Horizon Bancorp, Inc. Announces Second Quarter 2020 Financial Results

MICHIGAN CITY, Ind., July 29, 2020 (GLOBE NEWSWIRE) -- (NASDAQ GS:  HBNC) — Horizon Bancorp, Inc. ("Horizon" or the "Company") announced its unaudited financial results for the three and six months ending June 30, 2020.

Craig M. Dwight, Chairman and CEO of Horizon, commented, "Horizon's team put in an incredible performance during the second quarter to originate and process record mortgage loan volume, help thousands of local employers to access federal stimulus funding, assist borrowers with payment modifications, and safely open branches that had been operating by appointment only since March. This extraordinary effort was complimented by profitably growing and strengthening the balance sheet, maintaining solid asset quality metrics, managing expenses with customary discipline, and meaningfully growing pre–tax, pre–provision net income."

Second Quarter 2020 Highlights

• Earned net income of $14.6 million, or $0.33 diluted earnings per share, compared to $11.7 million, or $0.26 diluted earnings per share, for the first quarter of 2020 and $16.6 million, or $0.37 diluted earnings per share, for the second quarter of 2019.
   
• Grew pre–tax, pre–provision net income to $23.7 million for the quarter, compared to $21.8 million for the first quarter of 2020 and $20.8 million for the second 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.)
   
• Reported return on average assets ("ROAA") of 1.05% and return on average common equity ("ROACE") of 9.07% in the quarter, as well as adjusted ROAA of 1.03% and adjusted ROACE of 8.95%, excluding the impact of gains on sale of investment securities, net of tax. (See the "Non–GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity" tables below.)
   
• Increased the allowance for credit losses ("ACL") 13.7% during the quarter and 211.8% year–to–date to $55.1 million at period end, representing 1.38% of total loans, reflecting implementation of the Current Expected Credit Losses ("CECL") accounting method and prudent increases in the Company's general reserves. ACL at period end also represented 1.49% of loans excluding Federal Paycheck Protection Program ("PPP") loans, and 196.4% of non–performing loans excluding those which have been modified under the CARES Act.
   
• Maintained solid asset quality metrics, including non–performing and delinquent loans representing 0.70% and 0.10% of total loans, respectively, at June 30, 2020, while net charge–offs were unchanged at 0.01% of average loans for the period.
   
• Granted payment deferrals to loans representing 14.3% of the total loan portfolio at period end, compared to 10.4% as previously reported.
   
• Secured approval for 2,340 PPP loans during the quarter, providing approximately $308.1 million in funding for local employers in the communities Horizon serves, with $1.1 million in deferred salary expense associated with origination costs that will be amortized to interest income as PPP loans are forgiven or paid off. Accreted PPP loans fees, net of amortized origination costs, of $869,000 were recognized as interest income in the second quarter, with the balance of approximately $9.1 million expected to be accreted to interest income over the life of these loans.
   
• Reported non–interest expense of $30.4 million, representing 2.18% of average assets on an annualized basis, or 2.26% after adding back $1.1 million of deferred PPP loan origination costs, compared to 2.38% for the first quarter of 2020 and 2.51% for the second quarter of 2019.
   
• Improved the efficiency ratio in the period to 56.23% compared to 58.79% for the first quarter of 2020. (See the "Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio" tables below.)
   
• Originated a record $252.8 million in mortgage loans during the quarter, up 128.1% from the first quarter of 2020 and 127.0% from the second quarter of 2019, and generated record gain on mortgage loan sales of $6.6 million, up 90.6% from the linked quarter and 218.6% from the year–ago period.
   
• Reported net interest margin of 3.47% and adjusted net interest margin of 3.35%, with each declining by 9 basis points from the first quarter of 2020. (See the "Non–GAAP Reconciliation of Net Interest Margin" table for the definition of this Non–GAAP calculation). An estimated 3 basis points of compression is attributed to PPP lending in the quarter, for both net interest margin and adjusted net interest margin.
   
• Horizon's tangible book value per share increased from $10.63 at December 31, 2019 to $10.87 at June 30, 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 $1.3 billion in cash and investment securities, which is approximately 22.6% of total assets, and approximately $910.7 million in unused availability on lines of credit, at June 30, 2020.

Summary

Mr. Dwight commented, "Our team's success in managing the effect of significantly lower interest rates on Horizon's loan and deposit pricing in the second quarter is reflected in net interest margin compression of only 9 basis points from the first quarter of this year, which includes an estimated 3 basis points of compression from PPP lending."

Mr. Dwight stated, "Horizon's asset quality metrics continued to remain favorable through the second quarter, as evidenced by low delinquency and other real estate owned and a moderate increase in non–performing loans. Horizon's reserve build reflects adoption of CECL on January 1 and the increase in our quarterly allocation to cover anticipated loan losses related to economic factors and the nature and characteristics of our 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. However, at the current time, we are not aware of any material specific loan losses caused by COVID–19 closures. We believe federal stimulus programs softened the adverse economic impact of COVID–19 for some businesses and consumers to date. Looking ahead, as federal stimulus programs begin to roll back and the pandemic continues, we will be closely monitoring the potential for increased loan losses, and intend to maintain prudent reserves, tightly manage operating expenses, and use our strong balance sheet and ample funding to continue to meet the needs of the businesses and consumers we serve."

