Horizon Bancorp, Inc. (HBNC) Earnings

Management highlights

• Core strength of community banking model demonstrated with annualized return on average assets above 1.60%, return on average tangible common equity above 19%, and net interest margin at 4.29%. • Deposit gathering efforts led to over $147 million growth or 11% annualized, with $61 million growth in nine interest-bearing segments. • Commercial lending team had $34 million growth in the quarter with elevated pipelines. • Net interest margin unchanged at 4.29% from prior quarter, with average interest earning cash balances exceeding projections. • Expenses came in at $40.7 million, in line with expectations considering seasonal headwinds. • Capital ratios improved strongly with CET1 up 40 basis points to 10.82% and total risk-based capital to 14.77%.

Guidance

• Period end loan and deposit balances expected to grow mid-single digits, with deposit growth modestly more than loan growth. • Non-FTE net interest income expected to grow in the low teens year over year, FTE net interest margin in 4.25% - 4.35% range. • Average earning asset balances expected to modestly exceed $6 billion for the full year. • Fee income expected in mid $40 million range, expenses in mid $160 million range. • Effective tax rate anticipated in 18 - 20% range. • Change in rate cut assumption from two to none did not impact the outlook.

Segment performance

Loan: Total loans held for investment ended the quarter at $4.87 billion, driven by a $34.2 million increase in commercial loans. Residential and consumer loans were down by $32 million in the quarter. Commercial loan growth was concentrated in Grand Rapids, Indianapolis, and Northwest Indiana market, with 37% of the net quarterly increase attributable to commercial and industrial loans. Deposit: The deposit portfolio had a positive first quarter with approximately $147 million in growth, comprising a good mix across consumer and commercial segments, including $61 million in nine-interest-bearing segments growth. Net interest margin was 4.29% in Q1, CET1 increased by 40 basis points to 10.82%, and total risk-based capital improved to 14.77%.

Risks & headwinds

Statements made during the call are forward-looking and subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed, including factors noted in the slide presentation and in Horizon's most recent Form 10-K and later filings with the Securities and Exchange Commission.

Analyst Q&A

• Q: Hey, good morning, everybody. Hope you're doing well. Maybe just starting off here on kind of deposit growth and the margin. Obviously, you know, exceptional deposit growth this quarter, but there's a bit of a drag on the interest margin, just given that elevated cash position. As you look towards loan pipeline, how quickly do you think you can deploy that excess cash and then tie that into how you see the margin trending in the near term?

  A: of extra cash from good, strong deposit growth in the quarter is not a bad thing. Didn't impact net interest income, but, you know, had a modest impact on the net interest margin, as you noted. Looking forward, you know, in the second quarter, we would anticipate being a modest net user of cash, so possibly see loan growth slightly, see deposit growth for the second quarter. But as you look over the balance of the year, as the guidance would infer, You know, cash was 3-ish percent of earning assets in the first quarter. If it's between 2% and 3% over the balance of the year, that's within the realm of our expectations. So, you know, not really worried about having to deploy it quickly here. We'll continue with our strategic objectives on the liability side of the balance sheet most notably.

• Q: Maybe one more from me, just kind of at a broader top level, you know, relatively, you know, nice inline quarter from a PTNR perspective, reiterated the guide for 2026, kind of up and down the expectation set, but the environment does continue to evolve here. So, I'm curious if there are any areas in the outlook where you feel incrementally better or worse, you know, versus three months ago, or is it as simple as, you know, progress according to plan?

  A: Thank you for the call. This is Thomas. Appreciate the question. No, I'd go with the second part of your response there about, as expected, the outlook looks very similar, very strong first quarter, and look forward to the next subsequent quarters.

• Q: Morning. Good morning. Good morning. Maybe the first question to kind of continue on the deposit growth topic, are you seeing these client wins coming from M&A disruption in your markets, or is this coming from more similar sized peers?

  A: Thanks for the question. For us, this deposit strategy started last year. around how we organize weekly, daily as a team, and just the expectations we're putting out across all positions, client-facing positions, about growing both sides of the balance sheet. And so it is not a strategy targeted at one specific institution and or geography area. I'd say it's an elevated lift across the entire portfolio. As we talked about in some of our comments, the growth we saw was both in consumer and commercial, equally distributed, and also is distributed across both sides of the franchise in Indiana and Michigan. So For us, we really see this more of just a true step up in organic efforts and really not a specific target of disruption in the marketplace and or a specific institution.

• Q: And then maybe on the loan growth side, how much did payoff activity affect the commercial balances last quarter? There's a growth trend. slowed a little bit. I'm just curious. I think for the full year, correct me if I'm wrong, but I think the mid-single-digit guide kind of implies maybe a bit above that for commercial loan growth. So I'm just curious if one key was maybe outsized payoffs.

