Executive Summary / Key Takeaways

• Horizon Bancorp's strategic pivot, focusing on asset mix shift towards higher-yielding commercial loans and disciplined funding management, has resulted in six consecutive quarters of net interest margin expansion, reaching 3.04% in Q1 2025.
• Strong organic commercial loan growth (14% annualized in Q1 2025) and the planned runoff of lower-yielding indirect auto loans are key drivers of earning asset yield improvement and portfolio remixing.
• The successful sale of the mortgage warehouse business in Q1 2025 generated a $7.0 million pre-tax gain, enhancing non-interest income and adding significant optionality to the company's capital position.
• Management expects full-year 2025 net interest income growth in the mid-teens and expense growth to be flat to up low single digits, signaling anticipated positive operating leverage and improved recurring profitability.
• The company maintains strong credit quality metrics, exceeding regulatory capital requirements, and is actively evaluating capital deployment options, including stock buybacks, given the perceived intrinsic value in the stock price.

The Horizon Story: Reshaping the Balance Sheet for a More Profitable Future

Horizon Bancorp, Inc. operates as a community-focused financial institution deeply embedded in the Midwest, primarily serving markets across Indiana and Michigan. Its business model centers on relationship-based commercial and retail banking, complemented by private wealth management services. For years, Horizon has grown its footprint, partly through strategic acquisitions, building a diverse lending portfolio and a granular, tenured deposit base across its branch network. This history of community engagement and prudent growth has established a foundation of client loyalty, a key strength in a competitive banking landscape.

In recent periods, Horizon has embarked on a deliberate strategic pivot, aiming to enhance profitability and shareholder value by optimizing its balance sheet and refining its operational efficiency. This strategy involves a significant shift in asset mix, prioritizing growth in higher-yielding commercial lending segments while strategically reducing exposure to lower-yielding portfolios like indirect auto loans. Concurrently, the company has focused on disciplined funding management, leveraging its stable deposit base and managing wholesale borrowings to lower its cost of funds.

The competitive environment in the Midwest is dynamic, featuring a mix of larger regional players like Old National Bancorp (ONB), First Merchants Corporation (FRME), Fifth Third Bancorp (FITB), and Huntington Bancshares (HBAN), as well as smaller community banks and increasingly, fintech alternatives. While larger competitors like FITB and HBAN possess greater scale and often lead in digital innovation, offering faster transaction speeds and broader product suites, Horizon leverages its deep community ties and relationship-based model to foster strong customer loyalty and retention. HBNC's operational structure also allows for cost efficiency in certain niche lending segments, providing a competitive edge. However, the company acknowledges a relative lag in technological scale compared to some larger rivals, necessitating ongoing investment in digital capabilities to support its relationship banking model and enhance customer experience. Investments in areas like treasury management personnel are strategic responses aimed at bolstering its ability to compete effectively for core commercial deposits and relationships against both regional and national players.

While the company appears to lack a specific, proprietary technological moat akin to unique manufacturing processes in other industries, it has made strategic investments in digital technologies and teams. These investments are aimed at supporting its lending portfolios and enhancing its operational capabilities. Management commentary highlights efforts to improve digital banking integration and leverage technology to enhance efficiency and customer service within its relationship-based framework. The strategic intent behind these investments is to ensure the company remains competitive in service delivery and operational efficiency, even as larger peers invest heavily in digital transformation and fintech partnerships. The "so what" for investors is that while Horizon may not lead with a unique technological differentiator, its focused investments are crucial for maintaining relevance and supporting its core business model in an increasingly digital banking environment, potentially contributing to future operational leverage and client retention.

Strategic Execution Translates to Improved Financials

Horizon's strategic focus has begun to yield tangible financial results, most notably in its net interest income and margin performance. The first quarter of 2025 marked the sixth consecutive quarter of net interest margin expansion, reaching 3.04%. This significant improvement from 2.50% in the prior year period is a direct outcome of the favorable asset and liability mix shifts. Despite a decrease in average earning assets, the yield on these assets benefited from the strategic pivot towards higher-yielding loans. Simultaneously, disciplined deposit pricing and management of borrowings contributed to a lower cost of funds, further widening the margin.

