Horizon Bancorp, Inc. (HBNC) Q3 2026 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss the financial results for the third quarter of 2026. [Operator Instructions] Now, I will turn the call over to Deanna Chase from Horizon Bank for the opening introduction.

Good morning, and welcome to our conference call to review Horizon's third 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 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, Deanna. Good morning, and we appreciate you joining us. We're pleased with Horizon's productive third quarter, where strong financial results underscore our continued positive momentum. Highlights include top-tier performance as displayed by annualized returns on average assets extending above 1.7%, returns on tangible common equity in excess of 20% and a sustained net interest margin in the mid-4.3% range. These results continue to advance our healthy capital levels with CET1 exceeding 11.5% and total risk-based capital of 15.48% at the end of the quarter. As we look at the quarter, we continue to take a disciplined approach to growth on both sides of the balance sheet, while simultaneously managing pricing and credit risk. This measured approach to balance sheet expansion resulted in both loans and deposits continuing to grow in the mid-single-digit range on an annualized basis. Loan performance was further strengthened by broad-based expansion across our commercial, consumer and mortgage platforms, complemented by continued excellent credit trends. Deposit performance remained strong during the quarter with growth concentrated primarily in the core relationship balances, reflecting the strength of our local community banking model. The balance sheet performance continued to align well with our full year growth expectations while continuing to display our commitment to maintaining durability in our net interest margin profile. Our strategy of efficient balance sheet expansion, continued development of our fee income businesses and conservative approach to credit has delivered meaningful shareholder value and positions the company well to navigate a potentially uncertain interest rate environment. Horizon's third quarter performance was positive on many fronts. And I'll hand the presentation over to Lynn Kerber, Horizon's Executive Vice President and Chief Commercial Banking Officer, who will provide additional insight into the quarter's lending performance and continued positive credit trends. Lynn?

Good morning, and thank you, Thomas. The third quarter was another strong quarter for our lending team and reflects the continued success of Horizon's relationship-based community banking model. We generated balanced growth across commercial, residential mortgage and consumer portfolios, maintained stable credit performance and continued to deploy capital in a disciplined manner despite a competitive operating environment. What I find most encouraging is not simply the level of growth but the quality and diversity of that growth. We continue to win attractive relationship opportunities across our footprint while maintaining the underwriting and pricing discipline that supports long-term profitability and sustainable performance. As outlined on Page 4, loans held for investment ended the quarter at just over $5 billion, increasing approximately $47 million or approximately 4% on an annualized basis. Growth was broad-based across the franchise with strong contributions from our Grand Rapids, Midland and Lansing markets in Michigan and Lake County and Fort Wayne, Indiana. Our community banking teams continue to originate quality opportunities, supported by additional production from our equipment finance platform. This year, we very deliberately balanced volumes and margins in alignment with our balance sheet and net interest margin optimization goals while focusing on expanding our customer relationships. Residential real estate grew $16.5 million, buoyed by an expanded mortgage lending team and seasonal summer home sales activity. Consumer loans grew $18 million, predominantly in home lending segments. Commercial portfolio growth was $12.2 million for the quarter with C&I balances increasing approximately $22 million during the quarter and nearly $118 million or 12% from a year ago. C&I balances now represent approximately 31% of our commercial portfolio. Commercial real estate loans declined $9.9 million, impacted by both a deliberate selective strategy regarding real estate segments as well as elevated payoffs in July and August due to our customers choosing to sell their properties. Payoff activity was elevated in Q2 and early Q3 and moderated in September. And based on our current view, expected payoff activity will return to a more normalized run rate in the fourth quarter. Looking ahead, our loan pipelines remain consistent and continue to reflect the strength of our local markets and customer activity levels. We believe Horizon remains well positioned to continue generating mid-single-digit loan growth while maintaining our disciplined approach to risk management. Credit quality remains a strength for Horizon and continues to perform in line with our expectations. Net charge-offs were approximately $1.2 million during the quarter or 10 basis points annualized of average loans. While this was modestly higher than the prior quarter, the charges are reflective of timing between the second quarter and the third quarter and overall loss levels remain consistent with historical and expected trends with a year-to-date annualized loss rate of 6 (sic) [ 7 ] basis points. Borrower performance remained stable across the portfolios and early-stage delinquencies continue to be well controlled. Substandard loans improved during the quarter, declining to approximately $60 million from $65 million in the prior quarter, a reduction from 1.3% to 1.2% of total loans. Nonperforming loans ended the quarter at approximately $36 million or 72 basis points of loans, while nonperforming assets represented just 68 basis points of total assets. Our allowance for credit losses ended the quarter at $52.3 million, representing 1.04% of loans held for investment. We believe the reserve remains appropriate given the current risk profile of the portfolio, expected loss content and prevailing economic assumptions. Overall, we delivered another quarter of profitable and balanced loan growth while maintaining disciplined underwriting and stable credit performance. The combination of diversified production, stable credit metrics and consistent customer activity gives us confidence in our outlook for the remainder of 2026. Now I'll turn the call back to Thomas for a discussion of deposit trends and the balance sheet.

