Q4 2024 Horizon Bancorp Inc Earnings Call
Speaker Change: All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation there will be an opportunity to ask questions.
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To withdraw your question, please press star, then two.
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 include those factors noted in the slide presentation.
Speaker Change: Additional information about the 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: 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.
Speaker Change: The company assumes no obligation to update any forward-looking statements made during the call.
Speaker Change: 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.
Speaker Change: Representing Horizon today are Executive Vice President and Senior Operations Officer Kathy DeRider
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, John Stewart.
Speaker Change: Executive Vice President and Chief Administration Officer, Mark Secor, and Chief Executive Officer and President, Thomas Prame.
Speaker Change: At this time, I would like to turn the call over to Thomas Prame. Please go ahead.
Thomas Prame: Good morning and thank you for joining us. We're pleased to share our fourth quarter results as well as the well-executed strategic initiatives outlined in our last earnings call, which has improved Horizon's ability to deliver long-term value to its shareholders.
Thomas Prame: The outcome of the team's collective effort in the quarter resulted in exceptional loan growth, a significantly improved net interest income and margin, positive credit metrics, and a restructured expense base that will benefit the organization moving forward.
Thomas Prame: Page 4 displays Horizon's positive fourth quarter results, reflecting the organization's commitment to continually advance our financial performance through creative actions focused on shareholder value.
Thomas Prame: The quarter delivered continued growth in our core revenue models driven by a fifth consecutive quarter of expanded net interest margin.
Thomas Prame: Additionally, the team produced annualized loan growth excluding warehouse balances of 10 percent, reflective of our commitment to dedicating resources to expanding profitable core commercial relationships while continuing to reduce the portfolio of lower yielding auto loans.
Thomas Prame: As we move into 2025, the team remains confident on its ability to find ample lending opportunities in our local markets, while maintaining the positive credit trends that have been the cornerstone of strength for the organization.
Thomas Prame: Verizon's deposit portfolio displayed solid trends with core deposits remaining flat and the company electing to allow higher priced transactional CD balances to roll off the balance sheet to improve the organization's overall profitability.
Thomas Prame: The granular and tenured deposit base remained strong and benefited the organization with fed rate cuts during the quarter.
Thomas Prame: Our fourth quarter results continue to advance the financial health of the franchise through a more productive balance sheet, delivering strong net interest income, and excellent credit metrics.
Thomas Prame: which will lead to a more efficient baseline in 2025. John will provide additional insight on this topic later in the presentation.
Thomas Prame: As I noted in my opening comments, we are very pleased with our results in the fourth quarter and the financial positioning of the organization heading into 2025.
Thomas Prame: A key part of our optimism is the positive momentum of loan growth and quality credit metrics.
Speaker Change: 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.
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Lynn Kerber: Thank you, Thomas. Good morning. I am pleased to share a very positive momentum and results in the fourth quarter. Total loans held for investment, excluding mortgage warehouse, grew $123 million, representing 10% annualized growth.
Lynn Kerber: Growth was predominantly in our core commercial lending segments and increased activity in the retail mortgage lending segment.
Lynn Kerber: The net results also take into consideration the strategic reduction of indirect auto loans, which ended the year at $294 million.
Lynn Kerber: Transitioning to some detail on each portfolio, we have commercial loans highlighted on slide 6. It was a very strong quarter for commercial lending with net loan growth of 164 million dollars representing 22% annualized growth.
As noted in my third quarter remarks...
Lynn Kerber: Production from quarter to quarter is impacted by the timing of new production, seasonal funding on construction and operating lines, and payoff activity.
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Lynn Kerber: While the timing from quarter to quarter may vary, we anticipate our annualized growth rates remain generally consistent.
We continue to stay focused on our core markets.
Lynn Kerber: Primary segments of owner-occupied and non-owner-occupied commercial real estate, traditional C&I lending, and small and mid-ticket equipment finance.
Lynn Kerber: Commercial credit quality is performing well with the December 31st 2024 key metrics at or below peer performance.
Lynn Kerber: In addition, we observed positive migration in the fourth quarter with the upgrade and payoff of several non-performing credits.
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Lynn Kerber: Turning to slide 7, consumer loan balances decreased 42.1 million dollars during the quarter, reflective of our continued wind down in indirect auto lending.
Lynn Kerber: excluding indirect auto lending, core consumer loans remain flat with primary activity being home equity lending.
