Q2 2025 Horizon Bancorp Inc Earnings Call
Operator: Welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the second quarter of 2025. All participants will be in a listen-only mode.
Good morning everyone and welcome to the Horizon Bank Corp Inc conference call to discuss Financial results for the second quarter of 2025.
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 star then 1 on your touchtone phone. To withdraw your question, please press star then 2.
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.
After today's presentation, there will be an opportunity to ask questions.
to ask a question, you may press star then 1 on your touchtone phone,
Todd Etzler: Now I will turn the call over to Todd Etzler, Executive Vice President, Corporate Secretary, and General Counsel for the opening introduction. Good morning and welcome to our second quarter conference call. Please remember that today's call may contain statements that are forward looking in nature. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission.
To withdraw your question. Please. Press star. Then 2
Now I will turn the call over to Todd Edler, Executive, Vice President, corporate secretary and general counsel for the opening introduction.
Todd Edler: Good morning and Welcome to our second quarter conference call.
Todd Edler: Please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks uncertainties and other factors that could cause actual results to differ materially from those discussed including those factors noted in the slide presentation.
Todd Etzler: 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.
Todd Edler: 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.
Todd Edler: In addition management May refer to certain non-gaap Financial measures that are intended to help investors understand Horizon's business.
Todd Edler: Reconciliations for these measures are contained in the presentation.
Operator: For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they may be accessed at the company's website, horizonbank.com.
Todd Edler: The company is assumes no obligation to update any forward-looking statements made during the call.
Todd Etzler: 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.
Todd Edler: For anyone who does not already have a copy of the press release and supplemental. Presentation issued by Horizon yesterday, they may be accessed at the company's website horizonbank.com.
Speaker Change: Representing Horizon today are Executive Vice President and Senior operations officer Kathy D writer.
Todd atler: Executive Vice President, corporate secretary and general counsel Todd atler.
Speaker Change: Executive Vice President and chief Commercial Banking officer Lynn Kerber.
Todd Etzler: Executive Vice President and Chief Administration Officer Mark Secor, and Chief Executive Officer and President Thomas Prame.
Jon Stewart: Executive Vice, President and Chief Financial Officer Jon Stewart.
Jon Stewart: Executive Vice President and chief Administration officer Mark Secor.
Thomas Prame: At this time, I will turn the call over to Thomas Prame. Thank you, Todd. Good morning, and we appreciate you joining us. Horizon's second quarter earnings reflect the strength of the organization's exceptional core community banking franchise. Strong loan growth, stable and granular core funding, excellent credit quality, and prudent management of expenses fueled the quarter's positive results and expanded on management's commitment to improve the financial performance of the company. The quarter was highlighted by a seventh consecutive quarter of significant net interest margin expansion. low net charge-offs of two basis points annualized, and enhanced momentum and key performance metrics of ROAA and ROATCE.
Thomas Prime: President, Thomas Prime.
Speaker Change: At this time, I will turn the call over to Thomas. Preme Thomas.
Thomas Preme: Thank you, Todd. Good morning. And we appreciate you joining us.
Thomas Preme: Horizon second quarter earnings reflect the strength of the organizations exceptional core Community banking franchise,
Thomas Preme: Strong loan growth, stable and granular core funding. Excellent credit quality and prudent management of expenses. Fueled the quarters positive results and expanded on Management's commitment to improve the financial performance of the company.
Thomas Preme: The quarter was highlighted by a seventh consecutive quarter of significant. Net interest margin expansion.
Thomas Prame: We continue to show the strength across our core community banking platform that is being driven by a disciplined approach to creating a more efficient balance sheet and effective deployment of capital. We are pleased with our results for the first six months of 2025, with reported earnings per share growing by 58% versus the comparable period a year ago. Page 3 provides insight into the quarter's results. The quarter displayed positive growth in our revenue model, with the margin continuing to expand through solid loan growth of approximately 6% and disciplined pricing both on loans and deposits. Non-interest income continues to deliver good results, and the consistency in our expense management efforts further provided momentum to our improving operating metrics.
Thomas Preme: Loan that charge off of 2 basis, points, annualized and enhanceable, metam and key performance metrics of roaa and Roa tce.
Thomas Preme: We continue to show the strength across our core Community banking platform that is being driven by a disciplined approach to creating a more efficient balance sheet and effective deployment of capital.
Thomas Preme: We are pleased with our results for the first 6 months of 2025.
Thomas Preme: With reported earnings per share growing by 58% versus the comparable period a year ago.
Thomas Preme: Page 3 provides Insight in the quarters results.
Thomas Preme: The quarter displayed positive growth in our Revenue model, with the margin continuing to expand through solid loan. Growth of approximately 6%.
Thomas Preme: And discipline pricing both on loans and deposits.
Thomas Prame: Overall, a solid quarter on many fronts, and we feel well positioned heading into the second half of 2025. As mentioned earlier, the second quarter was highlighted by strong loan growth and asset quality that has been a consistent theme of our excellent community banking model.
Thomas Preme: Not interest income continued to deliver good results and the consistency in our expense management. Efforts further provided momentum to our improving operating metrics.
Thomas Preme: Overall, a solid quarter on many fronts and we feel well positioned heading into the second half of 2025.
Lynn Kerber: I'll transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share highlights for the second quarter in this part of our business. Thank you, Thomas. We are very pleased with loan growth for the second quarter, which closely aligned with our forecast for volume, mix, and yield. Net loans held for investment grew $75.5 million, representing 1.5% growth in the quarter and 6.2% on an annualized basis. Primary drivers of loan growth included commercial loans of $117 million and consumer loans of $8 million offset by the sale of residential loans and the planned contraction of indirect loans.
Thomas Preme: As mentioned earlier, the second quarter was highlighted by strong loan growth and as a quality that has been a consistent theme of our excellent Community banking model.
Speaker Change: I'll transition the presentation to our Executive Vice President and chief Commercial Banking officer Lynn Kerber.
Lynn Kerber: Who will share highlights for the second quarter in this part of our business model.
