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KBRA affirms the ratings of Horizon Bancorp, Inc. and Horizon Bank. The ratings reflect HBNC’s strong capital profile and positive operating leverage. The company's geographic footprint was expanded in 2021. Positive rating momentum is possible if core deposits and regulatory capital ratios are sustained at higher levels.
Positive
HBNC has above average risk-adjusted ROA and a strong capital profile. Mergers have improved efficiency and overhead metrics. The reserves/loans ratio is solid and regulatory capital ratios are above average. The company's geographic footprint was expanded in 2021.
Negative
Higher reliance on non-core funding sources has pressured NIM and earnings. Negative rating moment is possible if there is material deterioration in earnings or credit quality, reduction in regulatory capital ratios, or erosion to core funding.
NEW YORK--(BUSINESS WIRE)--
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.
To access rating and relevant documents, click here.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
Joe Scott, Senior Managing Director
(Rating Committee Chair)
+1 646-731-2438
joe.scott@kbra.com
Business Development
Justin Fuller, Senior Director
+1 646-731-1250 justin.fuller@kbra.com
Source: KBRA
FAQ
What are the ratings affirmed by KBRA for Horizon Bancorp, Inc. and Horizon Bank?
KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Horizon Bancorp, Inc. 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 Horizon Bank.
What factors contribute to HBNC's positive ratings?
HBNC has above average risk-adjusted ROA, a strong capital profile, and positive operating leverage. Mergers have improved efficiency and overhead metrics. The reserves/loans ratio is solid and regulatory capital ratios are above average.
What could negatively impact the ratings of HBNC?
Higher reliance on non-core funding sources has pressured NIM and earnings. Negative rating moment is possible if there is material deterioration in earnings or credit quality, reduction in regulatory capital ratios, or erosion to core funding.
What could lead to positive rating momentum for HBNC?
Positive rating momentum is possible 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.
How was the geographic footprint of HBNC expanded?
The geographic footprint of HBNC was expanded in 2021 with the TCF National Bank branch acquisitions.
