Q1 2024 Horizon Bancorp Inc Earnings Call
Operator: Good morning everyone, and welcome to the Horizon Bancorp Inc conference call to discuss financial results for the first quarter of 2024. All participants will be in the listen-only mode.
Good morning, everyone and.
And welcome to the Horizon Bancorp, Inc.
<unk> call to discuss financial results for the first quarter of 'twenty 'twenty four.
All participants will be in a listen only mode.
Should you need assistance please.
The conference specialist by pressing the star key followed by zero.
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Before turning the call over to the management.
Remember that today's call may contain statements that are forward looking in nature.
These statements are subject to risks and 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 and horizon <unk>. Most recent Form 10-K.
And it's later filings with the Securities and Exchange Commission.
In addition.
Management may refer to certain non GAA financial measures that are intended to help investors understand horizon's business.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then one on your touchtone phone.
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.
It can be accessed at the Companys website Horizon Bank Dot com.
Yeah.
Representing horizon today, our executive Vice President and senior operations Officer, Cathy Drogheda.
Speaker Change: Executive Vice President Corporate Secretary and General Counsel at Sir.
Speaker Change: Executive Vice President and Chief commercial banking Officer, Linda Kerber.
Speaker Change: Yeah.
Speaker Change: Executive Vice President and Chief Financial Officer, Mark CCAR.
Thomas frame: And Chief Executive Officer, and President Thomas frame.
Thomas frame: At this time I would like to turn the call over to Mister Thomas frame.
Please go ahead Sir.
Thomas frame: Good morning, and thank you for participating in today's call Horizon had a solid start to the year with our second consecutive quarter of expanded net interest income both in dollars and in margin.
Operator: To withdraw your question, please press star, then two. Before turning the call over to management, please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks and 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.
Thomas frame: Net interest margin for the quarter was two 5% with continued improvement throughout March exiting the quarter at 253%.
Thomas frame: Additionally, our results showed noninterest income continues to perform well across our diversified operating model, even with seasonality of lower mortgage volumes expenses.
Thomas frame: Expenses were well managed in the quarter with results at the lower end of our guidance as the team continues to be diligent and capturing cost savings.
Thomas frame: Credit performance and trends remain positive with minimal charge offs low nonperforming loans.
Thomas frame: Through continued proactive portfolio management.
Thomas frame: As seen in the first quarter the franchise experienced significant loan growth on several fronts. Both in our core business lines and our previously communicated asset repositioning strategy we.
Thomas frame: We are very proud of the results of all of our teams this quarter displaying the diversity of our lending platforms across our footprint and the capability of our team to deploy our excess liquidity into high quality and higher yielding assets and improving our gulfport asset mix <unk>.
Thomas frame: Additional insight and detail into our loan growth will be shared by lane in the lending and credit sections later in our presentation.
Thomas frame: We are also optimistic about our deposit portfolio of results that displayed very strong trends in the quarter with the continued resiliency and core balances deposit cost increasing just nine basis points from year end and the modest run off in the first quarter was primarily attributed to the company's decision to reduce segments of its high cost public funds portfolio.
Operator: 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.
Thomas frame: Our first quarter results provide optimism.
Thomas frame: On our go forward financial outlook as we move into the second quarter with a positive trajectory continuing in margin and improved balance sheet positioning well managed expenses and continued solid credit trends as we move forward a key element of our positive outlook is the strength of our core lending platforms and to provide more detail on this segment of our business.
Thomas frame: Model I'll transition the presentation to Lynn Kerber, our executive Vice President and Chief commercial banking officer to provide details Lynn.
Lynn M. Kerber: Thank you Thomas.
Lynn M. Kerber: Beginning on slide five we have an overview of our loan portfolio as of March 31st with a mix of 60% commercial 17% residential and 22% consumer which remains relatively unchanged from the prior quarter.
Operator: For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they can be accessed on the company's website, horizonbank.com. Representing Horizon today are Executive Vice President and Senior Operations Officer Kathy DeRoyter. Executive Vice President, Corporate Secretary, and General Counsel Todd Etzler, Executive Vice President and Chief Commercial Banking Officer Lynn Kerber, Executive Vice President and Chief Financial Officer Mark Secor, and Chief Executive Officer and President Thomas Prame. At this time, I would like to turn the call over to Mr. Thomas Prame. Please go ahead, sir.
Lynn M. Kerber: Commercial loans increased $75 million, which includes $23 million in equipment finance activity residential mortgage loans increased to $101 million and consumer loans increased to 13 million.
Lynn M. Kerber: First quarter loan growth included 154 million in acquired loans, including approximately $59 million of consumer loans with credit protection $95 million in residential and a reduction of 39 million of indirect auto loans.
Lynn M. Kerber: These actions represent our planned redeployment of proceeds from december's balance sheet restructuring into high credit quality and higher yielding assets.
Lynn M. Kerber: On slide six we are pleased to report commercial loans increase.
Lynn M. Kerber: $74 $8 million for the first quarter, representing 11, 2% on an annualized basis.
Lynn M. Kerber: Fundings, including equipment finance, so the 110 million for the first quarter compared to 117 million for the fourth quarter.
Lynn M. Kerber: We saw a meaningful increase in the average commercial loan portfolio yield in the first quarter, increasing to 614% from six 5% in the fourth quarter.
Lynn M. Kerber: Also new production yields were 752% in the first quarter.
Lynn M. Kerber: Our core commercial pipeline increased from 167 million at December 31st two 187 million as of March 31.
Lynn M. Kerber: Activity continues to be well diversified by industry and geography.
