Q3 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 third quarter of 2024.
Good morning, everyone and welcome to the Horizon Bancorp, Inc Conference call to discuss financial results for the third quarter of 'twenty 'twenty four.
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Operator: Please note this event is being recorded.
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Operator: Before turning the call over to the management, 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 this 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.
Speaker Change: Before turning the call over to the management. Please remember that today's call may contain statements that are forward looking in nature.
Speaker Change: 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.
Speaker Change: Additional information about factors that could cause actual results to differ materially is contained and horizon's. Most recent Form 10-K, and its later filings with the Securities and Exchange Commission.
Operator: In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliation for these measures is contained in the presentation.
Operator: The company assumes no obligation to update any forward-looking statements made during the call.
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 at the company's website, horizonbank.com.
Operator: Representing Horizon today are Executive Vice President and Senior Operations Officer, Kathy DeWriter; Executive Vice President, Corporate Security and General Counsel, Todd Ezzler; 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 Seahor; and Chief Executive Officer and President, Thomas Prem.
Operator: At this time, I would like to turn the call over to Mr. Thomas Prem. Please go ahead, sir.
Thomas Prem: Good morning, and thank you for participating in today's call. We are pleased to share our third quarter results that display another quarter of positive net income growth, highlighted by expansion of net interest income and fee income, combined with excellent credit quality. Horizon’s positive third quarter results displayed on page four reflect the organization’s commitment to continuing enhance our financial performance. The quarter reflected continued growth and revenue models driven by a fourth consecutive quarter of expanded net interest income and continued fee income growth. Average loan growth for the quarter, which solid at 10% analyzed, coming out the strongly June production we previously reported.
Speaker Change: Highlighted by expansion of net interest income and fee income combined with excellent credit quality.
Speaker Change: Horizons positive third quarter results displayed on page four reflect the organization's commitment to continue to enhance our financial performance the quarter reflected continued growth in our revenue models driven by our fourth consecutive quarter of expanded net interest income and continued fee income growth.
Speaker Change: Average loan growth for the quarter was solid at 10% annualized coming off the strong late June production. We previously reported it also reflects continuation of our strategy to grow our core commercial portfolio, coupled with the planned runoff of lower yielding auto loans. The team remains very confident on its ability to find ample lending opt.
Thomas Prem: It also reflects continuation of our strategy to grow our core commercial portfolio, coupled with a plan run off of the lower yielding auto-level. The team remains very confident on its ability to find ample lending opportunities to grow in our local markets, while maintaining our positive credit trends displayed throughout 2024. Horizon's deposit portfolio displayed solid growth with stability in its core non-interest-bearing balances, and the franchise realizing the benefits of its commercial and consumer deposit-gathering efforts. The granular and tender deposit base continues to showcase very strong and sticky trends, with overall deposit costs increasing slightly. As our third quarter results displayed, the company has positive momentum on many fronts through a more productive balance sheet, revenue growth, and excellent credit metrics.
Speaker Change: <unk> to grow in our local markets, while maintaining our positive credit trends displayed throughout 2024.
Speaker Change: Horizon's deposit portfolio displayed solid growth with stability in its core noninterest bearing balances and the franchise realizing the benefits of its commercial and consumer deposit gathering efforts the granular and tenured deposit base continues to showcase very strong and sticky trends with overall deposit costs increasing slightly.
Speaker Change: As our third quarter results displayed the company has positive momentum on many fronts through a more productive balance sheet revenue growth and excellent credit metrics. The quarter did reflect slightly elevated expenses that as John will discuss in his presentation, we expect to transition back to more normalized levels as we approach 2020.
Thomas Prem: The quarter did reflect slightly elevated expenses that, as John will discuss in his presentation, we expect to transition back to more normalized levels as we approach 2025.
Speaker Change: Five.
Thomas Prem: Additionally, within today's presentation, John will also be sharing detail on strategic actions initiated in the fourth quarter, which will further advance our efforts to create long-term shareholder value and significantly improve our operating performance in 2025. At highlighting my opening comments, we're very pleased with the success in the quarter and average loan growth, revenue expansion, and continued excellent credit quality.
