Horizon Bancorp (IN) Q2 2025 Earnings Report

Horizon Bancorp (IN) EPS Results

• Actual EPS: $0.47
• Consensus EPS: $0.44
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

Horizon Bancorp (IN) Revenue Results

• Actual Revenue: $66.27 million
• Expected Revenue: $66.45 million
• Beat/Miss: Missed by -$180.00 thousand
• YoY Revenue Growth: N/A

Horizon Bancorp (IN) Announcement Details

• Quarter: Q2 2025
• Date: 7/23/2025
• Time: After Market Closes
• Conference Call Date: Thursday, July 24, 2025
• Conference Call Time: 8:30AM ET

Horizon Bancorp, Inc. operates as the bank holding company for Horizon Bank that engages in the provision of commercial and retail banking services. The company offers checking, saving, money market, certificate of deposits, individual retirement accounts, and time deposits, as well as non-interest- and interest-bearing demand deposits. It also provides commercial, residential real estate, mortgage, home equity, auto, personal, business, agricultural, and SBA loans, as well as credit cards. In addition, the company offers corporate and individual trust and agency, investment management, and real estate investment trust services; debit cards; treasury management; online and mobile banking; wealth, retirement, and estate and trust services; and sells various insurance products. It operates through full-service offices in northern and central Indiana and southern and central Michigan. Horizon Bancorp, Inc. was founded in 1873 and is headquartered in Michigan City, Indiana.

Horizon Bancorp (IN) Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Solid Q2 performance with 58% EPS growth vs. prior year, NIM up 19 bp to 3.23%, and improved ROA/ROATCE metrics.
• Positive Sentiment: Net loans held for investment grew 1.5% QoQ (6.2% annualized), led by 14.8% commercial loan growth, while non‐core portfolios ran off as planned.
• Positive Sentiment: Net interest margin continued to expand and full-year net interest income is expected to grow in the mid-teens, aided by strategic use of securities runoff for higher-yielding commercial loans.
• Positive Sentiment: Disciplined expense management kept Q2 noninterest expense at $39.4 M and full-year 2025 expense guidance is flat versus 2024, supporting positive operating leverage.
• Neutral Sentiment: Deposit balances were flat QoQ with stable funding costs and strong credit metrics, including low net charge-offs (2 bps) and an ACL of 1.09% of loans.

Presentation

[Operator]

Good morning, everyone, and welcome to the Horizon Bancorp Inc. Conference call to discuss financial results for the second quarter of twenty twenty five. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press then 1 on your touch tone phone.

[Operator]

To withdraw your question, please press then 2. Now I will turn the call over to Todd Eckler, Executive Vice President, Corporate Secretary and General Counsel for the opening introduction.

[Todd Etzler, EVP, Chief Legal And Risk Officer & Corporate Secretary at Horizon Bancorp]

Good morning, and welcome to our second quarter conference call. 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 ks 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.

[Todd Etzler, EVP, Chief Legal And Risk Officer & Corporate Secretary at Horizon Bancorp]

Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward looking statements made during the call. For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they may be accessed at the company's website, horizonbank.com. Representing Horizon today are executive vice president and senior operations officer, Kathy DeRider, executive vice president, corporate secretary and general counsel, Todd Epsler, executive vice president and chief commercial banking officer, Lynn Kerber, executive vice president and chief financial officer, John Stewart executive vice president and chief administration officer, Mark Secor and chief executive officer and president, Thomas Frame. At this time, I will turn the call over to Thomas Pram. Thomas?