Lynn M. Kerber: Equipment Finance Division contributed approximately 23 million in originations in the first quarter and we'll be continuing to ramp in the second quarter.
Lynn M. Kerber: We continue to anticipate a total contribution of $100 million to $125 million for the full year 2024.
Lynn M. Kerber: Commercial credit quality remained strong with low past dues of 18 basis point per quarter, and comparing to 16 basis points at December 31st and 16 basis points for March 2023.
Lynn M. Kerber: Nonperforming commercial loans decreased 27% in the quarter, usually the pay off an upgrade of several nonaccrual and substandard loans.
Lynn M. Kerber: Accordingly, we recorded commercial net recoveries of 57000.
Lynn M. Kerber: Also provided for your reference on slide seven is a breakdown of key sectors and our commercial portfolio, which demonstrates no significant concentration in any one sector and particularly multifamily.
Lynn M. Kerber: Owner occupied office and health care.
Lynn M. Kerber: As noted at the percent of risk based capital is consistent with the Ub P. Our peer group and well within regulatory guidance.
Lynn M. Kerber: With continued focus on the interest rate environment for 2024, we've included a summary of maturing CRE loans for 2024 and 2025 on slide eight.
Lynn M. Kerber: For the remainder of 2024, we have 277 note with current balances of $213 million maturing representing 10, 9% of our portfolio.
Lynn M. Kerber: Of this tranche there our balances of $101 million with interest rates of less than 7%, representing five 2% of our CRE portfolio.
Lynn M. Kerber: Similarly, 2025 has 240 notes maturing with balances of 188 million maturing representing nine 6% of the portfolio.
Lynn M. Kerber: Of this tranche there our balances of $123 million with rates of less than 7%, representing six 3% of our CRE portfolio.
Thomas M. Prame: Good morning, and thank you for participating in today's call. Horizon had a solid start to the year with its second consecutive quarter of expanded net interest income, both in dollars and in margins. That the interest margin for the quarter was 2.5%, with continued improvement throughout March, ending the quarter at 2.53%. Additionally, our results showed non-interest income continues to perform well across our diversified operating model, even with seasonality of lower mortgage volume. Expenses were well managed in the quarter, with the results at the lower end of our guidance as the team continues to be diligent in capturing cost savings.
Lynn M. Kerber: And all this is another example of how horizon benefits from our long standing commitment to pricing discipline, and we believe rates and maturities are well managed and our CRE portfolio.
Lynn M. Kerber: Exposure to rate related credit risk at this time.
Lynn M. Kerber: Turning to slide nine Youll see that consumer direct loan balances increased $52 million during the quarter reflective of previously mentioned acquired home improvement loan and continued reduction of auto loans by $39 million in the quarter. These.
Lynn M. Kerber: These actions are consistent with our stated strategy of limiting loan production that no longer meets our risk adjusted return targets and redeploying capital to higher yielding improved credit product.
Lynn M. Kerber: The average consumer direct yield was 8.23% for the portfolio with an average of 892% for new production.
Lynn M. Kerber: The average yield for consumer indirect was $3, two 8%, which is consistent with recent quarters.
Lynn M. Kerber: Consumer direct past dues improved in the first quarter with delinquency of 0.76%.
Lynn M. Kerber: Reduction from 1.3% at December 31st and a continuation over the past six months period.
Lynn M. Kerber: Indirect loans reported past dues of 1.12% also a reduction from 1.49% at December 31st and the six month trend.
Lynn M. Kerber: Year to date, and our net charge offs for consumer direct or four basis points.
Lynn M. Kerber: The annualized rate of 17 basis points, and consumer indirect where seven basis point annualized rate of 28 basis points, which represents an improvement from Q4 charge offs.
Lynn M. Kerber: Slide 10 highlights our mortgage loan performance for the quarter, our portfolio grew $101 million on a quarter in part due to approximately $95 million of acquired high credit quality residential mortgages.
Lynn M. Kerber: We expect residential mortgages to benefit from seasonality during the second third quarter with both purchases and new construction.
Lynn M. Kerber: The average mortgage loan yield was $4 five 3% for the portfolio and 7.25% for new production.
Lynn M. Kerber: With net recoveries for the quarter. This portfolio continues to reflect quality homeowners, a significant payment capacity and equity in their homes.
Thomas M. Prame: CREDIT PERFORMANCE AND TRENDS REMAIN POSITIVE WITH MINIMAL CHARGE-OFFS, AND LOW NON-PERFORMING LOANS THROUGH CONTINUED PROACTIVE PORTFOLIO MANAGEMENT. As seen in the first quarter, the franchise experienced significant loan growth on several fronts, both in our core business lines and our previously communicated asset repositioning strategy. We are very proud of the results of all of our teams this quarter, demonstrating the diversity of our lending platforms across our footprint and the capability of our team to deploy our excess liquidity into high quality and higher yielding assets and improve our goal forward asset mix.
Lynn M. Kerber: Our asset quality metrics continue to be strong as outlined on slide 11.
Lynn M. Kerber: Past dues over 30 days were quaint three 3%.
Lynn M. Kerber: Improvement from the prior quarter.
Lynn M. Kerber: As noted earlier, both direct and indirect consumer loans reported lower passenger used for this quarter offset by an increase in residential mortgage loans.
Lynn M. Kerber: Nonperforming loans decreased slightly from 23 23 million to $19 2 million, representing 41 basis point.
Lynn M. Kerber: The reduction from 46 basis points.
Lynn M. Kerber: Of total loans.
