Horizon Bancorp Inc: Form 10-Q for the period ended Sep 30, 2024

Forward–Looking Statements

This report contains certain forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp, Inc. (“Horizon” or the “Company”) and Horizon Bank (the “Bank”). Horizon intends such forward–looking statements to be covered by the safe harbor provisions for forward–looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. 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,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “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.

Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward–looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward–looking statement include but are not limited to:

• current financial conditions within the banking industry;
• changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;
• the aggregate effects of elevated inflation levels in recent years;
• loss of key Horizon personnel;
• macroeconomic conditions and their impact on Horizon and its customers;
• the increasing use of Bitcoin and other crypto currencies and/or stable coin and the possible impact these alternative currencies may have on deposit disintermediation and income derived from payment systems;
• the effect of interest rates on net interest rate margin and their impact on mortgage loan volumes and the outflow of deposits;
• increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks;
• potential loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g., Apple Pay or Bitcoin) take a greater market share of the payment systems;
• estimates of fair value of certain of Horizon’s assets and liabilities;
• volatility and disruption in financial markets;
• changes in prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;
• changes in sources of liquidity;
• potential risk of environmental liability related to lending and acquisition activities;
• changes in the competitive environment in Horizon’s market areas and among other financial service providers;
• legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular;
• changes in regulatory supervision and oversight, including monetary policy and capital requirements;
• changes in accounting policies or procedures as may be adopted and required by regulatory agencies;

For the Three and Nine Months ended September 30, 2024 and 2023

• litigation, regulatory enforcement, tax, and legal compliance risk and costs, as applicable generally and specifically to the financial and fiduciary (generally and as an ESOP fiduciary) environment, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same;
• the effects and costs of governmental investigations or related actions by third parties;
• rapid technological developments and changes;
• the risks presented by cyber terrorism and data security breaches;
• the rising costs of effective cybersecurity;
• containing costs and expenses;
• the ability of the U.S. federal government to manage federal debt limits;
• the potential influence on the U.S. financial markets and economy from the effects of climate change and social justice initiatives;
• the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings; and
• acts of terrorism, war and global conflicts, such as the Russia-Ukraine and Israel-Hamas conflicts, and the potential impact they may have on supply chains, the availability of commodities, commodity prices, inflationary pressure and the overall U.S. and global financial markets.

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward–looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward–looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward–looking statements, see “Risk Factors” in Item 1A of Part I of our 2023 Annual Report on Form 10–K, in Item 1A of Part II of this Quarterly Report on Form 10–Q, and in the subsequent reports we file with the SEC.

Critical Accounting Estimates

The notes to the consolidated financial statements included in Item 8 of the Company’s 2023 Annual Report on Form 10–K contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The Company considers these policies to be its critical accounting estimates. Management has identified as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

For additional information regarding critical accounting estimates, see Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes in the Company’s application of critical accounting estimates since December 31, 2023.

Results of Operations

Net Income

Net income increased $2.0 million to $18.2 million, or $0.42 per share, during the three months ended September 30, 2024 when compared to $16.2 million, or $0.37 per share, for the same period in 2023. The increase from the year ago period was primarily driven by an increase in net interest income and a reduction in the effective tax rate in the current period, partially offset by an increase in non-interest expense when compared to the year ago period. Net interest income

For the Three and Nine Months ended September 30, 2024 and 2023

increased by $4.8 million, or 11.5% when compared with the year ago period, driven by a modest increase in average earning assets and a 25 basis point increase in the net FTE interest margin1, to 2.66% in the current period.

Net income declined $6.9 million to $46.3 million, or $1.06 per share, during the nine months ended September 30, 2024 when compared to $53.2 million, or $1.22 per share, for the same period in 2023. The decrease from the year ago period was primarily a result of growth in non-interest expense, a decline in non-interest income and increased provision for loan loss related to loan growth in the current period.

Net Interest Income

Net interest income increased $4.8 million during the three months ended September 30, 2024, to $46.9 million, when compared to the same period in 2023. While average earning asset growth was modest, the reported net FTE interest margin1 increased by 25 basis points, to 2.66% for the three months ended September 30, 2024 compared to the year ago period, attributable to the favorable mix shift in both average interest earning assets toward higher-yielding loans and the funding mix toward lower cost deposit liabilities, in addition to a higher contribution to the net FTE interest margin1 from interest-free funds. Interest accretion from the fair value of acquired loans did not contribute significantly to the third quarter net interest income, or net FTE interest margin1.

1Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.

