Horizon Bancorp, Inc.

Good morning, everyone, and welcome to the Horizon Bancorp conference call to discuss the final financial results for the first quarter of 2026. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Now I will turn the call over to Mr. Todd Edsler, Executive Vice President, Corporate Secretary, and General Counsel for the opening introduction. Please go ahead.

Good morning and welcome to our conference call to review Horizon's first quarter results. Please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, They may be accessed at the company's website, horizonbank.com. Representing Horizon today are Executive Vice President and Senior Operations Officer Kathy DeRuiter, Executive Vice President and Chief Commercial Banking Officer Lynn Kerber, Executive Vice President and Chief Legal and Risk Officer Todd Etzler, Executive Vice President and Chief Financial Officer John Stewart, and Chief Executive Officer and President Thomas Graham. At this time, I will turn the call over to Thomas Graham. Thomas.

Thank you, Todd. Good morning, and we appreciate you joining us. Verizon's first quarter results demonstrate the core strength of our community banking model and our commitment to shareholders to deliver a top-performing organization through durable, peer-leading performance metrics and top-quartile shareholder returns. We are very pleased with the quarter's results displaying an annualized return on average assets above 1.60%, return on average tangible common equity above 19%, and continued durability in our net interest margin at 4.29%. These results drove a meaningful increase in our CET1 by 40 basis points to 10.82% and improved total risk-based capital to 14.77% in the quarter. Specific highlights within the quarter were led by the team's excellent deposit gathering efforts with over 147 million in growth or 11% annualized. These results were further enhanced by approximately 61 million of growth within the nine interest-bearing segments of the consumer and commercial portfolios. Our commercial lending team had a solid performance with 34 million in growth within the quarter with elevated pipelines that we believe will continue to fuel solid balance sheet growth throughout 2026. The positive momentum in the commercial was counterbalanced by episodic mortgage refinance activity in early Q1, where management elected not to chase lower-yielding mortgages under the balance sheet or remain steadfast on its disciplined pricing. We feel confident in this decision. We have seen loan balances quickly align with full-year growth estimates in early Q2. This momentum, combined with our strong deposit balances, positions the organization well for solid organic growth on both sides of the balance sheet in 2026. Additionally, our fee income efforts continue to make solid progress with year-over-year growth and record relationship banking segments of service charges, interchange fees, and fiduciary services. Complementing these efforts, we continue to display excellent credit metrics with low charge-offs and non-performing loans below historical norms. As I mentioned at the beginning of my comments, we're very pleased with the first quarter results for our shareholders. Additionally, we are confident in our full-year outlook heading into Q2 with strong lending pipelines, positive deposit trends, B-income verticals gaining stride, and expenses well managed. So it's a good start to the year on many fronts. Let me transition the presentation over to Horizon's Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share our lending highlights for the quarter and our continued excellent credit performance. Lynn?

Good morning. This quarter, we selected steady disciplined commercial growth despite a competitive lending landscape and a dynamic rate environment. We continue to prioritize high-quality commercial lending, a well-balanced portfolio mix, and continued pricing discipline. Our credit metrics remain stable, and we're exiting this first quarter with solid momentum. Total loans held for investment ended the quarter at $4.87 billion. driven by a $34.2 million increase in commercial loans. As Thomas mentioned previously, residential and consumer loans were down on the quarter by $32 million as the leadership team elected not to leverage the balance sheet for lower-yielding mortgages in the first quarter. Residential mortgage lending remains an important offering, and we expect growth in subsequent quarters as the rate environment stabilizes and yields are more attractive. Commercial loan growth was concentrated in the Grand Rapids, Indianapolis, and Northwest Indiana market. We continued to diversify the portfolio with 37% of the net quarterly increase attributable to commercial and industrial loans compared to their 30% share of the overall commercial portfolio. This mix reinforced the strength of our commercial franchise. Credit performance remained satisfactory and within historical ranges. substandard loans were $63.4 million, representing 1.3% of total loans, which is consistent with the 1.22% to 1.36% range over the past year and down from $66.7 million, or 1.36% in Q1 of last year. Non-performing loans are $37 million, representing 0.76% of total loans, consisting of $15.7 million in commercial loans, $10.6 million in residential real estate loans, and $8.4 million in consumer loans. While non-performing loans have increased modestly over recent quarters, levels remain manageable and consistent with a well-diversified portfolio. We anticipate improvement in the subsequent quarters of 2026 as we are forecasting several loans returning to performing status payoffs, or completion of the collection efforts. These loans are well-secured and or appropriately reserved, and we do not expect an impact on losses. Net charge-offs were 626,000, or five basis points annualized, aligned with our historically low loss experience and favorable compared to the 15 basis points reported by our UDTR peer group for 2025. The allowance for credit losses remains stable at $51.3 million, or 1.05% of loans held for investment. The $391,000 provision reflects replenishment of charge-offs and a reduction in reserve for unfunded commitments. Going forward, provision levels will continue to be influenced by loan growth, portfolio composition, and economic conditions. Overall, we delivered a solid first quarter of commercial loan growth, while maintaining our credit profile. We expect continued momentum in 2026, supported by positive trends in lending activity early in Q2, increased residential mortgage and consumer origination activity. We remain well-positioned to serve high-quality clients across our market, and our disciplined approach continues to support balance, sustainable growth, and strong shareholder returns. I'll now turn the commentary back to Thomas. for an overview of our positive deposit trends.

