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

The ratings reflect strong risk-adjusted ROA, supported by modestly above average NIM driven by comparatively higher yields from mortgages, C&I, and the investment portfolio (17% of total assets), and underpinned by low RWA density. The competitive loan yields are partly attributed to solid market share in its legacy and underserved footprint, affording some pricing advantages. Furthermore, fee revenue contribution (20% of total revenues) is solid and balanced, which KBRA expects to remain durable with expanded focus in higher growth markets. Upward trending earnings also reflect solid operating leverage as mergers have increased efficiencies and scale, with recent overhead metrics tracking better than peers. Management is highly seasoned with long-tenures within the bank, which has promoted a cohesive and conservative credit culture that has limited outsized concentrations and higher-risk CRE exposures (C&D/RBC ~40%). Also, solid high-touch credit administration policies have limited credit costs over time with annual NCO ratios tracking lower than industry peers. While impacts from COVID-19 remains uncertain, HBNC’s exposures to “at risk” sectors appear manageable with retail, hotel, and restaurants representing 38%, 25%, and 12%, respectively, of RBC as of March 31, 2020, partly mitigated by solid LTV buffers. Reported ACL/loans is strong at 1.30% (1.74% including credit marks) and reinforced by solid core capital (TCE ratio of 9.0% in 1Q20). Regulatory capital ratios are sound though track modestly below industry peers. An elevated noncore funding mix (~20% of total funding) is a limiting rating factor. While KBRA views ALCO strategies well developed, liquidity pressures and costs could become magnified under lengthened negative credit scenarios given a moderate composition of funding that is inherently more susceptible to pricing volatility and seasonal or cyclical impacts. Also, the geographic footprint is narrow compared to many higher rated regional peers.

KBRA continues to monitor the potential direct and indirect effects of the coronavirus on the banking and other sectors. Please refer to our publication U.S. Bank 1Q 2020 Ratings Compendium for our latest thoughts.

The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019.

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Related Publications

• KBRA Monitors COVID-19 Credit Impact by Sector

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

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 U.S. Information Disclosure Form 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 U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. 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 and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

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