

$

21,839

$

22,803

$

99,120

$

81,817

Merger expenses

5,650

(Gain) / loss on sale of investment securities

(2,622

)

(1,088

)

(248

)

(339

)

(10

)

(4,297

)

75

Death benefit on BOLI

(31

)

(233

)

(264

)

(580

)

Prepayment penalties on borrowings

3,804

3,804

Adjusted pre–tax, pre–provision income

$

28,084

$

25,571

$

23,441

$

21,267

$

22,793

$

98,363

$

86,962

Horizon’s net interest margin decreased to 3.34% for the fourth quarter of 2020 compared to 3.39% for the third quarter of 2020. The decrease in net interest margin reflects an increase in the cost of interest bearing liabilities of 27 basis points, offset by an increase in the yield of interest earning assets of 15 basis points. Interest income from acquisition–related purchase accounting adjustments was $973,000 higher during the fourth quarter of 2020 when compared to the third quarter of 2020.

Horizon’s net interest margin decreased to 3.34% for the fourth quarter of 2020 when compared to 3.58% for the fourth quarter of 2019. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 52 basis points offset by a decrease in the cost of interest bearing liabilities of 30 basis points.

Horizon’s net interest margin decreased to 3.44% for the year ended December 31, 2020 compared to 3.69% for the prior year. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 64 basis points offset by a decrease in the cost of interest bearing liabilities of 48 basis points.

The net interest margin was impacted during the third and fourth quarters of 2020 due to the PPP loans that were originated. Horizon estimates that the PPP loans increased the net interest margin by 18 basis points in the fourth quarter and compressed the margin 4 basis points for the third quarter. 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 increase to the net interest margin for the twelve months of 2020 using the same assumptions was estimated to be 3 basis points.

The net interest margin was impacted during the third and fourth quarters of 2020 due to higher liquidity levels impacting the mix of interest earning assets. Horizon estimates the higher liquidity levels compressed the net interest margin by 7 basis points for the fourth quarter and 3 basis points for the third quarter. This assumes the higher liquidity level was not included in average interest earning assets or interest income. The compression to the net interest margin for the twelve months of 2020 using the same assumptions was estimated to be 4 basis points.

The net interest margin was also impacted during the third and fourth quarters of 2020 due to the issuance of $60.0 million in subordinated notes in June 2020. Horizon estimates that the subordinated notes compressed the net interest margin by 10 basis points for both the third and fourth quarters. This assumes the subordinated notes were not included in average interest bearing liabilities or interest expense and were primarily offset by a reduction in cash. The compression to the net interest margin for the twelve months of 2020 using the same assumptions was estimated to be 6 basis points.

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,

2020

2020

2020

2020

2019

2020

2019

Net interest income as reported

$

43,622

$

43,397

$

42,996

$

40,925

$

41,519

$

170,940

$

160,791

Average interest earning assets

5,365,888

5,251,611

5,112,636

4,746,202

4,748,217

5,120,106

4,470,450

Net interest income as a percentage of average interest earning assets (“Net Interest Margin”)

3.34

%

3.39

%

3.47

%

3.56

%

3.58

%

3.44

%

3.69

%

Net interest income as reported

$

43,622

$

43,397

$

42,996

$

40,925

$

41,519

$

170,940

$

160,791

Acquisition–related purchase accounting adjustments (“PAUs”)

(2,461

)

(1,488

)

(1,553

)

(1,434

)

(1,042

)

(6,936

)

(5,590

)

Prepayment penalties on borrowings

3,804

3,804

Adjusted net interest income

$

44,965

$

41,909

$

41,443

$

39,491

$

40,477

$

167,808

$

155,201

Adjusted net interest margin

3.44

%

3.27

%

3.35

%

3.44

%

3.49

%

3.38

%

3.57

%

Net interest margin, excluding acquisition–related purchase accounting adjustments and prepayment penalties on borrowings (“adjusted net interest margin”), was 3.44% for the fourth quarter of 2020 compared to 3.27% for the prior quarter and 3.49% for the fourth quarter of 2019. Interest income from acquisition–related purchase accounting adjustments was $2.5 million, $1.5 million and $1.0 million for the three months ended December 31, 2020, September 30, 2020 and December 31, 2019, respectively.

