Horizon Bancorp, Inc.

Good morning, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the second quarter of 2026. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist 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. To withdraw your question, please press star and then two. Now, I will turn the call over to Todd Etzler, Executive Vice President, Corporate Secretary, and General Counsel for the opening introduction.

Good morning and welcome to our conference call to review Horizon's second 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 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 Kathie 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 Prame. At this time, I will turn the call over to Thomas Prame. Thomas.

Thank you, Todd. Good morning, and we appreciate you joining us. Horizon's second quarter results continue to highlight the strength and durability of our community banking model and management team's commitment to delivering shareholder value. The quarter continues to show impressive results with a net interest margin in the mid-430 range, strong fee income performance, and excellent credit trends. These results advance our capital levels with CET1 of 11.09%, and total risk-based capital of 15.01% at the end of the quarter. As we impact the first half of 2026 performance, we are pleased with our practical approach to balance sheet growth with year-to-date deposit growth of approximately 5% annualized, coupled with quality lending growth of approximately 4% annualized, led by a strong commercial loan performance of 5.7% annualized in the second quarter. These results align well with our four-year expectations and display our disciplined approach to growth on both sides of the balance sheet while maintaining the consistency in our net interest margin performance throughout the year. Our strategy of efficient balance sheet growth coupled with expansion of our fee income verticals and conservative approach to credit positions the company well for continued positive shareholder value generation in the second half of 2026. As communicated to the market previously, the company did establish an accrual for legal expenses related to an unfavorable litigation decision in the second quarter. We anticipate this accrual will remain in place until the company finalizes its appeal process in subsequent quarters. Including this one-time event, which represents earnings of approximately five cents per share in the quarter, the second quarter results were positive on many fronts, expanding on our momentum from the first quarter and aligned with our full-year expectations. Overall, we believe it's been a very successful start to the first half of 2026. and John will provide more specific details concerning our second quarter and year-to-date results. The performance level of the franchise to date and the positive financial results we have delivered for our shareholders have been very strong and we remain optimistic on this outlook as we head into the second half of 2026. At this time, I'd like to hand the presentation over to Lynn Kerber, Horizons Executive Vice President and Chief Commercial Banking Officer, to provide additional insight into the quarter's excellent funding and credit performance. Lynn?

Good morning. The second quarter was another solid quarter from a lending perspective and showed growth over the first quarter. We generated strong commercial growth, maintained stable credit metrics, and continued to deploy capital in a disciplined manner despite a competitive market environment. What I find most encouraging is not just the level of growth, but the composition of that growth. We continue to win attractive relationship opportunities across our footprint, While maintaining the underwriting and pricing discipline, this supports long-term profitability. As outlined on page 4, loans held for investment end of the quarter at just under $5 billion, increasing approximately $81 million, or 6.6% annualized. Commercial banking continued to drive growth, with commercial balances increasing approximately $64 million during the quarter. residential and consumer portfolios contributed modest growth during the quarter and continue to perform well. Mortgage pipelines have improved entering the third quarter, supported by recent production trends and strategic hiring initiatives. Page five provides an overview of our commercial lending portfolio and performance in the second quarter. The vast majority of our growth came from C&I lending, which increased approximately $62 million to 31% of the commercial portfolio. Growth was broad-based across the franchise with strong contributions from our Michigan markets as well as Indianapolis and Northwest Indiana. While commercial balances increased meaningfully, commercial real estate balances remained relatively flat. This was primarily the result of elevated payoff activity rather than weaker production. The majority of payoffs occurred because customers successfully executed business plans through property sales or reached the natural conclusion of a financing need. We remained committed to our underwriting standards and rate discipline rather than compromising long-term product quality or profitability. Regarding the CNI activity, the strongest growth came from our community banking franchise and was augmented by our equipment finance team. Primary segments were professional services, construction services, property management, warehouse and logistics, and utility-related businesses. Importantly, this growth was not driven by one or two large transactions. Rather, it reflects healthy activity across a broad group of customers and the continued success of our relationship banking strategy. These relationships often extend beyond lending and create opportunities for deposits, Treasury Management Payments, which are strategic priorities for the bank. Credit quality continues to be a significant strength for Horizon. Net charge-offs were approximately $605,000, or just five basis points annualized. That remains exceptionally low relative to both historical levels and peer performance. More importantly, we are not seeing deterioration in the underlying trend that would suggest a meaningful change in our outlook. Early-stage delinquencies remain low and well-controlled, while borrower performance remains stable across the portfolio. Substandard loans totaled $64.6 million, or 1.3% of loans, and were essentially unchanged from both the prior quarter and prior year. Non-performing loans declined during the quarter to $34.9 million, or 0.70% of loans. The key takeaway is that criticized asset levels remain stable, non-performing loans improve, and loss experience with the portfolio continues to be very low. The allowance for credit losses remains stable at $51.9 million, or 1.05% of loans held for investment. We believe the reserve remains appropriate given current portfolio performance and economic assumptions. Overall, we delivered another quarter of strong commercial growth Thank you, Lynn.

