Horizon Bancorp Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Good morning, everyone, and welcome to the Horizon Bancorp Inc. Conference Call to discuss Financial Results for the Q3 of 2023. All participants will be in listen only mode. To ask a question. Star then 2.

Operator

Please note this event is being recorded. Before turning the call over to management, Please remember that today's call may contain statements that are forward looking in nature. These statements are subject to risks, Uncertainties and Other Factors That Could Cause Actual Results TO Differ Materially From Those Discussed, including those factors noted in slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10 ks and its later filings with the Securities and Exchange Commission. In addition, management may refer to certain non GAAP of Financial Measures that are intended to help investors understand Horizon's business.

Operator

Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward looking statements made during the call. Day taken access at the company's website horizonbank.com. Representing Horizon today are the Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber the Executive Vice President and Chief Financial Officer, Mark Secor and Chief Executive Officer and President, Thomas Pram. At this time, I would like to I turn the call over to Mr.

Operator

Thomas Bray. Please go ahead.

Speaker 1

Call. Good morning and thank you for participating. We're pleased to share our 3rd quarter results that were highlighted by strong loan growth led by our commercial banking team, resilient and stable core deposit portfolio and an increase in our non interest income performance. Not unlike the first half of twenty twenty three, The team continues to manage expenses very well, and you'll see in our presentation, our credit quality performance remains a positive foundation for the franchise. Within our comments today, we'll update you on our Q4 and full year outlook as we continue to strategically manage our balance sheet, portfolios and pricing and expand revenue sources, conservatively manage risk and maintain ample capital and liquidity that we believe will position us well as we move into 2024.

Speaker 1

To offer more detail into our Q3 results, let me introduce Lynn Kerber, our Executive Vice President and Chief Commercial Banking Officer to provide insight into our lending and credit performance. Lynn?

Speaker 2

Thank you, Thomas. Beginning on Slide 6, we show that commercial loans increased $83,000,000 for the quarter call or 13.1% on an annualized basis. Net fundings were $96,800,000 for the 3rd quarter versus $128,000,000 for the 2nd quarter. Our average commercial loan yield was 5.80% for the portfolio and 7.5% for new production. New loan originations continue to be very diverse across our markets and industries.

Speaker 2

In the Q3, 1 third of our originations were commercial and industrial, which is a continuation of some expansion in this category. The overall commercial pipeline increased from $118,000,000 at June 30 to $145,000,000 as of September 30. Activity continues to be well diversified by industry and geography with 51% in Michigan and 49% in Indiana. Commercial credit quality remains strong with low past dues of 8 basis points for quarter end. Non performing commercial loans decreased 16% in the quarter and year to date net charge offs were 1 basis point on an annualized basis.

Speaker 2

Turning to Slide 8, You will see that consumer directed loan balances increased $64,000,000 during the quarter, which consisted primarily of increases in home equity loans. This increase was partially offset by intentional runoff and indirect auto loans. This change in mix is consistent with our strategic plan of redeploying capital to higher yielding product types. The average consumer direct yield was 8.05% for the portfolio and 8.96% for new production. The average yield for consumer indirect was 3.25% for the portfolio and 9.51% for new production.

Speaker 2

Consumer past dues increased in the 3rd quarter call for both consumer direct and consumer indirect reflective of the broader economic conditions. However, consumer non performing loans remain stable. Year to date net charge offs for consumer direct are a net recovery of 1 basis point and consumer indirect charge offs were 31 basis points. Call. Slide 9 highlights our mortgage loan performance for the quarter.

Speaker 2

Our portfolio was stable and consistent with our expectations for 2023 aligning with our industry trends. Thus far for 2023, 67% of our year to date production is salable. The average mortgage loan yield was 4.23 percent for the portfolio and 7.63% for new production. Call. With 0 charge offs for the quarter, this portfolio continues to reflect high quality borrowers with significant payment capacity and Equity in Their Homes.