Speaker Change: Thank you, Thomas.
Speaker Change: We are very pleased with long growth for the second quarter, which closely aligned with our forecast, for volume, mix and yield.
Speaker Change: That loans held for investment grew. 75.5 million representing 1.5% growth in the quarter and 6.2% on an annualized basis.
Speaker Change: Primary drivers of long growth included, commercial loans of 117 million, and Consumer loans of 8, million offset by the sale of residential loans. And the plant contraction of indirect loans,
Lynn Kerber: Commercial loan growth of $117 million represents growth of 14.8% in the quarter, driven by growth in our core commercial banking segment. Growth for the quarter is consistent with our overall portfolio composition with expansion of our C&I portfolio. We continue to actively manage a diverse portfolio, both from a geographic and segment basis, with the largest segment at 6% of total loans and our CRE ratios below our peer group. Loan demand and pipelines remain stable at this time, and we continue to focus on quality, origination, and pricing discipline. Despite volatility related to federal policies and their associated impact on interest rates, our lenders have done an excellent job managing rates and maintaining spread.
Speaker Change: Commercial loan growth of 117 million represents growth of 14.8% in the quarter driven by growth in our core Commercial Banking segment.
Speaker Change: Growth for the quarter is consistent with our overall, portfolio composition with expansion of our cni portfolio.
Speaker Change: we continue to actively manage a diverse portfolio, both from a geographic, and segment basis with the largest segment, at 6% of total loans, and our CRA ratios below our peer group,
Lynn Kerber: In the second quarter, we piloted equipment finance syndication sales and expect this will be an additional tool to support balance sheet management and a generation of additional non-interest income. Turning to slide six, consumer loan balances decreased $41 million during the quarter, reflective of the continued strategic shift to run down the indirect auto portfolio and reinvest this liquidity into higher yielding and franchise value commercial lending relationships. Residential mortgage lending modestly grew during the quarter. reflecting our organization's strategy to sell a majority of its production and leverage its balance sheet for higher quality client relationships in our local market.
Speaker Change: Loan demand and pipelines, remain stable at this time and we continue to focus on quality origination and pricing disciplines, despite volatility related to Federal policies and their Associated impact on interest rates. Our lenders have done an excellent job managing rates in maintaining spread
Speaker Change: In, in the second quarter, we piloted equipment Finance, indication, sales and expect. This will be an additional tool to support balance sheet management and a generation of additional non-interest income.
Speaker Change: Turning to slide 6 consumer loan, balances decreased 41 million. During the quarter reflective of the continued strategic shift to run down the indirect Auto portfolio and reinvest this liquidity into higher yielding and franchise value commercial lending relationships.
Speaker Change: Residential mortgage lending modestly grew during the quarter.
Speaker Change: reflecting our organization strategy to sell a majority of its production and leverage, its balance sheet for higher quality client relationships in our local markets,
Lynn Kerber: Credit quality remains satisfactory and consistent with credit performance over the past year. Substandard loans and non-performing loans represent 1.29% and 54 basis points, respectively, a slight reduction in both metrics this quarter. Net charge-offs were a mere 254,000, or two basis points in a quarter, which compares favorably to performance over the past year. Year-to-date charge-offs totaled $1.1 million, representing an annualized charge-off rate of 5.0%. Finally, our allowance for credit losses increased to $54 million, representing an increase from 1.07% to 1.09% of loans held for investment. Provision expense of $2.4 million represents an increase from recent quarters, which is primarily driven by loan growth and economic forecast.
Speaker Change: Credit quality remains satisfactory and consistent with credit performance over the past year.
Speaker Change: Substandard loans and non-performing Loans, represent 1.29% and 54 basis points. Respectively, a slight reduction in both metrics this quarter
Speaker Change: Points in a quarter which compares favorably to performance over the past year.
Speaker Change: Year to date, charge offs, total, 1.1 million representing an annualized charge off rate of 5 basis points.
Speaker Change: Finally, our allowance for credit losses, increased to 54 million representing the increase from 1.07% to 1.09% of loans held for investment.
Lynn Kerber: the most recent quarters having benefited from the release of special reserve allocations. We continue to monitor economic conditions and future provision expense will be driven by anticipated loan growth and mix, economic factors, and credit quality trends.
Speaker Change: provision expense of 2.4 million represents an increase in recent quarters, which is primarily driven by loan growth in the economic forecast,
Speaker Change: The most recent quarters having benefited from the release of Special Reserve allocations.
Thomas Prame: Now I'd like to turn things back to Thomas, who will provide an overview of our deposit trunk. Thank you, Lynn. Moving on to our deposit portfolio, displayed on slide 8. Horizon's core relationship balances continue to show the strength of the franchise's community banking model. Balances for the quarter are relatively flat from Q1, and the team extended its disciplined approach to deposit pricing while continuing to take advantage of Horizon's diversified funding sources. These efforts helped our funding costs remain relatively flat from the first quarter. We continue to believe the deposit portfolio is positioned well to benefit the organization moving forward with its granular composition and longstanding relationships in our local market.
Speaker Change: We continue to monitor economic conditions and future. Provision expense will be driven by anticipated loan growth and mix, economic factors and credit quality trends.
Thomas: Now, I'd like to think turn things back to Thomas, we'll provide an overview of our deposit trends.
Thomas: Thank you, Lynn.
Thomas: Moving on to our composite portfolio. Displayed on slide 8.
Thomas: Horizon's core relationship. Balances continue to show the strength of the franchises Community banking model.
Thomas: Balances for the quarter. Are relatively flat from q1 and the team. Extended its discipline approach to deposit pricing while continuing to take advantage of Horizon's Diversified funding sources.
Thomas: These efforts helped our funding costs, remain relatively flat from the first quarter.
Thomas Prame: The team has displayed its ability to be agile and leveraging multiple funding options and creating optionality within the portfolio to continue to create shareholder value.
Thomas: We continue to believe the deposit portfolio is positioned well to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets.