  A: Yeah, good morning. This is Lynn, and thank you for your question. Payoff activity actually was very consistent with our long-term averages. I would attribute your question really more to just a little bit of seasonality in the first quarter, also, you know, being selective in where we're lending. So I don't really see payoffs as contributing to that in the first quarter, really just kind of looking at seasonality as an organic run, right?

• Q: Hi, everyone. Good morning. Thanks for taking the questions. Thomas, I was wondering, or maybe Elaine, if you could update us just on the equipment leasing team build-out, what you're seeing from a production standpoint. And I believe in the past we've talked about, you know, the leasing build-out could be a benefit to the income going forward. So we're just curious if you could touch on that unit in particular.

  A: Sure. You know, when we first launched the equipment finance division, our business plan had certain assumptions to it, and We're in effectively year two of that plan, and the team has been running volume-wise, income-wise, a little bit between our year two and year three of the plan. So, it's been going really well. The team has been built out. We have capacity there. So, it's going as expected.

• Q: And then, maybe for Thomas or John, just going back to the earlier question, you know, when you think about the outlook and the guidance that you laid out, I mean, as you look at the macro landscape, and I appreciate, you know, the margins pretty neutral to, you know, rate changes along the curve, but we just kind of think about, you know, what would it take to drive, you know, upside to that outlook? Would it just be, you know, greater certainty from a macro perspective, some additional commercial hires, or just kind of any thoughts on kind of what could be some sources to drive some outperformance to those expectations?

  A: I think it would be right down the line of what you just spoke to. As we talked about before, a bit of our governance around our balance sheets around deposit growth and core deposit growth. We have a very strong lending team that also has shown some incredible discipline, not just on credit but also on spreads. So accelerating our deposits and keeping that pace would give us some capacity to continue to grow the balance sheet. from a perspective of talent, let's see, you know, I think it's hard to see some more talent ads in some of our key markets in Grand Rapids, Lansing, Detroit, down in Indianapolis, which could give us some accelerated growth. But overall, I think we have a great franchise to drive 2026 and any type of additional ads are just being added to that.

• Q: And just one last one on capital management priorities going forward, you know, To the earlier points, you guys are building capital at really strong clips, and, you know, asking a buyback or, you know, an increase in dividend or, you know, some acquisitions, you know, seems like you guys are going to be offering, you know, some significant excess capital levels. So we're just curious to maybe hear some updated thoughts on how you're thinking about managing that excess capital inflow just to kind of optimize your return on tangible as well.

  A: I appreciate the question, and also thanks for the acknowledgement around the capital generation of the new profile of the balance sheet. You know, it's exactly what we wanted to do for our shareholder value proposition heading 2026 and beyond. As we have discussed before, our positive level of capital generation really does give optionality for our stakeholder value proposition, and whether that's going to be deploying it in a creative profitability, expanding our existing business model, buy back the shares, or reinvesting some of the experience of our teams. These are all tools that are in our toolkit right now as we look forward into 2026. As you mentioned, we are very comfortable right now with our current capital levels and also the additional growth in capital. It's really not going to burn a hole in our pocket. We'll continue very disciplined in the approach on that and making sure that it makes sound decisions going forward around shareholder value. But, again, very pleased with what the balance sheet is producing and also the outlook for our levels going forward.

• Q: Hey, good morning, guys. Hopefully you can hear me this time. Just had a question about the commercial loan outlook. Thomas, could you just kind of, or maybe Lynn, just give us a little bit of color as to what areas of the footprint and segments are driving the optimism?

  A: Hey, good morning. You know, as you can see from our historical performance, we've been pretty balanced. in our overall portfolio mix and our originations. I don't anticipate that to change. As I noted in my comments, we are looking to add some additional CNI and just diversify the overall portfolio. And, you know, we've been seeing the results of that over the last several quarters. So, I don't expect our business model to change substantially. We're just balancing, you know, the right mix in the portfolio. pricing discipline and credit quality, of course. So, no substantial changes. As far as the outlook, I think it remains really unchanged at this point. You know, we had communicated single-digit loan growth or mid-single-digit loan growth for the year. I think we're on track for that. So, we're just really sticking to our nitties at this point in time.

• Q: And then, kind of with regards to market disruption, particularly in Michigan, Are you seeing any opportunities to maybe add lending teams or, you know, target any potential additional hires?

  A: You know, we added to our team substantially over the last few years, and we feel like we have capacity with our existing team, very talented group of bankers, a lot of experience. So I feel good about that. That being said, we always have an eye for talent, and we'll look at that opportunistically.