Adjusted net interest margin was 3.38% for the year ended December 31, 2020 compared to 3.57% for the prior year. Interest income from acquisition–related purchase accounting adjustments was $6.9 million and $5.6 million for the years ended December 31, 2020 and 2019.

Lending Activity

Total loans were $3.88 billion, or $3.67 billion excluding PPP lending, on December 31, 2020. Total loans were $4.04 billion, or $3.73 billion excluding PPP lending, on September 30, 2020 and $3.64 billion on December 31, 2019. During the year ended December 31, 2020, commercial loans increased $145.6 million, mortgage warehouse loans increased $245.3 million, and loans held for sale increased $9.4 million, offset by a decrease in residential mortgage loans of $146.4 million and a decrease in consumer loans of $14.0 million.

Loan Growth by Type, Excluding Acquired Loans

(Dollars in Thousands, Unaudited)

December 31,

December 31,

Amount

Percent

2020

2019

Change

Change

Commercial

$

2,192,271

$

2,046,651

$

145,620

7.1%

Residential mortgage

624,286

770,717

(146,431

(19.0)%

Consumer

655,200

669,18...0

(13,980

)

(2.1)%

Subtotal

3,471,757

3,486,548

(14,791

)

(0.4)%

Loans held for sale

13,538

4,088

9,450

231.2%

Mortgage warehouse

395,626

150,293

245,333

163.2%

Total loans

$

3,880,921

$

3,640,929

$

239,992

6.6%

Residential mortgage lending activity for the three months ended December 31, 2020 generated $7.8 million in income from the gain on sale of mortgage loans, a decrease of $1.0 million from the third quarter of 2020's record level and an increase of $4.7 million from the fourth quarter of 2019. Total origination volume for the fourth quarter of 2020, including loans placed into the portfolio, totaled $186.1 million, representing a decrease of 10.1% from third quarter 2020 levels, and an increase of 63.3% from the fourth quarter of 2019. As a percentage of total originations, 58% of fourth quarter 2020 volume was related to refinances and 42% was for new purchases. Total origination volume of loans sold to the secondary market totaled $157.7 million, representing a decrease of 5.2% from the third quarter of 2020 and an increase of 88.8% from the fourth quarter of 2019.

Expense Management

Three Months Ended

December 31,

September 30,

Amount

Percent

Non–interest Expense

2020

2020

Change

Change

Salaries and employee benefits

$

20,030

$

18,832

$

1,198

6.4%

Net occupancy expenses

3,262

3,107

155

5.0%

Data processing

2,126

2,237

(111

)

(5.0)%

Professional fees

691

688

3

0.4%

Outside services and consultants

2,083

1,561

522

33.4%

Loan expense

2,961

2,876

85

3.0%

FDIC insurance expense

900

570

330

57.9%

Other losses

735

114

621

544.7%

Other expense

3,665

3,422

243

7.1%

Total non–interest expense

$

36,453

$

33,407

$

3,046

9.1%

Annualized non–interest expense to average assets

2.47

%

2.30

%

Total non–interest expense was $3.0 million higher in the fourth quarter of 2020 when compared to the third quarter of 2020. Increased salaries and employee benefits reflected higher performance–based compensation accruals following improved financial performance in the second half of this year. Higher FDIC insurance expense reflected significant growth in deposits through the end of the fourth quarter of 2020. Outside services and consultants, other losses and other expenses were partially offset by a decrease in data processing.

Three Months Ended

December 31,

December 31,

Amount

Percent

Non–interest Expense

2020

2019

Change

Change

Salaries and employee benefits

$

20,030

$

16,841

$

3,189

18.9%

Net occupancy expenses

3,262

3,106

156

5.0%

Data processing

2,126

2,235

(109

)

(4.9)%

Professional fees

691

520

171

32.9%

Outside services and consultants

2,083

1,415

668

47.2%

Loan expense

2,961

2,438

523

21.5%

FDIC insurance expense

900

900

—%

Other losses

735

377

358

95.0%

Other expense

3,665

3,718

(53

)

(1.4)%

Total non–interest expense

$

36,453

$

30,650

$

5,803

18.9%

Annualized non–interest expense to average assets

2.47

%

2.32

%

Total non–interest expense was $5.8 million higher in the fourth quarter of 2020 when compared to the fourth quarter of 2019. Increases in salaries and employee benefits, FDIC insurance expense, outside services and consultants, loan expense and other losses were offset in part by decreases in data processing and other expense.