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thank you, Todd. Good morning, and we appreciate you joining us. Horizon's second quarter earnings reflect the strength of the organization's exceptional core community banking franchise. Strong loan growth, stable and granular core funding, excellent credit quality, and prudent management of expenses fueled the quarter's positive results and expanded our management's commitment to improve the financial performance of the company.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

The quarter was highlighted by a seventh consecutive quarter of significant net interest margin expansion, low net charge offs of two basis points annualized and enhanced momentum in key performance metrics of ROA and ROATCE. We continue to show the strength across our core community banking platform that is being driven by a disciplined approach to creating a more efficient balance sheet and effective deployment of capital. We are pleased with our results for the first June, with reported earnings per share growing by 58% versus the comparable period a year ago. Page three provides insight into the quarter's results. The quarter displayed positive growth in our revenue model with the margin continuing to expand through solid loan growth of approximately 6% and disciplined pricing both on loans and deposits.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Noninterest income continued to deliver good results, and the consistency in our expense management efforts further provided momentum to our improving operating metrics. Overall, a solid quarter on many fronts, and we feel well positioned heading into the second half of twenty twenty five. As mentioned earlier, the second quarter was highlighted by strong loan growth and asset quality that has been a consistent theme of our excellent community banking model. I'll transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share highlights for the second quarter in this part of our business model.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

Thank you, Thomas. We are very pleased with loan growth for the second quarter, which closely aligned with our forecast for volume mix and yield. Net loans held for investment grew $75,500,000 representing 1.5% growth in the quarter and 6.2% on an annualized basis. Primary drivers of loan growth included commercial loans of $117,000,000 and consumer loans of $8,000,000 offset by the sale of residential loans and the planned contraction of indirect loan. Commercial loan growth of $100,117,000,000 dollars represents growth of 14.8% in the quarter, driven by growth in our core commercial banking segment.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

Growth for the quarter is consistent with our overall portfolio composition with expansion of our C and I portfolio. We continue to actively manage a diverse portfolio, both from a geographic and segment basis with the largest segment at 6% of total loans and our CRE ratios below our peer group. Loan demand and pipelines remain stable at this time, and we continue to focus on quality, origination, and pricing discipline. Despite volatility related to federal policies and our associated impact on interest rates, our lenders have done an excellent job managing rates and maintaining spread. In in the second quarter, we piloted equipment finance syndication sales and expect this will be an additional tool to support balance sheet management and the generation of additional non interest income.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

Turning to Slide six. Consumer loan balances decreased $41,000,000 during the quarter, reflective of the continued strategic shift to run down the indirect auto portfolio and reinvest this liquidity into higher yielding and franchise value commercial lending relationships. Residential mortgage lending modestly grew during the quarter, reflecting our organization's strategy to sell a majority of its production and leverage its balance sheet for higher quality client relationships in our local market. Credit quality remains satisfactory and consistent with credit performance over the past year. Substandard loans and non performing loans represent one point two nine percent and fifty four basis points respectively, a slight reduction in both metrics this quarter.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

Net charge offs were in near 254,000 or two basis points in the quarter, which compares favorably to performance over the past year. Year to date charge off totaled $1,100,000, representing an annualized charge off rate of five basis points. Finally, our allowance for credit losses increased to $54,000,000, representing an increase from 1.07% to 1.09% of loans sold for investment. Provision expense of $2,400,000 represents an increase from recent quarters, which is primarily driven by loan growth and economic forecast. The most recent quarters having benefited from the release of special reserve allocation.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

We continue to monitor economic conditions, and future provision expense will be driven by anticipated loan growth and mix, economic factors, and credit quality churn. Now I'd like to think turn things back to Thomas, who'll provide an overview of our deposit trend.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thank you, Lynn. Moving on to our deposit portfolio displayed on slide eight. Horizon's core relationship balances continue to show the strength of the franchise's community banking model. Balances for the quarter were relatively flat from Q1, and the team extended its disciplined approach to deposit pricing while continuing to take advantage of Horizon's diversified funding sources. These efforts helped our funding costs remain relatively flat from the first quarter.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

We continue to believe the deposit portfolio is positioned well to benefit the organization moving forward with its granular composition and long standing relationships in our local markets. The team has displayed its ability to be agile in leveraging multiple funding options and creating optionality within the portfolio to continue to create shareholder value. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional second quarter financial highlights and our outlook as we look through the remainder of 2025.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