Thank you, Lynn. Transitioning to our deposit portfolio displayed on Slide 8. The deposit portfolio in the third quarter continued to deliver strong results. Growth in the quarter of approximately $81 million or 6% annualized was primarily focused within the relationship-based core deposit portfolios of the Community Bank with CD balances slightly down from a planned reduction in higher cost deposits. Deposit growth during the quarter was achieved while maintaining a measured approach to pricing, supporting Horizon's historically low cost of deposits with total deposits, including noninterest-bearing balances, increasing only 3 basis points and interest-bearing deposits increasing by only 4 basis points in the quarter. Year-to-date, deposits were up $206 million, representing a 5.2% annualized growth rate. The team continues to effectively align core deposit growth with prudent community lending opportunities across our local markets. These activities have produced solid year-to-date performances on both sides of the balance sheet and provided durability in our margin performance. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional balance sheet and income statement highlights, along with our outlook for the remainder of 2026. John?

Thank you, Thomas. As indicated on Slide 9, the net interest margin was flat with Q2 at 4.37% despite the increase in average interest-bearing cash balances. Loan yields increased by 3 (sic) [ 4 ] basis points versus the prior quarter, offsetting the 3 basis point increase in total deposit costs, inclusive of noninterest balances. This, coupled with the favorable cash reinvestment dynamics in the bond portfolio, drove the durability of the margin outcome we experienced during the quarter. Looking ahead, I'll make a few comments. Loan yield dynamics remain generally favorable. The weighted average production coupon on loans approximated 7% in Q3. This continues to compare favorably to current book yields and expected cash flows over the coming quarters, which should approximate $150 million per quarter in the 6.25% range. As we have said for a few quarters now, it continues to be our expectation that interest-bearing deposit costs trend higher from here. Given the strong starting point for our net interest margin and the favorable loan yield dynamics just mentioned, we are well positioned to continue with selective promotional deposit pricing aimed at winning new households and a greater wallet share across our footprint. In terms of the rate sensitivity positioning, we continue to believe the balance sheet is relatively neutral under the assumption that non-time interest-bearing deposit betas are in the range of 30% to 40% over time or in line with historical trends. On the asset side, about 25% of our loan book contractually reprices inside 30 days and about 15% of our securities portfolio is invested in variable rate assets. As noted later in the deck, we expect the margin percentage to express further modest expansion during the fourth quarter, even as we look to accelerate our organic growth on both sides of the balance sheet. Finally, you'll note that the outlook on Slide 13 includes 1 additional 25 basis point Fed hike in early December. Moving to Slide 10. At almost $12 million, it was another strong quarter for noninterest income. Results this quarter were again driven by solid performance in our core relationship-based businesses, enhanced by a strong quarter in mortgage and fiduciary activities, which grew by 52% and 8% year-on-year, respectively. Both business lines continue to benefit from newer leadership, investment in talent and improved sales management practices. Growth in our fee-generating businesses will continue to be a high priority in the coming year with the objective being to grow our share of revenue into recurring profitable sources of noninterest income. On Slide 11, expenses came in at $41.5 million, which was down from the reported $43.8 million in Q2, which included the $3.1 million legal charge. Otherwise, all other expense lines were in line with expectations and reflected normalized professional service expense and modestly elevated medical benefits expense. Overall, expenses continue to be well managed and in line with full year expectations. Turning to Slide 12. Our strong earnings performance, combined with measured balance sheet growth continues to support robust capital generation. During the quarter, our CET1 ratio increased by another 44 basis points to 11.53%. We are highly confident in the strength of our capital position and our ability to sustain attractive levels of profitability. As a result, we maintain significant flexibility to thoughtfully deploy capital, and we'll continue evaluating a range of opportunities aimed at enhancing long-term value to our shareholders, all while maintaining our disciplined approach to risk and growth. Turning to Slide 13. Our guidance for 2026 is largely unchanged, save for a few details specific to Q4. Full year period-end loan and deposit balances are still expected to grow mid-single digits, which from here would suggest more loan growth than deposit growth in Q4. For the fourth quarter, non-FTE net interest income is expected to be in the range of $66 million to $67 million, with continued modest expansion of the FTE net interest margin. This outlook includes one 25 basis point rate hike in early December. Fee income is still expected to be in the mid-$40 million range for the year. And excluding the $3.1 million legal charge in the second quarter, expenses are still expected to be in the low to mid-$160 million range for the full year. The effective tax rate for Q4 is anticipated to be in the range of 18% to 19%. Overall, it has been a successful first 9 months of 2026. And as the guidance suggests, Q4 should represent a strong finish to the year, setting the company up for another strong year in 2027. Our guiding strategic principles have not changed to deliver balanced growth, durable peer-leading return on assets and returns 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 the remainder of 2026. Horizon's strategy remains consistent in its approach to maintain a durable and top-tier earnings profile that will create long-term value for our shareholders. We believe the consistency of this profitable growth strategy, combined with peer-leading capital generation will produce a level of success that will warrant your continued investment in Horizon. We are pleased with our results year-to-date and continue to be confident in what we believe will be a very positive outlook for our shareholders in the fourth quarter of 2026. 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.