Twelve Months Ended

December 31,

December 31,

2020

2019

Adjusted

Non–interest Expense

Actual

Merger
Expenses

Adjusted

Actual

Merger
Expenses

Adjusted

Amount
Change

Percent
Change

Salaries and employee benefits

$

71,082

$

$

71,082

$

65,206

$

(484

)

$

64,722

$

6,360

9.8%

Net occupancy expenses

12,811

12,811

12,157

(75

)

12,082

729

6.0%

Data processing

9,200

9,200

8,480

(360

)

8,120

1,080

13.3%

Professional fees

2,433

2,433

1,946

(392

)

1,554

879

56.6%

Outside services and consultants

7,318

7,318

8,152

(2,466

)

5,686

1,632

28.7%

Loan expense

10,628

10,628

8,633

(2

)

8,631

1,997

23.1%

FDIC insurance expense

1,855

1,855

252

252

1,603

636.1%

Other losses

1,162

1,162

740

(71

)

669

493

73.7%

Other expense

14,952

14,952

16,466

(1,800

)

14,666

286

2.0%

Total non–interest expense

$

131,441

$

$

131,441

$

122,032

$

(5,650

)

$

116,382

$

15,059

12.9%

Annualized non–interest expense to average assets

2.34

%

2.34

%

2.47

%

2.36

%

Total non–interest expense was $9.4 million higher for the year ended December 31, 2020 when compared to the prior year. Increases in salaries and employee benefits, loan expenses, data processing, FDIC insurance expense and net occupancy expenses were offset in part by decreases in outside services and consultants expense and other expense.

Annualized non–interest expense as a percent of average assets were 2.47%, 2.30% and 2.32% for the three months ended December 31, 2020, September 30, 2020 and December 31, 2019, respectively.

Annualized non–interest expense as a percent of average assets were 2.34% and 2.47% for the years ended December 31, 2020 and 2019, respectively. Annualized non–interest expense, excluding merger expenses, as a percent of average assets were 2.34% and 2.36% for the years ended December 31, 2020 and 2019, respectively.

Income tax expense totaled $2.0 million for the fourth quarter of 2020, a decrease of $2.4 million when compared to the third quarter of 2020 and a decrease of $2.0 million when compared to the fourth quarter of 2019. The decrease in income tax expense in the fourth quarter of 2020 compared to the third quarter of 2020 and the fourth quarter of 2019 was primarily due to the ability to recognize solar tax credits from completed projects the Company has invested in along with an increase in tax exempt municipal investments.

Income tax expense totaled $9.9 million for the year ended December 31, 2020, a decrease of $3.4 million when compared to the same prior year period. The decrease in income tax expense was primarily due to the solar tax credits, an increase in tax exempt municipal investments and lower taxable income.

Capital

The capital resources of the Company and Horizon Bank (the “Bank”) exceeded regulatory capital ratios for “well capitalized” banks at December 31, 2020. Stockholders’ equity totaled $692.2 million at December 31, 2020 and the ratio of average stockholders’ equity to average assets was 11.82% for the year ended December 31, 2020.

Capital levels benefited from the Company’s previously disclosed public offering of subordinated notes raising $60.0 million in June 2020. Horizon’s fortress balance sheet at December 31, 2020 maintained adequate regulatory capital ratios when stress testing for highly adverse scenarios.

The following table presents the actual regulatory capital dollar amounts and ratios of the Company and the Bank as of December 31, 2020.