Net interest income increased by $9.0 million, or 20.7%, to $52.3 million in Q1 2025 compared to $43.3 million in Q1 2024. This growth was driven by a $3.9 million increase in total interest income and a $5.1 million decrease in total interest expense. The increase in interest income was primarily from interest and fees on loans, which rose to $74.5 million from $67.0 million, reflecting both loan growth and improved yields on new originations and repricing maturities. The decrease in interest expense was largely due to lower costs on deposits and borrowings, falling to $25.6 million and $9.2 million, respectively, in Q1 2025 from $28.0 million and $11.9 million in Q1 2024.

Non-interest income saw a substantial increase, rising by $6.6 million, or 66.0%, to $16.5 million in Q1 2025 from $9.9 million in Q1 2024. This surge was primarily attributable to a $7.0 million pre-tax gain on the sale of the mortgage warehouse business, which closed in January 2025. Excluding this gain and other non-recurring items, core non-interest income showed generally favorable results, with increases in interchange fees and gain on sale of mortgage loans, and stability in service charges and fiduciary activities.

Total non-interest expense increased by $2.2 million, or 6.0%, to $39.3 million in Q1 2025 compared to $37.1 million in Q1 2024. This rise was mainly driven by a $2.1 million increase in salaries and employee benefits, partially offset by a $1.0 million decrease in other expenses (including marketing and advertising). The increase in personnel costs reflects ongoing hiring efforts in revenue-generating roles within commercial lending, equipment finance, and treasury management, as well as a less favorable expense adjustment compared to the prior year. Management has indicated that strategic initiatives completed in Q4 2024 aimed to restructure the go-forward cost structure, and the Q1 2025 expense level is expected to approximate a go-forward run rate for key expense lines, contributing to anticipated operating leverage in 2025.

Credit quality remains a point of strength for Horizon. The allowance for credit losses (ACL) stood at $52.7 million, or 1.07% of period-end loans held for investment (HFI), at March 31, 2025, compared to $52.0 million, or 1.07% of loans HFI, at December 31, 2024. The provision for credit losses on loans increased to $1.5 million in Q1 2025 from $0.7 million in Q1 2024, primarily driven by loan growth. Net loan charge-offs increased to $0.9 million in Q1 2025 from $0.3 million in Q1 2024, mainly due to the planned runoff of the indirect auto portfolio. Despite the increase, annualized net charge-offs remained low at 7 basis points of average loans. Non-accrual loans increased slightly to $28.8 million (0.59% of loans HFI) at March 31, 2025, from $25.8 million (0.53% of loans HFI) at December 31, 2024. Total non-performing assets also increased to $31.4 million (0.41% of total assets) from $27.4 million (0.35% of total assets). Management views these levels as remaining within historical ranges and at or below UBPR peer performance, not expecting a material impact on the outlook.

Balance Sheet Dynamics and Capital Strength

Total assets decreased by $172.5 million, or 2.2%, to $7.63 billion at March 31, 2025, from $7.80 billion at December 31, 2024. This decrease was primarily driven by a $123.8 million reduction in cash and cash equivalents and a $64.3 million decrease in loans held for sale, a direct result of the mortgage warehouse business sale. These decreases were partially offset by a $62.1 million increase in loans held for investment.

The loan HFI portfolio grew to $4.90 billion at March 31, 2025, from $4.80 billion at December 31, 2024. This growth was led by strong organic commercial loan growth of $103.3 million (14% annualized), complemented by increased activity in residential mortgage lending. This growth was partially funded by the planned $36 million reduction in the indirect auto portfolio. The commercial portfolio remains well-diversified across industries and geographies, with no single sector exceeding 10% of the commercial book. The Equipment Finance division continues to contribute to commercial growth.