Transitioning to our deposit portfolio displayed on slide 8, Verizon's deposit portfolio for the first half of 2026 continued to deliver favorable performance, with positive growth in its major categories of non-interest bearing, interest bearing segments, with CD balances relatively flat year-to-date. As mentioned in our Q1 earnings comments, the company is expected to be a net user of the strong deposit gathering efforts generated in the first quarter and leverage this liquidity as fuel for our quality loan growth in the second quarter. This agility in our business model helped maintain our historically low cost of interest-bearing deposits, increasing only four basis points in the quarter, while providing ample funding capacity for loan growth, which was led by the commercial team in the second quarter. Year to date, deposits are up $125 million, representing a 4.8% annualized growth rate. As we move forward, the franchise remains highly engaged on pairing core deposit growth with common sense community lending efforts in our local markets. These activities have produced solid year-to-date performances on both sides of the balance sheet and we remain committed to this parallel strategy of growth and margin management as we approach the second half of 2026. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional income statement highlights and the continued positive outlook we see for the remainder of 2026. John?

Thank you, Thomas. As you can see on slide 9, the net interest margin expanded by another 8 basis points in Q2 to 4.37%. As noted in Thomas' comments, we expected to be a net user of cash in the second quarter, which turned out to be the case, with average interest earning cash down about $59 million. This result was certainly a favorable contributor to the margin expansion in Q2. As we have said all year, the movement of average cash quarter to quarter has the potential to impact the net interest margin percentage, but has little impact on net interest income dollars. More notably, we saw expansion of the spread between loan yields and total deposit costs. Loan yields increased by nine basis points versus the prior quarter, compared with a three basis point increase in total deposit costs, inclusive of non-interest balances. This, coupled with the favorable earning asset mix shift previously mentioned, drove the margin expansion we experienced during the quarter. Looking ahead, I'll make a few comments. Loan yield dynamics remain generally favorable. The weighted average new production rate on total loans was about 6.75% in Q2, which has continued thus far in July. This compares favorably to current book yields, as you can see. and expected cash flows over the coming quarters, which should approximate $150 million per quarter coming off in the 6.2% range. As noted last quarter and as we saw in Q2, it was and continues to be our expectation that interfering deposit costs trend modestly higher from here with no additional rate cuts. Given the loan yield dynamics just mentioned, we do have some promotional deposit pricing in the markets aimed at winning new households and Greater Wallet Share. During Q2, our weighted average deposit production costs were in the range of 2.3%, inclusive of the mix of production and non-interest-bearing balances. Therefore, marginal growth in loan and deposits should be generally supportive of our net interest margin and net interest income outlook. Cash balances will continue to move the margin percentage around With balances ending the quarter $44 million above the average and our expectations for loan and deposit growth, we would anticipate average cash over the balance of the year to exceed the $102 million we saw in Q2. The result is that we anticipate the margin percentage to be in the range of 4.3% to 4.35% over the second half of the year. Finally, you'll note that the outlook on slide 13 now include the general market expectations for one 25 basis point Fed hike later in the year, compared with two cuts in our initial 2026 outlook in January and no rate changes in our April update. As was the objective all along, we feel our interest rate exposure is very close to neutral, and therefore our net interest income and margin outlook have remained unchanged all year. As you can see on slide 10, non-interest income results were strong during the quarter, growing 10% compared with the year-ago period, led by fiduciary activities and mortgage, which