Thank you, Lynn. Moving on, our deposit portfolio displayed on slide eight. Verizon's deposit portfolio had a very positive first quarter in terms of growth, portfolio mix, and cost. As mentioned previously, the portfolio growth of approximately $147 million comprised a good mix across both the consumer and commercial segments. The quarter was highlighted by $61 million in nine-inch experience growth, Reflected of the organization's continued efforts to expand sticky primary banking relationships within subtractive markets throughout Indiana and Michigan. Even with the excellent growth in balances, the team was successfully able to reduce overall interest-bearing costs by seven basis points in the quarter through consistent portfolio reviews with local leadership and an agile approach to local market pricing. The franchise has found good rhythm in its deposit-gathering efforts. And we believe our deposit portfolio continues to be well-positioned to meet the growth and margin expectations of the organization, its granular composition, and long-standing relationships in our local markets. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, Jon Stewart, who will offer additional first quarter financial highlights and the continued positive momentum we see for the remainder of 2026. Jon?

Thank you, Thomas. Turning to slide 9, consistent with our original outlook for the year, the net interest margin in Q1 was unchanged from the prior quarter at 4.29%. The objective all along was to build a balance sheet with a level of profitability that was durable and largely inoculated from changes in rates. The one quarter does not necessarily make a trend. We feel good about the performance in Q1 and would note that our net interest margin and net interest income outlook is unchanged from our original guidance, despite going from the assumption of two rate cuts previously to none today. Specific to the first quarter, I would note that average interest earning cash balances did exceed our internal projections by about $60 million. You will recall the Q1 guidance called for average earning asset balances to decline from Q4 related to lower cash balances at year end. This did not happen primarily because deposit growth was stronger than expected in the quarter, which we were pleased to see. However, these higher cash balances did negatively impact the margin percentage by about four basis points in Q1. Away from cash, underlying margin trends remained supportive. New loan production in the quarter exceeded 6.6%, compared with average loan yields in the quarter of 6.28%, and roll-off yields just below 6%. In the investment portfolio, we are anticipating another $75 to $100 million of principal cash flows over the balance of the year at about 4.7%. Reinvestment rates in Q1 approximated 4.8%. These earning asset trends should largely be supportive of the net interest margin, even with the expectation that our interest-bearing deposit costs may be flat to up over the balance of the year with no further rate cuts. As you can see on slide 10, non-interest income got off to a nice start in Q1. Excluding the $7 million warehouse gain and modest securities losses in the first quarter a year ago, fees were up about 13% year over year. This result was driven by strong year-over-year gains in service charges and fiduciary activities. While mortgage gain on sale was flat year-over-year, the team is off to a nice start in the second quarter, such that we would still anticipate full year results to reflect solid progress in this business. On slide 11, expenses came in at $40.7 million, in line with expectations, particularly considering the seasonal headwinds in benefits and occupancy expense. These areas were partially offset by lower levels of spend on outside business services and the timing of marketing spend. Looking ahead, we would anticipate a modest increase in quarterly expense run rate in Q2 related to the full impact of annual merit increases and planned marketing spend for specific growth initiatives. That said, there is no change to our outlook for full-year expenses in the mid-$160 million range. Turning to capital on slide 12, once again, capital ratios improved quite strongly in the quarter, with CET1 up 40 basis points to 10.82%. This result was driven by strong profitability levels and a modest sequential decline in risk-weighted assets, as we continue to proactively manage the deployment of risk capital across the balance sheet. As we have previously communicated, we are very comfortable with the company's capital position, particularly in light of the de-risk balance sheet we now have, and as our 2026 outlook suggests, the expectation that we will continue to accrete capital quickly, which you will see over the course of the year. Turning to slide 13, our guidance for 2026 has not changed. Period end loan and deposit balances are still expected to grow mid-single digits. which continues to infer deposit growth modestly more than loan growth in dollars. As we have consistently noted, ultimately balance sheet growth will be driven by deposit growth going forward, and this strategy has not changed. Non-FTE net interest income is still expected to grow in the low teens year over year, with the FTE net interest margin in the range of 4.25% to 4.35%. average earning asset balances are still expected to modestly exceed $6 billion for the full year. This outlook previously included the assumption for two 25 basis point rate cuts in April and October, which have now been removed. This change in assumption did not impact the outlook. Fee income is still expected to be in the mid $40 million range for the year, with results generally consistent quarter to quarter. Expenses in the mid $160 million range is also unchanged. As noted in my prior remarks, for the reasons noted, we would anticipate a modest uptick in the quarterly run rate from the level seen in Q1. The effective tax rate is still anticipated to land in the range of 18 to 20%. Overall, we are pleased with the start to the year in 2026, and as the guidance suggests, it should be a strong year for Horizon. steady growth with durable peer-leading returns on assets, returns on tangible common equity, and top quartile internal capital generation. With that, I will turn the call back over to Thomas.

