HBNC

Business Context and Reporting Period

Company: Horizon Bancorp, Inc. (HBNC)
Reporting Period: Fiscal year ended December 31, 2025
Business Overview: Horizon is a registered bank holding company headquartered in Michigan City, Indiana, operating as a single commercial banking segment. It provides commercial and retail banking services through its subsidiary, Horizon Bank, across northern and central Indiana and southern and central Michigan. The bank maintains 71 full-service offices.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss vs. Profit: The Company reported a net loss of $150.5 million in 2025 compared to net income of $35.4 million in 2024. This reversal was primarily driven by a pre-tax loss of $299.5 million on the sale of investment securities.
• Balance Sheet Repositioning: In Q3 2025, Horizon reclassified its held-to-maturity portfolio to available-for-sale and sold $1.4 billion of securities to reduce interest rate risk and improve liquidity. This action resulted in the significant realized loss noted above.
• Net Interest Income Growth: Despite a decline in average earning assets, Net Interest Income increased by $40.9 million (21.7%) due to a strategic shift toward higher-yielding commercial loans and lower-cost relationship-based deposits. The Net Interest Margin expanded 81 basis points to 3.49%.
• Loan Portfolio Mix: Commercial loans grew by $354.3 million (11.5%), while the consumer loan portfolio decreased by $294.3 million (30.5%) following the sale of the indirect auto portfolio.
• Expense Increases: Non-interest expense rose by $13.5 million, largely due to $12.7 million in prepayment penalties associated with the redemption of $700 million in Federal Home Loan Bank (FHLB) advances.

Guidance, Outlook, and Risks

Management Commentary: Management highlights that the core community banking model performed strongly, with Q4 2025 Return on Average Assets (ROAA) improving to 1.63% and Return on Average Equity (ROAE) to 15.71%. The balance sheet repositioning is expected to enhance long-term profitability by reducing interest rate sensitivity and funding costs.

Capital and Liquidity: The Company remains "well-capitalized" under regulatory standards. Total capital ratio was 14.36% and Tier 1 leverage ratio was 9.55% as of year-end. Liquidity is supported by approximately $1.7 billion in available credit lines and $667.6 million in unpledged available-for-sale securities.

Key Risks:

• Interest Rate Risk: Sensitivity to changes in market rates remains a primary risk, though the repositioning aims to mitigate this.
• Credit Risk: Commercial loans comprise 70.4% of the portfolio. Non-performing assets increased to 0.63% of total assets, though net charge-offs remained low at 0.06% of average loans.
• Operational Risk: Exposure to cybersecurity threats, fraud, and reliance on third-party vendors.
• Disintermediation: Competition from FinTech and digital assets could impact deposit stability and fee income.

Investor Verification Checklist

• Realized Loss Impact: Verify the tax benefit realization ($50.7 million benefit) and the long-term strategic value of the $299.5 million realized loss on securities.
• Deposit Stability: Assess the composition of the $5.28 billion deposit base, noting that approximately 22% of deposits were uninsured (excluding state-insured public deposits).
• Commercial Loan Concentration: Review the 70.4% concentration in commercial loans and the specific exposure to non-owner occupied real estate ($1.67 billion).
• Capital Adequacy: Confirm the "well-capitalized" status and the ability to sustain dividends ($0.16 per share declared) despite the net loss.
• Future Expense Run Rate: Evaluate whether the $12.7 million in prepayment penalties is a one-time cost or indicative of future balance sheet management expenses.