10-Q: Horizon Bancorp Reports Q3 Loss Amid Balance Sheet Repositioning

Horizon Bancorp, Inc. reported a significant net loss for the third quarter and nine months ended September 30, 2025, primarily driven by a substantial loss on the sale of investment securities as part of a balance sheet repositioning strategy.

Summary

• Reported a net loss of $(221.990) million for the three months ended September 30, 2025, compared to net income of $18.180 million for the same period in 2024.
• Reported a net loss of $(177.404) million for the nine months ended September 30, 2025, compared to net income of $46.311 million for the same period in 2024.
• Incurred a pre-tax loss of $(299.132) million for the three months and $(299.538) million for the nine months ended September 30, 2025, on the sale of investment securities as part of balance sheet repositioning efforts.
• Net interest income increased by $11.5 million (24.5%) to $58.4 million for the three months and $30.5 million to $166.0 million for the nine months ended September 30, 2025.
• Net FTE interest margin expanded to 3.52% for the three months and 3.26% for the nine months ended September 30, 2025, compared to 2.66% and 2.60% respectively in the prior year periods.
• Total assets decreased by $1.1 billion (14.0%) to $6.712 billion as of September 30, 2025, from $7.801 billion at December 31, 2024.
• Total investment securities decreased $1.2 billion (58.0%) to $0.9 billion as of September 30, 2025, following the reclassification of $1.8 billion held-to-maturity securities to available-for-sale and subsequent sales.
• Total loans held for investment (HFI) decreased $23.4 million to $4.8 billion, influenced by the sale of approximately $176 million of the indirect auto portfolio, partially offset by $278.4 million in organic commercial loan growth.
• Total deposit balances decreased by $79.8 million (1.4%) to $5.5 billion, including a decline of approximately $275 million in high-cost transactional deposit balances.
• Total borrowings decreased by $985.1 million (79.9%) to $247.2 million, primarily due to the payoff of $700 million in Federal Home Loan Bank (FHLB) advances.
• Subordinated notes increased by $98.3 million to $154.0 million, driven by a $100.0 million offering of 7.000% Fixed-to-Floating Rate Subordinated Notes due 2035.
• Allowance for Credit Losses (ACL) on loans was $50.2 million (1.04% of HFI loans) at September 30, 2025, down from $52.0 million (1.07%) at December 31, 2024.
• Non-accrual loans increased by $3.6 million (13.8%) to $29.358 million, representing 0.61% of total loans HFI.
• Total non-performing assets increased $8.3 million (30%) to $35.715 million, or 0.53% of total assets.
• Net charge-offs for the nine months ended September 30, 2025, were $2.0 million, compared to $0.9 million in the prior year comparable period.
• Book value per common share decreased by $4.50 to $12.96, and tangible book value per common share decreased by $3.92 to $9.76.

Sentiment

Score: 3

Explanation: The company reported a substantial net loss primarily due to a strategic balance sheet repositioning involving the sale of investment securities at a significant loss. While net interest income and margin improved, and capital ratios remain strong post-capital raise, the immediate financial impact is negative, reflected in decreased book values and increased non-performing assets. The repositioning aims for long-term benefits but comes with a high short-term cost.

Positives

• Net interest income increased by $11.5 million (24.5%) for the three months and $30.5 million for the nine months ended September 30, 2025, demonstrating improved core earnings.
• Net FTE interest margin expanded significantly to 3.52% for Q3 2025 and 3.26% for the nine months ended September 30, 2025, driven by a favorable mix shift towards higher-yielding loans and lower-cost deposit liabilities.
• Loan and securities yields have expanded while deposit costs have declined, contributing to margin improvement.
• Achieved organic commercial loan growth of $278.4 million, indicating strength in core commercial lending.
• Reduced total borrowings by $985.1 million (79.9%) to $247.2 million, including the payoff of $700 million in FHLB advances, reflecting successful de-leveraging efforts.
• Increased cash and cash equivalents by $164.8 million (56.2%) to $458.3 million, enhancing liquidity.
• Allowance for credit losses on loans decreased to $50.2 million (1.04% of HFI loans) at September 30, 2025, partly due to improved historical loss metrics and portfolio sales.
• The Company and Bank continue to meet all capital adequacy requirements to be considered well capitalized, maintaining a strong regulatory capital position.