Lynn Kerber: Residential mortgage lending modestly grew during the quarter. We continue to opportunistically expand our mortgage lending team with local in-market lenders that are relationship focused and work well with our commercial and retail teams.
Lynn Kerber: We expect to realize increased mortgage lending activities in 2025 through continued disciplined sales process and outbound calling efforts.
Lynn Kerber: Overall credit quality remains satisfactory in the consumer and mortgage portfolios with delinquencies and charge-offs within targeted ranges.
Lynn Kerber: Our asset quality metrics continue to be strong, as outlined on slide 8.
Lynn Kerber: substandard loans of 43.2 million dollars represented 0.89 percent of loans reflecting a decrease for the quarter of 16.5 million dollars. We are fortunate to have a large commercial non-accrual payoff as well as positive migration on several substandard commercial loans.
Lynn Kerber: Non-performing loans were 27 million dollars representing 56 basis points of total loans that excludes mortgage warehouse this quarter.
Lynn Kerber: The quarterly increase was predominantly in consumer revolving bonds, which are supported by credit enhancements and residential mortgage loans offset by reduction in commercial loans.
Lynn Kerber: The results in the fourth quarter remain within our historical ranges and we do not expect this change to materially impact our outlook for performance in these segments.
Lynn Kerber: Finally, our allowance for credit losses decreased by approximately $900,000.25 to $52 million, resulting in an ACL to loan ratio of 1.07%.
Lynn Kerber: Primary drivers in the ACL components are loan growth, the elimination of the mortgage warehouse allocation available for sale accounting, and changes in specific allocations.
Lynn Kerber: Provision expense of 1.2 million dollars is a combination of the ACL increase, replenishing the reserve for fourth quarter charge-offs,
of $621,000 and a change in allocations for unfunded commitments.
Lynn Kerber: Future reserve amounts and related provision will be driven by loan growth.
and Mix Economic Forecasts and Credit Trends.
Thomas Prame: Now I'd like to turn things back to Thomas who will provide an overview of our deposit trends.
Thank you, Lynn.
Thomas Prame: Moving to our deposit portfolio displayed on slide 9. Verizon's core deposit balances were stable within the quarter.
Thomas Prame: with the organization electing to reduce exposure to higher cost and longer duration CDs.
Thomas Prame: continue its disciplined approach, deposit pricing, and management's focus on creating a more profitable balance sheet.
Thomas Prame: The benefits of this strategy were evident as the company was able to reduce interest-bearing funding costs while capitalizing on the Fed's interest rate declines.
Thomas Prame: We believe the deposit portfolio is well-positioned to continue to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets that know and trust Horizon Well.
Thomas Prame: We're pleased with the resiliency of the client base and the dexterity the team has displayed leveraging multiple funding options while balancing cost and duration within the portfolios.
Thomas Prame: Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through some four-quarter highlights and key strategic initiatives the team completed during the quarter.
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John Stewart: Thank you, Thomas. Turning to slide 10, our Q4 net interest margin was stronger than anticipated, up 31 basis points link quarter to 2.97%, driven by a few key factors.
John Stewart: First, our leadership teams were able to strategically redeploy the cash proceeds from the October securities sale earlier than expected, with stronger organic commercial loan growth and the purposeful reduction of higher cost non-relationship deposit balances.
John Stewart: Second, the balance sheet mix continues to organically improve with the strategic execution aimed at driving a more profitable mix of both higher yielding assets and lower cost liabilities.
John Stewart: Third, the reduction of the Fed funds rate in November and December was beneficial to the margin in the quarter.
John Stewart: And finally, there was a lift of approximately five basis points related to interest recoveries on specific commercial loans.
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John Stewart: Looking ahead, many of the creative strategies that we have executed over the last several quarters will remain in place through 2025, and the year-end balance sheet should get us off to a nice start in the new year.
John Stewart: With this as a backdrop, we would anticipate sequential quarterly margin improvement over the course of the year.
John Stewart: Recall, we still anticipate paying down $200 million of FHLB advances in late March and early April.
John Stewart: Importantly, as there has been a great deal of volatility in the forward expectations for Fed funds rates in recent months, following the securities actions taken in Q4 and our expectation that deposit betas will slow going forward, we believe our balance sheet is now very close to neutral in the front end of the curve.
