KBRA Affirms Ratings for Horizon Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Michigan City, Indiana-based Horizon Bancorp, Inc. (NASDAQ: HBNC) (“the company”). KBRA also affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the subsidiary, Horizon Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by historically solid core profitability, notably on a risk-adjusted basis, primarily driven by strong credit quality. While recent earnings have been more volatile, this has been driven by two separate securities repositioning transactions (4Q23 and 4Q24) which resulted in chunky, realized losses. After generating a solid 1.25% ROA in 1Q25, we expect profitability to revert to its historically peer-or-better levels over time due to ongoing net interest margin expansion, modest credit costs and good expense control.

HBNC’s asset quality has been solid, including very low charge-offs and non-performing assets over the last few years. Even with the headwinds facing the industry including uncertainties related to trade and monetary policy, KBRA believes that Horizon is well positioned due to management’s conservative credit risk appetite and its well-balanced, granular loan portfolio mix. Investor CRE concentration is lower than average with limited industry concentrations and cycle-sensitive exposures, notably, minimal exposure to office real estate at 3.8% of loans.

KBRA also acknowledges HBNC’s tenured and granular core deposit base. Core deposits at the company have exhibited stability over recent periods with noninterest bearing deposits increasing 3.1% since 1Q24 and remaining around 20% of total deposits. Meanwhile, just over $150 million of interest-bearing deposit growth over the last year has driven by clients’ appetite for relatively short-dated CDs offset by a decline in interest bearing demand deposits. We note that the firm also used excess liquidity to pay down its FHLB advances by over $300 million which was more than the $200 million for which they had initially planned. We view the ongoing paydown of the advances positively from a funding cost and funding mix perspective.

Capital remains appropriately managed. Since 1Q24, HBNC’s TCE ratio has increased approximately 100bps on good earnings retention as well as a lower level of unrealized losses on its securities portfolio. Meanwhile, its CET1 ratio has increased by 40 bps over the same time period to a peer-like 11.3%. KBRA expects capital to continue to build over the course of 2025 and remain at similar levels to rated peers.

Rating Sensitivities

A rating upgrade is not expected over the medium term. Positive rating momentum is possible over the longer term if regulatory capital ratios converge with higher rated peers and earnings exhibit stability at or above levels seen at higher rated peers. We would also expect credit quality to remain strong through a potential credit cycle. Rating pressure is possible if there is material deterioration in earnings or credit quality, an unexpected reduction in regulatory capital ratios to levels that trend below peers occurs, or in the event of substantial erosion to core funding.

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