each grew by about 20% year-on-year. Both business lines are benefiting from new leadership, investments in talent, and improved sales management practices. Additionally, we were pleased to see an acceleration in year-over-year growth in interchange fees as both card usage and spend experienced growth in the current period. On slide 11, expenses came in at $43.8 million, which includes the previously announced $3.1 million legal charge. Excluding this item, expenses were modestly better than expectations and largely unchanged from the prior quarter. as operational efficiency and positive operating leverage remain a focal point. We did see the anticipated uptick in salary expense and higher strategic marketing spend, which was largely offset by seasonal declines in benefits and occupancy costs and lower professional fees. Turning to capital on slide 12, while the aforementioned legal charge modestly impacted the growth in capital ratios, due to results drove another nice sequential increase. with CET1 up 28 basis points to 11.09%. This result was driven by continued strong levels of operating profitability and modest sequential growth 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 considering the sustained high level of profitability we are expecting. As our 2026 outlook suggests, The expectation is that we will continue to accrete capital quickly, which you will see over the balance of the year. Turning to slide 13, our guidance for 2026 is modestly more favorable. Period end loan and deposit balances are still expected to grow mid-single digits, which would suggest loan and deposit growth to be well balanced in dollars over the second half of the year. As we have consistently noted, 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 over the second half of the year in the 430 to 435 range, assuming higher cash balances going forward. Average earning asset balances are still expected to modestly exceed $6 billion for the full year. This outlook now includes one 25 basis point rate hike in October compared with no changes to rates in April. This change in assumption did not impact the outlook. The income is still expected to be in the mid $40 million range for the year with results generally consistent quarter to quarter. Excluding the $3.1 million legal charge in the second quarter, expenses are now expected to be in the low to mid $160 million range for the full year. This would suggest a quarterly run rate similar to what we experienced in the first half of the year, excluding the legal charge. The effective tax rate is still anticipated to be in the range of 18 to 20%. Overall, we are pleased with the results of the first half of 2026. As the guidance suggests, it should be a strong second half of the year for Horizon as well. Balanced growth with durable pure leading returns on assets, return on tangible common equity, and top quartile capital generation. With that, I'll turn the call back over to Thomas.

Thank you, John, and I appreciate the financial insights and the updated outlook for 2026. Horizon's strategy remains consistent as we move into the second half of 2026 with a relentless focus on creating long-term shareholder value. We believe our current performance levels reflecting durability and key financial metrics, coupled with consistent profitable growth, a disciplined operating model, and peer-leading capital generation will produce a level of success that will warrant your continued investment in Horizon. We are confident in what we believe will be a very positive outlook for our shareholders in 2026, and we look forward to sharing our third quarter results in October. 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.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then two. Our first question comes from Damon Del Monte with KBW. Please go ahead.

Hey, good morning, guys. Hope everybody is doing well today. Good morning, Damon. Good morning. Just wanted to start off with the margin. Appreciate the color, John, that you gave on the outlook there. Just want to make sure I understand the dynamics here. So basically, you know, I think from a growth perspective, you're still seeing a positive benefit on the asset yield side, but it sounds like that the funding cost might get to kind of creep up a little bit, which could ultimately weigh on the The margins from the QQ level of 437 if you're guiding towards 430 to 435. Is that the right way to think about it?

