$17.85
$30.19
bear $17.85
base $28.00
bull $30.19
margin of safety $10.00
market price* $19.46
Horizon Bancorp is the holding company for Horizon Bank, a community bank based in Michigan City, Indiana, serving northern and central Indiana and southern and central Michigan. At June 30, 2026 it had $6.6 billion of assets, about $5.0 billion of loans, $5.4 billion of deposits and $726 million of shareholders' equity, spread over roughly 51.3 million diluted shares. At the end of 2025 about 70% of loans were commercial, 16% residential real estate and the rest consumer and other. What changed in 2025. In August management rebuilt the balance sheet. It moved $1.8 billion of low-yielding bonds, carried at a $282.6 million unrealized loss, into the available-for-sale portfolio and sold $1.4 billion of them at a $299.5 million pre-tax loss, reinvesting part of the proceeds at higher yields. It repaid $700 million of Federal Home Loan Bank advances (a $12.7 million prepayment penalty), sold its indirect auto loan book ($284.2 million) and, earlier in the year, its mortgage warehouse business, and sold 7,138,050 new shares at $14.50 for net proceeds of $98.0 million. The result was a 2025 reported loss of $150.5 million ($3.24 a share), but most of that was the realization of a loss that already sat inside the bond portfolio. The earnings that followed look very different: the net interest margin was 4.29% in the fourth quarter of 2025 versus 2.97% a year earlier, fourth-quarter return on equity was 15.7%, and first-half 2026 net income was $51.1 million (first quarter $26.2 million, second quarter $24.9 million) with net interest income of $125.7 million versus $107.6 million a year earlier. Long-term borrowings fell from $1.23 billion to $249 million. Nothing new has been reported since the second-quarter results, and the previous analysis (31 August 2026) was built on a different basis, so its figures are not comparable. How we measure earnings. For a bank we start from operating cash flow, remove the swings in working capital (mortgage loans being held for sale, accrued interest, other assets and liabilities), then subtract stock compensation, maintenance capital spending and the provision for credit losses, which we treat as a permanent cost of lending. Interest and deposits are the raw material of a bank, so no debt is subtracted. Owner earnings per share on this basis were $1.04 (2016), $1.18, $1.59, $1.70, $1.64, $2.42, $2.49, $1.55, $1.64 and $1.54 (2025). Those years describe the bank before the repositioning, with 2023 to 2025 running at $68 to $72 million a year. We therefore measure the repositioned bank from the periods after it: first-half 2026 owner earnings were $53.3 million, a $106.7 million annual pace or $2.08 a share. Because provisions were only $1.3 million in that half, and we assume $9 million a year across a normal cycle, our starting level is $100 million, or about $1.95 a share. In the historical series the bond-sale losses ($32.1 million in 2023, $39.1 million in 2024 and $299.5 million in 2025) are added back as non-cash, while the $12.7 million cash prepayment penalty reduced 2025 and is not in the starting level. Growth check. Owner earnings fell 0.4% in total in 2025 (down 5.6% per share because of the new shares). The base case assumes zero growth from the starting level; the step from 2025's $71.8 million up to $100 million is a change in level that we attribute to the repositioning, evidenced by the margin and by two quarters of results, not growth. Base case, $28.00 a share. Owner earnings of $100 million a year, held flat for 30 years, are worth $26.83 a share, plus $1.17 for a tax asset described below. We credit no growth. Past growth came from acquiring other banks (Lafayette Community Bancorp, Wolverine Bancorp, Salin Bancshares in March 2019), each a separate bet, and from one year (2025) of 11.5% commercial loan growth; neither meets our standard for growth we can count on. We credit 30 years because the bank earned positive owner earnings in every one of the ten years on record, including the 2020 pandemic year with a $20.8 million provision, and because its deposit franchise and charter are structural; we credit nothing beyond that because nothing nameable carries it further. If the earnings simply stopped after year 10 the base would be $15.52, which shows how much rests on the franchise lasting. The tax asset. The loss created a $96.6 million deferred tax asset labelled "net capitalized expenses" (total net deferred