[Operator Instructions] The first question comes from Brendan Nosal with Hovde Group.

Starting off here on the margin, kind of thinking beyond the fourth quarter, it feels like the underlying dynamics are additive to your margin as you kind of continue to grow loans at better rates versus the back book. So when you couple that with rate neutrality, it feels like there could be margin expansion beyond the fourth quarter. But I just want to kind of check in with you to see if I have the underlying drivers right.

It's John. Thanks for the question. Yes, a lot of dynamics at play here. I think we do have some good momentum on the asset side. We've had that for a while. I think that continues, especially with the shape of the curve as it is today. I think the question as we get into higher rates, the market currently has December, March, June, plus or minus, something like that. The balance sheet will behave pretty neutral to those changes in rates, as I mentioned in my prepared remarks, under the assumption that the non-time deposit beta is in that 30% to 40% range. We're not there quite yet with that first September hike. But I think over time, that would approximate what we've done historically, and those are the underlying assumptions as it relates to the rate sensitivity going forward.

Okay. That's fair. Turning to expenses. It looks like if we kind of hold this quarter's $41.5 million run rate, kind of land near the higher end of the outlook for the full year. And I know that I'm splitting hairs here, but just any thoughts on kind of expense expectation run rate going forward?

Yes. Thanks for the follow-up there. Yes, the third quarter was a little bit elevated. There were a few pretty idiosyncratic reasons for that, that we don't necessarily will carry forward. I think the outlook in the fourth quarter is probably closer to the operating range we saw in Q1 and Q2, which is nearer to $41 million.

The next question comes from Damon DelMonte with KBW.

So, just curious, might be maybe for Lynn or for Thomas, but nice to see the C&I growth this quarter. And just kind of wondering, are you guys seeing a growing demand from your existing customers, in other words, drawing down on lines of credit? Or is this just a function of adding new relationships or maybe a combination of both? So, just looking for a little color on the C&I growth side of things.

Thank you very much for the question. Our line of credit usage has been actually very stable. So, it's not really a function of our customers borrowing more on their lines. We have been very fortunate to expand some of our existing C&I customers' business as well as some new opportunities as we're growing into that space. There's a little bit of disruption in the market with a couple of competitors that actually had some very nice opportunities from that as well.