Speaker 2

Our asset quality metrics continue to be strong as outlined on Slide 10. Net charge offs for the Q3 were $722,000 representing 2 basis points of average loans. Nonperforming loans improved to 0.45%. Past dues continued to be low at 30 basis points of total loans for the quarter. Finally, our allowance for credit losses was maintained at 49,900,000 representing 1.14 percent of total gross loans, which we believe is appropriate given the low level of past dues and nonperforming and Charge Offs and Current Economic Forecasts.

Speaker 2

Credit quality across all of our lending classes is performing well and reflects our history of consistent and well balanced approach to lending. Now I'd like to turn things back to Thomas, who will provide an overview of our deposit portfolio and trends.

Speaker 1

Thank you, Lynn. I appreciate the insight and the detail. Transitioning to our deposit base, which is going to start on Slide number 12. As noted, Horizon has a seasoned and very granular portfolio With an average client tenure of about 10 years, a majority of these balances continue to be held in our transactional relationship accounts that know and trust Horizon Well. Additionally, in Q3, the portfolio displayed less than 20% of balances being uninsured.

Speaker 1

As I stated in my opening remarks, We're very pleased with our 3rd quarter deposit performance, maintaining Horizon's core funding stability and limiting additional funding needs from brokered and or wholesale balances. Call. On Slide 13 provides detail on the resiliency of the portfolio and the team continues to be very upbeat about its strength. Our core consumer and commercial relationships were stable with minimum changes in total balances. The combined portfolio balances change approximately 0.64 percent for the quarter.

Speaker 1

Public funds balances were also stable and experienced some heightened pricing pressures for excess liquid funds this quarter. However, the portfolio continues to maintain a significantly lower cost of funding when compared to alternative wholesale options. The quarter closed with brokered CDs and other fixed rate borrowings flat with ample borrowing capacity available if needed. As you saw in Q2, cash flows from our operations and securities portfolio provided a positive Fed funds sold position of $72,000,000 at the end of Q3. Call.

Speaker 1

As mentioned previously, the deposit portfolio continues to deliver strong results in terms of stability, resiliency and flexibility in our funding. Call. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, Mark Secor, who will walk through our current highlights and our income statement and key financial metrics for Q3. Mark?

Speaker 3

Thank you, Thomas. Our 3rd quarter results were positive on many fronts. As Lynn stated, we had quality loan growth from the commercial team, improved non interest income and continued a disciplined operating model in respect to expenses and credit. And our approach to new loan production spreads And strong loan growth shifted lower yielding assets into higher yielding loans. In Q3, we experienced elevated deposit pressure on commercial and public liquid funds, putting pressure on the net interest margin and net interest income in the near term.

Speaker 3

However, we will continue to actively manage pricing and our balance sheet to begin improving the net interest margin over the longer term. Starting with Slide 14, non interest income improvement over the linked quarter was led by increases in gain on sale of mortgages and other income from sale of assets, while most other line items remain consistent. The company is continuing to diversify Slide 15. Our efforts to manage our operating expenses continues to be a strength for Horizon. Call.

Speaker 3

Non interest expenses were 1.81 percent of average assets for the quarter compared to 1.86% last quarter. Session continue to be a priority and you can expect it to remain our focus throughout 2023. Non interest expenses improved modestly even with an elevated FDIC insurance expense that was offset by lower quarter over quarter call. Thanks for taking my questions. I will now turn the call over to Mr.

Speaker 3

President. Thanks for taking my questions. Thanks, and modest reductions in commissions and other variable compensation. Our loan and deposit pricing management maintains a strong spread as displayed on Slide 16. While it narrowed in the quarter, we believe a 4 14 basis point spread And Horizon's loan and deposit pricing remains healthy, compares favorably to peers' recent median and has the ability to improve over time.

Speaker 3

Call. The results highlight our disciplined loan pricing for new loan production and a greater focus on originating higher yielding loan products. We will continue to focus on loan spread management, product shift into higher yielding loan products and cash flow reinvestment at higher rates. Call. The quarterly results also reflect our efforts to retain quality, durable end market relationships in a highly competitive market for deposits.