John Stewart: Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional second quarter financial highlights and our outlook as we look to the remainder of 2025. Thank you, Thomas. Turning to slide 9, the Q2 net interest margin increased by another 19 basis points to 3.23%, which was above expectations. Included in the margin this quarter is approximately seven basis points of outsized interest recoveries on commercial and residential loans. Excluding that recovery income, the margin expanded nicely in Q2, driven by the continued execution of our core balance sheet strategies, which resulted in an improved mix of both earning assets and liabilities.
Thomas: The team has displayed its ability to be agile and leveraging multiple funding options and creating optionality within the portfolio to continue to create shareholder value.
Thomas: Let me hand the presentation over to our Executive Vice President and Chief Financial Officer. Jon Stewart who will walk through additional second quarter financial highlights and our Outlook as we look to the remainder of 2025
Jon Stewart: Thank you, Thomas.
Jon Stewart: Attorney to slide 9 the Q2 and interest margin increased by another 19 basis points to 3.23% which was above expectations.
Jon Stewart: Included in the margin. This quarter is approximately 7 basis points of outsized interest, recoveries on commercial and residential loans.
Jon Stewart: Excluding that recovery income, the margin expanded nicely in Q2.
John Stewart: Additionally, and importantly, excluding the interest recoveries just noted, loan yields expanded in the second quarter, which is a result of the purposeful mix shift, favorable roll-off, roll-on yield dynamics, and disciplined pricing. The combination of these factors resulted in a widening of our net spread in the quarter as earning asset yields expanded with and without the recoveries, while interest-bearing funding costs declined by two basis points versus the prior quarter. Looking ahead, many of these same balance sheet dynamics are expected to persist for the balance of the year, such that we would still expect additional net interest margin expansion as the year progresses, albeit at a more modest pace.
Jon Stewart: driven by the continued execution of our core balance sheet strategies which resulted in an improved mix of both earning assets and liabilities
Jon Stewart: Additionally and importantly excluding the interest. Recoveries just noted loan yields expanded in the second quarter which is a result of the purposeful mix shift. Favorable. Roll off, roll on yield Dynamics.
Jon Stewart: And discipline pricing.
Jon Stewart: The combination of these factors resulted in a widening of our net spread in the quarter as earning asset, yields expanded with and without the recovery, while interest bearing funding costs declined by 2 basis points versus the prior quarter.
Jon Stewart: Looking ahead. Many of these same balance sheet Dynamics are expected to persist for the balance of the year.
John Stewart: While our current outlook assumes two cuts in September and December, neither will have a material impact on the net interest income outlook or margin outlook for the remainder of the year, which remains for full-year net interest income growth to be in the mid-teens.
Jon Stewart: Such that we would still expect additional net interest margin expansion as the year progresses, albeit at a more modest pace.
Jon Stewart: While our current Outlook assumes 2 Cuts in September and December, neither will have a material impact on the net interest income Outlook or margin outlook for the remainder of the year.
John Stewart: Slide 10 provides a profile of the remaining investment securities and the projected cash flows and yield roll-off for the coming year. It continues to be the case that we do not intend to reinvest cash flows in 2025. As we have done in the past several quarters, we will continue to use those proceeds to fund organic, relationship-based commercial loan growth.
Jon Stewart: Which remains for full-year net interest income growth to be in the mid-. Teens
Jon Stewart: Slide 10 provides a profile of the remaining investment Securities, and the projected, cash flows and yield rolloff for the coming year.
Jon Stewart: It continues to be the case that we do not intend to reinvest cash flows in 2025.
John Stewart: As you can see on slide 11, reported non-interest income was straightforward this quarter. Interchange fees and mortgage gain on sale experienced some seasonal strength in the quarter, while most other categories were relatively stable. Additionally, mortgage continues to benefit from the prior period investment in the business and the efforts of new leadership. Our outlook for 2025 remains unchanged for growth in the low single digits. This comparable excludes the securities losses in both 2024 and 2025 and the $7 million gain in the first quarter.
Jon Stewart: as we have done in the past several quarters, we will continue to use those proceeds to fund organic relationship, based commercial loan growth,
Jon Stewart: As you can see on, slide 11 reported non-interest income was straightforward this quarter.
Jon Stewart: Interchange fees and mortgage gain on sale experience, some seasonal strength in the quarter.
Jon Stewart: While most other categories were relatively stable.
Additionally, mortgage continues to benefit from the prior period investment in the business and the efforts of new leadership.
Jon Stewart: Our outlook for 2025, remains unchanged for growth in the low single digits.
John Stewart: On slide 12, at $39.4 million, you can see it was another well-managed expense quarter for the company, as we remain focused on delivering sustainable, positive operating leverage. While we are pleased with the expense results through the first half of the year, we understand the need to remain diligent. Therefore, we are modestly reducing our outlook for full-year reported expenses to now be approximately flat when compared to the $158.8 million reported for the full year 2024.
Jon Stewart: This comparable excludes the Securities losses in both 2024 and 2025 and the 7 million dollar gain in the first quarter.
Jon Stewart: On slide 12 at 39.4 million. You can see it was another well-managed expense quarter for the company as we remain focused on delivering sustainable positive operating Leverage
Jon Stewart: Diligent.
Jon Stewart: Therefore, we are modestly reducing our outlook for full year. Reported expenses to now be approximately flat when compared to the 1 5, 8. 8 2 4.
John Stewart: Turning to capital on slide 13, the positive momentum of the last few quarters continued again this quarter with link quarter increases in all capital ratios as well as tangible book value per share. The increases were driven by improved profitability and the strategic repositioning of the balance sheet, which continues to restrict growth in risk weighted and total assets. We would generally expect these capital trends to continue for the balance of the year as profitability improves and total balance sheet growth remains relatively muted.
Jon Stewart: Turning to Capital on slide 13. The positive momentum of the last few quarters continued again. This quarter with link quarter increases in all capital ratios as well as tangible book. Value per share,
Jon Stewart: For the balance of the year as profitability, improves and total balance sheet growth remains relatively muted.