Additionally, within today's presentation, John will also be sharing detail on strategic actions initiated in the fourth quarter, which will further advance our efforts to create long term shareholder value and significantly improve our operating performance in 2025.
Speaker Change: As highlighted in my opening comments, we're very pleased with the success in the quarter and average loan growth revenue expansion and continued excellent credit quality.
Lynn Kerber: To provide additional insight on our lending performance, I'll transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber. Thank you, Thomas.
Speaker Change: Provide additional insight on our lending performance I'll transition the presentation to our executive Vice President and Chief commercial banking Officer Lynn cover.
Lynn Cover: Thank you Tommy.
Lynn Kerber: At the beginning on slide five, we have an overview of the loan portfolio as of September 30 with a mix of 60 percent commercial, 17 percent residential, and 21 percent consumer, reflecting our strategic shifts in loan portfolio mix. Average loans increased 10 percent annualized from the linked quarter. However, period and loan growth was flat, with primary growth predominantly in commercial loans and mortgage loans, coupled with a continued decline and lower-yielding auto loans.
Lynn Cover: Beginning on slide five we have an overview of the loan portfolio as of September 30th with a mix of 60% commercial 17% residential and 21% consumer reflecting our strategic sense in loan portfolio mix.
Lynn Kerber: Transitioning to some detail on each portfolio, we have commercial loans highlighted on slide six. For the third quarter, commercial loans increased $9.5 million, representing 1.3 percent growth on an annualized basis. Initial loan fundings were generally consistent with typical activity levels. However, net total commercial loans were impacted due to the previously noted acceleration of production in the second quarter results, and the higher-than-average payoffs and line of credit paydowns in the third quarter. The core commercial pipeline continues to be stable with opportunities for growth and traditional commercial categories and the ramp up of our equipment financing division.
Lynn Kerber: Our equipment finance division has been well received and is meeting our expectations for new originations. We are continuing to focus our efforts on opportunistic growth and continue to ask equality. Activity continues to be well-diverse by the industry and geography, and our portfolio mix to be consistent with our overall portfolio composition.
Lynn Kerber: Commercial credit quality remains strong with PES dues as September 30 of three basis points, non-performing loan ratio of 24 basis points, and net recoveries of $58,000 year-to-date 2024.
Lynn Kerber: Turning to Flight 7, consumer lone balance is decreased $43 million during the quarter.
Lynn Kerber: We flexible our plan reduction in the indirect auto. The mortgage portfolio grew $3 million, representing 2% of an annualized growth. Overall, credit quality remains satisfactory in the consumer and mortgage portfolio, with the link with the entire jobs within targeted ranges. Our asset quality metrics continue to be strong as outlined on slide 8. Substandard loans of 59.8 million dollars represented 1.24% of loans, reflecting an increase for the quarter of $8.6 million. While there is an increase for the quarter, several of the downgrades are viewed as a very nature and expected to resolve through loan payoffs and/or improving performance.
Lynn Cover: Sato the mortgage.
Lynn Cover: Folio grew $3 million, representing 2% of annualized growth.
Lynn Cover: We're all credit quality remains satisfactory in our consumer and mortgage portfolios with delinquency and charge offs within targeted ranges.
Lynn Cover: Our asset quality metrics continue to be strong as outlined on slide eight.
Lynn Cover: Substandard loans of $59 $8 million represented 124% of loans, reflecting the increase for the quarter of $8 $6 million.
Lynn Cover: While there is an the increase for the quarter. So several of the downgrades are viewed as temporary in nature and expect it to resolve through loan pay offs and or improving performance.
Lynn Kerber: Non-performing loans increase in the quarter to $24.4 million, representing 51 basis points of total loans. This increase was principally attributed to two larger home equity loans totaling $1.7 million, a $2.6 million single credit in the commercial portfolio, and $602,000 in the mortgage portfolio. While an increase, one home equity loan has already been paid off, and remaining loans have adequate collateral and engaged borrowers with working with our funders. The results in the third quarter remain within historical ranges and comparable to our peer group performance, and we do not expect this moderate change to materially impact our outlook for charge off at this time.
Lynn Cover: Nonperforming loans increased in the quarter to $24 $4 million, representing 51 basis points of total loans.
Lynn Cover: This increase was principally attributable to two larger home equity loans totaling $1 $7 million.