Speaker 3

$2,800,000,000 at the end of the quarter, down $26,000,000 from June 30. The portfolio had a book yield of 2.21% call in an effective duration of 6.7 years at the quarter end. As longer term investments were originally identified as held to maturity, The duration of that portfolio is 2.2 years longer than the available for sale portfolio. Expected cash flows from investments are estimated to be $25,000,000 for the remainder of 2023 and a total of $120,000,000 over the next 12 months. Where we continue to actively review strategic options for this portfolio.

Speaker 3

Slide 18, call. Horizon continues to maintain solid regulatory capital ratios well above the requirements to be considered well capitalized, call. And we believe we have sufficient capital to be open to options to improve our earnings outlook in the foreseeable future. Call. We anticipate that growth in capital will outpace the growth in total assets during the next 12 months, providing additional strength.

Speaker 3

Call. As shown on Slide 19, we continue to maintain a strong cash position at the holding company The cash position helps provide additional stability in uncertain times and as mentioned previously, keeps the door open for strategies to improve our earnings. Call. Horizon's current focus for the use of capital is organic earnings growth as current opportunities and market conditions make M and A less likely. Call.

Speaker 3

However, we remain open and receptive to discussions for profitable new revenue opportunities both in acquisition and lift outs. We expect to continue our targeted dividend payout ratio of 30% to 40%, continuing our 30 year plus year of uninterrupted quarterly cash dividends. Based on our current stock price, our dividend provides a higher yield relative to the sector. Looking ahead on Slide 20, we provide you with an update on our current expectations for the Q4 and full year 2023. Call.

Speaker 3

Our loan growth continues to be solid in both commercial and consumer sectors, which should be valuable contributors to core earnings in subsequent quarters. Call. For the Q4 and full year 2023, we expect 4% to 5% and 6% to 7% total loan growth respectively. Our net interest margin and net interest income trends should continue to benefit from our balance sheet and pricing management. Call.

Speaker 3

We expect a net interest margin of 2.33 percent to 2.38 percent for the 4th quarter 2.5 percent to 2.55 percent for the whole year. We expect net interest income of $40,000,000 to $42,000,000 for the 4th quarter and Non interest income should continue near current levels with the anticipation of consistent fee income from our investments in treasury management and wealth and a seasonal softening in Q4 of mortgage lending. The expected range of $10,000,000 to $11,000,000 in non interest income in the 4th quarter call. And a total of $43,000,000 to $44,000,000 in 2023. Non interest expenses continue to be proactively managed across the organization, call, specifically in segments of our business impacted by rising rates, such as mortgage and consumer lending.

Speaker 3

We also intend to invest in revenue generating talent in our treasury management and commercial lending teams to contribute to top line in 2024. As a result, we expect non interest expenses to range from about $35,000,000 to $36,000,000 in the 4th quarter. This will result in $142,000,000 to $143,000,000 of non interest expense for the year. Call. We also expect these expenses to reign below 1.85 percent of average assets for the Q4 and the full year.

Speaker 3

Call. Our operating metrics, ROAA and ROAE, are expected to be slightly lower in the next quarter. Call. We anticipate ROAA to range from 75 basis points 80 basis points for the 4th quarter and between 85 basis points 90 basis points for the year. Call.

Speaker 3

We expect ROAE to range from 8.5% to 9% for the 4th quarter and between 9.5% and 10% for the full year 2023. Finally, for the TCE ratio on December 31, we are expecting 6.6% to 6.8%. Now I will turn it back over to Thomas for some final comments.

Speaker 1

Thank you, Mark. So why invest in Horizon? Our investment thesis is simple. We're located in attractive Midwest Growth Markets. These markets have desirable economic environments, significant infrastructure investment and Flourishing Ecosystems for Business and Communities.