Lynn M. Kerber: The decrease was driven principally by a reduction in commercial loan.
Lynn M. Kerber: Nonperforming loans.
Lynn M. Kerber: Net charge offs for the first quarter were 426000, representing one basis point of average loans.
Lynn M. Kerber: On an annualized rate of four basis points. This was also an improvement over the third and fourth quarters of 2023.
Lynn M. Kerber: Finally, our allowance for credit losses increased 357000 in the quarter to $54 million as of March 31st.
Lynn M. Kerber: The increase has been that effect of loan growth reductions due to loan product mix shifting to portfolios with lower historical loss rates economic forecast and the elimination of a dedicated specific reserves related to commercial loans that paid us in full during the first quarter.
Lynn M. Kerber: Provision expense of 804000 is a combination of the allowance increase of 357000.
Lynn M. Kerber: <unk> commitment and replenishing the reserve or charge off loans in the first quarter.
Lynn M. Kerber: The allowance represents 1.09% of total gross loans, which we believe is appropriate given credit performance and current economic forecasts.
Lynn M. Kerber: Future reserve amounts and related provision will be driven by loan growth and mix economic forecasts and credit trends.
Lynn M. Kerber: Quality across all of our lending classes is performing well and it reflects our history of consistent and well.
Thomas M. Prame: Additional insight and detail into our loan growth will be shared by Lynn in the lending and credit sections later in our presentation. We are also optimistic about our deposit portfolio results, which displayed very strong trends in the quarter, with continued resiliency and core balances, deposit costs increasing just nine basis points from year-end, and the modest runoff in the first quarter was primarily attributed to the company's decision to reduce segments of its high-cost public funds portfolio.
Lynn M. Kerber: First approach to lending.
Lynn M. Kerber: Now I'd like to turn things back to Thomas who will provide an overview of our net interest income trends.
Thomas: Thank you Lynn great insight information.
Thomas: As mentioned earlier, we are pleased to see the positive momentum in our net interest margin through our strategic efforts to reposition our balance sheet to higher yielding and higher quality assets also while maintaining a disciplined approach to deposit pricing to.
Thomas: To help illustrate the progress on our margin. We have included a waterfall graph on page 12 as seen the deliberate shift from Laura yielding assets. The high quality loans is making a meaningful impact on our asset yields increasing by 19 basis points in the quarter.
Lynn M. Kerber: We expect this positive trend to continue into the second quarter as higher yielding new production continues to replace lower yielding amortization and cash flows from the securities portfolio.
Lynn M. Kerber: Also within the first quarter, we are experience, we experienced softer demand for swap fee income and overall commercial loan fee income was down due to the seasonal nature of payoffs and we expect this to even out over the course of the year as.
Lynn M. Kerber: As I stated in my opening remarks horizons deposits and funding costs were well managed throughout the quarter.
Thomas M. Prame: Our first quarter results provide optimism on our go-forward financial outlook as we move into the second quarter with a positive trajectory continuing in margin and improved balance sheet positioning, well-managed expenses, and continued solid credit. As we move forward, a key element of our positive outlook is the strength of our core lending platforms, and to provide more detail on this segment of our business model, I'll transition the presentation to Lynn Kerber, our Executive Vice President and Chief Commercial Banking Officer Lynn?
Lynn M. Kerber: <unk> core consumer and commercial balances were flat from the fourth quarter with single digit increases in funding costs.
Lynn M. Kerber: Noninterest bearing deposits experienced minor seasonal fluctuations, primarily due to commercial tax payments into year end distributions.
Lynn M. Kerber: And the company elected to leverage its excess liquidity to reduce its public funds portfolio.
Lynn M. Kerber: Allowing higher priced CD maturities to flow off the balance sheet.
Lynn M. Kerber: With this backdrop, our first quarter interest bearing liability costs increased a modest five basis points for the quarter and purchase.
Lynn M. Kerber: Accounting adjustments were relatively flat compared to the fourth quarter.
Lynn M. Kerber: As we enter the second quarter, we have confidence in our ability to continue to improve our net interest margin even in a flat rate environment. We expect to see further expansion in the second quarter. As stated March posted a continued advancement of 2.53% of net interest margin and the team continues to remain diligent on improving our asset mix and yields.
Lynn M. Kerber: While keeping our measured approach to funding costs.
Lynn M. Kerber: Let me hand, the presentation over to our executive Vice President and Chief Financial Officer, Mark <unk>, who will walk through other key financial metrics from the first quarter and our outlook as we move forward Mark.
Mark: Thank you Thomas.
Mark: Beginning with slide 13, total noninterest income for the first quarter was in line with the first three months of 2023 with the largest segment being account service fees up approximately seven 5% from the first quarter of 2023.
Mark: Noninterest income was down from the adjusted linked quarter due to a decrease of $360000 in bully income, resulting from the policy surrendered at the end of last year and with lower mortgage banking income.
Mark: The company continues to diversify core fee income through key talent ads and Treasury management and expanded private wealth capability and anticipates growth in these noninterest income segments throughout the year as we expand our relationship banking model.
Mark: On slide 14 first quarter results displayed our commitment to diligent expense management.
Lynn M. Kerber: Beginning on slide 5, we have an overview of the loan portfolio as of March 31st, with a mix of 60% commercial, 17% residential, and 22% consumer, which remains relatively unchanged from the prior quarter. Commercial loans increased $75 million, which included $23 million in equipment finance activity. Residential mortgage loans increased to $101 million, and consumer loans increased to $13 million. First quarter loan growth included $154 million in acquired loans, including approximately $59 million of consumer loans with credit protection, $95 million in residential, and a reduction of $39 million of indirect auto loans.
