HORIZON BANCORP INC /IN/ Q3 FY2025 earnings call

• Successful execution of balance sheet repositioning exceeding initial expectations, on pace for top-tier financial outcomes.
• Net interest margin expanded with commercial loan engine and core deposit franchise strength.
• Loan balances reflected runoff of lower-yielding indirect auto portfolio, with commercial loans net growing $58 million.
• Deposit portfolio had resilient core relationship balances with planned outflow of higher cost transactional accounts.
• Credit quality remained excellent with low charge-offs and satisfactory substandard and nonperforming loan levels.
• Expenses outside transaction-related activities well managed, aligning with internal and market expectations.

Horizon's third quarter results showed successful balance sheet repositioning. Net interest margin expanded for the eighth consecutive quarter. Loan balances had a $162 million decrease, with net growth in commercial loans of $58 million and runoff/sale of $210 million in indirect auto loans. Core relationship deposits remained resilient with planned outflow of higher cost transactional accounts. Credit quality was excellent with substandard loans at 1.31% and nonperforming loans at 0.64%. The allowance for credit losses decreased to $50.2 million, with a net release of $3.6 million in provision for credit losses.

• Q4 margin expected to be in the range of 4.15% to 4.25%, exiting the year at 4.2% to 4.3% and remaining there through 2026.
• 2026 EPS expected at approximately $2 per share.
• Non-FTE net interest income expected to grow in the low double-digit range.
• Q4 fees expected to approximate $11 million, expressing high single-digit year-over-year growth excluding securities loss in the year-ago period.
• Effective tax rate in 2026 expected to be in the range of 18% to 20%.

• Economic conditions could impact provision expense as future provision expense is driven by loan growth, mix, economic factors, and credit quality trends.
• Potential consumer stress could affect credit quality, though exiting the indirect auto portfolio enhanced credit profile.
• Market uncertainties could impact M&A activities, though Horizon is well-positioned with a derisked balance sheet.

Q: Maybe just kind of starting at a top-level strategic view here. It's just -- it's a vastly different company today than it was 1, 2, 3 years ago. And in recent years, the narrative has just been so focused around the securities book and capital. And now that you finally kind of put that issue to bed, can you just kind of update us on what you think the new narrative for Horizon is and the next major areas of strategic emphasis?

A: Thanks, Brendan. Thomas. I appreciate the question very much. We're very pleased with the organization as it exits Q3 and goes into Q4. And I think our financials are showing what we consider a new horizon heading into 2026. What you'll see with us is that we're going to be very consistent about the positive stewardship of capital that we're going to be delivering to our shareholders on a go-forward basis. Our new balance sheet is positioned well to generate capital at a significantly greater pace than before. We're also going to be very pleased with the optionality that this is going to present the organization, different than perhaps what you said before, we are a little bit more focused on the securities positioning. But again, we're going to be very measured in our deployment strategies and don't feel like we need to go out and quickly do something, but rather take a very measured approach on profitable deployment options going forward. That could be, for us, as we move into '26, very logical and accretive M&A that's additive to the community banking platform that we just created, expansion or lift of teams or acquisition of fee income platforms that create durable and franchise value earnings profile. And also, we're going to be very front-footed position moving to '26. But again, we'll be very respectful of capital deployment strategies and making sure that we enhance shareholder value.

Q: Maybe just as a follow-up to that on capital specifically. I guess, first, are there any other potential outlets for capital outside of organic loan growth and M&A? And then second, now that there's a potential M&A element to the story, just kind of take us through some of the criteria, whether it's size or geography or business mix that you would be interested in?

A: Sure. Thanks for the follow-up question. Specifically in M&A, Horizon has a great history of M&A success over -- for many decades. It's really been built on the fact of our great brand reputation in our core markets and also being just a really good company to transact with. As you look over the last couple of years, we have not been as well positioned in the space because of some of the earnings power that we had at the time and also the risk elements within the balance sheet. Heading into 2026, we have a significantly different and more efficient and derisked balance sheet that's going to be producing peer-leading financial metrics and top-tier capital generation. Successful M&A for us is going to be consistently focused around franchises that add to the current franchise that we have that we feel is extremely profitable. The size will probably be between $300 million, $400 million up to several billion dollars. But again, it's going to be logical and very accretive to the franchise from a space. We think there's great opportunities for us in Michigan and also in our core markets of Indiana. And again, from a positioning standpoint, Horizon will be in a stronger position and very much more front-footed. Again, the profile of the organization is significantly different and more optimistic. And also the balance sheet is more attractive towards potential partners, who would look at Horizon as an opportunity for them to be a long-term partner with us.

Q: Maybe start with a question for John. You mentioned the balance sheet being pretty rate neutral in terms of changes. When I just look at the mix today, a little more commercial heavy, fewer higher beta deposits and probably less fixed rate assets, which would tell me more asset sensitivity. Could you just kind of tell me where I'm wrong and how you can -- how you support that rate-neutral position?

A: Yes. Terry, thanks for the question. I appreciate that. Yes, I think as you look forward, I mean, the changes in the mix of the balance sheet would certainly lean us to be very modestly asset sensitive. We do a lot of -- obviously, the shock analysis, a lot of non-parallel shifts. And we really just don't see much change if we get a steepening or a flattening of the curve. We've got about 25% of loans are going to be floating on the asset side, a very modest amount of the securities portfolio is going to be floating. And then on the other side of the balance sheet, we do have some callable CDs in the structure and some really good deposit positioning such that we don't think that there'll be much of an impact from changes in rates either way.