Thank you, John, and I appreciate the summary of the quarter and the updated outlook for 2026. As we look ahead, our thesis will remain consistent, with management focused on creating sustainable long-term value for our shareholders, for our disciplined operating model, consistent profitable growth, and peer-leading capital generation. As you can see from our financial results, we continue to build significant shareholder value and optionality with a durable top tier financial earnings profile, excellent capital generation, and a premier community banking franchise located in some of the best markets in the Midwest. We're confident what we believe will be a positive outlook for our shareholders in 2026, and we look forward to sharing our second quarter results in July. At this time, I'd like to turn the presentation back over to our moderator to open up the line for questions for the management team. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. And our first question for today will come from Brendan Nossel with the Hubby Group. Please go ahead.

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?

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. Excuse me. 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.

All right. Thanks, John. 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?

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.

Okay. Fantastic, Thomas. Thanks for taking my questions.

The next question will come from Brandon Road with Stevens.

Please go ahead. 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?

And 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. Got it. Okay.

Thank you for that. 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.

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?

Got it. Okay. Thanks for taking my questions.

The next question will come from Damon Del Monte with KBW. Please go ahead. Morning, Damon. Pardon me. It seems that Mr. Del Monte is back in the queue. We will move on to our next question with Mr. Nathan Race with Piper Sandler. Please go ahead.

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.

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.

Okay, great. 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?

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.

Okay. Got it. That's helpful. 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.

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.

Okay, great. I appreciate all the color. Thank you, guys.

The next question will come from Damon Del Monte with KBW. Please go ahead.

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?

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.

Great. 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?

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. Okay.

Okay, great. That's all that I had. Thank you very much.

Again, if you have a question, please press star, then 1. Our next question will come from Brian Martin with Marine Capital. Please go ahead. 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. Hey, 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.

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. Yeah, 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.

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 –

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

Gotcha. Okay, so I'll make sure of that. And then 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.

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.

Okay. 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? 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. Yeah, okay. Got you. All right. Thanks for taking the questions, guys.

Thank you. This will conclude our question and answer session. I would like to turn the conference back over to Mr. Thomas Prehm for any closing remarks. Please go ahead.

Again, thank you for joining us today at our earnings call. We appreciate your time and your interest in Horizon, and also we look forward to sharing our second quarter results in July. Thank you very much, and I hope you have a fantastic week.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.