Income Statement Highlights

Net income for the second quarter of 2020 was $14.6 million, or $0.33 diluted earnings per share, compared to $11.7 million, or $0.26, for the linked quarter and $16.6 million, or $0.37, for the year–ago period.

Adjusted net income for the second quarter of 2020 was $14.4 million, or $0.32 diluted earnings per share, compared to $11.2 million, or $0.24, for the linked quarter and to $17.6 million, or $0.39, for the year–ago 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 second quarter of 2020 when compared to the first quarter of 2020 reflects an increase in net interest income of $2.1 million, a decrease in credit loss expense of $1.5 million and a decrease in non–interest expense of $717,000, offset by a decrease in non–interest income of $939,000 and an increase in tax expense of $409,000.

Second quarter 2020 non–interest income was reduced by a non-cash mortgage servicing asset impairment of $2.9 million, recorded to reflect the national increase in mortgage prepayment speeds and past due levels and determined based on a third-party valuation of Horizon's mortgage servicing asset. Gain on sale of mortgage loans grew to a record $6.6 million, up from $3.5 million in the linked quarter and $2.1 million in the year-ago period.

Non-interest expense of $30.4 million in the second quarter of 2020 reflected a $962,000 decline in salaries and employee benefits expense from the linked quarter. The reduction in salaries and employee benefits expense reflected the deferral of approximately $1.1 million in PPP loan origination costs in the second quarter of 2020, which will be amortized over the life of the PPP loans and would be recognized when the loans are forgiven or paid off. 

The decrease in net income for the second quarter of 2020 when compared to the same prior year period reflects an increase in credit loss expense of $6.2 million, offset by an increase in net interest income of $1.5 million, an increase in non–interest income of $226,000, a decrease in non–interest expense of $1.2 million and a decrease in tax expense of $1.3 million.

Net income for the first six months of 2020 was $26.3 million, or $0.59 diluted earnings per share, compared to $27.5 million, or $0.65 diluted earnings per share, for the first six months of 2019. Adjusted net income for the first six months of 2020 was $25.6 million, or $0.57 diluted earnings per share, compared to $31.8 million, or $0.75 diluted earnings per share for the first six months of 2019. The decrease in net income for the first six months of 2020 when compared to the same prior year period reflects an increase in the provision for credit loss expense of $14.4 million and an increase in non–interest expense of $259,000, offset by an increase in net interest income of $8.1 million, an increase in non–interest income of $3.6 million and a decrease in tax expense of $1.8 million.

Horizon's net interest margin decreased to 3.47% for the second quarter of 2020 compared to 3.56% for the first quarter of 2020. The decrease in net interest margin reflects a decrease in the yield of interest earning assets of 42 basis points, offset by a decrease in the cost of interest bearing liabilities of 39 basis points. Interest income from acquisition–related purchase accounting adjustments was $119,000 higher during the second quarter of 2020 when compared to the first quarter of 2020.  

Horizon's net interest margin decreased to 3.47% for the second quarter of 2020 when compared to 3.73% for the second quarter of 2019. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 76 basis points offset by a decrease in the cost of interest bearing liabilities of 64 basis points.

Horizon's net interest margin decreased to 3.51% for the first six months of 2020 when compared to 3.68% for the same prior year period. The decrease in net interest margin reflects a decrease in the yield on interest earning assets of 54 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 second quarter of 2020 due to the PPP loans that were originated. Horizon estimates that the PPP loans compressed the net interest margin by 3 basis points for the 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 compression to the net interest margin for the first six months of 2020 using the same assumptions was estimated to be 2 basis points.

Net interest margin, excluding acquisition–related purchase accounting adjustments ("adjusted net interest margin"), was 3.35% for the second quarter of 2020 compared to 3.44% for the prior quarter and 3.61% for the second quarter of 2019. Interest income from acquisition–related purchase accounting adjustments was $1.6 million, $1.4 million and $1.3 million for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

Net interest margin, excluding acquisition–related purchase accounting adjustment ("adjusted net interest margin"), was 3.39% for the first six months of 2020 compared to 3.55% for the same prior year period. Interest income from acquisition–related purchase accounting adjustments was $3.0 million and $2.8 million for the six months ended June 30, 2020 and 2019, respectively.

Lending Activity

Total loans of $3.99 billion, or $3.69 billion excluding PPP loans, on June 30, 2020 compared to $3.71 billion on March 31, 2020, $3.64 on December 31, 2019 and $3.67 billion on June 30, 2019. During the six months ended June 30, 2020, commercial loans increased $266.1 million, mortgage warehouse loans increased $150.1 million, and loans held for sale increased $11.8 million, offset by a decrease in residential mortgage loans of $66.3 million and a decrease in consumer loans of $8.3 million.

