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, IN-based Horizon Bancorp, Inc. (NASDAQ: HBNC) (“the company”). In addition, KBRA 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 Horizon Bank, the lead subsidiary. The Outlook for all long-term ratings is revised to Stable from Positive.

Key Credit Considerations

The ratings reflect HBNC’s above average risk-adjusted ROA (average of 1.87% the past three years) and strong capital profile that has been consistently better than peer despite active M&A. HBNC’s risk-adjusted ROA is supported by a strong deposit franchise, relatively lower risk weightings, and solid levels of noninterest income that have historically represented 18% - 24% of total revenues. The company’s earnings profile reflects positive operating leverage as mergers have meaningfully improved efficiency/overhead metrics. Additionally, the earnings profile reflects a sizeable investment portfolio of ~37% of total assets. Although total deposit costs of 104 bps at 1Q23 are better than the 143 bp peer average, higher reliance recently on non-core funding sources has pressured NIM and earnings. KBRA views management’s credit risk appetite as conservative, contributing to a long history of minimal losses, underpinned by a highly seasoned and cohesive management team, as well as a balanced, granular loan portfolio mix with limited industry concentrations and cycle-sensitive exposures. The reserves/loans ratio of 1.17% at 1Q23 is solid and reinforced by above average regulatory capital ratios. The geographic footprint is narrow compared to large regional peers, although we view economic dynamics of the footprint favorably, and we note that the geographic footprint was expanded in 2021 with the TCF National Bank branch acquisitions.

Rating Sensitivities

Positive rating momentum is possible over the longer term if there is a demonstrated ability to sustain current or higher levels of core deposits relative to total funding and regulatory capital ratios commensurate with higher-rated peers, combined with maintenance of credit quality through a potential credit cycle and better than peer on-balance sheet liquidity, as well as increasing fee income as a proportion of operating revenue. Negative rating moment is possible if there is material deterioration in earnings or credit quality, an unexpected reduction in regulatory capital ratios that trend meaningfully below peer levels, or substantial erosion to core funding.

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