Speaker 1

Horizon continues to execute well on its strategy of shifting growth to higher yielding assets, While maintaining its conservative credit risk profile, Horizon has demonstrated a track record of consistent underwriting and active portfolio management to ensure the success of our clients and our shareholders. The franchise has a stable and loyal deposit base with significant excess liquidity of $2,800,000,000 providing flexibility and nimbleness for our funding strategies. And our disciplined operating culture consistently achieves a low annual ratio of operating expense to average assets, call, which we expect to be less than 1.85 percent for 2023. This is coupled with our annualized net charge offs of only 2 basis points and historically low non performing loans. We are very compelling value stock, supportive of our commitment to our dividend with a 5.9 times PE ratio and a 6% dividend yield.

Speaker 1

Horizon has a track record of 30 plus years of uninterrupted quarterly cash dividends to our shareholders. We thank you in advance for joining our presentation this morning. This concludes our prepared remarks.

Operator

And we will now begin the question and answer session. Call. And our first question comes from Terry McEvoy from Stephens. Terry, please go ahead.

Speaker 4

Hi, thanks. Good morning, everyone. Maybe Mark, start with a question for you. Thanks for your thoughts on the 4th quarter net interest margin. Any thoughts on assuming the forward curve is correct, where you would expect the margin or when you'd expect the margin or possibly net interest income To bottom in

Speaker 3

the future. Yes. Good morning, Terry. We think it's close. As you said, we think in the Q1, based on what the current Expectations are in rates that it will trough by our modeling.

Speaker 3

We're seeing that and then start to tick up as we get into the second half of next year barring any major rate change. If we start to see the rates coming down in the second half of twenty twenty four, we'll see more benefit. What we saw coming out of this quarter were the last 2 months that the margin stabilized. So we have a pretty good idea Of what we're coming into going into the Q4.

Speaker 4

Great. And then just Listening to your comments about investing in treasury management and open to hiring commercial teams, any initial thoughts on how you manage

Speaker 2

Good morning, Terry. It's Lynn Kerber. Thanks for the question. Yes, we are looking at adding some additional staffing in our treasury department, following some additional expenses related with that staffing. The goal is to diversify our corporate deposit base better.

Speaker 2

Call. And by virtue of a lower cost of funding and that contribution, it would help offset that staffing increase. On the commercial side, there's going to be some team members that will be adding some assets that would

Speaker 1

call. Great. Thanks for taking my questions. Appreciate it.

Speaker 3

Thanks, Terry.

Operator

Call. And our next question comes from Nathan Race from Piper Sandler. Nathan, please go ahead.

Speaker 5

Great. Good morning, everyone. Thanks for taking the questions.

Speaker 3

Good morning. Just Just kind

Speaker 5

of thinking about getting to the margin guidance of $2.50 to $2.55 for the full year. I'm curious kind of what that contemplates in terms of the size of the earning asset base through the Q4. Are you guys seeing an opportunity just based on your deposit pipeline to wind down some wholesale funding to maybe bring down the earning asset base call. I guess I'm just trying to think about how to get to that $250,000,000 to $255,000,000 expectations just given the lower margin expectations for 4Q.

Speaker 1

Sure. Thanks, Nathan. This is Thomas. I appreciate the question. When we look at our asset size going in the Q4, we're going to imagine it will be relatively consistent call.

Speaker 1

As we left the Q3, we did have the excess cash position that we'll use to pay down any type of, I'll call, higher cost borrowing. When you look at our structured borrowings, it's actually at a relatively lower cost compared to overnight borrowings. We would say call. Our borrowing position will be relatively consistent going into Q4. Excess funds would be used to pay down any type of higher priced borrowings, which would be Most likely on the public fund side that we saw some elevation in the 3rd quarter and relatively consistent balance sheet going 3rd and 4th quarter.

Speaker 6

Yes.

Speaker 3

And that full year, if you recall, it's not adjusted. It's unadjusted. So it includes the swap gain that we received in the Q3.