Mark: Noninterest expenses were one 9% of average assets annualized for the first quarter compared to 194% in the linked quarter.
Mark: The decrease reflected overall proactive expense management across the franchise.
Mark: We do expect expenses to be in the range of 37, five to $38 3 million in the second quarter, reflecting a full quarter of merit increases and new talent and the equipment Finance Division.
Mark: Slide 15.
Mark: Horizon continues to maintain solid regulatory capital ratios that are well above the requirements to be considered well capitalized. We believe we have sufficient capital to be open to options to improve our earnings outlook in the future quarters and anticipate that growth in capital will outpace the growth in total assets during the next 12 months.
Mark: As we continue to deploy additional excess liquidity and cash flows from the securities portfolio, We do anticipate risk weighted assets will increase resulting in a slight decline to risk weighted capital ratios.
Mark: Looking ahead on slide 16, we are providing you with an update on our current expectations for 2024.
Mark: We expect sustainable organic loan growth in the core business lines, which could be valuable contributors to core earnings for the second quarter of 2024, we expect 5% to 6% annualized organic loan growth with the anticipation that we will replace the indirect auto runoff within acquired pool.
Mark: That reflects improved yield and credit quality, resulting in total loan growth of 8% to 10% annualized for the quarter.
Mark: Our net interest margin and net interest income trends should continue to benefit from our asset repositioning strategy and pricing management.
Mark: We expect our net interest margin to be in a range of 2.55% to 2.58% for the second quarter as well as pre provision net interest income in a range of 44, 7% to $45 5 million.
Mark: Noninterest income should continue near recent levels with the anticipation of consistent fee income from our investments in Treasury management, and private wealth, coupled with seasonal increases for interchange and mortgage originations.
Mark: The expected range is 10 to $10 5 million and noninterest income in the second quarter.
Mark: Noninterest expenses continued to be proactively managed across the organization specifically in segments of our business impacted by higher rates, such as mortgage and consumer lending.
Lynn M. Kerber: These actions represent our planned redeployment of proceeds from December's balance sheet, restructuring into high credit quality and higher yielding assets. Net Funding, including Equipment Finance, totaled $110 million for the first quarter compared to $117 million for the fourth quarter. We continue to anticipate a total contribution of $100 to $125 million for the full year 2024. Accordingly, we recorded commercial MET recoveries of $57,000. For the remainder of 2024, we have 277 notes with current balances of $213 million maturing, representing 10.9% of our portfolio.
Mark: As discussed we have invested in revenue generating talent and our leasing Buildout and Treasury management teams, which are expected to contribute to revenue growth in 2024.
Mark: We expect total noninterest expense to range from about 37 5 million to $38 3 million in the second quarter and remained below 2% of average assets.
Mark: In our original plan and current outlook for 2024, we still anticipate only two rate cuts in the second half of 2024, which will add additional benefit to the momentum we are seeing in our net interest margin.
Mark: As the timing of these potential rate moves becomes more certain we will update our outlook and forecast.
Mark: Now I will turn it back over to Thomas for some final comments.
Thomas: Thank you Mark I appreciate that.
Thomas: Outlined in our presentation, we see significant positive momentum for horizon in 2024.
Thomas: We are located in an excellent growth markets in the Midwest that are economically attractive for businesses and for individuals.
Thomas: Our loan growth is strong and aligned with our historical low credit risk profile. The commercial pipeline continues to be robust and our equipment leasing division has started to make an impact with upside potential in future quarters.
Thomas: The resiliency and stability of our core deposit base maintains its great value with additional opportunity to help performance as rates decline. The company also continues to have significant funding capacity if needed.
Thomas: Horizon has a lean and operating culture that consistently adapts to its market since environment to deliver long term shareholder value. We are strategically investing in improving our revenue models, maintaining an excellent credit profile and consistently capturing efficiencies and how we deliver our products and our services.
Thomas: We believe horizon is still a very compelling value supported by our 30 plus years of commitment to our dividend and currently offering a five 4% dividend yield.
Speaker Change: As always we thank you in advance for joining our presentation. This morning. This concludes our prepared remarks and now I'll ask our operator to please open the line for questions.
Speaker Change: Thank you.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we would pause momentarily to assemble our roster.
Speaker Change: Yeah.
Speaker Change: The first question comes from Terry Mcevoy.
Terence James McEvoy: With Stephens.
Terence James McEvoy: Please go ahead.
Terence James McEvoy: Hi, good morning, everyone. Good morning.
Terence James McEvoy: I appreciate all the details on slide 16, I was wondering if you could share your thoughts on how you see earning asset balances trending over the course of the year, you've got kind of cash.
Terence James McEvoy: At 271, you've got growth in certain portfolios, but then there's the run off of indirect. So if you could just help us put that altogether that'd be great.
Terence James McEvoy: Yes.
Lynn M. Kerber: Indirect loans reported past dues of 1.12 percent, also a reduction from 1.49 percent at December 31st and the six-month trend, and the annualized rate of 17 basis points, and consumer indirect were 7 basis points, an annualized rate of 28 basis points, which represents an improvement from Q4 charge-off on an annualized rate of four basis points. This was also an improvement over the third and fourth quarters of 2023. Thank you, Lynn.
Speaker Change: Thanks for the question Terry.
Speaker Change: We would anticipate there should be some slight growth in.
Speaker Change: Marine assets.