tax asset $129.9 million versus $49.9 million a year earlier, no valuation allowance). It lowers future cash taxes as it is used, and cash taxes paid in the first half of 2026 were $0.25 million against $12.0 million of tax expense. The filing does not give the timetable, so we credit $60 million in the base (about $1.17 a share), $45 million in the bear and $80 million in the bull. Bear case, $17.85 a share. Margin slips about half a point from the fourth-quarter level (to roughly 3.8%) and earnings are $95 million in year 1 and $90 million in year 2. From year 3 we run a full credit cycle scaled from the 2008 to 2012 record, when net charge-offs across FDIC-insured banks peaked at 3.0% of loans in the fourth quarter of 2009 and averaged roughly 2.6% in 2009 and 2010. Judging that a diversified Midwest commercial book, with a 1.05% allowance and 0.06% charge-offs today, would have run somewhat below the all-bank record, we use 75% of that path: net charge-offs of 1.0%, 1.9%, 1.9%, 1.2% and 0.8% of loans in years 3 to 7 (about $340 million on roughly $5.0 billion of loans), with the allowance building from 1.05% to about 3.0% of loans and then being released. After tax, owner earnings are $6.0 million in year 3, a loss of $29.5 million in year 4 and a loss of $13.7 million in year 5, then $57.4 million, $79.2 million and $99.7 million as reserves are released, and $76 million a year thereafter, 30 years in all. Common equity tier 1 capital was $553 million (10.4%) at year-end 2025 against a 7.0% requirement including buffers, a cushion of about $182 million, so we assume the dividend is suspended but no new shares are needed. The bear value is above tangible book value (roughly $11 a share) because even at the lower margin the bank earns about $1.48 a share, about 13% on tangible equity, once the cycle passes. No debt is deducted, as for any bank. Bull case, $30.19 a share. Today's run-rate of $106.7 million ($2.08 a share) persists because credit costs stay at their current low level (net charge-offs of 0.06% of loans in 2025) and the tax asset is used within about four years. This is worth $28.63 a share plus $1.56 for the tax asset. We credit no growth here either; the bull differs from the base only in credit costs and tax timing, because we cannot name a growth driver that meets our standard. Testing the case. The earnings level depends on the margin holding. The bank's own December 2025 simulation shows net interest income rising $2.1 million (0.8%) if rates fall 100 basis points and $6.0 million (2.3%) if they rise 100, so, in that static test, the margin does not depend on the direction of rates. The low provision is the weaker point: non-performing loans rose from $27.0 million to $34.9 million in 2025, non-accruals went from 0.53% to 0.67% of loans, and one available-for-sale security ($5.7 million) is on non-accrual, which is why the base assumes $9 million of provisions rather than the current $2.6 million annual pace. Margin-of-safety price, $10.00. We are fairly sure of the earnings level for the next few years, less sure of how long a margin above 4% lasts. The worst plausible outcome is a real credit cycle on a book that is 70% commercial, or an acquisition that goes wrong (goodwill is $155 million and no case writes it down); the bank would stay solvent but earn little for roughly three years and probably cut its $0.64 dividend. If the margin falls half a point with no credit cycle, owner earnings are about $1.48 a share (value $21.56); if provisions average $25 million, about $1.70 (value $24.61); if the tax asset yields nothing, minus $1.17. The price assumes a three-to-five-year holding period, with $0.64 a share in dividends paid over that time. At $10.00, slightly below tangible book value, the shares' earnings of about $1.95 a year are a 19.5% yield on that price before any change in how the shares are regarded, plus a 6.4% dividend; at $1.48 of earnings the yield would still be 14.8% and the dividend is covered. The margin-of-safety price is not higher because every dollar above it depends on the margin and credit costs staying at today's levels for a long time. What would prove us wrong: a margin that falls well below 3.8% without a recession, loan losses that exceed the cycle modeled, or a tax asset that proves unusable. One item could not be reconciled: the 2019 cash flow contained a $99.7 million decline in other assets, the cause of which we did not trace; it is removed as working capital and does not affect the figures above.