Speaker 5

Got you. Understood. And then just kind of thinking about the trajectory of loan yields going forward in a higher for longer rate environment. Any color on just kind of what the Radon production was in the 3rd quarter and just how you're kind of thinking about kind of the trajectory of loan yields over the next few quarters assuming The Fed pauses and just kind of the tailwinds that you guys have with some of those repricing going forward.

Speaker 2

Hi, this is Lynn Kerber. Relative to the commercial portfolio, we're really basing our new originations on Correct, cost of funds. And so that's been generally very much in sync. Over the last This year as the rate increases have occurred, generally there's a few week lag as our pipeline catches up to the new rate Depending on the rate structure and the terms of the funding. But overall, our margin over cost of funds for commercial has been pretty stable.

Speaker 2

And so if rates start to stabilize, I don't see that really having a lot of variation.

Speaker 5

Got it. But it sounds like when the kind of new production on a weighted average basis is still coming on nicely above the portfolio yields coming out of the 3rd quarter? Call. Okay, great. And then just lastly, sorry.

Speaker 3

I can add. In the presentation, Nate, we have the average production for last quarter for commercial was 7.5 Consumer was just under 9% and mortgage was at 7.6.

Speaker 5

Okay, great. Thank you for that. And then just lastly, any thoughts on kind of Share repurchase activities in the Q4 early next year just given where the stock is trading today?

Speaker 3

We have the ability and we have, I think, 1,800,000 shares in a plan that we could repurchase. But in our we've done quite a bit of evaluation of what use of capital and with the current cost of funds To give up cost of that cash to buy it, it doesn't appear stock repurchase right now is the best Although it's always on the table and we're constantly looking at it.

Speaker 5

Okay, great. I'll stop that. I appreciate the color. Thank you.

Speaker 1

Thanks for the questions.

Operator

And let me just remind you, if you would like to enter the question queue. Just press star 1. Our next question comes from Damon DelMonte from KBW. Damon, please go ahead.

Speaker 1

Good morning. Good day, Damon.

Speaker 7

Hey, good morning everyone. Hope everybody is doing well today and thanks for taking my questions. I just want to start off on Credit. Obviously, very strong credit trends continue with you guys. But just wondering, are there any areas of your portfolio where you may be seeing some early signs of stress And maybe something tied to a particular industry or geography?

Speaker 2

Call. Good morning, Damon. It's Lynn. Hi, Lynn. Thank you for

Speaker 3

the question. Hi, Lynn.

Speaker 2

As you see in our deck, we had a slight increase in past dues. And although it's still at only 30 basis points, which is a traditionally low past due percentage, call. Most of that was in our consumer portfolio. And as we reviewed those numbers, primarily automobile. And while the percent increased, if you look at our overall portfolio mix, we have been having reduction in our Indirect loan portfolio.

Speaker 2

And so while a percent has increased, the dollar amount hasn't increased substantially there. Relative to charge offs, that did increase this quarter and that was predominantly indirect auto. Call.

Speaker 7

Got it. Okay.

Speaker 1

A real quick follow-up on that. I know we've seen a lot out in the industry around And direct auto and consumer charge offs. I just ask as you review our results, please take a peek at Page 8. I think you'll see that even though Lynn said that we'll see a little bit Increase in our consumer charge offs simply because where the economy is, our consumer portfolio is high quality borrowers. And We're expecting that our trends on consumer charge outs, even though the industry may go in a different direction, are going to outperform there.

Speaker 7

Got it. Okay. And then with respect to, I guess, a broader view on credit and you look at like where the reserve is, No, that's been steadily marching down since it obviously peaked during the COVID time like most others. Where do you feel is a Comfortable level to settle at. It's down to 1.14% as of this quarter.

Speaker 7

So how do we think about settling rate For the reserve and then kind of using the provision line to keep that there.

Speaker 2

Yes. Thank you again. As we've shared at previous calls, during the pandemic, we had allocated quite a bit for certain sectors related to the COVID pandemic. And those portfolios, predominantly hotels and Retail, those performed extremely well. In fact, really stellar.