John Stewart: While the current guidance includes one cut in July, we do not view short end rate changes to be a major driver of our net interest income outlook for the year.
John Stewart: Rather, net interest income and margin performance will be a factor of our continued strategic execution on both sides of the balance sheet.
John Stewart: Slide 11 provides the profile of the remaining investment securities and the projected cash flows and roll-off yields for the coming year.
John Stewart: As it stands today, despite higher rates, we do not have any intention of reinvesting cash flows in 2025. Rather, those proceeds will be reinvested in relationship-based commercial lending, which will be economically accretive and additive to the long-term franchise value of the company.
John Stewart: I do want to comment on the remaining available for sale portfolio, which approximates $230 million at the end of the year.
John Stewart: At this point, this book has been through a couple of repositioning trades and what remains is unlikely to yield further repositioning opportunities without a significant improvement in market prices on the portfolio.
John Stewart: As you can see on slide 12, reported non-interest income included the previously disclosed $39.1 million realized loss on the sale of investment securities.
John Stewart: Excluding that loss, non-interest income declined a little over $1 million last quarter, primarily due to the seasonality of mortgage-related income.
John Stewart: Looking ahead to 2025, although non-interest income growth is expected to be in the low single digits for the year, we are anticipating continued positive momentum following our strategic investments throughout 2024 in treasury management, mortgage, and private wealth.
John Stewart: Moving to expenses on slide 13, as we noted last quarter, Q4 was impacted by expenses related to several specific initiatives to recalibrate our run rate heading into 2025.
You can see those items detailed on the slide.
John Stewart: Additionally, the quarter was impacted by higher than anticipated medical benefits expense, higher performance-based compensation accruals given the strong finish to the year, a singular OREO property write-down, and certain other accruals.
John Stewart: In total, these additional items account for roughly $2 to $2.5 million in the quarter, which would reconcile the reported figure back to our prior outlook.
John Stewart: These items will either reset to a lower level or not recur in 2025.
John Stewart: Therefore, we feel confident in the guidance provided on slide 16 for full year expenses, which would imply a lower run rate than Q4 results, and aligns with our initial expense outlook for 2025 discussed in October.
John Stewart: Turning to capital on slide 14, again this quarter, we were pleased to be able to show overall improvement in the company's capital ratios, despite the realization of the security loss through Tier 1.
John Stewart: Tangible common equity to tangible assets increased as a function of net income excluding the securities loss which was aided by the reversal of the tax valuation allowance.
John Stewart: On the regulatory front, ratios improved with the realized reduction in risk-weighted assets.
John Stewart: Going forward, further improvement in the company's capital ratios is expected, given our outlook for stronger profitability and a continued disciplined approach to balance sheet growth.
[inaudible]
John Stewart: Slide 15 provides an update on the strategic actions undertaken during the fourth quarter. In short, it was a busy quarter for the company, marked by the successful execution of several key initiatives.
John Stewart: all of which were aimed at strengthening the balance sheet, improving the long-term profitability of the company, and simplifying our business model to generate additional franchise value.
John Stewart: As previously mentioned, the security's repositioning early in Q4 is already outperforming initial expectations.
John Stewart: Strategic tax planning efforts yielded the release of the $5 million valuation allowance, which is a direct benefit to capital and tangible book value per share.
John Stewart: And finally, we were able to re-engage with the multiple interested parties in our Mortgage Warehouse Division and have sold the business for a gain, effective January 17th, which will be recognized in Q1 results.
John Stewart: As you can see, it was a positive and productive quarter on many fronts.
John Stewart: That said, we will continue to diligently evaluate additional opportunities to strengthen the balance sheet and add to the long-term franchise value of the company.
John Stewart: Finally, turning to slide 16, we're presenting our initial outlook for the full year 2025, which should represent a significant step forward on the path to improving profitability and continued positive momentum in our core operations. There are a few items I would like to highlight within our current forecast.
John Stewart: Specifically, as it relates to the balance sheet, we are anticipating growth in loans held for investment to land in the mid-single-digit range for the full year.
John Stewart: While there is likely to be some seasonality in Q1, we are committed to the favorable remixing of the portfolio into higher return, core commercial business.
John Stewart: Within our outlook for loan growth, we are anticipating the continued runoff of lower yielding indirect auto loans.
which should decline by about $100 million over the year.
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John Stewart: The warehouse balances of approximately $65 million at December 31st were carried in loans held for sale. Accordingly, we would expect the held for sale balance to decline by that amount in Q1.