Thank you, Thomas. Turning to Slide nine.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

The Q2 net interest margin increased by another 19 basis points to 3.23%, which was above expectations. Included in the margin this quarter is approximately seven basis points of outsized interest recoveries on commercial and residential loans. Excluding that recovery income, the margin expanded nicely in Q2, driven by the continued execution of our core balance sheet strategies, which resulted in an improved mix of both earning assets and liabilities. Additionally and importantly, excluding the interest recoveries just noted, loan yields expanded in the second quarter, which is a result of the purposeful mix shift, favorable roll off, roll on yield dynamics and disciplined pricing. The combination of these factors resulted in a widening of our net spread in the quarter as earning asset yields expanded with and without the recoveries, while interest bearing funding costs declined by two basis points versus the prior quarter.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

Looking ahead, many of these same balance sheet dynamics are expected to persist for the balance of the year, such that we would still expect additional net interest margin expansion as the year progresses, albeit at a more modest pace. While our current outlook assumes two cuts in September and December, neither will have a material impact on the net interest income outlook or margin outlook for the remainder of the year, which remains for full year net interest income growth to be in the mid teens. Slide 10 provides a profile of the remaining investment securities and the projected cash flows and yield roll off for the coming year. It continues to be the case that we do not intend to reinvest cash flows in 2025. As we have done in the past several quarters, we will continue to use those proceeds to fund organic relationship based commercial loan growth.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

As you can see on Slide 11, reported noninterest income was straightforward this quarter. Interchange fees and mortgage gain on sale experienced some seasonal strength in the quarter, while most other categories were relatively stable. Additionally, mortgage continues to benefit from the prior period investment in the business and the efforts of new leadership. Our outlook for 2025 remains unchanged for growth in the low single digits. This comparable excludes the securities losses in both 2024 and 2025 and the $7,000,000 gain in the first quarter.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

On Slide 12, at $39,400,000 you can see it was another well managed expense quarter for the company as we remain focused on delivering sustainable positive operating leverage. While we are pleased with the expense results through the first half of the year, we understand the need to remain diligent. Therefore, we are modestly reducing our outlook for full year reported expenses to now be approximately flat when compared to the $158,800,000 reported for the full year 2024. Turning to capital on Slide 13. The positive momentum of the last few quarters continued again this quarter with linked quarter increases in all capital ratios as well as tangible book value per share.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

The increases were driven by improved profitability and the strategic repositioning of the balance sheet, which continues to restrict growth in risk weighted and total assets. We would generally expect these capital trends to continue for the balance of the year as profitability improves and total balance sheet growth remains relatively muted. Finally, turning to Slide 14 and our updated outlook for the full year. In short, we are pleased with the progress through the first six months of the year and are optimistic for a strong finish. Net interest income and margin are trending nicely, while our expense outlook is modestly more favorable.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

As we have said for several quarters now, the objective remains to drive improvement in recurring and predictable operating profitability and are trending in the right direction. There are a few items I would like to highlight. While expectations for loan growth and loans held for investment are unchanged in the mid single digit range for the year, we are anticipating a bit more runoff in the indirect auto book versus prior expectations, which would now total about $125,000,000 for the year, up from about $100,000,000 previously. Deposit growth expectations remain unchanged in the low single digits. Under our base set of assumptions, which now includes two twenty five basis points Fed funds cuts in September and December, our net interest income growth expectations for the full year 2025 remain unchanged in the mid teens.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

Total reported expenses for 2025 are now expected to be approximately flat relative to the reported full year 2024. Finally, the full year effective tax rate for 2025 is still expected to be in the mid teens. With that, I'll turn the call back over to Thomas.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thank you, John, and appreciate the summary of the second quarter and our outlook for 2025. As you can see from our financial results and momentum entering the second half of the year, we continue to see a bright future for Horizon, and we are delighted with the positive strides in our financial performance metrics for the quarter and year over year comparison.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

A very good performance for the team on many fronts, and we look forward to continuing to deliver incremental shareholder value in the second half of twenty twenty five. This is the end of our prepared remarks, and I welcome the operator to open the line up for questions for our management team.