Speaker Change: After we deploy the remaining cash that we have that we planned from the restructure.
Speaker Change: That'll shift into higher yielding and then we would anticipate that the run off from indirect and from the securities portfolio would primarily fund the growth as we go forward this year.
Speaker Change: Sure.
Speaker Change: Thanks, Mark and then as a follow up could you maybe talk about the type of borrowers that contributed to the commercial loan growth ex leasing last quarter any certain sectors markets.
Speaker Change: Our customers new to the bank and any color there would be appreciated.
Speaker Change: Good morning, This is Lynn kerber.
Lynn M. Kerber: I would say overall it really represents our overall mix.
Lynn M. Kerber: Been pretty consistent between CRE and C&I.
Lynn M. Kerber: Every quarter and in our overall portfolio. So it really has not changed.
Speaker Change: We are.
Speaker Change: So actively managing concentration limits in certain sectors.
Speaker Change: So as far as any originations in hospitality office multifamily those have been more limited and so I think most of the approach was more so or high medical and that many storage. So.
Speaker Change: Overall, very consistent with our traditional lending.
Speaker Change: Thank you Lynn and thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: The next question comes from Nathan race with Piper Sandler. Please go ahead.
Nathan James Race: Hi, everyone. Good morning, good morning Nathan.
Nathan James Race: Was curious just to get some thoughts on just the geographic breakdown of the loans acquired in the corner.
Nathan James Race: Are these largely in footprint clients that you think you can cross sell clients.
Nathan James Race:
Nathan James Race: Additional products going forward and just curious kind of the appetite to continue to acquire some loans just to help redeploy.
Nathan James Race: Still relatively.
Thomas M. Prame: Thank you, Lynn. Great insight and information.
Nathan James Race: Axis.
Nathan James Race: Cash balance coming out of the quarter.
Speaker Change: Sure. Thanks, Nathan the geography, it was across more pops up mode, mainly outside of our geography.
Thomas M. Prame: To help illustrate the progress on our margin, we have included a waterfall graph on page 12. As seen, the deliberate shift from lower yielding assets to high quality loans is making a meaningful impact on our asset yields, increasing by 19 basis points in the quarter. Let me hand the presentation over to our executive vice president and chief financial officer, Mark Secor, who will walk through other key financial metrics from the first quarter and our outlook as we move forward.
Speaker Change: On the Bulks coast when the mortgages were more on the East Coast West Coast.
Nathan James Race: Now some of them up and down in the South as we look at these transactions.
Nathan James Race: Transactions that we do is when we go through the acquired loans were really looking at it from first making sure we get acceptable yields from risk return second is that we are looking for significantly high quality borrowers that both have capability and as as we look at these assets specifically in mortgage that they have equity in their homes. So we're we're not look.
Nathan James Race: And to change our credit profile for.
Nathan James Race: The organization in fact leased assets would probably improve our credit profile and we will give up a little bit on geography, and our ability to cross sell to make sure that we keep our credit metrics and our movement of earning assets.
Nathan James Race: As far as on a go forward basis, we do have a little bit of excess liquidity. We will most likely start continue to redeploy in the second quarter do not see that at the same magnitude as Mark said, we're going to look at the run off of the.
Nathan James Race: Indirect auto portfolio look at rebalancing there and then we will look at the overall cash flows off the securities portfolio also but I wouldn't see the magnitude in Q2 that we see in Q1, and then as we look at outer quarters, Q3, and Q4, primarily just be organic growth.
Mark E. Secor: Beginning with slide 13, total non-interest income for the first quarter was in line with the first three months of 2023, with the largest segment being account service fees, up approximately 7.5% from the first quarter of 2023. The company continues to diversify core fee income through key talent acquisitions in treasury management and expanded private wealth capabilities and anticipates growth in these non-interest income segments throughout the year as it expands its relationship banking model.
Speaker Change: Okay, great and perhaps looking past the second quarter guidance for loan growth do you still feel like kind of high.
Speaker Change: Digits is achievable.
Speaker Change: Through June <unk> of this year, just given all the hires that you've made.
Speaker Change: Across the platform over the last several quarters.
Nathan James Race: Charlotte Lynn piggyback on my commentary.
Lynn M. Kerber: Our pipelines coming out of the first quarter were strong.
Lynn M. Kerber: In most cases stronger than coming out of the fourth quarter, and our organic growth and the port and the first quarter was <unk>.
Lynn M. Kerber: Those levels, specifically very feel very confident about what we're seeing in the commercial team and I'll I'll pass over to Linda for some color there.
Lynn M. Kerber: Thanks, Thomas and good morning.
Lynn M. Kerber: Yeah, our commercial pipeline has been running pretty steady.
Lynn M. Kerber: As we noted in our slide deck, our pipeline as of March 31 is $187 million.
Lynn M. Kerber: Does not include the equipment leasing division.
Lynn M. Kerber: And so the 187 compares to about 167 billion at 12, 30 198 million at September 30, or so countries.
Lynn M. Kerber: We've had a nice cadence.
Lynn M. Kerber: And I'm looking at the equipment Finance division as it ramps up this.
Lynn M. Kerber: This quarter.
Lynn M. Kerber: You know start to hit its cadence in the third and fourth quarter. So that will really have a nice increase for us.
Lynn M. Kerber: Uh huh.
Speaker Change: Okay, Great very helpful. And then just on deposits. It seems like there is some seasonality in terms of flows this quarter on the.
Lynn M. Kerber: Of public funds side of things just curious how you guys are thinking about core deposit growth prospects over the course of 2024 going forward.