John Stewart: While deposit balances can be impacted by many factors, our base case assumption is for period end balances to grow in the low single-digit range, subject to typical seasonality, weaker in Q1 and Q4, with seasonal strength in Q2 and Q3.
John Stewart: Overall, we are anticipating a deposit mix to remain relatively consistent.
John Stewart: We are still anticipating that we will pay down the $200 million in maturing FHLB advances in late March and early April. As a reminder, these funds currently cost around 4%.
John Stewart: Under our base set of assumptions, which includes one 25 basis point set funds cut in July, our initial view is that full year 2025 net interest income will grow in the mid-teens.
John Stewart: This growth would be predominantly driven by net interest margin expansion, as average earning assets could be relatively unchanged when compared with full year 2024.
John Stewart: As discussed earlier, we are expecting the quarterly run rate of non-interest expense to decline relative to Q4, such that total expenses for 2025 should be flat to up low single digits relative to the reported full year 2024.
John Stewart: Lastly, I want to briefly comment on the updated guidance for the effective tax rate for 2025 to be in the mid-teens.
This revised guidance considers a couple of key items.
John Stewart: First, a stronger outlook for pre-tax income based on many of the items we have discussed thus far.
John Stewart: Additionally, more of the consolidated income is now coming from the bank versus the investment subsidiary previously.
John Stewart: Both items are positive developments for the company, but will yield an increase to the effective tax rate.
John Stewart: Second, this updated outlook does reflect management's decision to discontinue new investments in solar tax credits.
John Stewart: While this decision will reduce the net benefit to the tax liability in the near term, we intend to invest our capital in more creative core business growth over time, which we believe will create greater long-term value for our shareholders.
With that, I'll turn the call back over to Thomas.
Thomas Prame: Thank you, John. Appreciate the insight into the fourth quarter activities and the positive momentum as we launch into 2025 with a more productive balance sheet and a healthier core earnings engine.
Thomas Prame: As the team has discussed today, we are very optimistic about our outlook heading into 2025. We continue to expand our client base and brand in excellent growth markets in the Midwest that are economically attractive for businesses and for individuals.
Thomas Prame: Our relationship-based banking model has momentum with strong organic loan growth and a low historical credit risk profile.
Thomas Prame: The core commercial portfolio is experiencing ample growth across a diverse geography and portfolio mix and continues to deliver positive benefits as lower-yielding assets remix into higher-yielding loans.
Thomas Prame: The resiliency of our core deposit base maintains its great value. With an opportunity to improve our financial performance as rates decline, Verizon has a successful track record of growing deposits while maintaining a disciplined approach to pricing.
Thomas Prame: And lastly, Horizon has a lean and operating culture that consistently adapts to deliver long-term shareholder value.
Thomas Prame: We are strategically managing our balance sheet to improve our earning performance, simplifying our business model, and creating a more efficient cost structure that will deliver improved returns to our shareholders.
Thomas Prame: We see a bright future for Horizon in 2025 and we are delighted with the momentum and our core operating metrics as we enter the new year.
Thomas Prame: This is the end of our prepared remarks, and I welcome the operator to open up the line for questions from our management team.
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone.
Thomas Prame: If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
Thomas Prame: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question today comes from Brendan Nauvel with Hovde Group. Please go ahead.
Good morning, folks. Hope you're doing well.
Good morning.
Speaker Change: Maybe just starting off on loan growth expectations, you know, you're targeting, you know, quite strong commercial loan growth to get that mid-single-digit guy while absorbing the runoff and the indirect book. Can you maybe talk about how you aim to get to that growth number while maintaining discipline on pricing and maintaining your credit box? Thanks.
Speaker Change: Good morning, this is Lynn Kerber. Thanks for the question. Overall, I think in a core commercial lending, we're really looking at maintaining the same cadence.
Speaker Change: that we've had mid to high single digits. Keep in mind that we've added in our equipment finance division in 2024, and so we're also going to see the benefit of that as we move further into 2025.
Speaker Change: And this is Thomas, just to piggyback on some of the comments Lynn made.
Also, our markets are growing and thriving.
of being located in the north.
Northeast part and northern part of Indiana.