John Stewart: Finally, turning to slide 14 and our updated outlook for the full year, in short, we are pleased with the progress through the first six months of the year and are optimistic for a strong finish. Net interest income and margin are trending nicely, while our expense outlook is modestly more favorable. As we have said for several quarters now, the objective remains to drive improvement in recurring and predictable operating profitability and are trending in the right direction.
Jon Stewart: Finally turning to slide 14 and our updated outlook for the full year. In short, we are pleased with the progress to the first 6 months of the year and our optimistic for a strong finish.
Jon Stewart: Net, interest income and margin are trending nicely. While our expense Outlook is modestly more favorable.
Jon Stewart: As we have said for several quarters. Now, the objective remains to drive Improvement in recurring and predictable operating profitability.
John Stewart: There are a few items I would like to highlight. While expectations for loan growth in loans held for investment are unchanged in the mid-single-digit range for the year, we are anticipating a bit more runoff in the indirect auto book versus prior expectations. which would now total about $125 million for the year, up from about $100 million previously. Deposit growth expectations remain unchanged in the low single digit. Under our base set of assumptions, which now includes two 25-basis point Fed funds cuts in September and December, our net interest income growth expectations for the full year 2025 remain unchanged in the mid-teens.
Jon Stewart: And our trending in the right direction.
Jon Stewart: There are a few items, I would like to highlight.
Jon Stewart: While expectations for loan growth in loans, held for investment are unchanged in the mid single digit range for the year.
Jon Stewart: We are anticipating a bit more runoff, in the indirect auto book versus prior expectations.
Jon Stewart: Which would now total about 125 million for the year up from about a hundred million dollars previously.
Jon Stewart: The deposit growth expectations remain unchanged in the low single digits.
Jon Stewart: Under our base set of assumptions which now includes 225 basis points fed funds Cuts in September and December.
John Stewart: Total reported expenses for 2025 are now expected to be approximately flat relative to the reported full year 2024. Finally, the full year effective tax rate for 2025 is still expected to be in the mid-teens.
Jon Stewart: Our net interest income growth expectations for the full year. 2025 remain unchanged in the mid-. Teens
Jon Stewart: total reported expenses for 2025 are now expected to be approximately flat relative to the reported full year 2024.
Thomas Prame: With that, I'll turn the call back over to Tom. Thank you, John, and appreciate the summary of the second quarter and our outlook for 2025. As you can see from our financial results and momentum entering the second half of the year, we continue to see a bright future for Horizon, and we are delighted with the positive strides in our financial performance metrics for the quarter and year-over-year comparison.
Jon Stewart: Finally, the full year effective tax rate for 2025 is still expected to be in the mid-. Teens
Thomas: with that, I'll turn the call back over to Thomas.
Speaker Change: Thank you, John, and appreciate the summary of the second quarter and our outlook for 2025.
Thomas Prame: A very good performance for the team on many fronts, and we look forward to continuing to deliver incremental shareholder value in the second half of 2025.
Speaker Change: As you can see from our financial results and momentum entering the second half of the year. We continue to see a bright future for Horizon and we are delighted with the Positive strides in our financial performance metrics for the quarter and year-over-year comparison.
Operator: This is the end of our prepared remarks, and I welcome the operator to open the lineup for questions for our management. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press stars and two.
Speaker Change: A very good performance for the team on many fronts, and we look forward to continuing to deliver incremental shareholder value and the second half of 2025.
Speaker Change: This is the end of our prepared remarks and I welcome the operator to open the lineup for questions for our management team.
Speaker Change: 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,
Speaker Change: If you are using a speaker-phone, please pick up your handset before pressing the keys.
Operator: At this time, we will pause momentarily to assemble our roster.
Speaker Change: if at any time your question has been addressed and you would like to withdraw your question, please press star then 2
At this time, we will pause momentarily to assemble our roster.
Brendan Nosal: The first question today comes from Brendan Nosal with Hoppe Group. Please go ahead. Hey, good morning, everybody. Hope you're doing well. Morning, Brendan. Well, first of all, congrats on the quarter and the progress you've been making.
Speaker Change: The first question today comes from Brendan nozzle. With Hoppy group, please go ahead
Speaker Change: Hey, good morning everybody. Hope you're doing well. Morning Braden.
Thomas Prame: Maybe just to start off here on capital, you know, you folks continue to build ratios this quarter, just kind of curious if you have any updated thoughts on how you're viewing the capital build from here, potential uses as we move through the next few quarters, and just the ultimate thought process on kind of resolution of HTM and borrowing. Sure, Brendan, thanks for the question. And I appreciate the acknowledgement of the performance and capital build over the over the last year. Now, if you look at specifically look at our CET1 up about 90 basis points over the last 12 months, that includes some capital actions that we've taken internally.
Speaker Change: Um, well, first of all, congrats on the quarter and and the progress you've been making, um, maybe just to start off here on on capitals. Um, you know, you folks continue to to build ratios this quarter, just kind of curious. If you have any updated thoughts on how you're viewing. Um, the capital build for here potential uses as we move through the next, few quarters. And and just the ultimate thought process, on kind of resolution of HTM and borrowings, thanks.
Thomas Prame: So it's a, it's been really nice momentum. Now, as we look at the second half of the year and the capital levels we have and the generation coming off from a more profitable balance sheet, I would say that's going to give us some more optionality of what we'd like to do. As John mentioned in our opening comments, our focus over the last year is really about making sure we have a balance sheet and income statement that can have predictable returns and predictable operating income. I think the team's done really nice strides on that.
Speaker Change: Sure, Brandon, thanks for the uh, question. And I appreciate the acknowledgement of the performance and capital build over the over the last year. You know, if you look at specifically, look at our C1 up about 90 basis points over the last 12 months, uh, that includes some Capital actions that we've taken internally. So it's a, it's been really no small momentum, you know, as we look at the second half of the year and the capital levels we have and the generation coming off from a a more profitable balance sheet. I I would say that's going to give us some more optionality of of what we like to do. Um as John mentioned in our opening comments, our Focus over the last year is really about making sure we have a balance sheet.