Got it. Okay. That's good. And then I guess, maybe broader for Thomas. When you think about capital management, John alluded to or said what the capital generation was for this quarter. And obviously, it's coming at a pretty good clip. Could you just kind of remind us your priorities when it comes to that? Would you guys consider a buyback or maybe updated thoughts on M&A? Or is the focus more on just supporting organic growth opportunities?

Thanks for the question. Appreciate it. As you said, we positioned the company extremely well in terms of our financial performance and overall capital generation results. We've seen about 100 basis points increase in CET1 over the last year since our fourth quarter efforts. And as we look forward, we've seen the performance that we have this quarter. We see that continuing in further quarters as we go as a team. As you mentioned earlier, our leading strategy will continue to be primarily focused on how do we accelerate the growth of what we feel is a premier community bank while maintaining our profitability. We are still having very consistent reviews with the Board and also with the management team on other potential accelerants such as buybacks, dividend strategy and also potential partnerships. All options are available to us right now. But again, we feel very comfortable with our capital levels and the results of our ongoing growth strategy organically. So, I'd say we're very well aligned about the business model that we have right now, and we like the optionality in front of us, and we'll continue to have dialogue with the Board at the end of '26 and going into '27.

Okay. Great. And then just one kind of final last question here, maybe for John related to like expenses. You guys have done a really great job of managing expenses. But as we think into like 2027, are there any areas like in technology or maybe acceleration of using AI or something along those lines where you feel you need to invest more dollars, which could impact the outlook as we go through the year?

This is Thomas again. Overall capital spends on items that you talked about with technology. Over the last 3 years, just a quick reminder, we've replaced the online banking system for new account origination. We put in Abrigo for commercial. We have a new teller system inside the branches. We have a new account opening system inside the branches. So, I'd say from a technology spend, those are in the rearview mirror us and have already built into our run rate. So, you won't see any type of significant step-up. Of course, we'll look for opportunities to perhaps deploy some of our capital into our organic growth strategy from potential new branches. But again, these will not be significant step-ups. I think our run rate is pretty well established, and we'll see the typical merit increases and cost of living increases that you see from year-over-year. But the team has done a really nice job over the last 3 years, harvesting expenses from other parts of the organization and being able to reinvest into our organic model.

The next question comes from Nathan Race with Piper Sandler.

Curious just in terms of what you're seeing from a competitive perspective on new loan pricing these days, both on the commercial and equipment leasing side of things. And if maybe we don't get additional Fed rate hikes into next year, is there some underlying opportunities to remix the loan portfolio and some of those higher-yielding segments just to continue to drive loan yields higher? Obviously, you guys have already pretty strong loan yields north of 6.40% coming out of the third quarter. But just curious how much more expansion we could see in loan yields based on some remixing if we don't see additional hikes into next year?

Yes. I'll speak to commercial and turn it over to Thomas for any comments on retail. But as far as commercial goes, we exited just under 7%, barring any rate changes, I think that that's what we would expect as we move forward in Q4. With the last rate increase, as you would expect, some of our competitors, no one wants to be the first to move up. And so we're managing through that. Our team has done a really good job. We try to be selective with our pricing and managing to our NIM. So, the outlook for me right now is pretty stable, and we'll see what happens with the rate environment.

Okay. Great. And then, John, can you just update us in terms of what you have coming off the securities book over the next 12 months or through the end of next year and kind of what reinvestment rates look like to the extent you're looking to keep the securities portfolio flat relative to kind of cash flows coming off the book?

Yes, sure. Thanks for the question. It's going to be about $20 million to $25 million a quarter coming off the book still. Despite the move up in rates, our book has not extended. That was very intentional. So, we're pleased with that. They're coming off, as you look forward for the next 12 months, about 4.75% to 4.80%. They went on about 20 basis points favorable to that in Q3. Early here in Q4, even more favorable above 5% pretty comfortably without doing anything different on the underlying strategy of the portfolio actually even shortening it some. So, I feel pretty good about the outlook. Of course, the rate environment changes, we'll pivot with it, but that's where we are today.