Negatives

• Reported a significant net loss of $(221.990) million for the three months and $(177.404) million for the nine months ended September 30, 2025, a substantial decline from prior year profitability.
• Incurred a pre-tax loss of $(299.132) million for Q3 2025 and $(299.538) million for YTD 2025 on the sale of investment securities, significantly impacting non-interest income.
• Total assets decreased by $1.1 billion (14.0%), reflecting a reduction in the overall balance sheet size.
• Total investment securities decreased $1.2 billion (58.0%), indicating a substantial reduction in the investment portfolio.
• Total loans HFI decreased $23.4 million, partly due to the strategic sale of approximately $176 million of the indirect auto portfolio.
• Total deposit balances decreased by $79.8 million (1.4%), including a decline of approximately $275 million in high-cost transactional deposit balances.
• Non-interest expense increased $13.7 million for Q3 2025 and $17.8 million for YTD 2025, primarily due to $12.7 million in prepayment penalties on FHLB advances.
• Non-accrual loans increased by $3.6 million (13.8%) to $29.358 million.
• Total non-performing assets increased $8.3 million (30%) to $35.715 million.
• Net charge-offs increased to $2.0 million for the nine months ended September 30, 2025, from $0.9 million in the prior year.
• Book value per common share decreased by $4.50 to $12.96, and tangible book value per common share decreased by $3.92 to $9.76, reflecting the impact of the net loss.
• Other income (loss) decreased by $7.3 million to a loss of $6.6 million for Q3 2025, primarily due to a pre-tax loss of $7.7 million on the sale of the Indirect Auto portfolio.

Risks

• Effects on business resulting from new U.S. domestic or foreign governmental trade measures, including tariffs, import and export controls, and foreign exchange intervention.
• Uncertain conditions within the domestic and international macroeconomic environment, including trade policy, monetary and fiscal policy, and conditions in the investment, credit, interest rate, and derivatives markets.
• Current financial conditions within the banking industry.
• The impact of continued partial shutdown of the U.S. government.
• Changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity.
• The aggregate effects of elevated inflation levels in recent years.
• Loss of key Horizon personnel.
• Macroeconomic conditions and their impact on Horizon and its customers.
• The increasing use of Bitcoin and other crypto currencies and/or stable coin and the possible impact these alternative currencies may have on deposit disintermediation and income derived from payment systems.
• Risks related to the development and use of artificial intelligence (AI).
• The effect of interest rates on net interest rate margin and their impact on mortgage loan volumes and the outflow of deposits.
• Increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks.
• Potential loss of fee income, including interchange fees, as new and emerging alternative payment platforms take a greater market share of the payment systems.
• Estimates of fair value of certain of Horizon's assets and liabilities.
• Volatility and disruption in financial markets.
• Changes in prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets.
• Changes in sources of liquidity.
• Potential risk of environmental liability related to lending and acquisition activities.
• Changes in the competitive environment in Horizon's market areas and among other financial service providers.
• Legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular.
• Changes in regulatory supervision and oversight, including monetary policy and capital requirements.
• Changes in accounting policies or procedures as may be adopted and required by regulatory agencies.
• Litigation, regulatory enforcement, tax, and legal compliance risk and costs, and any disruptions caused by the same.
• The effects and costs of governmental investigations or related actions by third parties.
• Rapid technological developments and changes.
• The risks presented by cyber terrorism and data security breaches.
• The rising costs of effective cybersecurity.
• Containing costs and expenses.
• The ability of the U.S. federal government to manage federal debt limits.
• The risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon's initial expectations.
• Acts of terrorism, war and global conflicts, such as the Russia-Ukraine conflict and continued unrest in the Middle East, and the potential impact they may have on supply chains, the availability of commodities, commodity prices, and the overall U.S. and global financial markets.