Thomas Prame: So, as we look forward, optionality of items you may be discussing around potential buybacks, other uses of capital. So the table's gotten a little bit broader for us.
Thomas Prame: The second part of your question, I imagine, deals with some of the transactions that we've seen over the last year around individuals, perhaps raising equity and or using capital to restructure their balance sheet. In most of these cases, what we've seen out in the marketplace that these organizations have done that to achieve where Horizon has achieved success over the last year on our own. Now, we're really proud of that track record. And if you look over time, we've executed on several capital actions that are very friendly to our shareholders. A couple of them have the investment restructures.
Speaker Change: And income statement that can have predictable returns improved predictable, operating income. Um, I think the team's done really nice strides on that. So as we look forward, uh, optionality of items, you may be discussing around potential BuyBacks other uses of of capital. I said the the table's gotten a little bit broader for us. Um, the second part of your question, I imagine, uh, deals with some of the transactions that we've seen over the last year around individuals, perhaps raising equity, and or using Capital to restructure their balance sheet.
Thomas Prame: We ran out the indirect auto. We sold the mortgage warehouse business and took that capital and added to our stack. And additionally, we also are making different choices around capital and around tax investments. I think you can expect the same approach going forward as we continue to improve the performance of the organization and look for capital optionality.
Speaker Change: As we uh, continue to improve the port performance of the organization and look for Capital optionality.
Brendan Nosal: Okay, all right, well, Thomas, thank you for the thoughts there.
Speaker Change: Okay. All right. Well, the Thomas, thank you.
Speaker Change: for the, the
Lynn Kerber: Maybe kind of turning to lending and the competitive environment, just can we get an update on how the competitive environment is involved for both lending and funding? You know, I heard from several of that larger regional, they're stepping back into certain asset classes like commercial real estate, and then also hearing that funding competition is going up a little bit as more banks seek to grow loans. So we'd love your thoughts there. Thanks.
Lynn Kerber: Good morning, this is Lynn. Regarding commercial, I think generally I would describe the environment as fairly competitive, specifically on pricing. We've seen some compression on spreads in the commercial area with our competition. As I commented in my earlier remarks, I think our team has done an excellent job of navigating the rate environment and negotiating yield. But it does remain very competitive. We've seen some reduction in that spread over the indexes over the last, I would say, four months, probably more than I actually maybe anticipated with the volatility in the rate indexes. As far as underwriting classes, it really depends on the competitor.
Speaker Change: Turning um to lending uh and the competitive environment just can we get an update on how the competitive environments involved for both lending and funding? Um you know heard from several that larger Regional regionals are stepping back into certain asset classes like commercial real estate. And then also hearing that funding competition, a little bit is more Banks seek to grow loans. So it would love your thoughts there. Thanks.
Lynn Kerber: Uh, good morning. This is Lynn uh, regarding commercial. Um I think
Lynn Kerber: Everybody's managing to their concentrations. I've been asked in the past about our office exposure, multifamily. I mean, those segments have performed extremely well for us. So, we just continue to be very focused on our basic underwriting, the fundamentals, and also opportunistic. There have been some office loans that we've done over the last year, strong sponsors, low loan-to-value, strong underwriting metrics. So, I would say it's more situational.
Lynn Kerber: Okay.
Lynn Kerber: Thank you for the thoughts. Thanks for taking the question.
Terence McEvoy: The next question comes from Terry McEvoy with Stevens. Please go ahead. Hi, Terry. Hi, good morning. Thanks for taking my questions.
John Stewart: Maybe just start the small and the interchange revenue down quite a bit year over year. I know there's seasonality you talk about in the second quarter, but any color there on the decline in 2Q and your thoughts going forward? Appreciate the question. As far as interchange, we keep a pretty close eye on that. We've seen two aspects of interchange this year compared to last year. One, the overall swipes are slightly down, and the spend per swipe is down. Mainly, we're just seeing a little bit more conservative spend from the consumer base, and also where they're spending that.
John Stewart: As you know, not every swipe is equal at the terminal, and so as we see higher interchange volumes or lower interchange volumes in things like groceries and gas, that's going to impact it. But again, where I think we're seeing right now, these levels will probably be our go-forward look.
John Stewart: It is a follow up.
John Stewart: Could you just discuss market competition for deposits in your markets and where you see deposit costs trending in the back half of the year? I'd say for, I'll split it out by segment. First, I'll start with the consumer segment. I'd say that's relatively been a consistent quarter over quarter, you know, we're seeing promotional rates come down. And also we're seeing the term of those promotional rates pull back into the three to five month territory. So for us, as we've been disciplined about around that, we're making sure that we're not taking on extension risk and pricing for us in that portfolio is about 4%.
John Stewart: So it's in a good spot. You know, and we anticipate as we start seeing further side moves that they'll probably move, that market will move towards us. As we get into the larger institutional funds and then also in the public funds area, you know, that can still be a pretty wide bid ask. As you saw in the second quarter for us, we let some strategic, let some higher price CDs go off the balance sheet, simply because it just didn't make incremental sense from our margin management and overall flexibility on the balance sheet. So I would say the competitive and the public space is still pretty competitive.
John Stewart: There's some banks out there in our marketplace and also some credit unions that perhaps have a little bit higher loan to deposit ratios. But I wouldn't say that's like impairing our operating model. We're just being conscious of it, being diligent in our pricing going forward. And I think as you saw from our quarterly results, we were able to hold our overall funding costs slightly down from Q1. Perfect, appreciate that.
John Stewart: And Thomas, also appreciate the comments on the HTM securities and definitely acknowledge the actions taken and how they resulted in improved earnings and overall profitability. So thanks for the call there earlier.