Hey, Damon, good morning. Thanks for the question. Yeah, not really. Let me see if I can clarify. Yeah, as you alluded to, the trends on the asset side continue to be favorable, as I talked about in my prepared remarks, both in loans and in the bond portfolio, quite frankly. Thank you for joining us. Thank you. I was totally out of base there. Thanks for clarifying that.

And then I guess just secondly, I'm kind of lone growth, you know, nice to hear the continued optimism there. You know, I guess Thomas or Lynn, did any kind of updated view on what areas of the portfolio as well as the geographic footprint are kind of supporting this outlook?

Yeah, good morning. You know, as I've shared in the past, you know, we're not looking at anything new. Thank you for joining us.

And the next question comes from Nathan Race with Piper Sandler. Please go ahead.

Hi, everyone. Good morning. Thanks for taking the questions. John, I was wondering if you could just elaborate a bit more on the strategy in terms of keeping higher cash balances. Is that just given some of the strength in the pipeline, you just want to keep some excess cash around to fund that growth, or is it just not necessarily wanting to kind of add duration in the bond portfolio with the kind of short-duration securities portfolio that you guys have now?

Yeah, hey, thanks for the question. You know, I don't think it's actively managing cash to 100 versus 150 or something a little bit north of that. You know, cash would feel pretty normal at 2% to 3% of earning assets. I think it's just the timing of the ebbs and flows of deposit balances. He saw cash $165 million in Q1. It was down in Q2. It's going to be kind of second half of the year near where it was in Q1. I just think it's not some very intentional strategy to hold a higher balance.

Okay. And then you mentioned new loan productions coming on, I think, at a blended rate of 675. You know, that's above a lot of peers that we see across the region. You know, just curious if you can comment on what you're seeing from a competitive price perspective and what's really allowing you to get kind of premium pricing on new loans. Is it mainly coming from the equipment team or any other color along those lines would be helpful?

Thanks for that question. Pricing has been, I'll say, fluid dynamic over the last six months. The first quarter, I'll say, was very competitively aggressive, and we very intentionally tried to manage our spreads. I think by trying to negotiate that with our clients, Of course, also gathering deposits along the way. I think we saw the benefit of that in the second quarter. But it is very dependent on the competitor, the market, and the product. And there are certain credit quality deals that I'll say that we'll be more aggressive on and just trying to manage overall pricing for your quote-unquote average credit. So I don't know that it's one thing. It's just a matter of trying to make sure that we're aligned both market-wise and credit-wise.

Okay, got it. And then maybe if I could just sneak one more in for Thomas or John. You guys mentioned, you know, how your continued built capital is pretty strong. Let's just give them a profitability profile these days. Any targeted capital ratios that you guys are looking to manage to going forward and just how you guys think about kind of alternative avenues to deploy, you know, excess capital these days between buybacks and I'm just curious within that context as well, what you're kind of hearing and seeing on the acquisition front.

Thomas, thanks for the question. I'll pair this with John and some of the responses. First, I appreciate the acknowledgement of the capital generation of the profile of the bank right now. It's It's given us a ton of functionality to create long-term shareholder value. We do not have a published capital level that we're shooting for that we've communicated out in the marketplace. As you look at us right now, CT1, just above 11%. I wouldn't consider us overcapitalized at that level. Again, we're going to be creating capital very well going forward. But when I look at our options, specifically speaking with M&A, As we've talked about before, we really feel as though we have a very strong organic growth strategy that is producing some top-tier results both in the profitability metrics and also capital generation. We're very optimistic about our ability to continue this organic strategy going forward at a very attractive pace, not only at the balance sheet, but also the fee income verticals, and while maintaining our disciplined operating model. M&A for us is really an accelerant to the strategy. As opportunities come up in our ability to review these, we'll continue to be agile about making sure that we create a long-term shareholder value proposition, but capital is not going to burn a hole in our pocket. will be very disciplined about deploying that, especially as it comes to M&A and making sure that we keep a long-term view about how to create shareholder value and not just a short-term quarter-to-quarter. And, John, I'll pass over to you some thoughts on buybacks.

