Horizon Bancorp in Michigan City, Indiana, plans to raise about $200 million in capital to fund a major balance sheet restructuring that would involve selling $1.6 billion in low-yielding loans and securities.
The restructuring plan, unveiled Wednesday in a securities filing, appears to mark a departure from comments that the community bank’s executives made last month. During a July 24 conference call with analysts, Horizon’s CEO and chief financial officer indicated that the company would take a more gradual approach to reconfiguring its balance sheet.
“This is a surprising initiative based on management’s held-to-maturity securities portfolio commentary during the second-quarter conference call,” Piper Sandler Managing Director Nathan Race wrote Thursday in a research note.
While the planned restructuring will likely produce substantially improved profitability, investors may frown on the dilution to tangible book value that will result, Race added. “We believe legacy shareholders will be disappointed,” he wrote.
Shares in Horizon were down 5.6% to $15.16 in late-afternoon trading Thursday.
Horizon Chief Financial Officer John Stewart did not respond to a reporter’s inquiry about the restructuring plan by deadline.
On Horizon’s second-quarter earnings conference call, both Stewart and CEO Thomas Prame indicated that profitability gains Horizon has achieved over the past two years have made it unnecessary to dramatically adjust its held-to-maturity securities and wholesale funding levels.
Indeed, referring specifically to wholesale funding, Stewart said: “I wouldn’t anticipate any step function changes … at the moment.”
Horizon’s restructuring plan calls for raising close to $100 million in equity along with approximately $100 million in debt.
The $7.7 billion-asset company would use the cash to sell $1.4 billion in securities, along with $200 million in indirect auto loans. It also would pay down about $1.2 billion in wholesale funding and debt. Finally, Horizon would use a portion of the asset-sale proceeds to purchase $620 million in higher-yielding securities.
The steps are expected to lead to a stronger balance sheet and higher profitability, and to accelerate capital generation, Janney Montgomery Scott analyst Brian Martin wrote Thursday in a research note.
The repositioning would have generated a return on average assets of 1.58% and a net interest margin of 4.33%, if it had been carried out during the second quarter, according to Horizon.
The bank’s return on average assets on June 30 was 1.08%. Its net interest margin was 3.23%. Second-quarter earnings per share would have totaled 50 cents, instead of the reported 47 cents, according to the bank.
Net income for the three months ended June 30 totaled $20.6 million, up more than 45% from the same period in 2024.
Scores of banks, including Horizon, were buffeted by the sharp rate increase that saw the federal funds rate, which had hovered around zero for an extended period, jump to a range of 5.25% to 5.50% in little more than a year, between March 2022 and July 2023. The rate spike left many banks holding low-yielding instruments that could only be sold at a loss.
Prior to its announcement Wednesday, Horizon had taken a number of steps aimed at strengthening its balance sheet. The company has been downsizing its indirect auto lending business. And in December 2023, it executed a smaller-scale
The company reported a $32.7 million loss for the fourth quarter of 2023, but its ability to reinvest the asset-sale proceeds in higher-yielding loans boosted profitability going forward.
In similar fashion, the plan unveiled Wednesday would boost Horizon’s internal capital-generating capacity. At the same time, its tangible book value per share would fall from $14.32 per share to an estimated $9.18.