Horizon Bancorp, Inc. (HBNC) Q1 2026 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Horizon Bancorp conference call to discuss the financial results for the first quarter of 2026. [Operator Instructions] Now, I will turn the call over to Mr. Todd Etzler, 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, 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 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 of 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 noninterest-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 onto the balance sheet and 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 in our core 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 nonperforming 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, fee income verticals gaining stride and expenses well managed. It was 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 reflected 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 are exiting the 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 in 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 continue 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 remains 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. Nonperforming loans are $37 million, representing 0.76% of total loans, consisting of $16.7 million in commercial loans, $10.6 million in residential real estate loans and $8.4 million in consumer loans. While nonperforming 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, payoff 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 5 basis points annualized, aligned with our historically low loss experience and favorable compared to the 15 basis points reported by our UBPR peer group for 2025. The allowance for credit losses remained 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 markets, and our disciplined approach continues to support balanced 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 to our deposit portfolio displayed on Slide 8. Horizon'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 noninterest-bearing growth, reflective of the organization's continued efforts to expand sticky primary banking relationships within its attractive markets throughout Indiana and Michigan. Even with the excellent growth in balances, the team was successfully able to reduce overall interest-bearing costs by 7 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 with 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, John Stewart, who will walk through additional first quarter financial highlights and the continued positive momentum we see for the remainder of 2026. John?

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. Though 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 2 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 4 basis points in Q1. Away from cash, underlying margin trends remain 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 million 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, noninterest 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 derisked 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 through 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 in 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.

[Operator Instructions] And our first question for today will come from Brendan Nosal with the Hovde Group.

Maybe just starting off here on kind of deposit growth and the margin. Obviously, exceptional deposit growth this quarter, but there's a bit of a drag on the net interest margin just given that elevated cash position. As you look towards loan pipelines, 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?

Having extra cash from good strong deposit growth in the quarter is not a bad thing, didn't impact net interest income, but had a modest impact on the net interest margin, as you noted. Looking forward, in the second quarter, we would anticipate being a modest net user of cash, so possibly see loan growth slightly exceed deposit growth for the second quarter. But as you look over the balance of the year, as the guidance would infer 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 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.

Okay. All right. Maybe one more for me, just kind of at a broader top level, relatively nice in-line quarter from a PPNR perspective. Reiterated the guide for 2026 kind of up and down the expectations 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 versus 3 months ago? Or is it as simple as progress according to plan?

Thanks for the call. This is Thomas. Appreciate the question. No, I go with your 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.

The next question will come from Brandon Rud with Stephens.

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's 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 our organic efforts and really not a specific target of a disruption in the marketplace and/or a specific institution.

Got it. Okay. And then maybe on the loan growth side, how much did payoff activity affect the commercial balances last quarter? There's a -- growth 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 1Q is maybe outsized payoffs.

This is Lynn, and thank you for your question. Payoff activity actually was very consistent with our long-term averages. I would attribute it your question really more to just a little bit of seasonality in the first quarter, also 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 the organic run rate.

The next question will come from Damon DelMonte with KBW. Pardon me. It seems that Mr. DelMonte is back in the queue. We will move on to our next question with Mr. Nathan Race with Piper Sandler.

Thomas, I was wondering or maybe, Lynn, 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, you've talked about the leasing build-out could be a benefit to fee income going forward. So we're just curious if you could touch on that unit in particular.

Sure. When we first launched the Equipment Finance division, our business plan had certain assumptions to it. And we're in effectively year 2 of that plan, and the team has been running volume-wise, income-wise, a little bit between our year 2 and year 3 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. 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 the margin is pretty neutral to rate changes along the curve, but we just kind of think about what would it take to drive upside to that outlook? Would it just be 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 sheet 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 -- I think we'd like to see some more talent adds 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 adds just being added to that.

Okay. Got it. That's helpful. And just one last one on capital management priorities going forward. To the earlier point, you guys are building capital at really strong clips and absent a buyback or an increase in dividend or some acquisitions, it seems like you guys are going to be operating with 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 the return on tangible as well.

I appreciate the question. And also thanks for the acknowledgment around the capital generation of the new profile of the balance sheet. It's exactly what we wanted to do for our shareholder value proposition heading in 2026 and beyond. As we have discussed before, our positive level of capital generation really does give optionality for our shareholder value proposition and whether that's going to be deploying it in accretive profitability, expanding our existing business model, buyback of shares or reinvesting some of the expanding some of our teams. These are all tools that are in our toolkit right now as we look forward into '26. 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 be continuing very disciplined in the approach on that and making sure we make 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.

The next question will come from Damon DelMonte with KBW.

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?

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 C&I and just diversify the overall portfolio, and 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 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. 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 knitting 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 target any potential additional hires?

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 opportunist.

[Operator Instructions] our next question will come from Brian Martin with Brean Capital.

I wanted to just see if you could talk about just the -- it sounds like the pickup on the roll-off of the securities is maybe 10 basis points at this point. Can you talk about where the pickup is on the loan portfolio? And then just in particular, 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 is 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?

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 yes, 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, 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. 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 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'll pass the call to Thomas or Lynn on the loan side.

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, it's about $318 million, about 10% of the portfolio that has a weighted average rate of just under 6%. So with origination rates on average in 7 plus, we've got 100 to 150 basis point pickup opportunity based on the current rate environment.

Got you. 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 with kind of a commentary about rates not being appropriate.

Yes. 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 is 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% on 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 the consumer side was more of just an episodic piece on the mortgage. We don't expect mortgage consumer to have a hockey stick growth this year to be relatively flat, maybe mildly up, mildly down, but again, relatively consistent overall performance.

Got you. Okay. And just to be clear, I think John said maybe a 660 was kind of -- I thought that was new production yield and from Lynn, it sounded though it was 7. Is that just commercial for Lynn and maybe 660 for the aggregate loan book? Is that what you...

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

Got you. Okay. I want to make sure that. And then just last one for me was just on the capital priorities. Can you talk about -- I think when you -- through the balance sheet restructuring, I think you talked about maybe waiting a couple of quarters, proving yourself out. It seems like that's kind of -- that's working well here. Just in terms of the opportunities on the M&A side, can you remind us, 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 parameters are on potential M&A in terms of size or pricing or just anything that you can offer there, 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 expanding and up to also including just lending capital continue to grow. When you look at our capital levels, I wouldn't say we screen higher than peers. I would say we're right in the range. As John mentioned earlier, we have a bit of a derisked balance sheet, which allows us some flexibility on how much capital we need to hold. But overall, we're just -- 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 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 decisions on capital deployment.

Okay. And then in the payback period, I guess, in terms of where it needs to be on an M&A deal or even on share repurchases, I guess, is that kind of sub 3 years? Is that kind of what you're thinking about in terms of where that payback is?

Brian, I think the market has made their own determination as to kind of where payback periods need to be, and if it's plus or minus 3 years. 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. 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 matter.

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

Again, thank you for joining us today on 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 hope you have a fantastic week.

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