Actual

Required for Capital Adequacy Purposes

Required for Capital Adequacy Purposes with Capital Buffer

Well Capitalized
Under Prompt Corrective Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total capital (to risk–weighted assets)

Consolidated

$

650,206

14.92

%

$

348,617

8.00

%

$

457,560

10.50

%

N/A

N/A

Bank

532,315

12.21

%

348,810

8.00

%

457,813

10.50

%

$

436,013

10.00

%

Tier 1 capital (to risk–weighted assets)

Consolidated

606,395

13.92

%

261,462

6.00

%

370,404

8.50

%

N/A

N/A

Bank

492,221

11.29

%

261,606

6.00

%

370,609

8.50

%

348,808

8.00

%

Common equity tier 1 capital (to risk–weighted assets)

Consolidated

491,281

11.27

%

196,096

4.50

%

305,038

7.00

%

N/A

N/A

Bank

492,221

11.29

%

196,205

4.50

%

305,207

7.00

%

283,407

6.50

%

Tier 1 capital (to average assets)

Consolidated

606,395

10.66

%

227,453

4.00

%

227,453

4.00

%

N/A

N/A

Bank

492,221

8.71

%

226,158

4.00

%

226,158

4.00

%

282,697

5.00

%

“The strength and resilience of Horizon’s business is demonstrated by the Company’s strong operating fundamentals, ability to consistently generate retained earnings and growth in tangible book value per share and the Company’s healthy capital position overall,” said Mr. Dwight. “Accordingly, we will continue to be opportunistic with share repurchases under our current buyback authorization, and we remain committed to maintaining our current quarterly cash dividend.”

Liquidity

The Bank maintains a stable base of core deposits provided by long–standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, unpledged investment securities and borrowing relationships with correspondent banks, including the Federal Home Loan Bank of Indianapolis (the “FHLB”). At December 31, 2020, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.04 billion in unused credit lines with various money center banks, including the FHLB and the Federal Reserve Discount Window. The Bank had approximately $632.4 million of unpledged investment securities at December 31, 2020.

Use of Non–GAAP Financial Measures

Certain information set forth in this press release refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non–GAAP financial measures relating to net income, diluted earnings per share, net interest margin, total loans and loan growth, the allowance for credit losses, tangible stockholders’ equity, tangible book value per share, efficiency ratio, the return on average assets, the return on average equity and pre–tax, pre–provision income. In each case, we have identified special circumstances that we consider to be non–recurring and have excluded them. We believe that this shows the impact of such events as acquisition–related purchase accounting adjustments, among others we have identified in our reconciliations. Horizon believes these non–GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and one–time costs of acquisitions and non–recurring items. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this press release for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.

Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share

(Dollars in Thousands, Unaudited)

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Total stockholders’ equity

$

692,216

$

670,293

$

652,206

$

630,842

$

656,023

Less: Intangible assets

175,140

175,107

176,020

176,961

177,917

Total tangible stockholders’ equity

$

517,076

$

495,186

$

476,186

$

453,881

$

478,106

Common shares outstanding

43,880,562

43,874,353

43,821,878

43,763,623

44,975,771

Book value per common share

$

15.78

$

15.28

$

14.88

$

14.41

$

14.59

Tangible book value per common share

$

11.78

$

11.29

$

10.87

$

10.37

$

10.63


Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio

(Dollars in Thousands, Unaudited)

Three Months Ended

Twelve Months Ended

December 31,

September 30,

June 30,

March 31,

December 31,

December 31,

December 31,

2020

2020

2020

2020

2019

2020

2019

Non–interest expense as reported

$

36,453

$

33,407

$

30,432

$

31,149

$

30,650

$

131,441

$

122,032

Net interest income as reported

43,622

43,397

42,996

40,925

41,519

170,940

160,791

Non–interest income as reported

$

19,733

$

16,700

$

11,125

$

12,063

$

11,934

$

59,621

$

43,058

Non–interest expense / (Net interest income + Non–interest income) (“Efficiency Ratio”)

57.54

%

55.59

%

56.23

%

58.79

%

57.34

%

57.01

%

59.86

%

Non–interest expense as reported

$

36,453

$

33,407

$

30,432

$

31,149

$

30,650

$

131,441

$

122,032

Merger expenses

(5,650

)

Non–interest expense excluding merger expenses

36,453

33,407

30,432

31,149

30,650

131,441

116,382

Net interest income as reported

43,622

43,397

42,996

40,925

41,519

170,940

160,791

Prepayment penalties on borrowings

3,804

3,804

Net interest income excluding prepayment penalties on borrowings

47,426

43,397

42,996

40,925

41,519

174,744

160,791

Non–interest income as reported

19,733

16,700

11,125

12,063

11,934

59,621

43,058

(Gain) / loss on sale of investment securities

(2,622

)