Lynn Cover: A $2 6 million dollar single credit in the commercial portfolio and $602000 in mortgage portfolio.
Lynn Cover: While an increase one home equity loan has already been paid off and the remaining loans have adequate collateral and engaged borrowers with working with our vendors.
Lynn Cover: The results in the third quarter remain within historical ranges and comparable to our peer group performance and we do not expect this moderate change to materially impact our outlook for charge offs at this time.
Lynn Kerber: That charge off for the third quarter were $375,000, reflecting an increase from our most recent quarters and representing three basis points on the online spaces. Charge off to your date, remain predominantly in the consumer indirect auto portfolio.
Lynn Cover: Net charge offs for the third quarter were 375000, reflecting a decrease from our most recent quarters and representing three basis points on an annualized basis.
Lynn Cover: Charge offs year to date remain predominantly in the consumer indirect auto portfolio.
Lynn Kerber: Finally, our allowance for credit loss was modestly increased by approximately $700,000 and a quarter to $52.9 million, resulting in an allowance to loan ratio of 1.10%. The increase is primarily reflected in the document for economic forecast and an increase of $177,000 in specific reserves. Prevision expense of $1 million is a combination of the allowance increase and replenishing the reserve for third quarter charge off of the $375,000. You should reserve amounts and related provision will be driven by loan growth and mix, economic forecast and credit trends. Overall, we feel our portfolios are performing well, and the reserve is adequate based on current and forecast and charge off trends.
Lynn Cover: Finally, our allowance for credit losses modestly increased by approximately $700000 in a quarter to $52 $9 million, resulting in an allowance to loan ratio of 1.10%.
Thomas Prem: Now I'd like to turn things back to Thomas, who will provide an overview of our deposit trends. Thank you, Lynn.
Thomas Prem: Moving our deposit portfolio displayed on slide 9. The Ryzen's core consumer and commercial balances increase in the quarter highlighted by continued stable financial sparing deposit balances.
Operator: Our diverse branch network across Indiana, Michigan, combined with the recently added resources to our charging management team, are making solid strides gathering new relationships and expanding wall cheer when in our core mark. Guy Nick, okay, that's so cool.
Lynn Cover: Benefits of the late Q2 loan growth pulled through the averages in Q3, which in combination with another quarter of no purchases of investment securities led to a more favorable earning asset mix and modest expansion of the FTE net interest margin up two basis points to 266%.
Lynn Cover: This is the fourth consecutive quarter of sequential margin improvement and a trend we expect to continue for the foreseeable future.
Lynn Cover: Looking ahead, excluding the Q4 actions discussed later in the presentation. Our base case is anticipating NIM expansion in the range of seven to 10 basis points in Q4, when compared with Q3.
Lynn Cover: This expectation is based on the continued positive earning asset mix shift and the realized spread improvement from the September rate cut as evidenced by the reduction in our spot interest bearing deposit costs to around 250% in early October from a high of $2 seven 2% in the month of August.
Lynn Cover: We are assuming an additional 25 basis point rate cut in each of November and December which should continue to modestly benefit the net interest margin.
Lynn Cover: Further in the presentation, we will provide insight into our Q4 security sales, which will be additive to these baseline assumptions.
Lynn Cover: As you can see on slide 11, it was another good quarter for the company on the fee income front, delivering $11 $5 million and noninterest income above the guidance range for the quarter.
Lynn Cover: New business activity in our mortgage unit and strong momentum in our Treasury management business were the primary drivers of the linked quarter increase.
Lynn Cover: Looking ahead to Q4, we continued to see positive momentum in our Treasury management mortgage and private wealth businesses those seasonal declines in mortgage may lead to a modest reduction in fee income relative to Q3 results.
Lynn Cover: All in all we are pleased with the progress we're seeing in our fee generating businesses heading into 2025 and will continue to make strategic investments in these products.
Lynn Cover: Moving to expenses on slide 12.
Lynn Cover: All regulatory capital ratios will remain relatively unchanged when compared to Q to September 30th figures.
Lynn Cover: Finally, turning to the outlook on slide 15.
While Q4 results will be noisy as noted earlier the intent is to give you our best view of the quarter, while providing some clarity around some key line items for the coming year.