For the Three and Nine Months ended September 30, 2024 and 2023

Following are the average balance sheets for the three months ended (dollars in thousands):

(Dollars in Thousands, Unaudited)

53

For the Three and Nine Months ended September 30, 2024 and 2023

Net interest income increased $2.0 million during the nine months ended September 30, 2024, to $135.5 million, when compared to the same period in 2023. Growth in average earning asset balances and a 1 basis point increase in the reported net FTE interest margin2, to 2.60% for the nine months ended September 30, 2024 compared to the year ago period drove the net interest income growth versus the year ago comparable period. The net FTE interest margin expansion over the nine months ended September 30, 2024 was modest, as the increased contribution from interest-free funds was largely offset by the contraction in the net spread between the yield on earning assets and interest-bearing liabilities.

2 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.

For the Three and Nine Months ended September 30, 2024 and 2023

The following are the average balance sheets for the nine months ended (dollars in thousands):

(Dollars in Thousands, Unaudited)

55

For the Three and Nine Months ended September 30, 2024 and 2023

The following table illustrates the impact of changes in the volume of interest earning assets and interest bearing liabilities and interest rates on net interest income for the periods indicated.

Non-Interest Income

(Dollars in Thousands)

56

For the Three and Nine Months ended September 30, 2024 and 2023

Total non-interest income declined $0.3 million for the three months ended September 30, 2024 compared to the same period in 2023, and declined $0.5 million for the nine months ended September 30, 2024 compared to the same period in 2023. Primary drivers of the periodic changes are noted below.

Service charges on deposit accounts increased $0.2 million for the three months ended September 30, 2024 and $0.5 million for the nine months ended September 30, 2024, as compared to the same periods in 2023. The increases compared to the year ago periods were primarily a result of higher transaction-based fee activity in the current period.

Interchange fees, which include fees earned on qualified debit card volume and merchant processing fees, increased $0.3 million for the three months ended September 30, 2024 and $0.8 million for the nine months ended September 30, 2024, as compared to the same periods in 2023. The increases were primarily driven by growth in qualified debit card volume for both periods.

Mortgage servicing income decreased $0.2 million for the three months ended September 30, 2024 and $0.7 million for the nine months ended September 30, 2024, as compared to the same periods in 2023. The decrease was primarily driven by higher levels of amortization expense of mortgage servicing rights in the current period.

Cash value of bank owned life insurance decreased $0.7 million for the three months ended September 30, 2024 and $2.1 million for the nine months ended September 30, 2024, as compared to the same periods in 2023. The declines were due to the surrender of several policies during the fourth quarter of 2023.

Other income, which includes various miscellaneous income items as well as fair market value adjustments to certain other assets, increased by $0.3 million during the nine months ended September 30, 2024 primarily related to positive fair market value adjustments on certain marketable securities.

Non-Interest Expense

(Dollars in Thousands)

Non-interest expense increased $3.1 million for the three months ended September 30, 2024 compared to the same period in 2023, primarily the result of higher expenses related to outside services and consultants, salaries and employee benefits, and other expenses, which was partially mitigated by lower expenses related to FDIC insurance expense and net occupancy expense. Non-interest expense increased $6.9 million for the nine months ended September 30, 2024 compared to the same period in 2023, primarily the result of higher expenses related to salaries and employee benefits, outside services and consultants, FDIC insurance, and other expense.

Salaries and employee benefits expense increased by $1.8 million for the three months ended September 30, 2024, and $3.7 million for the nine months ended September 30, 2024, when compared to the same periods a year ago. The increase

For the Three and Nine Months ended September 30, 2024 and 2023

in both periods is partially attributable to growth in salary expense related to ongoing hiring efforts in revenue generating roles in commercial lending, equipment finance and treasury management. In addition, the current period was unfavorably impacted by an expense related to a legacy benefits program and additional compensation-related accrual relative to the prior periods.

Outside services and consultant expense increased by $1.4 million for the three months ended September 30, 2024, and $2.5 million for the nine months ended September 30, 2024, when compared to the same periods a year ago. The increase in both periods is related to ongoing strategic initiatives.

FDIC insurance expense increased by $1.2 million in the nine months ended September 30, 2024 compared to the year ago period. The increase in the period related to higher incurred assessment rates.

Other expenses, which includes corporate and other service expenses, increased by $0.2 million for the three months ended September 30, 2024 when compared to the same period in 2023, and increased by $0.9 million for the nine months ended September 30, 2024 when compared to the same period in 2023.

Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments

Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio against various economic backdrops, which periodically change. During the third quarter of 2024, the Company recorded a provision for credit losses on loans of $1.0 million. This compares to a provision for credit losses on loans of $0.3 million during the third quarter of 2023. The increase in the provision for credit losses when compared to the year ago period was primarily attributable to changes in loan mix and in the economic forecast.