Damon Delmonte: The next question comes from Damon DelMonte with KVW. Please go ahead. Hey, good morning, everyone. Thanks for taking my questions and appreciate all the color and disclosure in the slides. Just kind of curious, from the loan growth perspective, you know, you guys continue to feel pretty optimistic, it sounds like, on the back half of the year on the commercial side. Are you finding that the growth's being driven more by new customers coming to the bank? Or do you have some amount of increased line utilization from some of your current customers?
Lynn Kerber: Yeah, good morning. Relative to the commercial customers, I would say a good majority of our business has been with existing customers. Regarding the line of credit utilization, it's remained actually pretty stable. In fact, it actually reduced a little bit the last couple of months. So it's being driven by expansion of business with our customers and referrals by our customers. C&I is probably a little bit more new customer acquisition. So it's a mix, but it's really truly our core markets and expanding those existing relationships that we have. Okay, appreciate that.
John Stewart: And then with regards to the margin and the outlook there, John, can you just remind us, do you have any sizable CDs that are repricing in the back half of the year? No, the CD book is fairly homogenous, you know, the duration is relatively short. It's been sitting about five or six months, kind of all year long. So those dynamics all still stay in place. Got it.
John Stewart: Okay, and then just lastly, is there anything specific you guys are doing on the expense front to be able to manage them so successfully and kind of keep the total amount flat year over year? I don't know if there's any initiatives or anything kind of that's going on that's giving you the leverage there. No, thanks. Appreciate the acknowledgement there.
John Stewart: Nothing in particular. I mean, it's just really diligent expense management across the organization, both, you know, corporate out in the market. You know, we understand where the bogeys are and we're working hard to meet them. You know, there's nothing, no big, no big named expense plan or anything else out there. It's just, you know, just business as usual. But, you know, we've got a pretty tight budget and the folks are doing a really good job managing to it. Got it.
Damon Delmonte: Great. I appreciate all the call. Thank you very much. Thanks, Damon.
Nathan Race: The next question comes from Nathan Race with Piper Sandler. Please go ahead. Yes. Hi, everyone. Good morning. Thanks for taking the question. You guys have obviously done a great job building a more kind of core funded balance sheet over the last several quarters.
John Stewart: So just curious, you know, how you're thinking about, you know, the target for wholesale funding on the balance sheet going forward relative to kind of where we came out at the end of this quarter and maybe what your targets are over the next 12 to 18 months as deposit growth is expected to pick up. Yeah, thanks for the question. You know, I wouldn't say there's any specific targets out there. The general objectives at the top of the house remain the same, which is, you know, the balance sheet has been more heavily dependent on wholesale funding than in the past, and maybe we would want to see going forward, really nothing to the borrowings ticking up here in the second quarter.
John Stewart: I mean, we just took advantage of, as Thomas mentioned before, we just swapped some expensive deposit funding out and had a nice opportunity to do so at the very beginning of the quarter with the rally in rates, a pretty sharp rally that backed right off. But, you know, longer term, the objectives remain the same, which is to reduce the reliance on wholesale funding. You know, from here, if we have some good success on the deposit side, maybe it'll give us a chance to modestly reduce that going forward.
John Stewart: I wouldn't anticipate any step function changes, though, at the moment.
John Stewart: Okay, great. So, John, I imagine that implies, you know, some modest or in asset growth in the back half of this year. that's correct.
John Stewart: Okay, great. And then, John, if I heard you correctly, it sounds like you know, the way the balance sheet is positioned today, you guys are pretty neutral in terms of the margin impact to any cuts on the short end. Sorry, that's also correct. All right.
John Stewart: All right, and then just generally, from a margin perspective, is there still kind of an upward bias over the back half of this year, just given that neutral sensitivity and some of the repricing tailwinds that we talked about on the area and asset side, and with maybe, you know, kind of flash deposit costs as long as the Fed remains on pause. Yeah, I think that's correct as well. So I think if you look at the margin in the second quarter, the 323, we called out the seven basis points. So back that off to about 316 on an operating basis.
John Stewart: From there, we would anticipate there's some modest expansion, albeit less than what we've seen in the past. Most of the step function mix changes on the asset side and the liability side, as we just talked about, are largely behind us. So it really becomes about the churn on the asset side and the management of funding costs on the liability side. So I think it's correct that you would expect some modest improvement off that 316 back half of the year and probably into the beginning parts of next year as well. Still feel pretty good about that landing spot in Q4 for 315 to 320 on the operating margin.
John Stewart: Just to clarify, that's not tax equivalent adjustment on the margin you're referring to? So, the FTE reported margin was the 323 in the quarter. About seven basis points of that is what we've called out as outsized recoveries. So, if you back that down to the 316, that's what I'm talking from off of that number. Understood. Got you.
Nathan Race: Thank you for that. I appreciate all the color.
Nathan Race: Thanks, everyone. Thank you.
David Long: The next question comes from David Long with Raymond James. Please go ahead. Good morning, everyone. Thanks for taking my question.
Thomas Prame: Just big picture, and I don't want to put words in your mouth here, but overall, I think there's a general positive sentiment on the northern Indiana and Indiana as a whole economy. Can you just talk about maybe your outlook for the economy within your footprint? Sure, David, and I appreciate the acknowledgement. We are very pleased to be in the markets that we're in. Northern Indiana is still seeing some significant infrastructure investment, data centers, the two track here locally. We are still experiencing the outflow of talent, people and businesses to Indiana from Illinois. So I would say we were very fortunate to have some good tailwinds here in the marketplace.
Thomas Prame: Also, I want to acknowledge Indiana is just a great state to have your banking franchise in. It's a bank-friendly state. It's a friendly business state. And so with that, our distribution specifically in Northern Indiana going all the way down to Indianapolis has been a benefit for us. And I do want to not discount the fact that Michigan is a great state also. We're seeing just some great growth on the western side of Michigan where we just have some very positive distribution there and great leadership and talent in our commercial team and retail team. And we're seeing even in the CCF transaction that was done several years ago, the deposits that we received from that have been stable and sticky and modestly growing.
Lynn Kerber: Deposits that we received from that have been stable and sticky I know modestly growing and those are just really good communities that are down.