Lynn M. Kerber: Yeah.
Speaker Change: Thank you for the question.
Speaker Change: As we look in the second quarter and this is where we usually see some inflows from our public crumbs groups as we see tax tax money come in it will be held in the second quarter, we will see some growth in the third quarter on our core deposits.
Speaker Change: From our consumers or are building up and then in the fourth quarter and so the little bit of a seasonal decline as people start spending around the holiday season. So we would say is as we look at our outlook. We see the parts have been relatively flat for the remainder of the year small fluctuations, but nothing material.
Mark E. Secor: On slide 14, the first quarter results displayed our commitment to diligent expense management. We do expect expenses to be in the range of $37.5 to $38.3 million in the second quarter, reflecting a full quarter of merit increases and new talent in the Equipment Finance Division. We expect sustainable organic loan growth in the core business lines, which should be valuable contributors to core earnings. Non-interest expenses continue to be proactively managed across the organization, specifically in segments of our business impacted by higher rates, such as mortgage and consumer lending.
Speaker Change: Okay, Great if I could just ask one last one on the.
Speaker Change: Margin going forward.
Speaker Change: Perhaps for Mark just curious to kind of get a sense for the understanding of kind of the the progression in the margin over the course of <unk> and just to try to get more comfort with the <unk>.
Speaker Change: <unk> expansion.
Speaker Change: As for <unk>.
Speaker Change: Yes.
Speaker Change: As we said, we exited with March being at 253.
Speaker Change: The purchases during the month and the growth of the loan portfolio were a mid quarter two.
Speaker Change: Some towards the end of the quarter. So those higher yielding assets. We would anticipate we'll continue to to help the margin to get us to the outlook that we gave for the second quarter.
Speaker Change: So the trajectory is still there and then as we reprice.
Speaker Change: See from some of the slides the repricing of loans is still a significantly or higher than what our portfolio rates are so that will continue to help the margin also.
Speaker Change: Okay great.
Speaker Change: I appreciate all the color. Thank you thanks, David.
Speaker Change: Thank you.
Speaker Change: The next question comes from Damon Delmonte with <unk>. Please go ahead.
Damon Paul DelMonte: Hey, good morning, guys hope everybody's doing well today.
Damon Paul DelMonte: Credit credit has been exceptionally strong for you guys and as you guys continue to grow the loan portfolio just kind of curious as to your thoughts on the on the provision level and is in the reserve level.
Damon Paul DelMonte: Loan losses came down by four basis points this quarter to like 109, so kind of wondering how you're thinking about that you feel you need to.
Damon Paul DelMonte: Increase that going forward because of the nature of the types of loans that you're putting on the books.
Speaker Change: Thanks for the question.
Speaker Change: Relative to the allowance first of all I'll, just say that we had.
Speaker Change: A couple of factors that affected it this quarter.
Speaker Change: Or is it a reduction.
Speaker Change: As far as the percent of total loans.
Speaker Change: First of all we had a larger nonperforming loan that paid off and it had a specific reserve.
Speaker Change: So that was eliminated and in dental allowed us to decrease.
Speaker Change: The reserve.
Mark E. Secor: We expect total non-interest expense to range from about $37.5 million to $38.3 million in the second quarter and remain below 2% of average assets. In our original plan and current outlook for 2024, we still anticipate only two rate cuts in the second half of 2024, which will add additional benefit to the momentum we are seeing in our net interest margin.
Speaker Change: Just under 500000.
Speaker Change: So that was a sort of extra ordinary for this quarter and that's not always a repeating event we.
Speaker Change: We also had a change in mix in our portfolio.
Speaker Change: As we've stated we have been intentionally reducing our indirect auto paper that has traditionally had a higher.
Speaker Change: Credit losses, and so with that reduction it decreased the amount that's needed and with some of the loan purchases. This quarter those have a lower loss experience and one of the portfolios has a full coverage or credit enhancement and so it was a really a comedy.
Speaker Change: All of the specific reserve being eliminated and to build our loan mix.
Speaker Change: As far as going forward, our provision is really being driven by a couple of factors.
Speaker Change: <unk> loan growth and loan mix.
Speaker Change: Of course, the economic forecasts and our charge off experience. We are very pleased with charge offs this quarter.
Speaker Change: They were roughly half of first quarter and third quarter.
Speaker Change: Josh So that's been very positive.
Speaker Change: So I expect to the reserve related to be pretty stable as we move forward.
Josh: Great I appreciate that color.
Speaker Change: And then with regards to the upcoming.
Speaker Change: Theory maturities that was a great slide you guys included in the deck.
Speaker Change: Can you just talk a little bit about the approach that you take with your borrowers as they get close to the maturity date like are you guys, reaching out to them and.
Speaker Change: You know double checking financials, making sure they're comfortable with with the higher rate in order to best position you guys to.
Mark E. Secor: The resiliency and stability of our core deposit base maintains its great value, with additional opportunity to help performance as rates decline. The company also continues to have significant funding capacity if needed. As always, we thank you in advance for joining us for our presentation this morning. This concludes our prepared remarks, and now I'll ask our operator to please open the line for questions.
Speaker Change: To respond to any potential headwinds that you could be facing.
Speaker Change: Sure we actually have several activities that are part of our overall credit risk management and account relationships.
Speaker Change: And as a man that or not new I mean, this is just part of the fabric of monitoring our portfolio and working with our customers.
Speaker Change: Firstly, we're doing annual reviews on these clients.
Speaker Change: Collecting financial.