The investment securities portfolio decreased by $26.1 million, or 1.2%, to $2.10 billion at March 31, 2025. This decrease was due to amortization, maturities, and the sale of one corporate debt security. Notably, there were no purchases of investment securities during Q1 2025. Management has stated they do not intend to reinvest cash flows from the securities portfolio in 2025 but will instead use these proceeds to fund organic relationship-based commercial loan growth. The remaining available-for-sale portfolio is deemed unlikely to yield further significant repositioning opportunities without a material improvement in market prices.

Total deposits increased by $165.1 million, or 2.9%, to $5.77 billion at March 31, 2025, from $5.60 billion at December 31, 2024. This growth reflects the company's continued focus on gathering core commercial and consumer deposits. Non-interest bearing deposits increased modestly in the quarter. Management emphasizes the granular and tenured nature of the deposit base as a source of stability and value.

Total borrowings decreased significantly by $332.2 million, or 27.0%, to $900.1 million at March 31, 2025, from $1.23 billion at December 31, 2024. This reduction was primarily due to the repayment of Federal Home Loan Bank advances, with some paydowns occurring ahead of schedule due to rate volatility. Management anticipates the borrowing position to remain relatively similar to the March 31 balances for the remainder of 2025. The Bank maintains substantial unused credit lines, providing ample liquidity.

Horizon and its subsidiary bank remain well-capitalized, exceeding all regulatory capital requirements at March 31, 2025. Stockholders equity increased to $776.1 million from $763.6 million at year-end 2024, driven by net income retention and changes in accumulated other comprehensive loss related to unrealized gains on AFS securities, partially offset by dividends. Tangible common equity and tangible book value per share also increased. The successful sale of the mortgage warehouse business further enhanced capital optionality. Management views the current stock price as undervalued and is actively considering stock buybacks as a potential capital deployment strategy, alongside evaluating M&A opportunities that align strategically and geographically.

Outlook and Risks

Management's outlook for 2025 reflects confidence in the continued positive momentum generated by recent strategic actions. They anticipate full-year net interest income growth in the mid-teens, driven by further net interest margin expansion as strategic balance sheet execution persists. This outlook assumes two 25 basis point Fed fund cuts in June and September, although management emphasizes that NII and margin performance are primarily factors of their balance sheet strategies rather than short-term rate changes.

Expectations for growth in loans held for investment remain unchanged in the mid-single-digit range for the year, net of the anticipated $100 million runoff in the indirect auto portfolio. This implies continued strong growth in core commercial lending and equipment finance. Deposit growth is projected to be in the low single digits, with a slight mix shift towards time deposits.

Total reported expenses for 2025 are expected to be flat to up low single digits relative to 2024, reflecting the benefits of the Q4 2024 expense recalibration efforts and a focus on generating operating leverage. The full-year effective tax rate is expected to be in the mid-teens, reflecting a stronger pre-tax income outlook and a strategic decision to discontinue new solar tax credit investments in favor of core business growth.

Key risks to this outlook include potential changes in the level and volatility of interest rates, although management believes the balance sheet is relatively neutral to short-term rate changes. Macroeconomic conditions and their impact on loan demand and credit quality, including potential effects from tariffs, are actively monitored and could influence future ACL allocations. Competition from other financial institutions and fintechs remains a constant factor, requiring continued investment in technology and talent to maintain market position. Credit risk, particularly in the commercial and consumer portfolios, remains inherent, though current metrics are strong.

Conclusion

Horizon Bancorp's first quarter 2025 results underscore the positive impact of its strategic initiatives to optimize the balance sheet and enhance profitability. The narrative is one of a community bank successfully executing a pivot towards higher-yielding assets and more efficient funding, leading to sustained margin expansion and improved core earnings power. Strong commercial loan growth, disciplined expense management, and the capital boost from the mortgage warehouse sale position Horizon favorably for 2025. While navigating a competitive landscape and macroeconomic uncertainties, the company's focus on relationship banking, strategic investments in key business lines, and prudent risk management provide a solid foundation. The outlook for continued NII growth and controlled expenses suggests potential for enhanced operating leverage and shareholder value creation, making Horizon Bancorp a compelling consideration for investors seeking exposure to a regional bank with clear strategic momentum.