[Operator]

We will now begin the question and answer session. To ask the question, you may press star and one on a touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press then 2. At this time, we will pause momentarily to assemble our roster.

[Operator]

The first question today comes from Brandon Nozzle with Hosse Group. Please go ahead.

[Brendan Nosal, Director at Hovde Group]

Hey. Good morning, everybody. Hope you're doing well.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Good morning, Brandon.

[Brendan Nosal, Director at Hovde Group]

Well, first of all, congrats on the quarter and and the progress you've been making.

[Brendan Nosal, Director at Hovde Group]

Maybe just to start off here on on capital. You know, your books continue to to build ratios this quarter. Just kinda curious if you have any updated thoughts on how you're viewing the capital build for here, potential uses as we move through the next few quarters and just the ultimate thought process on kind of resolution of HTM and borrowings? Thanks.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Sure, Brendan.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thanks for the question, and I appreciate the acknowledgement of the performance and capital build over the last year. Now if you look at specifically, look at our CET1, they're up about 90 basis points over the last twelve months. That includes some capital actions that we've taken internally. So it's been really nice momentum. Now if you look at the second half of year and the capital levels we have and the generation coming out from a more profitable balance sheet, I would say that's going to give us more optionality of what we like to do.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

As John mentioned in our opening comments, our focus over the last year is really about making sure we have a balance sheet and income statement that can have predictable returns and predictable operating income. Think the team has done really nice strides on that. So as we look forward optionality of items we may be discussing around potential buybacks, other uses of capital. I said the table has gotten a little bit broader for us. The second part of your question, I imagine, deals with some of the transactions that we've seen over the last year around individuals perhaps raising equity and or using capital to restructure their balance sheet.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

In most of these cases, what we've seen out in the marketplace that these organizations have done that to achieve where Horizon has achieved success over the last year on our own. Now we're really proud of that track record. And if you look over time, we've executed on several capital actions that that are very friendly to our shareholders. A couple of them have the investment restructures. We ran out the indirect auto.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

We sold the mortgage warehouse business and took that capital and added to our stack. And, additionally, we also are making different choices around capital and around tax investments. I think you can expect the same approach going forward as we continue to improve the performance of the organization and look for capital optionality.

[Brendan Nosal, Director at Hovde Group]

Okay. Alright.

[Brendan Nosal, Director at Hovde Group]

So, well, Thomas, thank you for the the thoughts there. Maybe kind of turning to lending and the competitive environment. Just can we get an update how the competitive environment is involved for both lending and funding? You know, I've heard from several of that larger regional regional are stepping back into certain asset classes like commercial real estate, and then also hearing that funding competition is back a little bit as more banks seek to grow loans. So we would love your thoughts there. Thanks.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

Good morning. This is Lynn. Regarding commercial, I think, generally, I would describe the environment as fairly competitive, specifically on pricing. We've seen compression on spreads in the commercial area with our competition. As I commented in my earlier remarks, I think our team has done an excellent job of navigating the rate environment and, you know, negotiating needle.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

But it does remain very competitive. We've seen, you know, some reduction in that spread over the indexes over the last, I would say, four months. Probably more than I actually maybe anticipated with the volatility in the rate indexes. As far as underwriting classes, it really depends on the competitor. Everybody's, you know, managing to their concentrations.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

I've been asked in the past about our OpEx exposure, multifamily. I mean, those segments have performed extremely well for us. So we just continue to be very focused on our basic underwriting, the fundamentals, and also opportunistic. There have been some office loans that we've done over the last year, strong sponsors, low loan to values, strong underwriting metrics. So I would say it's more situational.