Speaker Change: Depending on the type of credit it is and so on a flow basis, we're continually monitoring those.
Speaker Change: As part of our underwriting and that annual review process, we do stress test for <unk>.
Speaker Change: Streets.
Speaker Change: Loan to value compression and some other factors so that's an ongoing activity.
Speaker Change: And.
Speaker Change: We have the opportunity to see how our customers are are positioned to absorb the interest rate changes upon maturity.
Operator: To ask a question, you may press star then 1 on your touchtone phone. Please go ahead.
Speaker Change: We also do a deep dive on certain CRE sectors, including hospitality office.
Speaker Change: My family.
Unnamed Speaker: Thanks, Mark. And then, as a follow-up, can you maybe talk about the type of borrowers that contributed to the commercial loan growth, ex-leasing last quarter, certain sectors, markets, customers new to the bank? Any color there would be appreciated.
Speaker Change: Nursing home Uh-huh CRE that may have.
Speaker Change: A term loan and.
Speaker Change: Are you going to be approaching that maturity, we do a deep dive on those throughout the year.
Speaker Change: And so again, we have a pretty good idea of how they are performing and what their capacity is.
Speaker Change: It's going to be to absorb any inter.
Speaker Change: Interest rate increase.
Speaker Change: As part of that stress testing, we go up to 300 basis points and as you can see from our charts.
Speaker Change: We took a look at those that are under 7%.
Speaker Change: I didn't provide the color here, but by and large.
Speaker Change: Most of the increases in this in these two tranches is about 200 basis points. So it's well within our stress testing metrics.
Nathan James Race: The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Speaker Change: Got it that's great color. Thanks, a lot for that one.
Speaker Change: All that I had for now thank you very much.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question from Brian Martin with Janney Montgomery. Please go ahead.
Brian Joseph Martin: Hey, good morning.
Brian Joseph Martin: Good morning, Brian.
Unnamed Speaker: As far as on a go forward basis, we do have a little bit of excess liquidity. We will most likely start and continue to redeploy it in the second quarter.
Brian Joseph Martin: Hey, just wondering maybe just one follow up on the credit side. The I just like the performance has been great here just on the special mentioned credits or kind of a criticized asset as you kind of look this quarter. It sounds like my guess is there's not much change given kind of what we saw with the provision in Lynn's comments, just there or is that.
Brian Joseph Martin: Accurate or just kind of a read through on that.
Brian Joseph Martin: There really wasn't a significant change in the first quarter as noted in our fourth quarter 10-K, we did see some increases on a handful of credits in the fourth quarter.
Brian Joseph Martin: There were some unusual circumstances, there we had one multifamily property that had a fire and water damage. It was under construction. So we felt it was too language that category. We also had a couple of C&I credits that had some interim financial results for that.
Unnamed Speaker: I do not see that in the same magnitude. As Mark said, we're going to look at the runoff of the indirect auto portfolio and look at rebalancing there. And then we'll look at the overall cash flows from the securities portfolio also. But I wouldn't see the magnitude in Q2 that we saw in Q1. And then as we look at the outer quarters, Q3 and Q4, primarily it'll just be organic growth.
Brian Joseph Martin:
Brian Joseph Martin: Warranted additional monitoring I'll say those companies are all strong we have strong sponsors.
Brian Joseph Martin: In the first quarter, we saw improvement.
Brian Joseph Martin: With stabilization and recovering from the fire from the one property.
Brian Joseph Martin: And for the C&I credits, we're seeing improvement in their interim numbers. So we remain very comfortable with those that theres not going to be further migration and then certainly as you saw in our substandard and non accruals are those improved this quarter. So we're very pleased with that performance.
Speaker Change: Yes, Okay perfect. That's helpful. I appreciate the added color and then maybe just for Mark Mark you talked about the loans that are repricing in that that's still going to kind of continue here can you just give us some idea of the magnitude of those loans that are repricing and then just how much of a rate pick up you're getting on those.
Unnamed Speaker: Okay, great. And perhaps looking past the second quarter guidance for loan growth, do you still feel that kind of high single digits is achievable in 3Q and 4Q of this year, just given all the hires that you've made?
Mark: Yes, Brian.
Speaker Change: I don't have the exact.
Mark: The exact specifics you know where were seeing the <unk> this quarter.
Mark: <unk> 9 million come out of indirect which that's one of the lowest yielding and so.
Mark: Those are those are going to pick up.
Unnamed Speaker: [inaudible]
Unnamed Speaker: Hey, good morning, guys. I hope everybody's doing well today.
Mark: To sometimes it's four basis points of overall.
Mark: Neil or 300 to 400 basis points.
Mark: On those loans.
Unnamed Speaker: Credit has been exceptionally strong for you guys, and as you guys continue to grow the loan portfolio, I'm just kind of curious as to your thoughts on the provision level and the reserve level. I think the loan loss reserve came down by four basis points this quarter to, like, 109. So I'm kind of wondering how you're thinking about that. Do you feel you need to increase that going forward because of the nature of the types of loans that you're putting on the books?
Mark: You can kind of see from Lynn slide than what's coming off the CRE where.
Mark: A rabbit two to maybe 200 basis point pick up on some of those that are rolling off.
Mark: So.
Mark: Yeah.
Mark: That's pretty much.
Mark: What we're seeing when they come in when they're rolling off.
Speaker Change: Gotcha Okay.
Speaker Change: And then just one last one mark just on the on the right on the margin one last thing on that was just the as far as the I think you talked about maybe your outlook being a couple of cuts here over the balance of the year. If can you talk about just a week, we don't see cuts or if they come later than expected does that.