I'm just curious, as you guys are kind of contemplating your budget for next year, what's the landscape look like across your footprint to maybe add some additional commercial producers or treasury management folks? Is that something you're contemplating in terms of some opportunities there, just maybe give us some disruption in your markets? Or just curious kind of how you guys are thinking about the landscape to add to the growth outlook?

Yes. So, we're continually evaluating that opportunistically [ and hiring ] as part of our budget process, and we do plan for that. The number that we end up doing, of course, we'll see, but we are looking opportunistically at that.

The next question comes from Brandon Rud with Stephens.

John, if I could start with a quick modeling question similar to an earlier one. On the fee income guide, it seems like if you were to just kind of take the average of the last few quarters, you can pretty easily get to the upper end of that guide. I just want to make sure I'm not missing something that may step down here in the fourth quarter.

Yes. Thanks for the question. It just wouldn't be our baseline assumption into a seasonally slower period in mortgage that we hold the levels you saw in Q3. The team is doing a great job. They did a fantastic job in the third quarter. Spreads were nice, volume was nice. But just seasonally, that would be the assumption underlying that.

Okay. Got it. And then, Lynn, to follow up on one of your comments earlier. I think you mentioned a targeted reduction in the CRE portfolio on either specific clients or categories of buildings. I'm just kind of curious if you could go into that a bit more.

Yes. I don't know that we're deliberately like exiting real estate or trying to reduce it. It's just more around -- we're managing concentrations and our exposure in different targets just like all of our competitors are. And so there are some segments that we were like, okay, we're probably full or nearing our appetite there and looking to some other segments. Just trying to manage that diversification and exposure for construction, that sort of thing. So, I feel really good about where we're at. It's just balancing that. And if you look at our mix, we have had more real estate in the past. We had a goal of diversifying into more C&I, and we're doing that. But that doesn't mean that we're exiting real estate or limiting our exposure there.

[Operator Instructions] The next question comes from Brian Martin with Brean Capital.

Say maybe just one for me on, Lynn, I think you talked about it, I guess I don't remember who it was, just on the loan growth or maybe it was John, on maybe fourth quarter being a little bit stronger. Any indications on where that strength is if it does pick up a little bit? And then just any big picture or broader comments on -- it seems like the outlook doesn't really change much from the levels this year in terms of -- as you look into '27 in terms of kind of the mid-single digit. So, just those 2 would be helpful, a little bit of color.

Yes. So, our new origination rate has been really had a nice cadence this year. As I mentioned in my comments, we were impacted by some higher payoffs this year than in the years past. As I mentioned, principally around our customers selling the properties and taking their profit as part of their business models. And so we've just seen some elevated payoffs this summer in particular. We do expect that to moderate in the fourth quarter based on my current information. But the run rate at the top of the department or the house has been good. So, I don't see any change in that.

Got you. Okay. That's helpful. And then just on -- I think, John, you mentioned the loan repricing. Just to be clear, I think you said it was about $150 million a quarter on the loan book. Was that just in the fourth quarter? Or is that kind of into '27? It sounded like into '27. Just wanted to confirm I had that right.

Yes, you do. I mean, if we look out over the next 4 to 6 quarters, it's about that level each quarter looking out.

Got you. Okay. And then the fee income, you talked about that being a bigger priority next year. I guess, just anywhere in particular we should expect to see some improvement or where you're focused on just to kind of we watch that as we roll into '27 here and into fourth quarter?

Thomas. Thank you for the question. We've put a really good effort in talent and also some products and services around TM investment over the last year. We see some of our deposit service charges reflecting that. And also, we've hired in a new Head of Wealth who's really put in a nice sales discipline and cadence and customer view and acquiring new clients. So, I'd say those are probably our 2 areas that we'll be looking for growth next year.

Got you. Okay. And just the last housekeeping for me. The -- the tax rate was a little bit lower this quarter. It sounds like it returns to kind of a more normalized level in fourth quarter and thereafter. Is that fair how to think about it?

Yes, you got that right.

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, and we look forward to sharing our fourth quarter results in January. Thank you again, and have a wonderful day.

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