HORIZON BANCORP INC /IN/ Q2 FY2025 earnings call

• Horizon's second quarter earnings reflect strength in core community banking, with strong loan growth, stable funding, excellent credit quality, and prudent expense management.
• Loan growth was driven by commercial loans ($117M) and consumer loans ($8M), offset by residential loan sales and indirect loan contraction. Commercial loan growth was 14.8% quarter-over-quarter.
• Credit quality remained satisfactory, with substandard and nonperforming loans slightly reduced, and net charge-offs near $254,000 (2 basis points).
• Expense management efforts led to a modest reduction in full-year expense outlook, now expected to be flat compared to 2024.
• Capital ratios saw linked quarter increases in all categories, driven by improved profitability and balance sheet repositioning.

Horizon Bancorp Inc.'s second quarter results highlighted strong performance across segments. Net loans held for investment grew $75.5 million, a 1.5% quarter-over-quarter increase and 6.2% annualized. Commercial loans drove much of the growth, with $117 million added, representing a 14.8% quarter-over-quarter increase, making up 14.8% of the loan growth. Consumer loans decreased $41 million as the indirect auto portfolio was run down. Residential mortgage lending modestly grew. The net interest margin increased 19 basis points to 3.23%, with loan growth and disciplined pricing contributing. Net charge-offs were low at 2 basis points annualized. The allowance for credit losses increased to $54 million, with provision expense at $2.4 million. Revenue contribution from commercial loans was significant at 14.8% of the quarter's loan growth, while consumer loans contributed negatively with a $41 million decrease.

• Net interest income is expected to grow in the mid-teens for the full year.
• Net interest margin is anticipated to modestly expand in the second half, despite expected Fed cuts having no material impact on the outlook.
• Full-year expenses are now projected to be flat relative to 2024.
• Loan growth for loans held for investment is expected in the mid-single-digit range, with more runoff in the indirect auto book (now $125 million for the year).
• Deposit growth expectations remain in the low-single digits.

• Interest rate volatility could impact loan rates and spreads.
• Competitive environment poses challenges, including compression in commercial lending spreads and funding competition.
• Economic conditions may affect loan growth, credit quality, and provision expenses.

Q: Congrats on the quarter and progress, any updated thoughts on capital build and potential uses?

A: Thomas Prame noted CET1 is up 90 basis points over 12 months, with optionality for buybacks or other capital uses, and similar capital actions friendly to shareholders will continue.

Q: Update on competitive environment for lending and funding?

A: Lynn Kerber said commercial lending is competitive on pricing, with spread compression in commercial area, and funding competition exists but team navigates well.

Q: Interchange revenue decline, thoughts going forward?

A: Thomas Prame said swipes and spend per swipe are down, with conservative consumer spending impacting interchange.

Q: Loan growth on commercial side, new customers vs existing?

A: Lynn Kerber said majority of commercial business is with existing customers, with line utilization stable, driven by expanding relationships and referrals.

Q: Any sizable CDs repricing in back half?

A: John Stewart said CD book is homogenous with short duration, dynamics unchanged.

Q: Expense management to keep total flat year-over-year?

A: Thomas Prame said it's diligent expense management across the organization with a tight budget.

Q: Target for wholesale funding and earning asset growth?

A: John Stewart said aim to reduce reliance on wholesale funding, with modest earning asset growth in back half.

Q: Margin impact of Fed cuts and upward bias?

A: John Stewart said margin is neutral to Fed cuts, with modest expansion expected in back half.

Q: Economy outlook in footprint?

A: Thomas Prame noted positive tailwinds in Northern Indiana and Michigan, with infrastructure investment and bank-friendly state environment.

Q: Expense outlook for 2026?

A: John Stewart said disciplined approach to budgeting, anticipating positive operating leverage in 2026.

Q: Asset mix targets?

A: John Stewart said securities portfolio may reduce to ~20% over time, with ratable path forward.

Q: Provision outlook and M&A appetite?

A: Lynn Kerber said provision driven by loan growth and economic forecast; Thomas Prame said disciplined M&A approach for shareholder-friendly, logical, and positive earn-back opportunities in Indiana and Michigan.