Thomas Prame: And those are just really good communities that our advisors are very intertwined in the DNA of helping make sure the communities are successful. So I would say, you know, Lynn talked a little bit earlier about their commercial growth. I do believe it's, you know, we've got a really good client base there, but also we're very fortunate that we have the right talent in growing markets. And so, as you said earlier, I think we're in the right spot to continue to be successful.
Speaker Change: It's a very intertwined in the DNA of ALP and make sure the communities are successful.
Speaker Change: I would say you know Lynn talked a little earlier about our commercial growth I do believe it's a you know we've got a really good client base. There, but also we're very fortunate that we have the right talent and growing markets and so as.
Speaker Change: As you said earlier I think we're not we're in the right spot to continue to be successful.
Speaker Change: Yeah.
Thomas Prame: Excellent. Thank you, Thomas. Appreciate that color.
Jon Stewart: Excellent. Thank you Thomas I appreciate that color.
Operator: As a reminder, if you would like to ask a question, please press star then 1 to join the question queue.
Speaker Change: As a reminder, if you would like to ask a question. Please press Star then one to join the question queue.
Brian Martin: The next question comes from Brian Martin with JANI. Please go ahead. Hey, good morning, guys. Congrats on all the success here. Thanks, Brad. Yeah, thanks for the question.
Speaker Change: The next question comes from Brian Martin with Janney. Please go ahead.
Brian Martin: Hey, good morning, guys. Congrats on all the success here.
Speaker Change: Thanks, Brad.
Speaker Change: Just a couple from me just in terms of the expense number and I guess the efforts you guys have had in that front and I guess, the expectation would be I know youre, not giving guidance on that but we should start to see some pick up as you go into 'twenty six and on the expense numbers.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yeah. Thanks for the question I think.
John Stewart: I think You should anticipate us approaching expenses in a similar fashion as we did this year, and that is to say, a pretty disciplined approach around budgeting. That's it's an important consideration for us to drop some positive operating leverage next year as well. But yeah, I mean, normal merit increases, you would anticipate there being some uplift to expenses in 26 versus the guidance that we've given for 20 full year 2025. Yeah, okay.
Speaker Change: You should anticipate us approaching expenses in a similar fashion as we did this year and that is to say.
Speaker Change: A pretty disciplined approach around.
Speaker Change: Budgeting that.
Speaker Change: It's an important consideration for us to drop some positive operating leverage next year as well.
Speaker Change: But yeah, I mean normal merit increases you would anticipate there being some uplift to expenses and 26 versus the.
Speaker Change: The guidance that we've given for 'twenty full year 2025.
Speaker Change: Okay.
John Stewart: Okay just making sure there's no initiatives that could keep it kind of at bay again like we're seeing this year with all the efforts you guys have done so and then just maybe one of the one of the additional one on the asset side just you talk about the mixes continuing to get better on the average earning assets and the funding side can you talk about maybe what the target of those mixes are as we as you kind of go forward here is there something you're targeting in terms of where those mixes go to over time?
Speaker Change: Okay, just making sure there's no initiatives that could keep it kind of a bay again like we're seeing this year with all your efforts you guys have done so and then just maybe one additional one on the asset side. If you could talk about the mix is continuing to get better on the average earning assets and the funding side can you just talk about.
Speaker Change: Maybe what the targeted those mix as ours as you kind of go forward here is there some.
Speaker Change: Something you're targeting in terms of where those mixes go to overtime.
John Stewart: Yeah, sure. So, I think on an organic balance sheet basis, you know, we've still got near 30% of earning assets in the securities portfolio. I mean, can that be over time something that looks more like 20%? You know, absolutely. However, the cash flows of the portfolio are fairly locked in at this point. We give you the forward four quarters. If you extrapolate that out, you know, four to six or eight quarters beyond that, it doesn't look too terribly different. So, the waypoint may be something close to what I just mentioned, but it's going to be a pretty ratable path forward to get there.
Speaker Change: Yeah sure so.
Speaker Change: I think on an organic balance sheet basis, we've still got near 30% of earning assets in the securities portfolio.
Speaker Change: I mean can that be over time, something that looks more like 20% yeah absolutely.
Speaker Change: However, the cash flows of the of the portfolio are fairly locked in at this point, we will give you the forward four quarters.
Speaker Change: You extrapolate that out.
Speaker Change: Four to six or eight quarters beyond that it doesn't look too terribly different so.
Speaker Change: The waypoint, maybe something close to what I, just mentioned, but it's going to be a pretty ratable.
Speaker Change: Ratable path forward to get there there's no large chunky.
John Stewart: There's no large chunky cash flows coming off in the next couple of years. So, you know, only so much of that is in our control unless you really, really gas pedal the loan growth, and that's just not the objective at the moment. Gotcha. Okay.
Speaker Change: Chunky cash flows coming off in the next couple of years.
Speaker Change: So.
Speaker Change: You know only so much of that is in our control unless you really really gas pedal the loan growth and that's just not the objective at the moment.
Speaker Change: Got you, Okay, and then on the asset side anything you're targeting on that side.
John Stewart: And on the asset side, anything you're targeting on that side other than just, Amanda, you talked about the remix here with the indirect. No, the indirect portfolio will continue to run off over the next, call it 18 to 24 months beyond that. And then the securities remix that I just mentioned, I don't think there's any specific targets to note. Yeah, okay.
Speaker Change: Other than just I mean, I know you talked about the remix here with the indirect.
Speaker Change: Yeah.
Speaker Change: No the indirect portfolio will continue to run off over the next call. It 18 to 24 months.
Speaker Change: Beyond that and then the securities remix that I, just mentioned I don't think Theres any specific targets to note yes.
Speaker Change: Yeah, Okay, Alright, and then maybe just last two just on the provision I know you talked about it being up a bit this quarter for a couple of items.
Lynn Kerber: All right, and then maybe just last two, just on the provision, I know you talked about it being up a bit this quarter for a couple items, just how we think about that going forward, just in terms of the pickup we saw this quarter with credit quality still being very, very strong.