(1,088

)

(248

)

(339

)

(10

)

(4,297

)

75

Death benefit on BOLI

(31

)

(233

)

(264

)

(580

)

Non–interest income excluding (gain) / loss on sale of investment securities and death benefit on BOLI

$

17,111

$

15,581

$

10,877

$

11,491

$

11,924

$

55,060

$

42,553

Adjusted efficiency ratio

56.48

%

56.64

%

56.49

%

59.43

%

57.35

%

57.20

%

57.23

%


Non–GAAP Reconciliation of Return on Average Assets

(Dollars in Thousands, Unaudited)

Three Months Ended

Twelve Months Ended

December 31,

September 30,

June 30,

March 31,

December 31,

December 31,

December 31,

2020

2020

2020

2020

2019

2020

2019

Average assets

$

5,864,086

$

5,768,691

$

5,620,695

$

5,257,332

$

5,250,574

$

5,628,783

$

4,933,058

Return on average assets (“ROAA”) as reported

1.49

%

1.40

%

1.05

%

0.89

%

1.40

%

1.22

%

1.35

%

Merger expenses

0.11

Tax effect

(0.02

)

ROAA excluding merger expenses

1.49

1.40

1.05

0.89

1.40

1.22

1.44

(Gain) / loss on sale of investment securities

(0.18

)

(0.08

)

(0.02

)

(0.03

)

(0.08

)

Tax effect

0.04

0.02

0.01

0.02

ROAA excluding (gain) / loss on sale of investment securities

1.35

1.34

1.03

0.87

1.40

1.16

1.44

Death benefit on BOLI

(0.02

)

(0.01

)

ROAA excluding death benefit on BOLI

1.35

1.34

1.03

0.85

1.40

1.16

1.43

Prepayment penalties on borrowings

0.26

0.07

Tax effect

(0.05

)

(0.01

)

ROAA excluding prepayment penalties on borrowings

1.56

%

1.34

%

1.03

%

0.85

%

1.40

%

1.22

%

1.43

%

Adjusted ROAA

1.56

%

1.34

%

1.03

%

0.85

%

1.40

%

1.22

%

1.43

%


Non–GAAP Reconciliation of Return on Average Common Equity

(Dollars in Thousands, Unaudited)

Three Months Ended

Twelve Months Ended

December 31,

September 30,

June 30,

March 31,

December 31,

December 31,

December 31,

2020

2020

2020

2020

2019

2020

2019

Average common equity

$

680,857

$

668,797

$

649,490

$

667,588

$

653,071

$

665,466

$

605,719

Return on average common equity (“ROACE”) as reported

12.79

%

12.08

%

9.07

%

7.02

%

11.26

%

10.29

%

10.98

%

Merger expenses

0.93

Tax effect

(0.16

)

ROACE excluding merger expenses

12.79

12.08

9.07

7.02

11.26

10.29

11.75

(Gain) / loss on sale of investment securities

(1.53

)

(0.65

)

(0.15

)

(0.20

)

(0.01

)

(0.65

)

0.01

Tax effect

0.32

0.14

0.03

0.04

0.14

ROACE excluding (gain) / loss on sale of investment securities

11.58

11.57

8.95

6.86

11.25

9.78

11.76

Death benefit on BOLI

(0.02

)

(0.14

)

(0.04

)

(0.10

)

ROACE excluding death benefit on BOLI

11.58

11.55

8.95

6.72

11.25

9.74

11.66

Prepayment penalties on borrowings

2.22

0.57

Tax effect

(0.47

)

(0.12

)

ROACE excluding prepayment penalties on borrowings

13.33

%

11.55

%

8.95

%

6.72

%

11.25

%

10.19

%

11.66

%

Adjusted ROACE

13.33

%

11.55

%

8.95

%

6.72

%

11.25

%

10.19

%

11.66

%

Conference Call

As previously announced, Horizon will host a conference call to review its fourth quarter financial results and operating performance.

Participants may access the live conference call on January 28, 2021 at 7:30 a.m. CT (8:30 a.m. ET) by dialing 877–317–6789 from the United States, 866–450–4696 from Canada or 412–317–6789 from international locations and requesting the “Horizon Bancorp Call.” Participants are asked to dial in approximately 10 minutes prior to the call.