[Brendan Nosal, Director at Hovde Group]

Okay. Thank you for the thoughts. Thanks for taking the questions.

[Operator]

The next question comes from Terry McEvoy with Stephens. Please go ahead.

[Terry Mcevoy, Managing Director at Stephens Inc]

Hi, Terry. Hi, good morning. Thanks for taking my questions. Maybe just start the small interchange revenue down quite a bit year over year. I know there's seasonality you talk about in the second quarter, but any color there on the decline in 2Q and your thoughts going forward?

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Appreciate the question. As far as interchange, we we keep a pretty close eye on that. We've seen two aspects of interchange this year compared to last year. One, the overall swipes are slightly down and the spend per swipe is down. Mainly, we're just seeing a little bit more conservative spend from the consumer base and also where they're spending that data as you know, not every swipe is equal at the at the terminal.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

And so as we see higher interchange signs such as, like, you know, or lowering the compliance with things like groceries and gas, that's gonna impact it. But, again, what I think we're we're seeing right now, these levels will probably be our go forward look. Maybe as a follow-up, could you just discuss market competition for deposits in your markets and where you see deposit costs trending in the back half of the year?

[Terry Mcevoy, Managing Director at Stephens Inc]

Yes. Say for I'll I'll split it out by segment.

[Terry Mcevoy, Managing Director at Stephens Inc]

First, I'll cover the consumer segment. I'd say that's relatively been a a consistent quarter over quarter. You know, we're seeing promotional rates come down and also we're seeing the term of those promotional rates pull back into the three to five month territory. So for us, as we've been disciplined about around that, we're making sure that we're not taking on extension risk and pricing for us in that portfolio is is about 4%.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

So it's it's in a good spot, you know, and then we anticipate as we start seeing further Fed move that they'll probably move that market will move towards us.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

As we get into the larger institution institutional funds and then also in the public funds area, you know, that can still be a pretty wide bid ask. As you saw in the second quarter for us, we let some strategic we let some higher price CDs go off the balance sheet because it it just didn't make incremental sense from a margin management and overall flexibility on the balance sheet. So I would say the competitive and the and the public space is still still pretty competitive. There's some banks out there in our marketplace and also some credit unions that perhaps have a little bit higher loan to deposit ratios. But I wouldn't say that's changed on, like, comparing our operating model.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

We're just being conscious of it, being diligent on our pricing going forward. And I think as you saw from our quarterly results, we were able to hold our overall funding cost slightly down from q one.

[Terry Mcevoy, Managing Director at Stephens Inc]

Perfect. Appreciate that. And Thomas also appreciate the comments on the HTM securities and definitely acknowledge the actions taken and how they've resulted in improved earnings and overall profitability.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

So thanks for the color there earlier. Thank you.

[Operator]

The next question comes from Damon DelMonte with KBW. Please go ahead.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, good morning, everyone. Thanks for taking my questions and appreciate all the color and disclosure in the slides. Just kind of curious from the loan growth perspective, you guys continue to feel pretty optimistic, it sounds like, on the back half of the year in the commercial side. Are you finding that the growth being driven more by new customers coming to the bank? Or do you have some amount of increased line utilization from some of your current customers?

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

Yeah. Good morning. Relative to commercial customers, I would say a good majority of our business has been with existing customers. Regarding the line of credit utilization, it's remained actually pretty stable. In fact, it actually reduced a little bit the last couple of months.

[Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp]

So it's being driven by expansion of business with our customers and referrals by our customers. C9 is probably a little bit more new customer acquisition. So it it it's a mix, but it's it's really truly our core markets in expanding those existing relationships that we have.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. Okay. Appreciate that. And then with regards to the margin and the outlook there, John, can you just remind us, do you have any sizable CDs that are repricing in the back half of the year?