Lynn Kerber: A lot of our franchise in Michigan, those growth markets are Grand Rapids, Southwest Michigan, Lansing, Detroit. We just have the right talent in the right places that are doing well. So I think a bit of it is not only in the marketplace, but also the talent we have in there. And as Lynn said, we'll keep our credit box consistent. We've been a cornerstone of our franchise for a while.
Speaker Change: Yep, yep, that's perfect. One more for me on capital. It looks like you'll be building, you know, quite a fair bit of capital across 2025. Just wondering what deployment plans are at this point. I mean, it feels like it's probably tough to do more on the security side of the equation given the HTM shield in place. So just wondering if you would consider repurchasing shares or if there's some other outlet for what you'll be building organically. Thanks.
Speaker Change: Thanks Brandon, great question. You're spot-on on that. We've been very disciplined in our approach to capital deployment. The last two times we've been able to go back to our securities portfolio and harvest some great opportunities for our shareholders, great long-term value there.
Speaker Change: You know, as we mentioned in the deck, we don't think there's a lot of opportunity still in the air.
Speaker Change: available for sale right now. As we showed in our quarterly earnings, our earnings engine is considerably different. 25 going into 25, it's stronger. It's going to create more stable earnings and also build our capital base.
Speaker Change: As we look at that, it's going to give us some more flexibility and options to deploy the capital. Hands down, stock buyback will be one of those. And just for reference, we have about 1.1 million shares authorized for buyback at this time.
Fantastic. Thank you for taking the questions.
Speaker Change: The next question comes from Terry McEvoy with Stephen. Please go ahead.
Good morning, everybody.
Speaker Change: Maybe start with Marge and a lot of balance sheet activity in the fourth quarter and that 292 core NIM.
Speaker Change: John, I wonder if you could just help us understand maybe where that was at the end of the year and then your comments on margin expansion in 2025. Can you just maybe rank order the drivers between FHLV payoff, deposit repricing lower, and then growth in the commercial portfolio, and what would be the driver of that expansion?
Hey Terry, thanks for the question. Good morning.
Speaker Change: Yes, so you're right, there's a lot of activity in Q4. If you peel back the impact in the month of December from some of the interest recoveries that we did experience, the exit run rate on margin was in the low threes, $3.03.
That was the margin for December.
Speaker Change: As I noted in my prepared remarks, we do anticipate that there will be some sequential improvement over the course of the year in 2025, such that, you know, best estimate with the balance sheet changes.
Speaker Change: exit run rate as best we can see now, kind of in the 315 to maybe 320 range. So you can see there's some sequential improvement there. As we noted last quarter, so kind of go back to that conversation, reiterate that this quarter.
The benefit of the FHLB Advance is...
Speaker Change: kind of mid single digits accretive on a basis point basis in the second quarter so that's just the reduction of cash to pay that pay off those borrowings
Thank you. Thank you.
Speaker Change: very, very minimal spread there. So as that comes off, that's going to be a creative. The balance, Terry, is really going to be a pretty even distribution of
Speaker Change: of just the improvement in the earning asset base and the liability mix over time. But as I mentioned, Lynn talked about some good commercial loan growth over the year, the indirect auto run off that helps. That is quite a creative, the net change for those two assets.
Speaker Change: And then on the liability side, you know, we'll see what the Fed gives us in terms of rate cuts, but that will kind of determine how much liability costs we end up pulling down. So I think it's going to be more a function of mix on the liability side.
Speaker Change: Thanks, John. And then just as a follow-up, the the warehouse gain in the first quarter, are there incremental strategic actions that you expect to maybe offset that gain, or will it fall to the bottom line? And I guess I should ask, is there a reserve at all on that warehouse, or is it relatively small?
Speaker Change: So, as Lynn mentioned in her prepared remarks, the reserve, we did carry a reserve against that. It was released when we migrate that over to Hell for Sale. So, you don't carry the reserve against the Hell for Sale balances. So, that was released in Q4. So, there is none going forward, and I'll let Thomas address again.
Speaker Change: Currently, the gain is going to be recognized in the quarter. We do not have strategic actions to deploy the gain. If something comes through the quarter that we believe is a credo to our shareholder value long-term, we would. But right now, we'll just take that as an add to our capital base.
Thanks for taking my questions, appreciate it.
[inaudible]
Speaker Change: The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Hi everyone, good morning. Thanks for taking the questions.