Sure. Thanks. Yeah, so as we said in the prepared remarks, capital, again, the build was happening pretty quickly this quarter. The expectation would be that that would continue. We can't use all that capital organically. We know that. Thank you very much. about the capital position looking forward. So we're going to have to do something with it at some point, and we certainly do feel like there's some intrinsic value outside of the business with the stability and the profitability mix that we see today as we look over the forecast horizon. So there's probably some intrinsic value outside to the shares as we feel, and so we'll take a look at all of them, including buybacks.

Okay, great. I appreciate all the color. Thanks, everyone.

Thank you.

Again, if you have a question, please press start and then one. Our next question comes from Brendan Nozzle with Hub Group. Please go ahead.

Hey, good morning, everybody. Hope you're doing well. Amy, just starting off here on kind of the footprint and kind of some changes in the backdrop. Had a deal announced in your neck of the woods in northwest Indiana earlier this week. I know that it's early days. We're just wondering, you know, based on kind of your knowledge of that franchise, whether you think there's any opportunity to capitalize on this location, whether it's on the kind of the talent side or commercial clientele.

Thanks for the question. I appreciate it. You know, I think as we look across our franchise, not only in northwest Indiana, but also across Michigan, kind of northeast Indiana, any time that there's going to be a transaction in the marketplace with Horizon's value proposition, our long roots in the marketplace, we believe there's going to be an upside for us. You know, with any type of change, there's an opportunity for people to reevaluate, whether that's relationships or what their go-forward plans are for employment. Horizon's had a great – I'll see brand in the marketplace around being successful and helping create careers and also helping clients. So I would anticipate as we see disruption in the marketplace, we would benefit from that.

Okay. Thanks, Thomas. One more for me. You spoke of the competitive environment at various points in the call. I'm just kind of curious when you look at the landscape, what do you think is more competitive right now? Is it lending or is it deposit gatherings?

I think it depends which part of my franchise you're talking to. I think if you look out in the marketplace right now, large commercial real estate I think is extremely competitive. Thank you very much. Our ability to make sure that we have the right people, right engagements in the marketplace, we should do pretty well in pricing. Our strategy is not to lead the market with rate. Our strategy is to lead the market with people and talent and relationships.

All right. Thanks, Thomas. I appreciate you taking my questions.

And the next question comes from Brandon Rudd with Stevens. Please go ahead.

Morning. Morning. I think you kind of alluded to it in the last question there, but the elevated payoffs in the commercial real estate portfolio, is that being more driven by building sales or hyper-competitive rates from other competitors?

Yeah, as I shared in my prepared remarks, it's mostly attributable to our customers fulfilling their business purpose. So, you know, we've had some larger commercial real estate loans on the books. Those developers have, you know, reached a point where the business, I'm sorry, the building project has reached their, you know, turning point that they want to sell it and reach the benefit of the investments that they made. So I would say when I looked at our payoff activity, it is really more around that. or it may have been a working capital or a short-term need for financing that has now been fulfilled. I'll be candid, there are a couple deals that we did let go over pricing structure. Those customers were able to get something more aggressive in the market and we elected not to compete on that. Again, we're focused on the mix of our portfolio and our overall profitability. But, you know, we're looking at the bigger picture.

Got it. Okay. Thank you for that. And then just maybe one question on the non-performing loans. They were down in the quarter, but the mix changed a bit. Commercials ticked a bit higher. I guess, can you talk about that portion of the non-performing loans? Was that on the C&I side, CRE? Any thoughts there?