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

No.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

The the CD book is fairly homogenous. You know, the duration is relatively short, it's about five or six months kind of all year long. So those dynamics also stay in place.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. Okay.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

And then just lastly, is there anything specific you guys are doing on the expense front to to be able to manage them so successfully and kind of keep down keep the the total amount flat year over year? I I don't know if there's any initiatives or anything kind of that's going on that's giving you the leverage there.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

No. Thanks.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Appreciate the acknowledgment there.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Nothing in particular. I mean, it's just really diligent expense management across the organization, both corporate out in the market. We understand where the bogeys are, and we're working hard to meet them. There's nothing no big named expense plan or anything else out there. It's just business as usual.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

But, know, we've got a pretty tight budget, and the and the folks are doing a really good job managing to it.

[Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. Great. I appreciate all the color. Thank you very much.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Yeah. Thanks, Damon.

[Operator]

The next question comes from Nathan Race with Piper Sandler.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

You guys have obviously done a great job building a more kind of core funded balance sheet over the last several quarters. So just curious how you're thinking about the target for wholesale funding on the balance sheet going forward relative to kind of where we came out at the end of this quarter and maybe what your targets are for the next twelve to eighteen months as deposit growth is expected to pick up? Yes. Thanks for the question. I wouldn't say there's any specific targets out there.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

The general objectives at the top of the house remain the same, which is the balance sheet has been more heavily dependent on wholesale funding than in the past than maybe we would want to see going forward. Really nothing to the borrowings kicking up here in the second quarter. I mean, just took advantage of as Thomas mentioned before, we just swapped some expensive deposit funding out and had a nice opportunity to do so at the very beginning of the quarter with the rally in rates, a pretty sharp rally that backed right off. But longer term, the objectives remain the same, which is to reduce the reliance on wholesale funding. From here, if we have some good success on the deposit side, maybe it'll give us a chance to modestly reduce that going forward.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

I wouldn't anticipate any step function changes though at the moment. Okay. Great. So John, I imagine that implies some monitoring asset growth in the back half of this year? That's correct.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. Great. And then John, if I heard you correctly, it sounds like the way the balance sheet is positioned today, you guys are pretty neutral in terms of the margin impact to any bad cuts on the short end? Sorry. That's also correct.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. Great. All right. And then just generally from a margin perspective, is there still kind of an upward bias over the back half of this year just given the neutral sensitivity and some of the repricing tailwinds that we talked about on the earning asset side and with maybe kind of flat deposit costs as long as the Fed remains on pause?

[John Stewart, CFO & Executive VP at Horizon Bancorp]

Yes.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

I think that's correct as well. So I think if you look at the margin in the second quarter, the 3.23%, we called out the seven basis points, so back that off to about 3.16% on an operating basis. From there, we would anticipate there's some modest expansion, albeit less than what we've seen in the past. Most of the step function mix changes on the asset side and the liability side, as we just talked about, are largely behind us. So it really becomes about the churn on the asset side and the management of funding costs on the liability side.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

So I think it's correct that you would expect some modest improvement off that $316,000,000 back half of the year and probably into the beginning parts of next year as well. Still feel pretty good about that landing spot in Q4 for $315,000,000 to $320,000,000 on the operating margin. Just to clarify, that's not taxable adjustment on the margin you're referring to? So the FTE reported margin was $323,000,000 in the quarter. About seven basis points of that is what we called out as outsized recovery.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

So if you back that down to the $316,000,000 that's what I'm talking about, off of that number.

[Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies]

Understood. Got you. Thank you for that. I appreciate all the color. Thanks, everyone.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thank you.

[Operator]

The next question comes from David Long with Raymond James. Please go ahead.

[David Long, MD - Banking at Raymond James Financial]

Good morning, everyone. Thanks for taking my question. Just big picture, and I don't want to put words in your mouth here, but overall, I think there's a general positive sentiment on the Northern Indiana and Indiana as a whole economy. Can you just talk about maybe your outlook for for the the economy within your footprint?

