Horizon in Indiana takes $33M hit in balance sheet restructuring

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Horizon Bancorp in Michigan City, Indiana, is repositioning its balance sheet. 

The $8 billion-asset Horizon, holding company for the 150-year-old Horizon Bank, sold $382.7 million in low-yielding available-for-sale securities. Horizon also surrendered $112.8 million in bank-owned life insurance. It plans to reinvest proceeds in higher-yielding loans — including loans originated by a recently launched equipment finance division.

"Our local bankers have proven their ability to generate high quality loan growth with improved yields that can leverage the liquidity provided by this transaction," President and CEO Thomas Prame said Tuesday in a press release. "This transaction provides significant earnings accretion and further positions the organization to remain flexible, as market conditions warrant, to consider additional strategies that create long term shareholder value."

Horizon unveiled its new equipment finance team, led by veteran banker Joel Mikolich, on Oct. 30. The group expects to begin lending early in 2024.

Horizon's restructuring moves come with a price. Fourth-quarter net income is expected to reflect an after-tax loss of $32.7 million, including $31.6 million associated with the securities sale. Prame projected "a 2.75 year" earn-back period, or approximately 33 months. 

Repositioning maneuvers similar to Horizon's have emerged as a common theme in recent months, as banks have sought to disentangle themselves from underwater securities portfolios.

On Monday, a day before Horizon's disclosure, the $2.3 billion-asset FVC Bancorp announced the sale of $61.4 million of available-for-sale securities with a weighted average yield of 1.54%. The restructuring resulted in an after-tax loss to FVC of $8.5 million to be booked in the fourth quarter. As with Horizon, projected earn-back is less than three years.   

Last week, the $12.3 billion-asset First Busey in Champaign, Illinois, announced the sale of $110 million of available-for-sale securities, resulting in a $5.3 million pretax loss. First Busey paired the securities sale with the sale of Visa Class B common shares, netting $5.5 million pretax. 

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Despite the hits to fourth-quarter earnings, analysts generally expressed satisfaction with the securities sales. Brian Martin, who covers Horizon for Janney Montgomery Scott, wrote Wednesday in a research note the transactions "should accelerate the company's ability to grow earnings." 

Freddie Strickland, who covers FVC for Janney, sounded a similarly positive note. "We welcome FVCB's move to execute on a partial securities restructure," Strickland wrote Tuesday in a research note.

The securities Horizon sold had a weighted average book yield of 2.01% and average duration of 3.4 years. Horizon said it remained well capitalized after the securities sale with common equity Tier 1 at 10.7% on a pro forma basis as of September 30. "Horizon has a history of a strong operating model with a stable and growing capital base, allowing the company to be nimble in executing strategic initiatives," Prame said.