For the three months ended September 30, 2024, net loan charge-offs decreased by $0.4 million to $0.4 million, compared to $0.8 million in the third quarter of last year.

The provision for credit losses on loans of $4.2 million for the nine months ended September 30, 2024 increased by $3.0 million when compared to the prior year period, which is primarily attributable to loan growth and the change in loan mix.

For the Three and Nine Months ended September 30, 2024 and 2023

For the nine months ended September 30, 2024, net loan charge-offs decreased by $0.3 million to $1.3 million compared to $1.6 million in the prior year period.

The Company’s allowance for credit losses as a percentage of period-end loans HFI was 1.10% at September 30, 2024, compared to 1.14% at September 30, 2023.

As of September 30, 2024, the liability for unfunded lending commitments was relatively unchanged at $0.7 million when compared to the third quarter of last year.

Income Taxes

The Company’s income tax expense for the third quarter of 2024 was $0.1 million compared to $1.3 million for the third quarter of 2023, resulting in effective tax rates of 0.4% and 7.3%, respectively. The decrease in the effective tax rate for the third quarter 2024 is primarily due to the increase in the net realizable tax credits for the current year.

The Company’s income tax expense for the first nine months of 2024 was $3.0 million compared to $4.6 million for the same period in 2023, resulting in effective tax rates of 6.0% and 8.0%, respectively. The decrease in the effective tax rate for the first nine months 2024 is primarily due to the increase in net realizable tax credits in the current period.

The effective income tax rates differed from the U.S. statutory federal income tax rates of 21% during the comparable periods primarily due to the effect of tax exempt income from securities, loans, and life insurance policies, and net tax benefits from tax credit investments.

Financial Condition

Total assets decreased by $13.0 million, or 0.2%, as of September 30, 2024, from $7.9 billion as of December 31, 2023. The decrease in total assets is primarily due to decreases in cash and cash equivalents of $291.7 million over the period, or 55.4%, to $234.8 million as of September 30, 2024, and a decrease in total securities balances of $63.3 million, to $2.4 billion, partially offset by growth in loans HFI of $383.5 million, or 8.8%, to $4.8 billion as of September 30, 2024.

Total investment securities decreased $63.3 million, or 2.5%, to $2.4 billion as of September 30, 2024 from $2.5 billion as of December 31, 2023, primarily as a result of amortization and maturities. There were no purchases of investment securities during the first nine months of 2024.

Total loans HFI increased to $4.8 billion as of September 30, 2024 compared to $4.4 billion as of December 31, 2023, led by organic commercial loan growth of $239.1 million. The company continues to maintain a balanced growth profile across various geographies, products and industries, and holds a diverse lending portfolio consisting primarily of commercial real estate, consumer, residential and commercial and industrial portfolios.

Total deposit balances increased by $62.1 million, or 1.1%, to $5.7 billion on September 30, 2024 when compared to balances as of December 31, 2023. The Company maintains a granular and tenured deposit base, with a continued focus on core commercial and consumer deposit gathering.

Total borrowings decreased by $87.9 million, or 6.5%, to $1.3 billion as of September 30, 2024 when compared to balances as of December 31, 2023, primarily related to repayment of a portion of Federal Home Loan Bank advances in August.

For the Three and Nine Months ended September 30, 2024 and 2023

Investment securities were comprised of the following as of (dollars in thousands):

Investment securities available for sale decreased $6.1 million since December 31, 2023 to $541.2 million as of September 30, 2024, and securities held to maturity decreased $57.3 million since December 31, 2023 to $1.9 billion as of September 30, 2024. The decrease in total investments was due to principal amortization and maturities, and there were no purchases of investment securities through the first nine months of 2024.

Credit Quality

The ACL balance at September 30, 2024 was $52.9 million, or 1.10% of period-end loans HFI compared to an ACL balance of $50.0 million at December 31, 2023 or 1.09% of loans HFI. The increase in the ACL was primarily due to the growth in commercial loans.

As of September 30, 2024, total non-accrual loans increased by $3.9 million, or 19.6%, from December 31, 2023, to 0.49% of total loans HFI. Total non-performing assets increased $3.8 million, or 17.4%, from December 31, 2023, to 0.32% of total assets.

During the three months ended September 30, 2024, net charge-offs were $0.4 million, or 3 basis points annualized of average loans in the period, down from $0.7 million, or 7 basis point annualized of average loans in the year ago comparable period. During the nine months ended September 30, 2024, net charge-offs were $1.3 million, or 4 basis points annualized of average loans in the period, compared with $1.6 million, or 4 basis point annualized of average loans in the year ago comparable period.