Speaker Change: How we think about that going forward just in terms of the pickup we saw this quarter with credit quality is still being very very strong.
Lynn Kerber: Good morning. Regarding the reserve, it did increase this quarter. It was driven predominantly by loan growth and mix, and then just economic forecasts. That was predominant. Of $1.7 million, roughly $1 million, a little over $1 million of it was economic forecasts, and the balance was loan growth. When you get to the provision, as you know, our credit quality has been really strong. We had very low charge-offs for the quarter, but we did have an increase in the unfunded commitments, and so that's the other piece there. As we move forward, I don't expect any significant change.
Speaker Change: Yeah, good morning regarding the reserve.
Speaker Change: Did increase this quarter and it was driven predominantly by loan growth and mix and then just.
Speaker Change: Economic forecast.
Speaker Change: Predominantly.
Speaker Change: Although a million seven roughly a million little over a million of it was economic forecasts.
Speaker Change: The balance was small growth.
Speaker Change: When you get to the provision as you know as you know our credit quality has been really strong we had very low.
Speaker Change: Charge offs for the quarter, but we did have an increase in unfunded commitments and so that's the other piece there.
Speaker Change: As we move forward I don't expect any significant change, it's really going to be moderated by loan growth levels in the economic forecast.
Lynn Kerber: It's really going to be moderated by loan growth levels and economic forecasts. Gotcha.
Lynn Kerber: Okay, I appreciate that, Lynn.
Speaker Change: Got you Okay I appreciate that and then.
Damon Delmonte: And then just the last one for me, just, I know you talked about broadening out the you know, the capital initiatives. Can you talk about your appetite for M&A here?
Speaker Change: The last one for me just I know you talked about broadening out the capital in there.
Speaker Change: Can you just talk about your appetite for M&A here and just.
Thomas Prame: And just, you know, if you are, you know, our discussion's up, is it, is there something you're targeting, you know, certain markets, geographies, just kind of what your approach to M&A is here, as things possibly broaden out. Thank you for the question. As you look across the horizons. decades of success here. A lot of it has come from the successful M&A, and we would look to continue that for the targets. As we talked about before, we're very, very excited about the marketplace here in Indiana and also in Michigan for the right fill-ins would be great.
Speaker Change: If you are our discussions out or is it.
Speaker Change: Or there's something you were targeting certain markets geographies, just kind of what your approach to M&A is here as is things, possibly broaden out.
Speaker Change: Thank you for the question.
Speaker Change: So as you look across the horizon.
Speaker Change: Decades of success here a lot of it has come from the successful M&A and that we look we would look to continue that targets as we talked about before.
Speaker Change: We're excited about the marketplace here in Indiana and also in Michigan for the right billings would be great.
Thomas Prame: There is, as you've probably seen also in the marketplace, there's an increasing dialogue going on, and we're glad to be part of those dialogues. We'll be very disciplined about the approach to M&A and make sure that it's, as we talked about earlier, very shareholder-friendly discussions on that, make sure we got positive earns back and that it makes logical sense to our investment base of why we involved M&A and also the returns that come along with that.
Speaker Change: And as you've probably seen on also on the marketplace Theres, an increasing dialogue going on and stuff.
Speaker Change: So we're glad to be part of those dialogues will be very disciplined about the approach them and they can make sure that it's.
Speaker Change: As we've talked about earlier very shareholder friendly discussions on that make sure. We got positive earn backs and that it makes logical sense to our investor base why why are we involved in M&A and also the.
Speaker Change: The returns that come along with that.
Thomas Prame: And in terms of geography or size, I mean, are you looking for something larger, smaller, multiple deals, any more commentary on that? Yeah, I think, you know, I think every CEO out there has a specific market size, exactly who they would want to be. For us, I would say we'd like to be continuous within our footprint. We have some marketplaces, I feel like we can definitely expand our brand and also print our distribution in the Grand Rapids area. Also in Eastern Michigan, there'd be some great opportunities for us there. We have great platforms, great leaders, just need more distribution.
Speaker Change: And then in terms of geography or size I mean are you looking for something larger or smaller multiple deals.
Speaker Change: Any more commentary on that.
Speaker Change: Yeah, I think you know I think every CEO out there has.
Speaker Change: Perfect market size, who exactly who they would want to be for us I would say, we'd like to be continuous within our footprint. We have some marketplaces I feel like we can definitely expand our brand and also a printer distribution in the Grand Rapids area I've called it also in eastern Michigan there'd be some great opportunities for us there.
Speaker Change: Platforms greatly or it's not just need more distribution from a size standpoint, we've been successful historically in that.
Thomas Prame: From a size standpoint, you know, we've been successful historically in that 500 million to a billion space. I think with our skill set and leaderships here that we could even go a little bit bigger than that, but I'd probably say that's about the size we'd be looking at. Gotcha. Okay, perfect.
Speaker Change: 500 million to a $1 billion space.
Speaker Change: With our skill set leadership here that we could even go a little bit bigger than that but I'd, probably say that's about the size we'd be looking at.
Speaker Change: Gotcha, Okay, perfect well again, congrats on all the success and thanks for taking the question.
Damon Delmonte: Well, again, congrats on all the success and thanks for taking the questions. Appreciate it also. Thank you.
Speaker Change: I appreciate it also thank you.
Operator: This concludes our question and answer session.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over for any closing remarks.
Thomas Prame: I would like to turn the conference back over for any closing remarks. Thank you. And again, thanks for participating in today's earnings call. We appreciate your time and interest in Horizon, and we look forward to sharing our third quarter results in October.
Speaker Change: Thank you and again, thanks for participating in today's earnings call. We appreciate your time and interest in horizon, and we look forward to sharing our third quarter results in October a wonderful day.
Operator: Have a wonderful day.
Speaker Change: Yeah.
Operator: The conference is now concluded. Thank you for attending today's presentation.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Operator: You may now disconnect.
Speaker Change: Yeah.
Speaker Change: [music].