Future Outlook

The company's interest-bearing liabilities are projected to reprice at a slightly faster pace than interest-earning assets for the next 100 basis points of declining interest rates, according to their simulation model. The company does not undertake to update any forward-looking statements.

Management Comments

• The decrease in the provision for credit losses on loans was primarily attributable to the release of approximately $3.1 million in total Allowance against the sold portion of the indirect auto portfolio, and well as the continued improvement in the Company's historical loss metrics.
• The increase in non-interest expense was driven by a $12.7 million prepayment penalty related to the payoff of $700 million in FHLB advances during the quarter as part of the Company's balance sheet repositioning.
• The decrease in total assets is primarily due to the Company's balance sheet repositioning efforts, which resulted in a decrease in total investment securities of $1.2 billion and a decrease in loans held for investment of $21.6 million.
• The decrease in deposit balances was driven by the ongoing balance sheet repositioning efforts, which led to a decline of approximately $275 million in high-cost transactional deposit balances during the third quarter of 2025, which were partially offset by growth non-interest bearing balances, commercial interest-bearing balances and time deposit balances.
• The Company maintains a granular and tenured deposit base, with a continued focus on core commercial and consumer deposit gathering.

Industry Context

The balance sheet repositioning, involving the sale of investment securities at a significant loss and the payoff of FHLB advances, suggests a strategic response to the current interest rate environment and potentially a move to optimize the asset/liability mix. This is a common strategy for banks facing unrealized losses on their bond portfolios due to rising rates. The expansion of net interest margin indicates successful management of interest rate sensitivity despite the broader market challenges. The sale of the indirect auto portfolio and mortgage warehouse business indicates a strategic shift in lending focus, aligning with broader industry trends of portfolio optimization and risk management.

Legal Proceedings

• The Company is involved in various claims, legal actions, and complaints which arise in the ordinary course of business.
• Management believes all such matters are adequately covered by insurance, are without merit, or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.

Stakeholder Impact

• Shareholders: Experienced a significant net loss and a decrease in book value per share. However, the capital raise and balance sheet repositioning are strategic moves intended to improve long-term financial health, potentially benefiting shareholders in the future. Dividends were maintained at $0.16 per share.
• Employees: Salaries and employee benefits increased, partly due to ongoing hiring efforts in revenue-generating roles and higher incentive compensation accruals.
• Customers: Loan portfolio adjustments, such as the sale of the indirect auto portfolio, may affect certain customer segments. The company maintains a focus on core commercial and consumer deposit gathering.
• Creditors: The repayment of $700 million in FHLB advances and the redemption of subordinated notes reduce overall debt, potentially improving creditworthiness. The issuance of new subordinated notes provides new capital.

Next Steps

• Redeem the remaining $56.5 million subordinated note issuance (2030 Notes) on October 1, 2025 (completed subsequent to quarter end).
• Continue to monitor the performance of all modified loans according to their modified terms.
• Assess goodwill for impairment annually, or more frequently if events occur or circumstances change.
• Manage interest rate risk within Board-approved policy limits using earnings simulation models quarterly.

Key Dates

Recommendation

The company is undergoing a significant balance sheet repositioning, incurring substantial short-term losses from the sale of investment securities and prepayment penalties on borrowings. While this resulted in a large net loss and a decrease in book value, it is a strategic move aimed at improving future net interest margin and overall financial health in a challenging interest rate environment. The successful capital raise and maintenance of 'well capitalized' status provide a strong foundation. Investors should 'hold' to observe the long-term benefits of this repositioning, as the immediate negative impacts are largely a result of strategic decisions rather than operational failures. The improved net interest margin is a positive sign for future profitability.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Horizon Bancorp, HBNC, Net Loss, Balance Sheet Repositioning, Investment Securities, Loan Portfolio, Deposits, Net Interest Margin, Credit Losses, Non-Performing Assets, Capital Ratios, Subordinated Notes, Common Stock Offering, FHLB Advances, Mortgage Warehouse, Indirect Auto Portfolio