Horizon Bancorp, Inc. Q4 FY2025 earnings call

• Horizon's fourth quarter results demonstrate the core strength of its community banking model and excellent execution of balance sheet repositioning.
• Exceeded prior performance estimates with annualized return on average assets above 1.6%, return on average equity approaching 16%, and net interest margin of 4.29%.
• Loan growth and credit quality were excellent, with reduction in higher cost transactional deposits, progress in fee income, and effective expense management for operating leverage.
• Kicking off 2026 from a position of strength, focused on creating sustainable long-term value for shareholders through disciplined operating model, profitable growth, and peer-leading capital generation.

Total loans were $4.9 billion at December 31, an increase of $60.7 million from September 30. Commercial loans increased $76 million in the fourth quarter, representing 9% growth on an annualized basis, with 28% in commercial and industrial and 72% in commercial real estate. Horizon's core relationship balances continued to show strength, with deliberate strategy to reduce high-cost transactional deposits; noninterest-bearing balances were up year-over-year. The net interest margin was 4.29% in Q4, annualized return on average assets was above 1.6%, and return on average equity approached 16%.

• Net interest margin outlook for 2026 is in the range of 4.25% to 4.35%.
• Period-end loans and deposit balances are expected to grow mid-single digits, with deposit growth modestly more than loan growth.
• Non-FTE net interest income is expected to grow in the low teens year-over-year. Average earning asset balances are likely to modestly exceed $6 billion for the full year.
• Fee income is expected to be in the mid-$40 million range. Expenses are expected to be in the mid-$160 million range. The effective tax rate is anticipated to land in the range of 18% to 20%.

• Factors causing actual results to differ from forward-looking statements, as noted in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission.
• Future provision expense will be driven by anticipated loan growth and mix, economic factors, and credit quality trends.

Q: Maybe just to kind of start here at a top level, if you guys look at your outlook for 2026, pretty similar to what you guys offered last quarter. As you look at kind of the opportunities and risks, like what in that outlook could end up going better for you guys? And conversely, what are some downside risks as you look at the year ahead?

A: Brendan, this is John. I think first and foremost, I commented on this in my prepared remarks. We actually view the outlook to be slightly more favorable than it was when we initially gave it. The NII, in particular, is where the leverage is higher base and more growth in the low teens. I think as you kind of generally push that through the numbers, you'll get a non-FTE number that's closer to $260 million. I think that guidance was maybe closer to mid-250s last quarter. FTE would be then about $4 million above that. So we do view there to be a more optimistic outlook. Maybe the very modest offset to some of that NII upside would be on the expenses, but really nothing materially there, just maybe $1 million delta or something from what we had initially put out there. I think some of the levers as you kind of work your way through the year, it's really going to come down to the ability to grow organic core deposits to fund organic core commercial loan growth. And I think a favorable outcome on that front is probably the biggest leverage point to upside to the outlook. And conversely, the opposite would be true. The loan growth pipeline, Lynn can talk a lot more about this. We feel really good about it. Spreads have held up really well. The team has done a fantastic job on the asset side, and it's going to come down on the liability side, I think, most notably.

Q: Maybe pivoting here to that topic of loan growth. Is there a point at which like the modest decline in the consumer category of the loans eases, which would allow the high single-digit commercial loan growth to shine through more visibly in that net growth number?

A: Thomas, thanks for the question again. As we look at the portfolio of our loans, our business model is truly a commercial banking model. That has been our lead strategy and Lynn and her team has just done a fantastic job on that. our consumer loan portfolio right now is primarily made up of HELOCs and consumer closed-end mortgages that deal with real estate. We feel as though we are well positioned there. We have a great credit profile in that area. Again, that's something we feel like we're going to stretch and try to create demand and/or try to create excess growth in that with taking on extra risk. So for us, it's a good product, but we're not seeing the consumer side to be something that we're going to probably push to accelerate. We really found great value not only on the lending side in commercial, but truly getting the full relationships with the deposits.

Q: Just on the outlook for fee income. I was hoping you could just talk a little bit about some of the drivers that you see leading to the kind of that mid-$40s million of revenues for 2026? I don't know if it's going to be driven more by fiduciary duties or do you have other treasury management services? Kind of I guess, what are your key assumptions behind that growth?

A: Thanks for the question. This is John. As we kind of roll the year forward and look at our budgeted assumptions, there's not one piece of that fee business that is towing the line, so to speak, modest kind of low- to mid uptick in service charges and interchange would be the assumption. We've got some specific initiatives in the market around interchange, but nothing -- we're not assuming anything in that outlook that would significantly change that view for 2026 anyway. Fiduciary activities expect them to continue to be strong. Mortgage should continue to grow and hopefully benefit rates. We'll kind of see what the rate environment does. But as we get back into the seasonally strong years, we'll get a better -- strong quarters, excuse me, we'll get a better outlook there. But there's nothing in particular, Damon, that is really pushing the growth number for 2026. It's pretty well balanced.