Residential mortgage lending activity for the three months ended June 30, 2020 generated a record $6.6 million in income from the gain on sale of mortgage loans, an increase of $3.1 million from the first quarter of 2020 and $4.5 million from the second quarter of 2019. Total origination volume for the second quarter of 2020, including loans placed into portfolio, totaled a record $252.8 million, representing an increase of 128.1% from the first quarter of 2020 and an increase of 127.0% from the second quarter of 2019. As a percentage of total originations, 77% of the volume was for refinances and 23% was for new purchases during the second quarter of 2020. Total origination volume of loans sold to the secondary market totaled $192.4 million, representing an increase of 184.7% from the first quarter of 2020 and an increase of 217.2% from the second quarter of 2019.

Expense Management

Total non–interest expense was $717,000 lower in the second quarter of 2020 when compared to the first quarter of 2020. Decreases in salaries and employee benefits, other expense and outside services and consultants expense were partially offset by an increase in loan expense. The reduction in salaries and employee benefits expense reflected the deferral of approximately $1.1 million in PPP loan origination costs in the second quarter of 2020, which will be amortized over the life of the PPP loans and recognized when the loans are forgiven or paid off.  

Total non–interest expense was $1.2 million lower in the second quarter of 2020 when compared to the second quarter of 2019. Decreases in salaries and employee benefits, other expenses and FDIC deposit expense were offset in part by increases in loan expenses, data processing expenses and outside services and consultants expense. Excluding merger expenses, total non–interest expense increased by $380,000 in the second quarter of 2020 when compared to the second quarter of 2019. This increase was primarily related to closing the Salin Bancshares, Inc. merger on March 26, 2019 and the related increase in costs.

Total non–interest expense was $259,000 higher for the first six months of 2020 when compared to the same prior year period. Increases in salaries and employee benefits, loan expenses, data processing and net occupancy expenses were offset in part by decreases in outside services and consultants expense, other expenses and FDIC deposit insurance.
Annualized non–interest expense as a percent of average assets were 2.18%, 2.38% and 2.51% for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively. Annualized non–interest expense, excluding merger expenses, as a percent of average assets were 2.18%, 2.38% and 2.39% for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

Annualized non–interest expense as a percent of average assets were 2.28% and 2.64% for the six months ended June 30, 2020 and 2019, respectively. Annualized non–interest expense, excluding merger expenses, as a percent of average assets were 2.28% and 2.40% for the six months ended June 30, 2020 and 2019, respectively.

Income tax expense totaled $2.0 million for the second quarter of 2020, an increase of $409,000 when compared to the first quarter of 2020 and a decrease of $1.3 million when compared to the second quarter of 2019. The increase in income tax expense in the second quarter of 2020 compared to the first quarter of 2020 was primarily due to an increase in income before taxes of $3.4 million. The decrease in income tax expense in the second quarter of 2020 compared to the second quarter of 2019 was primarily due to a decrease in income before taxes of $3.3 million.

Income tax expense totaled $3.6 million for the six months ended June 30, 2020, a decrease of $1.8 million when compared to the six months ended June 30, 2019. The decrease in income tax expense was primarily due to a decrease in income before taxes of $3.0 million.

Capital

The capital resources of Horizon and Horizon Bank (the "Bank") exceeded regulatory capital ratios for "well capitalized" banks at June 30, 2020. Stockholders' equity totaled $652.2 million at June 30, 2020 and the ratio of average stockholders' equity to average assets was 12.07% for the six months ended June 30, 2020.

Capital levels benefited from the Company's previously disclosed public offering of subordinated notes raising $60.0 million.  Horizon's fortress balance sheet at June 30, 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 Horizon and the Bank as of June 30, 2020.

"Horizon's capital position continues to be well capitalized, as defined by regulations, after the adoption of CECL," said Mr. Dwight. "In addition, Horizon's earnings were able to offset the adoption of CECL, ACL build, stock repurchases and dividends to successfully build tangible capital to a record $10.87 per share. Horizon also completed a $60.0 million subordinated debt offering, further strengthening our capital position, increasing liquidity at the holding company, and providing optionality to Horizon as we navigate through the economic challenges created by the pandemic."

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 June 30, 2020, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $910.7 million in unused credit lines with various money center banks, including the FHLB and the Federal Reserve Bank Discount Window. The Bank had approximately $453.6 million of unpledged investment securities at June 30, 2020.

Branch Network and Customer Experience

Horizon continues to implement its disciplined approach for enhancing the efficiency of its branch network on an ongoing basis, while leveraging technology to enhance the customer experience.

The Bank closed two branches during the second quarter of 2020, one of its Indianapolis branches acquired from Salin and its Horseprairie Valparaiso branch. The Bank expects to replace its Troy, Michigan loan production office with a full-service branch during the third quarter of 2020.

Also during the third quarter, Horizon expects to fully implement live online chat support, as well as fully online and mobile enabled deposit account opening capabilities, for the convenience of new and prospective customers.

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 loan and lease 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 net income. In each case, we have identified special circumstances that we consider to be 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.

Conference Call

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

Participants may access the live conference call on July 30, 2020 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 August 6, 2020. 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 10145660.

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 presentation 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 the presentation materials 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. 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.