Speaker Change: Just going back to Terri's question around the margin cadence over the course of this year, John, I just want to clarify that it sounds like more of the expansion that you expect this year is maybe going to be weighted towards the first half of the year, just given what you'll be doing in terms of paying down some wholesale sources.
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John Stewart: Yeah, I would expect it to actually be fairly ratable over the year. We will get a little bit extra in Q2, all else equal, just from the reduction of the $200 million. You know, cash coming down, yielding, you know, kind of IOER today, $440 million. We're going to pay off those borrowings.
John Stewart: Those cost 4% today. Replacement cost is actually higher than that if we were to just go back into the market for the same term. So you'll get some margin lift just by the effect of the $200 million reduction there on both sides of the balance sheet, but otherwise I would anticipate it to be fairly ratable.
Speaker Change: Okay, that's helpful. And then maybe a question for Lynn, you know, just curious what you're seeing in terms of new loan pricing today, maybe on a blended basis across the portfolios.
Speaker Change: and you know just curious you know what you guys have in terms of loans that are fixed rate that are also maybe having some repricing over the course of 2025 in terms of how that suggests the trajectory of loan yields are going to unfold this year.
Speaker Change: Good morning. I'll start first with the core commercial team. We generally will price off of the T-Bills and Prime and SOFR, our primary indexes.
Speaker Change: We are continuing to see some emphasis on floating rates right now as our customers are
Speaker Change: You know, just kind of looking at the right environment and deciding whether to fix or not, but generally on fixed rates, it could range anywhere from the high sixes into the eights, depending on the credit quality in the term.
Speaker Change: So I would say that that's been pretty, pretty stable and just kind of in dynamic correspondence to the rate environment as a whole. So, you know, rates move, we're going to see some reduction there.
Speaker Change: On the leasing side, we would expect that to be higher for our small ticket leasing. Middle market tends to follow our core commercial rates.
Speaker Change: On the leasing side, small ticket through November into December, we were seeing those rates an average of seven and a half up until the high eights.
Speaker Change: So again, depending on the credit quality, the type of financing, so obviously we're getting a bit of a premium on the leasing.
[inaudible]
Speaker Change: Okay, really helpful. Thank you for that. We have a slide in the deck in the appendix on our CRE maturities.
and for 2025...
Speaker Change: We have about $139 million that's under 7% right now, and so that will reprice, and then for 2026 we have roughly $161 million that's less than 7%.
Speaker Change: Okay, that's really helpful. I appreciate all the color. Thank you.
Damon Delmonte: The next question comes from Damon Delmonte with KCW. Please go ahead.
Damon Delmonte: Hey good morning everyone hope you're all doing well today. I just wanted to circle back on the commentary around expenses to make sure I followed this correctly.
Speaker Change: So John, did you kind of, when you backed out the...
Speaker Change: strategic initiative expense, and then some of the other items that are probably not recurring that occurred in the fourth quarter. Were you implying that kind of like a third quarter level of a little bit over $39 million is a good starting point for our quarterly run rate? Did I hear that correctly? ifferent
Speaker Change: The short answer to that question is yes, but maybe we'll just take a quick look at that slide 13.
Speaker Change: just so we're clear in talking about the same thing. So, reported expenses, $44.9 million. You see the three bullets that we summarized there for you.
Speaker Change: which very clearly are related to some of the strategic actions in the quarter that will not carry forward.
Speaker Change: That's $2.9 million. That will get you down to about $42 million. And then the last bullet, the additional items, you know, those are part of your normal run rate, your compensation expense, your medical benefits expense. They were just elevated in the quarter and relative to what we anticipate on a go-forward basis.
Speaker Change: In 2025, there were also some episodic items in there that otherwise might not have been anticipated in the original guidance. But if you back that out, as I mentioned, there's $2 to $2.5 million worth of those in there. And so that would get you right down to that range, $39.5 to $40 million, David, that you just mentioned.
Speaker Change: Got it, okay, that makes sense, thanks. And then just to circle back on the commentary around the margin, I think you had mentioned kind of.
a 315, a 320 level, was that for?
Speaker Change: where you think you would exit 25 based on kind of what you see the opportunities are in front of you or is that more in the first half of the year?
Speaker Change: No, my commentary there was that's where we anticipate the fourth quarter generally landing, just given some of the balance sheet movements that we're projecting with the guidance.