Speaker 2

Call. And so we had been releasing those reserves steadily over the last year. So what I think you'll see is that Our reserve is returning to more core analysis based on historic loss rate and Economic Forecast. And so I think as we move forward, it's going to be predominantly a function of that economic forecast. Call.

Speaker 2

Our credit quality metrics all remain very low, as you can see. And if you look back over our history over the last business cycle, We performed generally about 75% of our peer group losses.

Speaker 3

Yeah, this is Mark. You have to let the model drive the results and there is management judgment in there. But as you see the portfolio like indirect, which historically has our highest charge off is shrinking. We're putting on assets in categories in mortgage, commercial that have much lower historical losses. So That also is contributing to this.

Speaker 7

Got it. Okay. Mark, are you able to kind of like ballpark a rough estimate for provisioning going forward? I mean, Is it fair to look at the 1st 3 quarters of the year and kind of take that average and think that's doable here in the Q4? Or do you think, maybe just given Changing in broader macro trends, we need to have a little bit higher provision.

Speaker 3

Lynn can add to this. But I think if you look at what we might be seeing in the last several quarters for charge offs that we need to replace those. I think that's probably is a good guidance of what we're looking at.

Speaker 7

Call. Okay, great. And then just lastly, if I squeeze one more in, what's a good effective tax rate we should be using, I guess for the Q4 and then as we look to 2024.

Speaker 3

Yes, thanks for the question. The effective Tax rate continues to go down as earnings pretax earnings have come down from the last year. So it's hard to just say peg a number, but I think where we are right now is pretty good going forward at around that 8 What's driving that is we continue to invest in solar tax credits and they're having and we have obviously other tax Free income from munis and such. So but the solar credits are what's contributing a lot. Call.

Speaker 3

And those we're going to continue to invest in. Those have a 20 year carry forward. So we want to continue to invest in those and use that to help keep The marginal rate down. So I think where we are right now is good guidance.

Speaker 7

Got it. Okay. Call. That's all that I had. Thanks a lot for the color everyone.

Speaker 7

Appreciate it.

Speaker 1

Thank you.

Operator

And our next question comes from David Long from Raymond James. David, please go ahead.

Speaker 1

Call. Good morning, David.

Speaker 6

Good morning. Thanks for taking my question. Just a couple of things here. The first one on Slide 17 and you Discuss this in the formal comments, but the $25,000,000 of scheduled securities cash flows this 4th quarter and then $120,000,000 next year. Are there any prepayment assumptions built into that or are those simply just those that are contractually maturing?

Speaker 3

It's contractually maturing and runoff payments. Got it, got it.

Speaker 6

So if there are prepayments, those numbers could be a little bit higher.

Speaker 3

It could. And we see that once in a while. We'll see some bond get recalled. Yes.

Speaker 6

Sure. Okay, great. Thank you. And then Second question, as it relates to non interest bearing deposits, the contraction there seems to have stabilized a little bit for you guys. Where do you think that plays out over the next few quarters?

Speaker 6

Do you see more mix shifting still? And do you have like a percentage in mind that you think non interest bearing will get to X percent of total deposits. How are you thinking about that level here in the near to intermediate term?

Speaker 1

Thank you for the question. Usually in the what we see in the 4th quarter is we do take in some tax money from our public funds group that Because perhaps the average is to be relatively stable, if not slightly up there. And then the consumer spending happens in the Q4. The Q1 historically for our business model and our clients usually is an outflow of deposits as people make their tax payments dividend out their company. So I I would say we see a slight decline, but nothing of major concern, probably just the seasonality that you saw from the Q1 of last year.

Operator

Call. And we have a question now from Brian Martin from Janney Montgomery. Brian, please go ahead.

Speaker 8

Call. Good morning, everyone. Just wondering if you can talk a little bit about where the you talk about being a little bit more targeted on where you're thinking on loan growth and just kind of Getting better yield. Just kind of where you're focused at today on it sounds like maybe indirect still hasn't continued to run off, but Maybe just point us a little bit there and just kind of the yield pickup you're expecting on that with the liquidity levels you guys have.