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Sure, David.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

And I appreciate the acknowledgement. We we are very pleased to be in the markets that we're in. Northern Indiana is still seeing some significant infrastructure investment, data centers, the two tracks here locally. We are still experiencing the outflow of talent, people, and businesses to Indiana from from Illinois. So I I would say we we're very fortunate to have some good tailwinds here in the in the marketplace.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Also, I wonder about, you know, Indiana is just a great state to have a, you know, your the banking franchise in. It's a it's a bank friendly state. It's a friendly business state. And so with that, you know, our distribution, specifically in Northern Indiana going all the way down to Indianapolis, has has been a benefit for us. And I do wanna, you know, not this comes back, you know, Michigan's a a great state also.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

This seems there's some great growth on the Western Side Of Michigan where we just have some very positive distribution there and great leadership and and talent on our commercial team and retail team. And we're seeing even in the book of CF transaction that was done several years ago, the deposits that we received from that have been stable and sticky and are modestly growing. And also just really good communities that our our advisers are very, intertwined in the DNA of helping make sure the communities are successful. So I would say, you know, we talked a little bit earlier about our commercial growth. I I do believe it's you know, we got a really good client base there, but also we're we're very fortunate that we have the right talent in growing markets.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

And so as you said earlier, think we're in we're in the right spot to continue to be successful.

[David Long, MD - Banking at Raymond James Financial]

Excellent. Thank you, Thomas.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Appreciate that color.

[Operator]

As a reminder, if you would like to ask a question, please press star then 1 to join the question queue. The next question comes from Brian Martin with Janney. Please go ahead.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Hey. Good morning, guys. Congrats on all the success here.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thanks, Brad.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Hey.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Just a couple for me. Just in terms of the expense number and I guess the the efforts you guys have had in that front, I guess, the expectation would be, I know you're not giving guidance on that, but we should start to see some pickup as you go into '26 on on the expense numbers.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

Yes. Thanks for the question. I think you should anticipate us approaching expenses in a similar fashion as we did this year.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

That is to say, a pretty disciplined approach around budgeting that it's an important consideration for us to drop some positive operating leverage next year as well. But yeah. I mean, normal merit increases, you would anticipate there being some uplift to expenses in '26 versus the the the guidance that we've given for '24 or 2025.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Yeah. Okay.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Just just okay. Just making sure there's no initiatives that could keep the kind of at bay again, like, we'll see initiatives all the efforts you guys have done. So and then just maybe one of the one of the additional one on the asset side. Just you talked about the mix is continuing to get better on the average earning assets in the funding side. Can you just talk about maybe what the target of those mixes are as we as you kinda go forward here?

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Is there something you're targeting in terms of where those mixes go to over time?

[John Stewart, CFO & Executive VP at Horizon Bancorp]

Yes. Sure. So I I think on an organic balance sheet basis, you know, we've still got near 30% of earning assets in the securities portfolio. Mean, can that be over time something that looks more like 20%?

[John Stewart, CFO & Executive VP at Horizon Bancorp]

Absolutely. However, the cash flows of the portfolio are fairly locked in at this point. We give you the forward four quarters. If you extrapolate that out four to six or eight quarters beyond that, it doesn't look too terribly different. So the waypoint may be something close to what I just mentioned, but it's going to be a pretty ratable path forward to get there.

[John Stewart, CFO & Executive VP at Horizon Bancorp]

There's no large chunky cash flows coming off in the next couple of years. So, you know, only so much of that is in our control unless you really, really yeah, pedal the the the loan growth, and that's just not the objective at the moment.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Gotcha. Okay. And on the on the asset side, anything you're targeting on on that side other than just mean, you talked about the remix here with the indirect.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

No. The indirect portfolio will continue to run off over the next, call it, eighteen to twenty four months. Beyond that and then the securities remix that I just mentioned, I don't think there's any specific targets to know.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Yeah. Okay.

[Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott]

Alright. And then maybe just last two. Just on the provision, I know you talked about it being up a bit this quarter for a couple items. Just how we think about that going forward just in terms of the pickup we saw this quarter with credit quality still being very, very strong.

[Analyst]

And good morning. Regarding the reserve, it did increase this quarter. It was driven predominantly by loan growth and mix and then just economic forecast. That was a predominant of a million seven, roughly a million, a little over a million of it was economic forecast, and the balance was loan growth. When you get to the provision, as you as you know, our credit quality has been really strong.

[Analyst]

We had very low charge offs for the quarter, but we did have an increase in unfunded commitments. And so that's the other piece there. As we move forward, I don't expect any significant change. It's it's really gonna be moderated by, you know, loan growth levels and economic forecast.

[Analyst]

Gotcha. Okay. I appreciate that, Wayne. And then just the last one for me. Just I know you talked about broadening out the, you know, the capital initiative.

[Analyst]

Can you talk about your appetite for M and A here? And just what if you are are discussions out there? Is it are there something you're targeting, certain markets, geographies? Just kind of what your approach to m and a is here as as being possibly broadened out.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Yeah.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thank you for the question. Since you look across the Horizon's decades of success here, a lot of it has come from the successful m and a, and, you know, we look we would look to continue that for the targets. As we talked about before, we're very, very excited about the marketplace here in Indiana and also in Michigan for the right billings would be great. There are as you probably see on also on the marketplace, there's an increasing dialogue going on and, you know, we're we're glad to be part of those dialogues. So we'll be very disciplined about about the approach.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

I mean, they make sure that it's as we've talked about earlier, very shareholder friendly discussions on that, make sure we got positive earnings back and that it makes logical sense to our investment base about why why we involve them and and also the the returns that come along with that. And in term and and in terms of geography or size, I mean, are you looking for something larger, smaller, multiple deals?

[Analyst]

Any any more commentary on that?

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Yeah. I think, you know, I think every CEO out there has a specific market size, who exactly who they would wanna be.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

For us, I would say we'd like to be continuous within our footprint. We have some marketplaces that I feel like we can definitely expand our brand and also print our distribution in the Grand Rapids area. I'll call it also in Eastern Michigan. There'd be some, you know, great opportunities for us there. We have great platforms, great leaders to see more distribution.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

From a size standpoint, you know, we've been successful historically in that 500,000,000 to a billion space. I I think with our skill set leadership here that we could even go a little bit bigger than that, but I'd I'd probably say that's about the size we'd be looking at.

[Analyst]

Got you. Okay. Perfect.

[Analyst]

Well, again, congrats on all the success, and thanks for taking the questions. Appreciate it also.

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thank you.

[Operator]

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

[Thomas Prame, CEO, President & Director at Horizon Bancorp]

Thank you. And again, thanks for participating in today's earnings call. We appreciate your time and interest in Horizon, and we look forward to sharing our third quarter results in October. Have a wonderful day.

[Operator]

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

Participants

Executives

• Todd Etzler, EVP, Chief Legal And Risk Officer & Corporate Secretary

Analysts

• Thomas Prame, CEO, President & Director at Horizon Bancorp
• Lynn Kerber, Chief Commercial Banking Officer at Horizon Bancorp
• John Stewart, CFO & Executive VP at Horizon Bancorp
• Brendan Nosal, Director at Hovde Group
• Terry Mcevoy, Managing Director at Stephens Inc
• Damon Delmonte, Managing Director at Keefe, Bruyette & Woods (KBW)
• Nathan Race, MD & Senior Research Analyst at Piper Sandler Companies
• David Long, MD - Banking at Raymond James Financial
• Brian Martin, Director - Banks & Thrifts at Janney Montgomery Scott
• Analyst