• Q: Hey, good morning, guys. Good morning. Say, I wanted just to see if you could talk about just the – it sounds like the pickup on the roll-off of the securities is, you know, maybe 10 basis points at this point. Can you talk about where the pickup is on the loan portfolio? And then just in particular, you know, what yields you're getting on the new commercial product? And then also just in terms of growth, whether it be Lynn or somebody else, just obviously the residential and consumer were down this quarter. I guess, can you talk about where's the appetite on the consumer and residential side? And just remind us what your growth outlook is for those components over the balance of the year.

  A: Brian, it's John. I'll take the first part of that question and then pass it off to my teammates here on the loan growth discussion there. So, yeah, we had some comments in the prepared remarks around the roll-on, roll-off dynamics in the loan portfolio. So new production coupon rate production in the quarter was just above 6.6%. the roll-off was just under 6% as you kind of roll that forward for the balance of the year, about $150 million a quarter in amortization and payoff activity, you know, absent any prepayment activity. That's coming off at about 6.1%, so there is still some favorability between new production yields and what is coming off the balance sheet on the loan side. I think it would be true maybe to a lesser extent, as you noted, on the securities portfolio. So as we look forward there for the balance of the year, it's a pretty consistent profile from what we saw in the first quarter in terms of anticipated cash flows. And then, you know, if the environment were to look like it does plus or minus today, we would still be kind of in line to roll off yields or maybe slightly favorable. I wouldn't anticipate there being a lot of changes there. I know in the past, there's been some questions about our maturities. As far as 2026, we've got about 380 million in our commercial portfolio that's going to roll off. It's about 12%. Those have a weighted average rate of about 6% right now. And then 27 is about $318 million, about 10% of the portfolio that has a weighted average rate of just under six. So with origination rates on average in seven, seven plus, we've got 100 to 150 basis points picked up opportunity based on the current rate environment.

• Q: Gotcha. That's helpful. And then just in terms of the appetite on the consumer side and the residential, given they were down this quarter and, you know, It's kind of a commentary about rates not being appropriate.

  A: Thank you for the question. We still have appetite for both those products. We feel it's core in our overall community banking model. There's just some episodic pricing that happened at the end of 2025 and early 2026, specifically with the 10-year dipping down near 4%. In our marketplace, there is some pricing sub-6 and some longer-duration fixed assets that we elected not to play and a small refinance buying there. Again, we don't see this as a long-term issue. We've already seen in April, the overall loan portfolio is performing extremely well on its growth aspects, aligning with John's earlier comments for the full year. So we believe that the consumer side was more of just an episodic piece on the mortgage We don't expect a mortgage consumer to have a hockey stick growth this year, be relatively flat, maybe mildly up, mildly down, but, again, relatively consistent overall performance.

• Q: Gotcha. Okay, and just to be clear, I think John said maybe a 660 was kind of a – I thought that was new production yield from Lynn. It sounded as though it was 7. Is that just commercial for Lynn and maybe 660 for the aggregate loan book? Is that what you're –

  A: Yeah, John was looking at a blend, and I was looking at specific coupon rates for the first quarter. Yeah.

• Q: This last one for me was just on the capital priorities. Can you talk about, you know, I think when you do the balance sheet restructuring, I think you talked about maybe waiting a couple quarters, proving yourself out. It seems like that's kind of working well here, just in terms of, the opportunities on the M&A side, can you remind us, you know, is M&A something you guys are considering at this point, or is it still a ways off? And then just remind us of what your, you know, parameters are on potential M&A in terms of size or pricing or just anything that you can offer there, you know, what the intent would be.

  A: I appreciate the question. As we talked about earlier, for us with our capital deployment, it's all tools in the toolbox for us, whether that's M&A, whether that's doing buybacks or perhaps even expending. Also including just letting capital continue to grow. When you look at our capital levels, I wouldn't say we screen higher than Pierce. I would say we're right in the range. As John mentioned earlier, we have a bit of a de-risk balance sheet, which allows us some flexibility on how much capital we need to hold. But overall, we're very pleased with our capital generation. We do not have a specific plan right now of going out and saying that we're going out into the M&A environment. Again, we'll continue to look at all options going forward for our shareholders and evaluate them with a long-term view to make sure that we're making right decisions and a very consistent and prudent decision on capital planning.

• Q: And then in the payback period, I guess, in terms of, you know, where it needs to be on an M&A deal or even on share repurchases, I guess, is that kind of sub-three years? Is that kind of what you're thinking about in terms of where that payback is?

  A: You know, Brian, I think. The market has made their own determination as to kind of where payback periods need to be. And, you know, if it's plus or minus three years, you know, I wouldn't say we feel terribly differently about that. If you're willing to accept that on an acquisition, which comes with a certain level of risk, execution risk, integration risk, and so on and so forth. You know, I think it would probably be our view that we would be willing to accept something longer than that for a risk-free transaction like stock repurchases, but we don't have any specific targets out there for that part.