First of all, on the mortgage and consumer reduction, we had some clients that were... Thank you for joining us. and we have two that we're pursuing collection efforts and it's just taking a little bit longer than expected. No concerns, it's just working through the process. Relative to the changes, as I've shared in the past, I do see it as more of a migration. When I look at our criticized loans, those have been flat or declining. The only other thing I'll share is keep in mind is that We added our equipment science division roughly two and a half years ago, and that portfolio is starting to season, so we'll start to see some activity there as well.

Got it. Okay. Thank you very much for that. Maybe just one more modeling question, John. Thanks for the comments on the loans that are maturing and the new loan yields. What does the opportunity look like on the securities portfolio? What's the pickup in yield there now for securities? Those are maturing.

Hey, thanks. Thanks for the question. Yeah, reinvestment in the second quarter was in the high fours. Reinvestment in the third quarter, just maybe we pivot a little bit and pull in the duration a little bit, just given how the market has changed and spread to pretty tight. So I would anticipate they're pretty neutral. So I would not expect a whole lot of change in terms of the earned yield on the balance sheet for securities.

Thank you for taking my questions. Thank you.

And the next question comes from Brian Martin with Breen Capital. Please go ahead.

Hey, good morning. I think you guys mentioned just on the mix on the loan side, just kind of the real estate, kind of where your guidance, you know, where your concentration levels are. Can you just remind us where you're expecting to kind of keep that or kind of, you know, what areas on the real estate side concentration are you, what ratios or concentrations are you kind of targeting or maintaining?

Hey, good morning, it's John. So real quick, the concentration levels are about 235%, so we've got lots of room on the construction concentrations, even much lower than that. I think our expectation as capital at the bank continues to build, that those continue to moderate lower, but we've got plenty of room there currently.

Okay, so both of them would go lower from where they are today. Is that your plan? Gotcha. Okay. And then how about just on, I think, Lynn, you said that the comments on the payoffs this quarter, I guess, do you anticipate the payoffs being elevated kind of in the back half of the year, or how are you thinking about that in terms of based on what your guidance is in terms of loans and just what your expectations are?

I would say that based on my knowledge of some pending payoffs, I would anticipate that Q3 may be similar to Q2. But again, It's more episodic than, you know, payoffs from just throughout the portfolio. So, I wouldn't say there's going to be a wholesale change. At least for Q3, Q4, I would expect it would return to more of our normal pace. Got you.

Okay. John, I think you commented on the deposit pricing. What do you anticipate the deposit pricing? Did you say 230? I forget. I couldn't hear what you said on Thank you. Thank you. Thank you.

Maybe to pinpoint your question a little bit, so interest-bearing deposit costs were 1.94% in Q2. They were 1.95% in June and are 1.95% in July, so we just haven't really seen them move a whole lot.

Yeah, okay, that sounds good. It's not much incremental, if anything, going higher on that front. So, okay, that's all fun. And the last one for me was just you talked about M&A being an accelerant. If it is something you guys consider – Can you just remind us what's important to you guys today? I'm assuming nothing's changed, but just what is important if you go down that road to consider something on that front?

Thanks for the question, Neil, because we look at it very much industriological. We look for things that are either fill-ins or natural extensions of our franchise, but it really, for us, we look at the core deposit franchise. There's lots of things you could do with the balance sheet, but we'll be looking for something that has attractive core deposits so we can continue to leverage cultural fits. But, again, you won't see us go significantly outside of that strategy box, and we'll just be patient. And with our earnings profile, our history of being good acquirers, as things come to market, we are getting a nice chance to engage in those dialogues and remain agile but also very disciplined in our approach.

Gotcha. Okay. That's all super helpful. Thanks for taking the questions, and congrats on a nice quarter, guys.

Thank you.

The next question comes from Nathan Race with Piper Sandler. Please go ahead.

Hi, Nathan. Nathan, your line is now live.

Okay.

All righty. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Again, thank you for participating in today's earnings call. We appreciate your time and interest in Horizon. We look forward to sharing our third quarter results in October. Thank you very much and have a wonderful day.

The conference is now concluded. Thank you for joining. You may now disconnect.