Q: Congrats on all the progress coming out of the quarter. Just going back to the margin discussion, John, I wonder if you could just help us just in terms of with the securities portfolio repositioning, how much cash flow coming off each quarter over the next 12 months or so? And also kind of what the back book repricing tailwinds look like on the commercial real estate portfolio that's fixed?

A: Sure. Thanks, Nathan. I'll pass the second question over to Lynn and answer your first question first. In terms of the cash flows coming off the securities portfolio, honestly, very minimal. That was part of the repositioning efforts. As you could see on the slide, we bought a lot of discounted cash flows. So those are bonds with underlying coupons kind of in the 2s and 3s. And so that's what I was referring to when I said the optionality for the -- the prepayment optionality for the borrowers underlying those are de minimis. So as we look out over the next year, it's probably only, call it, $10 million to $15 million worth of cash flow coming off that portfolio each quarter, not much.

Q: Maybe start with a question for John. You mentioned the balance sheet being pretty rate neutral in terms of changes. When I just look at the mix today, a little more commercial heavy, fewer higher beta deposits and probably less fixed rate assets, which would tell me more asset sensitivity. Could you just kind of tell me where I'm wrong and how you can -- how you support that rate-neutral position?

A: Yes. Terry, thanks for the question. I appreciate that. Yes, I think as you look forward, I mean, the changes in the mix of the balance sheet would certainly lean us to be very modestly asset sensitive. We do a lot of -- obviously, the shock analysis, a lot of non-parallel shifts. And we really just don't see much change if we get a steepening or a flattening of the curve. We've got about 25% of loans are going to be floating on the asset side, a very modest amount of the securities portfolio is going to be floating. And then on the other side of the balance sheet, we do have some callable CDs in the structure and some really good deposit positioning such that we don't think that there'll be much of an impact from changes in rates either way.

Q: Just had a question on credit and kind of, if you, Thomas, give a little bit of color on maybe some of the trends you guys are just seeing. NPAs were up $5 million quarter-over-quarter, not a big amount. But just wondering, are there any areas of the portfolio where maybe you're starting to see some signs of stress that are requiring a little bit more attention?

A: Yes, I'll pass this one over to Lynn. She can walk you through some of what we saw in NPAs and how our commercial credit is looking.

Q: Got it. Okay. And then with the improvement of the profile, as we think about the provision in the coming quarters and kind of growth, I mean, is it fair to kind of assume that maybe the provision will kind of be more like the average of the first 2 quarters of this year? Or should we expect it to be a little bit lighter just given the removal of those indirect auto loans?

A: Yes. So in regards to the provision, as you see, we did have a release this quarter that was predominantly related to the indirect portfolio as well as just the overall calibration of our loss rate because of that. And so we pulled out roughly $200 million in indirect loans, which dropped the -- reduced the current allocation requirement. And then the long-term loss rate for the portfolio also goes down. And so I would expect that it's going to be more similar to an average, like you said, in the first and second quarter, but it's going to be reflective of predominantly just growth rate and credit trends and charge-offs.

Q: I just wanted to -- one of my questions was just asked there, but the -- just on the loan growth outlook, can you just talk a little bit about just the loan growth outlook for maybe more 2026 and just kind of where you expect the growth to come from? And then just are there plans to add some additional staff? Are you good with the talent you've got in place right now? Or just kind of -- I know you've talked a little bit about M&A, just kind of more on the organic side. Do you really -- do you need to add people to kind of pick up the growth rate? Or do you have the staff now and there's not really plans to do that?

A: Yes. It's Thomas. Thanks for the question. I think if you look through this year, our growth rate was very solid in the core franchise. If you take out the indirect auto, our commercial growth rate was probably in the low double digits number on a consistent basis. As we move into '26, this will be the main part of our growth rate. And as John highlighted in his comments, we're anticipating that to be in the mid-single-digit level. The main difference is that Horizon isn't having an opportunity finding options to lend. We're just being very disciplined in our credit profile and also our margin management. So from a need to add additional -- significant additional headcount, we don't see that in the marketplace. We've entrenched ourselves in the growth markets and also of our core markets and are doing very well. We'll just be very selective on a go-forward basis, but making sure that we still continue to grow, but grow in a very smart and profitable way and make sure we hold our credit profile. So very confident in our ability for '26. This isn't a need for us to do a hockey stick on growth. It's more for us to be just measured in the approach and continue what we do best and be part of our local communities.

Q: I just wanted to -- one of my questions was just asked there, but the -- just on the loan growth outlook, can you just talk a little bit about just the loan growth outlook for maybe more 2026 and just kind of where you expect the growth to come from? And then just are there plans to add some additional staff? Are you good with the talent you've got in place right now? Or just kind of -- I know you've talked a little bit about M&A, just kind of more on the organic side. Do you really -- do you need to add people to kind of pick up the growth rate? Or do you have the staff now and there's not really plans to do that?

A: Yes. It's Thomas. Thanks for the question. I think if you look through this year, our growth rate was very solid in the core franchise. If you take out the indirect auto, our commercial growth rate was probably in the low double digits number on a consistent basis. As we move into '26, this will be the main part of our growth rate. And as John highlighted in his comments, we're anticipating that to be in the mid-single-digit level. The main difference is that Horizon isn't having an opportunity finding options to lend. We're just being very disciplined in our credit profile and also our margin management. So from a need to add additional -- significant additional headcount, we don't see that in the marketplace. We've entrenched ourselves in the growth markets and also of our core markets and are doing very well. We'll just be very selective on a go-forward basis, but making sure that we still continue to grow, but grow in a very smart and profitable way and make sure we hold our credit profile. So very confident in our ability for '26. This isn't a need for us to do a hockey stick on growth. It's more for us to be just measured in the approach and continue what we do best and be part of our local communities.