For the Three and Nine Months ended September 30, 2024 and 2023

(Dollars in Thousands Except Ratios, Unaudited)

61

For the Three and Nine Months ended September 30, 2024 and 2023

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 FHLB. At September 30, 2024, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $1.52 billion in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $1.41 billion at December 31, 2023.

The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $291.7 million during the first nine months of 2024, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $54.7 million and have historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $322.4 million mainly due to growth in the loan portfolio, which used cash of $413.4 million. Financing activities used cash of $24.0 million, largely resulting from the repayment of long-term borrowings of $563.1 million and $21.3 million in dividends paid on common stock during the first nine months of 2024.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2024. Stockholders’ equity totaled $754.8 million as of September 30, 2024, compared to $718.8 million as of December 31, 2023. For the nine months ended September 30, 2024, the ratio of average stockholders’ equity to average assets was 9.30% compared to 8.97% for the twelve months ended December 31, 2023. The increase in stockholders’ equity during the period was due to net income generated during the period and the improved market value of securities available for sale, offset by cash dividends paid to common shareholders.

As of September 30, 2024, the ratio of total stockholders’ equity to total assets is 9.52%. Book value per common share was $17.27, increasing $0.80 compared to December 31, 2023.

Tangible common equity1 totaled $588.5 million at September 30, 2024, and the ratio of tangible common equity to tangible assets1 was 7.58% at September 30, 2024. Tangible book value, which excludes intangible assets from total equity, per common share1 was $13.46, increasing $0.87 compared to December 31, 2023.

Horizon declared common stock dividends in the amount of $0.48 per share during the first nine months of 2024 and $0.48 per share for the same period in 2023. The dividend payout ratio (dividends as a percent of basic earnings per share) was 45.3% and 39.3% for the first nine months of 2024 and 2023, respectively. For additional information regarding dividends, see Horizon’s 2023 Annual Report on Form 10–K.

1 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure.

For the Three and Nine Months ended September 30, 2024 and 2023

Use of Non-GAAP Financial Measures

In addition to financial measures presented in accordance with GAAP, this document refers to non-GAAP financial measures, which Horizon believes are helpful to investors and provide a greater understanding of our business and financial results without the impact of items or events that may obscure trends in the Company’s underlying performance. 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 document for reconciliations of the non-GAAP information identified herein and its most comparable GAAP measures.

Non–GAAP Reconciliation of Net Fully-Taxable Equivalent ("FTE") Interest Margin

(Dollars in Thousands, Unaudited)

63

For the Three and Nine Months ended September 30, 2024 and 2023

Non–GAAP Reconciliation of Return on Average Tangible Common Equity

(Dollars in Thousands, Unaudited)

Non–GAAP Reconciliation of Tangible Common Equity to Tangible Assets

(Dollars in Thousands, Unaudited)

Non–GAAP Reconciliation of Tangible Book Value Per Share

(Dollars in Thousands, Unaudited)

64

Interest rate risk management focuses on monitoring and maintaining variances in the Company's net interest income profile due to changes in interests rates to within Board-approved policy limits. The Company primarily uses earnings simulation models to expose net interest income to 12- and 24- month sensitivities to various movements in rates. Simulations are modeled quarterly to include scenarios where market rates change instantaneously up or down in a parallel or non-parallel manner, which account for the periodic changes in the balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2023 Annual Report on Form 10-K.

The table below shows the modelled effects of an immediate and parallel shift in interest rates on the Company's net interest income profile over a one-year horizon versus the base case net interest income in a flat rate scenario. The simulation model assumes a static balance sheet over that twelve month period, and utilizes various non-maturity interest bearing deposit beta assumptions, based on the underlying products, ranging from 12% to 80% in the disclosed model outputs below. Deposit beta is an estimate for how quickly interest-bearing deposit pricing will change for a given change in interest rates. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results, but rather to provide insight into our current interest rate exposure and to assist in the execution of appropriate asset/liability management strategies. As shown below, the model output would indicate that as of September 30, 2024, the Company's interest-bearing liabilities are projected to reprice at a faster pace than interest-earning assets for the next 100 basis points of declining interest rates.

(Dollars in millions)

65

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of disclosure controls and procedures as of September 30, 2024, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a–15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon's disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission's rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosures.

Changes in Internal Control Over Financial Reporting

Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended September 30, 2024, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

There have been no material changes from the factors previously disclosed under Item 1A of Horizon's Annual Report on Form 10–K for the fiscal year ended December 31, 2023.