HBNC

Overall Business & Strategy

• The Q2 2026 results highlight the strength and durability of Horizon's community banking model and commitment to delivering long-term shareholder value. The company maintains a disciplined strategy of balanced, efficient balance sheet growth, expanded fee income verticals, and conservative credit underwriting.
• Year-to-date 2026, deposit growth is ~5% annualized, while quality lending growth is ~4% annualized, with commercial loans growing 5.7% annualized in Q2, aligned with the company's four-year growth targets. Net interest margin performance has remained consistent year-to-date.

Lending & Credit Performance

• Commercial loan growth was broad-based across markets, with the strongest C&I growth coming from community banking and the equipment finance team, across segments including professional services, construction services, property management, warehouse and logistics, and utility-related businesses. Growth was spread across many small-to-medium customer relationships rather than driven by a small number of large transactions.
• Credit quality remains a core strength: net charge-offs were ~$605,000 (5 basis points annualized), well below historical and peer levels. Substandard loans totaled $64.6 million (1.3% of total loans), unchanged from the prior quarter and prior year. Non-performing loans declined to $34.9 million (0.70% of total loans). The allowance for credit losses stands at $51.9 million (1.05% of loans held for investment), which management considers appropriate for current portfolio and economic conditions.
• The company maintained strict underwriting and pricing discipline through the competitive market environment, declining to compromise long-term loan quality or profitability for market share.

Net Interest Margin & Capital

• Net interest margin expanded 8 basis points quarter-over-quarter to 4.37%, driven by a 9 basis point increase in loan yields that outpaced a 3 basis point increase in total deposit costs, plus a favorable shift in earning asset mix. Weighted average new loan production was 6.75% in Q2, a rate that has continued into July.
• Capital levels remain strong: CET1 ratio is 11.09% and total risk-based capital is 15.01% at quarter-end, with a 28 basis point sequential increase in CET1 driven by strong operating profitability and modest risk-weighted asset growth. Management is comfortable with the current capital position and expects continued strong capital accretion through the rest of 2026.

Operating Expenses

• Total Q2 operating expenses were $43.8 million, which includes a one-time $3.1 million legal accrual for an unfavorable litigation decision. Excluding this one-time charge, expenses were in line with expectations and largely unchanged from the prior quarter, with higher salary and marketing spend offset by lower seasonal benefits, occupancy, and professional fees. Operational efficiency and positive operating leverage remain key focal points for management.

• Full-year 2026 period-end loan and deposit growth are still expected to be mid-single digits, with balanced dollar growth in both categories over the second half of 2026. Growth remains driven by core deposit gathering, consistent with prior strategy.
• Net interest margin is expected to be 4.30% to 4.35% over the second half of 2026, and non-FTE net interest income is still expected to grow in the low teens year-over-year. Average earning asset balances are still expected to modestly exceed $6 billion for the full year 2026. The guidance now incorporates market expectations for one 25 basis point Fed rate hike in late 2026 (changed from prior expectation of no rate changes in the April update), but this adjustment did not change the full-year outlook, as Horizon's interest rate exposure remains near neutral.
• Full-year 2026 net income is still expected to be in the mid $40 million range, with consistent results quarter-over-quarter. Excluding the Q2 one-time legal charge, full-year 2026 expenses are now expected to be in the low to mid $160 million range, matching the quarterly run rate from the first half of 2026.
• The 2026 effective tax rate is still expected to be between 18% and 20%.

Loans: Total loans held for investment ended the quarter at just under $5 billion, an increase of ~$81 million (6.6% annualized). Commercial lending drove growth, with commercial balances rising ~$64 million in the quarter. C&I lending specifically grew ~$62 million, and now represents 31% of the commercial portfolio, with broad-based growth across Michigan, Indianapolis, and Northwest Indiana. Commercial real estate balances were flat quarter-over-quarter due to elevated payoff activity from completed customer business plans, not weak production. Residential and consumer lending contributed modest, stable growth. Deposits: Year-to-date 2026 deposits grew $125 million, a 4.8% annualized growth rate. Non-interest bearing and interest-bearing deposit categories both grew, while CD balances were relatively flat year-to-date. The cost of interest-bearing deposits increased only 4 basis points in the quarter, ending at 1.94%. Non-interest income: Grew 10% year-over-year, led by fiduciary activities and mortgage banking, which each grew ~20% year-over-year. Interchange fee growth also accelerated, driven by increased card usage and customer spending.

• A one-time $3.1 million legal accrual (equal to ~$0.05 per share) was recorded in Q2 2026 related to an unfavorable litigation decision. The accrual will remain in place until the company completes its appeal process in future quarters. The legal charge modestly reduced Q2 net income and capital ratio growth, but did not change the full-year outlook.
• The operating environment remains highly competitive for both lending and deposit gathering, particularly for large commercial real estate loans. Competitors may offer more aggressive pricing, which can lead to occasional customer payoffs from Horizon's portfolio if management declines to match discounted pricing to preserve profitability.
• Margins are exposed to modest upward movement in deposit costs even if the Fed holds rates steady, which could create small downward pressure on margin percentage from the Q2 level of 4.37%.
• The equipment finance portfolio, added roughly two and a half years ago, is starting to season, which will lead to some increased non-performing loan and credit activity over time.

Q: The analyst asked why management expects higher average cash balances in the second half of 2026, and whether this is a strategic choice to hold liquidity for loan growth or avoid adding duration to the bond portfolio. / A: Management clarified that holding higher cash is not an intentional strategic choice. It simply reflects natural timing of ebbs and flows in deposit balances, with cash bouncing between quarterly levels based on when loan growth and deposits come in. Cash at 2% to 3% of earning assets is considered normal for the bank.

Q: The analyst asked how Horizon achieves 6.75% blended new loan production rates, which are above many peer banks, and what factors enable this premium pricing. / A: Management explained pricing has been fluid over the last six months, with the first quarter seeing very aggressive competitor pricing. Horizon intentionally maintained spread discipline, and that discipline paid off in the second quarter. Pricing varies by competitor, market, and credit quality: the bank is more aggressive on high-quality credit deals and maintains disciplined pricing for average credit, aligning pricing with both market conditions and internal credit requirements.

Q: Given Horizon's strong current capital generation, the analyst asked about targeted capital ratios, plans for deploying excess capital including buybacks and M&A, and the current acquisition market environment. / A: Management stated the bank has no published target capital ratio, and does not consider current CET1 of ~11% to be overcapitalized. Horizon prioritizes its strong organic growth strategy that delivers attractive profitability and capital generation, with M&A only as an accelerant to this existing strategy, not a core priority. Management will remain disciplined, will not rush capital deployment, and is open to all options including share buybacks for excess future capital.

Q: The analyst asked what is more competitive right now for Horizon: lending or deposit gathering. / A: Management noted that large commercial real estate lending is currently extremely competitive. Horizon's strategy is not to compete on leading market rates, but to compete by offering superior client service, relationship depth, and local market talent, which allows the bank to maintain appropriate pricing discipline.

Q: The analyst asked what criteria Horizon prioritizes when evaluating potential M&A targets, given that M&A is an accelerant to the company's strategy. / A: Management prioritizes targets that are fill-ins or natural extensions of Horizon's existing geographic footprint. The most important criteria for any target is an attractive core deposit base to leverage the existing balance sheet, as well as strong cultural alignment. Horizon will not pursue deals outside of this strategic box, and remains patient and disciplined in evaluating opportunities.