Lynn Cover: In sum, we are encouraged by the financial outlook and positive momentum for the company as we look ahead.
Lynn Cover: Specifically as it relates to the balance sheet and the period total loan balances are likely to be relatively unchanged from September 30, excluding warehouse balances.
Lynn Cover: Core commercial growth will continue to be positive, but be largely offset by the continued runoff of the indirect auto portfolio.
Lynn Cover: Assuming the sale of the warehouse balances by year end.
Lynn Cover: Total end of period loan balances are expected to be down low single digits.
Lynn Cover: Deposit balances are likely to be relatively stable as we continue to focus on core retail and commercial customers, but given our current liquidity position, we will continue to be more prescriptive around our appetite for higher priced non relationship balances.
Lynn Cover: We are expecting total net interest margin expansion of 15 to 20 basis points in Q4 from the 266% reported in Q3.
Lynn Cover: This would be inclusive of the contribution from the securities repositioning the balance sheet assumptions, just noted and anticipated further rate reductions.
Lynn Cover: This should drive an increase in net interest income in the upper single digit percentage range for the quarter when compared with Q3.
Lynn Cover: While expenses in Q4 are likely to approximate $42 million. This includes several items that are not expected to carry forward into 2025.
Lynn Cover: As such to provide some additional clarity on run rate expenses. Our preliminary look at 2025 is consistent with current consensus expectations for the company.
Speaker Change: <unk>, just kind of curious where you see the the margin kind of settling once all is said and done in 2025.
Speaker Change: And then how much additional benefit you are expecting across next year.
Speaker Change: <unk> continues to cut rates modestly thanks.
Speaker Change: Yeah, Hey, Brennan as John Thanks for the question.
Speaker Change: So rather than giving you a landing point for 2025, we will just talk to some of the moving pieces. So as you noted I think the guidance is pretty straightforward on where are we generally expect Q4 to land.
Speaker Change: From there we have a couple of things that are generally favorable to the margin outlook. So the continuation of the.
Speaker Change: Earning asset mix changes that you've been seeing so core commercial loan growth offset by lower yielding runoff in the loan portfolio cash flows the securities portfolio.
Speaker Change:
Speaker Change: Moving to higher yielding assets all of that will continue for the foreseeable future through 'twenty five.
Speaker Change: So that's generally favorable rate cuts, we said in the prior quarter and continue to believe it to be true.
Speaker Change: Modestly favorable to the net interest margin. So however, you assume those in your model.
Speaker Change: That would be our base case assumption around rate cuts and then of course you know.
Speaker Change: Net of all the transactions that we see on slide 14, where we'll end up with.
Speaker Change: A fairly high cash position and so over the course of 2025, we would be looking to place those assets into higher yielding.
Speaker Change: Assets is well placed to cash in higher yielding assets as well. So I think generally some some favorable organic momentum on the margin.
And then of course, you noted the benefit that we're likely to see just mathematically with the pay down and the security of the borrowing position excuse me at the end of <unk> at the beginning of two two so that will flow through the margin in the second quarter.
Speaker Change: Alright awesome, Doug that's helpful color. Thank you.
Speaker Change: One more from me before I step back.
Speaker Change: <unk> for the quarter, certainly saw a nice improvement, which wasn't too shocking given what rates did across the third quarter.
Speaker Change: Can you happened to update us on the fair value of the HTM portfolio at 930.
Speaker Change: <unk>.
Speaker Change: Yeah.
Speaker Change: Okay, Great and then just one clarifying question on expenses, there's different aggregators of consensus estimates, but John just to clarify we're thinking kind of high <unk> 50 range.
Speaker Change: 160 for next year unexpected.
Speaker Change: Yes, I think the consensus number that we see is in that sort of a $1 55 to $1 60 range yet.
Speaker Change: Okay great.
Speaker Change: Just be curious just with the profitability improvement that you'll have from the balance sheet restructuring here in early <unk> and with the stock still trading kind of just north of tangible book curious to hear your updated thoughts on.
Speaker Change: Share repurchases just as you continue to build capital with the repositioning and profitability improvement coming out of <unk>.
Speaker Change: Yes.
Sean: Yeah, Nathan it's Sean Thanks for the question.
