Paying Down $200 Million FHLB Advances Will Lower Funding Costs In 2025

Key Takeaways

• Strategic shift towards core commercial and mortgage lending aims to drive revenue and improve credit quality by reducing reliance on high-risk loans.
  
• Cost restructuring and funding cost reduction initiatives are expected to enhance earnings by improving net interest margins and operational efficiency.
  
• Strategic decisions, including reducing indirect auto loans and solar tax credits, could affect diversification, tax rate, and net interest income amidst economic uncertainties.

Catalysts

Operates as the bank holding company for Horizon Bank that engages in the provision of commercial and retail banking services.

• Horizon Bancorp's anticipated expansion in core commercial lending and increased mortgage lending activities in 2025 is expected to drive revenue growth by tapping into higher-yielding loans.
  
• The strategic reduction of indirect auto loans, which have higher charge-off rates, should improve net margins by enhancing the overall credit quality and profitability of the loan portfolio.
  
• Planned paydown of $200 million in maturing FHLB (Federal Home Loan Bank) advances will lower funding costs, contributing to improved net interest margins.
  
• Given the recent strategic cost restructuring initiatives, Horizon expects a more efficient expense baseline in 2025, likely leading to enhanced earnings from a lower cost base relative to income.
  
• Horizon's strategy to reinvest cash flows from non-core assets into relationship-based commercial lending rather than securities is anticipated to elevate long-term earnings by aligning capital with core business growth.

Horizon Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Horizon Bancorp's revenue will grow by 20.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 39.2% in 3 years time.
• Analysts expect earnings to reach $126.7 million (and earnings per share of $2.82) by about January 2028, up from $21.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, down from 35.2x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.92%, as per the Simply Wall St company report.

Horizon Bancorp Future Earnings Per Share Growth

Risks

• The strategic reduction of indirect auto loans, which have historically higher loss rates, could impact loan portfolio diversification and could affect net margins depending on future credit quality shifts.
  
• The ongoing allowance for credit losses (ACL) decreased in Q4, while future reserves will be driven by loan growth and credit trends, presenting a risk to earnings if economic conditions worsen.
  
• Noninterest income growth is projected to be in the low single digits, impacted by seasonal factors and the realization of losses on prior investment securities sales, affecting overall revenue.
  
• The decision to pull back on solar tax credits investment reduces tax benefits, potentially increasing the effective tax rate and affecting net earnings.
  
• Further margin improvements are contingent upon strategies like paying down FHLB advances and deposit repricing, which are sensitive to market and interest rate fluctuations, potentially impacting net interest income growth.

Valuation

• The analysts have a consensus price target of $19.5 for Horizon Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $323.3 million, earnings will come to $126.7 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $16.97, the analyst's price target of $19.5 is 13.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.