Speaker Change: Got it, okay, that's helpful. I appreciate that clarification. And then I guess just lastly, when you, you know, very strong credit trends, you're gonna be growing loans, you know, pretty steadily here in the commercial area during 25. What are your thoughts around the loan loss reserve level? You know, I think it was 107 this past quarter, kind of been in that range for the last four or five quarters. Do you still feel comfortable with that, or do you feel like you might need to grow that a little bit more just given the commercial growth?
Speaker Change: Yeah, thanks for that question. You know, as I've remarked in prior presentations, there's really a couple of key drivers on the allowance, loan growth, loan mix.
Speaker Change: The economic forecast and then our just credit quality and charge-offs.
Speaker Change: So, to answer your question, you know, loan growth is going to be a primary driver, but I would also say loan mix, as our balance sheet has been recalibrated in some of the categories, particularly running down indirect.
Speaker Change: car loans, you know, those were a higher loss rate and that's where we've experienced a lot of our charge-offs. And so as that mix continues to change what we're going to see the results of that in the reserve.
Credit quality has been very stable.
Speaker Change: And so I don't expect that to be a factor at this point. Our net charge-offs have been very consistent for the last several years.
Speaker Change: As we run down that indirect portfolio, I would expect our charge-offs would also move that direction. So I think at this point, the outlook on it is relatively stable.
Speaker Change: Great, I appreciate that, Carl or Lynn. That's all that I had, thank you very much.
Speaker Change: The next question comes from David Long with Raymond James. Please go ahead.
Good morning, everyone. Thanks for taking my question.
Speaker Change: are such hires considered in your Operating Expense Outlook for the year.
Thomas, thank you for the question.
Speaker Change: I wouldn't say we're going to strategically change the profile of our lending portfolio this year. We made some great investments last year.
Speaker Change: equipment finance, some key hires, and some markets. So I'd say we're pretty stable from an FTE count going through 25.
Speaker Change: I would say 2025 is going to be a year that we just benefit from the investments made over in early 2024, late 2024. Equipment finance, though, if you go back and look at it, I know we've been talking for a couple quarters here. It literally started the end of the first quarter of last year, so we have a lot of runway in front of us there. Again, we have the right people in the right markets going into 2025.
Speaker Change: God, thank you, Thomas, appreciate it. And then my second question is relates to deposits. And just curious what you're seeing on the ground from deposit competition. Are you seeing rational competitors out there or do you see, you know, still some aggressive pricing? How is that, what is the market like in Northern Indiana and then Southern Michigan?
Speaker Change: I appreciate the question. It takes everyone a little bit of time to react to Fed moves, so just having Fed moves in December, I think it's a little too early to say whether or not there's rational pricing out there. I think you've seen from our balance sheet performance.
Speaker Change: here coming to ending Q4 and going into Q1. We've been able to navigate, which is kind of a fluid landscape out there. There's always individuals who have some type of need and desire to build their balance sheet from a deposit standpoint, whether you're in northern Indiana or Michigan.
Speaker Change: I'd say for us, we've been able to navigate that way three ways. One, we have a great branch distribution of 70 local branches, which I think gives us a competitive advantage that's our really good at harvesting deposits.
Speaker Change: Our commercial team is truly a relationship banking team. That was, again, the relationship that's both sides of the balance sheet. And then, as I said before, the investment we made...
Speaker Change: over the last year with about 40% more treasurer management people on the ground actively going after our commercial clients. And also just regular clients out there that have excess deposits, I think helps us navigate that.
Speaker Change: I anticipate we'll always have a little bit of overrational pricing in the marketplace, but our positioning and the talent we have in the marketplace should help us navigate that.
Got it. Thanks for the call, Thomas. Appreciate it. Thanks.
Mark Pram, Mark Secor, John Stewart, Lynn Kerber
Speaker Change: The next question comes from Brian Martin with Janie Montgomery. Please go ahead.
Hey, good morning, guys.
Good morning.
Speaker Change: Say, just one, John, just on the tax rate, is that pretty ratable throughout the year? I guess there's any lumpiness in that as you think about the new rate getting reset, just given the, you know, the buildup in earnings throughout the year as you benefit, you know, it seemed like that was pretty ratable, so just tax rates pretty similar then?
Speaker Change: Yeah, thanks for the question. Yeah, so that's based on our projected numbers for the full year. You'll see it step up here in the first quarter, and then all else equal would remain right in that mid-teens level for the full year.
