Revising Lending Portfolios And Cutting Costs Will Secure Future Stability

Key Takeaways

• Higher-yielding lending portfolios and strategic balance sheet management are boosting revenue and margin expansion, improving net interest income and earnings.
  
• Cost-reduction measures and a strengthened capital position enhance operating leverage, allowing for potential stock buybacks, increasing earnings per share.
  
• Exposure to macroeconomic unpredictability, reliance on equipment finance, and volatile rate expectations pose risks to revenue growth and profitability for Horizon Bancorp.

Catalysts

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

• Horizon Bancorp is benefitting from a strategic shift towards higher-yielding lending portfolios, such as commercial and industrial (C&I) loans, and equipment finance. This is expected to improve their revenue and potentially their net interest margins through an increased interest income from these assets.
  
• The company anticipates continued margin expansion throughout 2025 due to a favorable interest rate environment and strategic balance sheet management, which is likely to impact earnings positively by reducing funding costs and improving net interest income.
  
• Horizon Bancorp has initiated successful cost-reduction measures, including decreasing its indirect auto loans. This streamlined expense base is expected to improve operating leverage and profit margins in 2025.
  
• The sale of the mortgage warehouse business has strengthened Horizon Bancorp’s capital position, which provides optionality for stock buybacks or other value-enhancing strategies, potentially increasing earnings per share if repurchases are executed.
  
• Continuous growth in deposits, driven by stable core relationship balances and strategic deposit pricing, is expected to support the bank’s expansion efforts and provide a solid funding base for further loan growth, positively impacting earnings.

Horizon Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Horizon Bancorp's revenue will grow by 23.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.6% today to 37.2% in 3 years time.
• Analysts expect earnings to reach $139.5 million (and earnings per share of $3.16) by about May 2028, up from $45.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, down from 14.3x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

Horizon Bancorp Future Earnings Per Share Growth

Risks

• Horizon Bancorp is exposed to the unpredictability of macroeconomic conditions, which could influence consumer and commercial loan demand, potentially impacting revenue growth.
  
• Concerns regarding the effect of potential modifications in tariff policies on the commercial loan portfolios could create uncertainty, affecting net interest margins and earnings.
  
• The company's partial reliance on equipment finance division growth could present risks if demand fluctuates, which could negatively influence overall loan growth and revenue.
  
• Volatile rate expectations and potential changes in the Federal Reserve's policy introduce uncertainty regarding future deposit pricing and borrowing strategies, potentially affecting net interest income.
  
• The increased allocation for economic forecasts in the credit loss provision could signal concerns about future credit quality, which may impact overall profitability if negative economic conditions materialize.

Valuation

• The analysts have a consensus price target of $17.6 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 $374.8 million, earnings will come to $139.5 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $14.84, the analyst price target of $17.6 is 15.7% 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.