A telephone replay of the call will be available approximately one hour after the end of the conference through February 4, 2021. The replay may be accessed by dialing 877–344–7529 from the United States, 855–669–9658 from Canada or 412–317–0088 from other international locations, and entering the access code 10150632.

About Horizon Bancorp, Inc.

Horizon Bancorp, Inc. is an independent, commercial bank holding company serving northern and central Indiana, and southern and central Michigan through its commercial banking subsidiary, Horizon Bank. Horizon may be reached online at www.horizonbank.com. Its common stock is traded on the NASDAQ Global Select Market under the symbol HBNC.

Forward Looking Statements

This press release may contain forward–looking statements regarding the financial performance, business prospects, growth and operating strategies of Horizon Bancorp, Inc. and its affiliates (collectively, “Horizon”). For these statements, Horizon claims the protection of the safe harbor for forward–looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements in this press release should be considered in conjunction with the other information available about Horizon, including the information in the filings we make with the Securities and Exchange Commission. Forward–looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward–looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance.

Although management believes that the expectations reflected in such forward–looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include risk factors relating to the banking industry and the other factors detailed from time to time in Horizon’s reports filed with the Securities and Exchange Commission, including those described in Horizon’s Annual Report on Form 10–K and its quarterly reports on Form 10–Q. Further, statements about the effects of the COVID–19 pandemic on our business, operations, financial performance, and prospects may constitute forward–looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward–looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties, and us. Undue reliance should not be placed on the forward–looking statements, which speak only as of the date hereof. Horizon does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to update any forward–looking statement to reflect the events or circumstances after the date on which the forward–looking statement is made, or reflect the occurrence of unanticipated events, except to the extent required by law.

Financial Highlights

(Dollars in Thousands, Unaudited)

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Balance sheet:

Total assets

$

5,886,614

$

5,790,143

$

5,739,262

$

5,351,325

$

5,246,829

Investment securities

1,302,701

1,195,613

1,126,075

1,099,943

1,042,675

Commercial loans

2,192,271

2,321,608

2,312,715

2,050,402

2,046,651

Mortgage warehouse loans

395,626

374,653

300,386

223,519

150,293

Residential mortgage loans

624,286

675,220

704,410

757,529

770,717

Consumer loans

655,200

658,884

660,871

675,849

669,180

Earning assets

5,206,645

5,262,054

5,143,978

4,835,934

4,706,051

Non–interest bearing deposit accounts

1,053,242

1,016,646

981,868

709,978

709,760

Interest bearing transaction accounts

2,802,673

2,600,691

2,510,854

2,264,576

2,245,631

Time deposits

675,218

718,952

814,877

907,717

975,611

Borrowings

475,000

587,473

583,073

704,613

549,741

Subordinated notes

58,603

58,566

58,824

Junior subordinated debentures issued to capital trusts

56,548

56,491

56,437

56,374

56,311

Total stockholders’ equity

692,216

670,293

652,206

630,842

656,023


Financial Highlights

(Dollars in Thousands Except Share and Per Share Data and Ratios, Unaudited)

Three Months Ended

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Income statement:

Net interest income

$

43,622

$

43,397

$

42,996

$

40,925

$

41,519

Credit loss expense

3,042

2,052

7,057

8,600

340

Non–interest income

19,733

16,700

11,125

12,063

11,934

Non–interest expense

36,453

33,407

30,432

31,149

30,650

Income tax expense

1,967

4,326

1,993

1,584

3,920

Net income

$

21,893

$

20,312

$

14,639

$

11,655

$

18,543

Per share data:

Basic earnings per share

$

0.50

$

0.46

$

0.33

$

0.26

$

0.41

Diluted earnings per share

0.50

0.46

0.33

0.26

0.41

Cash dividends declared per common share

0.12

0.12

0.12

0.12

0.12

Book value per common share

15.78

15.28

14.88

14.41

14.59

Tangible book value per common share

11.78

11.29

10.87

10.37

10.63

Market value – high

15.86

11.48

12.44

18.79

19.42

Market value – low

$

10.16

$

9.05

$

8.40

$

7.97

$

16.60

Weighted average shares outstanding – Basis

43,862,435

43,862,435

43,781,249

44,658,512

44,971,676

Weighted average shares outstanding – Diluted

43,903,881

43,903,881

43,802,794

44,756,716

45,103,065

Key ratios:

Return on average assets

1.49

%

1.40

%

1.05

%

0.89

%

1.40

%

Return on average common stockholders’ equity

12.79

12.08

9.07

7.02

11.26

Net interest margin

3.34

3.39

3.47

3.56

3.58

Allowance for credit losses to total loans

1.47

1.39

1.38

1.30

0.49

Average equity to average assets

11.61

11.59

11.56

12.70

12.44

Bank only capital ratios:

Tier 1 capital to average assets

8.71

8.57

8.48

9.43

9.49

Tier 1 capital to risk weighted assets

11.29

10.67

10.49

11.83

12.20

Total capital to risk weighted assets

12.21

11.56

11.74

12.67

12.65


Financial Highlights

(Dollars in Thousands Except Share and Per Share Data and Ratios, Unaudited)

Twelve Months Ended

December 31,

December 31,

2020

2019

Income statement:

Net interest income

$

170,940

$

160,791

Credit loss expense

20,751

1,976

Non–interest income

59,621

43,058

Non–interest expense

131,441

122,032

Income tax expense

9,870

13,303

Net income

$

68,499

$

66,538

Per share data:

Basic earnings per share

$

1.56

$

1.53

Diluted earnings per share

1.55

1.53

Cash dividends declared per common share

0.48

0.46

Book value per common share

15.78

14.59

Tangible book value per common share

11.78

10.63

Market value – high

18.79

19.42

Market value – low

$

7.97

$

15.50

Weighted average shares outstanding – Basis

44,044,737

43,493,316

Weighted average shares outstanding – Diluted

44,123,208

43,598,373

Key ratios:

Return on average assets

1.22

%

1.35

%

Return on average common stockholders’ equity

10.29

10.98

Net interest margin

3.44

3.69

Allowance for credit losses to total loans

1.47

0.49

Average equity to average assets

11.82

12.28

Bank only capital ratios:

Tier 1 capital to average assets

8.71

9.49

Tier 1 capital to risk weighted assets

11.29

12.20

Total capital to risk weighted assets

12.21

12.65


Financial Highlights

(Dollars in Thousands Except Ratios, Unaudited)

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Loan data:

Substandard loans

$

98,874

$

88,286

$

61,385

$

61,322

$

58,670

30 to 89 days delinquent

6,938

5,513

4,029

12,017

7,729

Non–performing loans:

90 days and greater delinquent – accruing interest

262

331

123

246

146

Trouble debt restructures – accruing interest

1,793

1,825

2,039

2,115

3,354

Trouble debt restructures – non–accrual

2,610

2,704

3,443

3,360

2,006

Non–accrual loans

22,142

24,454

22,451

18,281

15,679

Total non–performing loans

$

26,807

$

29,314

$

28,056

$

24,002

$

21,185

Non–performing loans to total loans

0.69

%

0.72

%

0.70

%

0.65

%

0.58

%


Allocation of the Allowance for Credit Losses

(Dollars in Thousands, Unaudited)

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Commercial

$

42,210

$

39,795

$

39,147

$

32,550

$

11,996

Residential mortgage

4,620

5,464

5,832

5,654

923

Mortgage warehouse

1,267

1,250

1,190

1,055

1,077

Consumer

8,930

9,810

8,921

9,181

3,671

Total

$

57,027

$

56,319

$

55,090

$

48,440

$

17,667


Net Charge–offs (Recoveries)

(Dollars in Thousands Except Ratios, Unaudited)

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Commercial

$

23

$

488

$

6

$

(20

)

$

146

Residential mortgage

(10

)

136

24

17

40

Mortgage warehouse

Consumer

216

199

377

407

443

Total

$

229

$

823

$

407

$

404

$

629

Percent of net charge–offs (recoveries) to average loans outstanding for the period

0.01

%

0.02

%

0.01

%

0.01

%

0.02

%


Total Non–performing Loans

(Dollars in Thousands Except Ratios, Unaudited)

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Commercial

$

14,348

$

16,169

$

14,238