Speaker Change: How does that change kind of your big picture outlook, and I know you'll update it as you get more details on the rate, but just if they don't see cuts like youre looking at.
Speaker Change: How do we how does that influence kind of what you've already talked about guidance wise.
Speaker Change: Yeah, Brian So the second quarter, we don't we're not anticipating any rate cuts. So the guidance. We gave is without any rate cut if we are at.
Speaker Change: In our modeling we put one in July range, and then at the end of the year.
Speaker Change: In the last call made last quarter so.
Speaker Change: It has it has some slight impact.
Speaker Change: <unk>.
Speaker Change: But overall, if we if we don't see them and we will continue to see margin increase just from the repricing of the Oh, yeah the assets.
Speaker Change: Specifically investments in there are coming off.
Speaker Change: And then.
Speaker Change: We see higher rates for loans that are maturing.
Speaker Change: So we would continue to anticipate margin increases we would go into the third and fourth quarters, if we see a rate cut being still liability sensitive slightly.
Speaker Change: We would just see a little additional benefit.
Speaker Change: Gotcha, Okay perfect. That's all I had thanks for taking my questions. Thanks, Brian.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session.
Unnamed Speaker: So that was sort of extraordinary for this quarter. That's not always a repeating event. We also had a change in mix in our portfolio. As we've stated, we have been intentionally reducing our indirect auto paper that has traditionally had higher credit losses. And so with that reduction, it's decreased the allowance that's needed.
Speaker Change: I would now like to turn the conference back over to Thomas Crane for any closing remarks.
Thomas M. Prame: Thank you and again I appreciate all the questions today and also thank you for participating in today's earnings call. The team had a very solid first quarter with Pos momentum in our key earnings metrics also heading into Q2 as stated we're very optimistic in the near term about our ability to continue to improve our financial performance and remain well positioned for.
Speaker Change: Potential lowering rates so it would be additive to our positive financial trajectory. Thank you again for your attendance today and we look forward to our next update in July.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: The conference has now concluded.
Unnamed Speaker: And with some of the loan purchases this quarter, those have had a lower loss experience, and one of the portfolios has full coverage with credit enhancement. And so it was really a combination of the specific reserve being eliminated and the overall loan mix. As far as going forward, our provision is really being driven by a couple factors. First, loan growth and loan mix. Of course, the economic forecast and our charge-off experience. We were very pleased with charge-offs this quarter. They were roughly half of the fourth quarter and third quarter charge-offs, so that's been very positive. So I expect the reserve to be pretty stable as we move forward.
Speaker Change: Thank you for attending today's presentation you may now disconnect.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: No.
Speaker Change: [music].
Unnamed Speaker: Sure. We actually have several activities that are part of our overall credit risk management and account relationship management that are not new. I mean, this is just part of the fabric of monitoring our portfolio and working with our customers. First of all, you know, we're doing annual reviews on these clients, you know, collecting financials on schedule, depending on the type of credit it is. And so, on a flow basis, we're continually monitoring those. As part of our underwriting and that annual review process, we do stress testing for interest rates, loan-to-value compression, and some other factors. So, that's an ongoing activity.
Speaker Change: Mhm.
Speaker Change: [music].
Unnamed Speaker: And, you know, we have the opportunity to see how our customers are positioned to absorb the interest rate changes upon maturity. We also do a deep dive on certain CRE sectors, including hospitality, office, multifamily, nursing home, you know, CRE that may have As part of that stress testing, we go up to 300 basis points. And as you can see from our charts, we took a look at those that are under seven percent.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Unnamed Speaker: I didn't provide the color here, but by and large, most of the increases in this in these two tranches are about 200 basis points. So it's well within our stress testing metric. Got it. That's great, Collin. Thanks a lot.
Brian Joseph Martin: We have the next question from Brian Martin with Jenny Montgomery. Please go ahead.
Unnamed Speaker: Just one follow-up on the credit side, the performance has been great here. On the special mention credits or the criticized assets as you look at this quarter, it sounds like my guess is there's not much change given what we saw with the provision in Lynn's comments just there. Accurate or just kind of a read through on that?
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Unnamed Speaker: you know, warranted additional monitoring, I'll say. Those companies are all strong. We have strong sponsors. In the first quarter, we saw improvement with stabilization and recovery from the fire at one property. And for the CNI credits, we're seeing improvement in their interim numbers. So we remain very comfortable with those, and there's not going to be further migration. And then, certainly, as you saw in our substandard and non-accruals, those improved this quarter. So we're very pleased with that performance.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].
Unnamed Speaker: Yeah, Brian, I don't have the exact specifics. You know, we're seeing this quarter thirty-nine million come out of indirect, which is one of the lowest yielding. And so those are, you know, those are going to pick up, you know, three to sometimes four basis points of overall yield or 300 to 400 basis points on those loans. You kind of see from Lynn's slide and what's coming off of CRE where she's around a two to maybe 200 basis point pickup on some of those that are rolling off. So I think that's pretty much, you know, what we're seeing when they come when they're rolling off.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Hum.
Speaker Change: [music].
Thomas M. Prame: Thank you, and again, I appreciate all the questions today. And also, thank you for participating in today's earnings call. You know, the team had a very solid first quarter with positive momentum in our key earnings metrics, also heading into Q2. As stated, we're very optimistic in the near term about our ability to continue to improve our financial performance and remain well-positioned for potential rate cuts that will be added to our positive financial trajectory. Thank you again for your attendance today, and we look forward to our next update in July.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
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