Speaker Change: Is there anything else that you'd be considering on the capital side in terms of potential M&A? Is that also on the board?
Speaker Change: As far as a consideration, given everything you guys have done organically, there seems to be a lot of momentum there without doing M&A, but just trying to understand the capital build here and where the uses of that are.
Speaker Change: Yeah, I would say, as Thomas, M&A is definitely on the radar for us. It'd have to be the right strategic size and location and make what I'll just call logical sense from a geography standpoint, a mechanics standpoint. As you said before, I think we're more attractive as we move into 2025 than 2024 for potential partners who can see the upside in our stock that's going to happen.
[inaudible]
Speaker Change: Okay, and in terms of, you know, what, what would interest you, Thomas, you know, can you give us some broad, you know, parameters on M&A, if you did consider M&A, kind of what's important in, you know, size, geography, you know, whatever, you know,
you can disclose or provide there.
Speaker Change: Sure, I think everyone starts with cultural fit first to make sure your business models align well. Infills for us in our natural growth markets of Southwest Michigan, Eastern Michigan, and also Southern Indiana would be fantastic. And again, the size would have to be appropriate.
Speaker Change: For us, it would be something that would be logical, that wouldn't be too much of a stretch. But again, M&A is a two-way dialogue. There needs to be a seller and a buyer. But we're out there in the marketplace entertaining conversations, and we'll see where they go.
Speaker Change: Got you. Okay. I appreciate that and then maybe just one last one on the on the commercial side It sounds like there's still that hundred million dollars in the indirect portfolio as far as kind of redeploying
Speaker Change: Are there any other places in the loan portfolio that you guys see room for changes or is it really that $100 million and then it's just organic growth on the commercial side is the focus and how we think about loan growth going forward?
Speaker Change: Yeah, our focus is really on our organic engine. As Thomas mentioned, we have a very talented team and some very strong, attractive markets. We have invested in some hires over the last few years and augmented a couple of our teams over the last year and a half. We do have capacity within those teams.
and so we're really focused on our core business segments.
Speaker Change: As you can see from the information in the deck, we've had a pretty consistent...
roughly 25-30% C&I.
Speaker Change: and roughly 45-50% non-owner-occupied and the balance in owner-occupied business. That has been very consistent quarter over quarter, and I don't expect it will deviate from that.
Speaker Change: Gotcha. And Lynn, just the, I don't know if you commented on the pipelines, but just the pipelines and then can you remind us where the...
Speaker Change: Equipment Finance, kind of where they ended the year and just kind of their outlook for continued growth in 2025, you know, what that might look like.
Speaker Change: Sure. For 2024, the Equipment Finance Division contributed roughly $140 million to our production. I would say...
Speaker Change: 60% of that was small ticket origination, and then 40% of it was middle market. We did purchase a couple small, very small portfolios at the beginning of our launch, just to get some earning assets on the books.
Speaker Change: and through syndication, but the vast majority of it is small ticket at this point, and that continues to be our focus. So, based on their run rate, they did have a very strong fourth quarter, particularly December. That's pretty typical in the equipment finance business, as businesses are making purchases right at year end. But as we move forward into the next year, we're really targeting 150, 175.
is our goal for next year.
Speaker Change: Okay, basically, so kind of double the growth, you know, reproduce the growth you have this year in terms of on the equipment.
and equipment finance side.
Speaker Change: Yeah, we really focus on our monthly run rate that we've experienced over the last six months. And so it's really a continuation of that. I don't consider it to be a major expansion. It's just going to be an organic run rate from what we've had this year.
Speaker Change: Gotcha, understood. And then just the commercial pipeline, you know, kind of, you know, you usually give a little color on just kind of where that's at today and that's all I have. Thank you.
Thank you.
Speaker Change: And so while it may vary from month to month, quarter to quarter, if you look at our annual run rate, I would say that's a good predictor for 2025.
Speaker Change: Okay, that's all I have. Thank you for taking the questions and congrats on all the all the initiatives here.
Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
[inaudible]
Thank you, Betsy, I appreciate that.
Speaker Change: Again, thank you for participating in today's earnings call. We truly appreciate your time and your interest in Horizon. As you can see, the team had an extremely productive fourth quarter, and we have great momentum on our key earning metrics heading into 2025. Thank you again for your attendance today, and we look forward to sharing our first quarter results in April.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
This is a production of the U.S. Department of State.