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 underpinned by HBNC's comparatively lower-risk credit profile, reflecting a balanced and granular loan portfolio, conservative underwriting, and limited commercial loan segment concentrations, including modest investor CRE (~160% of RBC at 1Q24). Headline sensitive exposures such as office are minimal (3% of loans) and are mostly across non-Tier 1 markets, with a large proportion related to medical services and service-oriented professionals (CPAs, attorneys, etc.). Although we recognize that the credit environment has been benign for an extended period, in part, attributable to a measured risk appetite, credit loss history, nonetheless, has been low. While earnings are supported by stable levels of noninterest income (~20% of total revenues) and well contained operating expenses, profitability will likely remain pressured given the elevated build-up of lower-yielding securities. Coming out of the pandemic, HBNC’s core deposit levels surged due to the acquisition of TCF National Bank branches in 2021 and government stimulus, and as with many banks, that liquidity was deployed into the securities portfolio, most of which was longer-dated. The higher for longer interest rate environment has negatively impacted HBNC’s NIM as liquidity has been locked up in the investment portfolio (31% of assets at 1Q24) and the company was forced to increase its utilization of borrowings (~20% of total funding) to fund loan growth and provide gap funding for deposit outflows. However, margin lift from restructuring of the balance sheet in 4Q23, whereby the company sold $383 million in lower-yielding securities, has begun to materialize, as most proceeds were utilized for both organic and purchased loan growth. Although the noncore funding base remains meaningful, the company’s loan-to-deposit ratio was a very manageable 83% in 1Q24, with deposits reflecting granularity and comparatively lower costs, which are supported by a reasonable NIB deposit mix (20% of deposits at 1Q24). While capital protection as measured by the CET1 ratio is adequate for the risk profile, it tracks modestly below the peer average. KBRA’s expectation is for the CET1 ratio to trend upward over the intermediate term with no anticipated regression in the near term.

Rating Sensitivities

A rating upgrade is unlikely over the medium term. Conversely, deterioration in earnings beyond expectations, substantial degradation in credit quality measures, a material increase in noncore funding, or aggressive capital management resulting in a reduction to the CET1 ratio could negatively pressure ratings.

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