Sean: Like any other capital deployment activity, we're looking at.
Sean: We would look at that as well and are in a similar vein.
Sean: I think you are right, we will be in a position to evaluate capital alternatives for the foreseeable future with the.
Sean: With the improved profitability metrics, we see in kind of the glide path that we see.
Sean: On the asset side, we should be in an excess capital position that.
Sean: We feel pretty comfortable with but.
Sean: But yes, we were just a value we'd be evaluating that.
Sean: But the same authorities and the same metrics that we would look at anything else.
Speaker Change: Okay, Great I appreciate all the color. Thank you.
Speaker Change: The next question comes from Damon Delmonte with <unk> W. Please go ahead.
Speaker Change: Hey, good morning, everyone and hope you're all doing well today.
Speaker Change: Just wanted to circle back on the expense question.
Speaker Change: Good good color and disclosure as to what to expect here in the fourth quarter.
Operator: Yeah, those are the only two questions I had, so thank you very much. Thank you.
Brian Martin: Our next question comes from Brian Martin with Janney Montgomery. Please go ahead.
Operator: Hey, good morning, guys. Morning.
Brian Martin: Hey, say someone might have been answered, but just on the, on the, on the loan pipelines, when I guess, can you comment on just kind of, one of the commercial pipeline this today, and then I think you talked about the equipment and answers, kind of where the footings are, on the equipment and answer level today.
Lynn Kerber: Sure, good morning. Our commercial pipeline has been very steady. Our initial funding has been really close to average, plus or minus, per quarter. So I'm really pleased with that. Very stable.
Lynn Kerber: The equipment leasing division. And, you know, we had stated we are targeting roughly 100, 110 million this year. I believe we're just over 85 million as of September 30th. So that's meeting our expectations and having really developing a nice cadence. Not with the teams will use some both. So I think it's really relatively stable. Some of the noise that we had this quarter last quarter really had to do with just some timing of some larger rather, you know, rather large loans. Really, at the end of the second quarter, that probably would have otherwise gone into third quarter.
Lynn Kerber: And just to pay off and line a credit activity. Second quarter it was light and pay off's were much less than average and third quarter. You know, we saw an increase, and they were higher than average. That pay off activities really being driven by a customer's business model. So, you know, their project Reach stabilization. They're either taking that to the secondary market or selling the property. So really just coming down to some movement in the portfolio based on customer activity. Gotcha. Okay. Now it's helpful.
Operator: And then, in terms of the indirect portfolio. Where does that portfolio land? I mean, it was run off this quarter, I guess. In terms of size, what do you expect that portfolio to kind of shake out over time? Is it kind of a continued run down here?
Thomas Prem: Just Thomas, I'll help you on that one. I'd ask me in about 30 to 35 million a quarter. Okay. And so it accelerated the last two quarters.
Thomas Prem: But as we get to a smaller portfolio of the primary, able to decrease a little bit. Okay. All right.
Operator: And then.
Operator: All right. Yeah.
Operator: And then just maybe just secondly on the mortgage side. You know, the obviously a nice lift here this quarter, I guess. It's given where there will be always rates and seasonality. I guess is the current level kind of sustainable way to think about mortgage. Here in the near turn. I think it's jam put in some of the comments on the slide. We anticipate mortgage would be slightly down here in the fourth quarter, which seasonality of the fourth and the first, and then come back in the second quarter. So I want to anticipate this and be a runmery.
Brian Martin: We've had a new leadership join Mortgage. It's increased our sales productivity. It also helped us on the secondary market delivery. This quarter was a reflection of that. But we'll move in a little bit more seasonality and cue four and cue one. Gotcha. Okay. That's all I had. Guys, thank you.
Operator: This concludes our question and answer session.
Operator: I would like to turn the conference back over to management for any closing remarks.
Thomas Prem: Thank you. Again, thank you for participating in today's earnings call.
Thomas Prem: As stated, the team is very productive in the third quarter, and we have a great start to the fourth quarter to significantly advance our financial performance as we had in the 2025.
Operator: I want to thank everyone again for our attendance today, and we wish you all the best in the upcoming holiday season. Thank you.
Operator: The conference is now concluded. Thank you for attending today's presentation.
Operator: You may now disconnect.