Speaker 1

Thank you for the question. I'll start and I'll pass over to Lynn to talk specifically about commercial. I'd say from a macro level on the balance sheet, our growth will still of our pricing. I would anticipate on a go forward the decline in that portfolio will be relatively near for the next several quarters. Our consumer portfolio outside of that through the branches has been stable, slight uptick.

Speaker 1

And then mortgage has That one there has been a slight up and that's really because our prepayments are slowing down on that. The originations are relatively consistent with the balance as we talked call. About 25% of the originations going on the balance sheet, but we're seeing slowdowns in payments there, which is giving that just, I'd say, modestly up. And I'll pass it over to Linda to talk about the commercial growth in the various segments.

Speaker 2

Great. Thanks, Thomas. I would direct you to Page 6 of our slide deck. We've got a portfolio composition for the commercial portfolio. This has been very consistent.

Speaker 2

You'll see that our non owner occupied is 48%, C and I is 25% and our owner Slide is 23%. This has been very consistent over the last several years. And when you break down our quarterly pipeline and new originations, it virtually mirrors this mix. As I made in my call. I commented in my comments earlier, we have been seeing some increase in C and I this quarter.

Speaker 2

It was 33% versus our portfolio composition of 25%. And this is a continuation of a trend that we've been seeing over the last year as we seek to diversify into that sector a little bit more. And that will be a continued trend as we go into next year, by expanding some efforts into C and I.

Speaker 8

Okay. And the yields pickup you're getting on that This type of loan growth is the average yield that Mark, I guess, I think as we talked about what the number was, is that kind of what we should expect on As far as the pickup goes?

Speaker 1

Yes. Our pricing and pickup that you saw in the deck should be consistent as we go in the Q4.

Speaker 8

Okay. All right. And Thomas, I don't know if you can give any update on just I think you talked last quarter about potentially looking at restructuring the bond book, just kind of where you're at there, what kind of you guys are still looking at that?

Speaker 1

Thank you for the question. I think as Mark alluded, we're always Looking for the best use of capital and where we could put that, whether that's share buybacks, security repositioning or leveraging the balance sheet. Right now, we're still evaluating that. For us, it's really part of the where that forward curve is going to be. As we saw, What happened with the curve here this quarter, expectations where the terminal rate changed and what next year will look like.

Speaker 1

So as we get some more stability in view of what 2024 will We'll probably sit down with our Board and our leadership team around the capital deployment there, understanding that, of course, we still have margin pressures here, but We're still very optimistic about the strength of our deposit portfolio. And as Mark talked about earlier, we believe that our margin is probably at the bottom of the trough now as we move into 2024. Call.

Speaker 8

Perfect. That's helpful. And just maybe one last one for Mark. Just on the margin, Mark, do you have the spot margin for the month of September? I know it sounds like It was bottoming.

Speaker 3

Yes. Unadjusted, we were at 2.39

Operator

Call. And this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 1

Thank you, Marlise, and appreciate your help today. I also want to thank everyone for participating in our earnings call today. We believe our end market revenue opportunities, the valuable deposit franchise, Credit culture, expense management discipline have positioned Horizon well for the final months of 2024. We appreciate your interest in investment Horizon. We look forward to speaking to you next quarterly call that will happen in January.

Speaker 1

In the meantime, don't hesitate to reach out with any questions and have a wonderful holiday season. Thank you.

Operator

Call. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.

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Key Takeaways

  • Horizon reported 13.1% annualized commercial loan growth (up $83 million) with a total commercial pipeline rising to $145 million and new-production yields of 7.5% for commercial, 8.96% for consumer direct, and 7.63% for mortgages.
  • Credit quality remains a cornerstone of the franchise, with nonperforming loans improving to 0.45%, annualized net charge-offs of only 2 basis points, and an allowance for credit losses of 1.14% of total loans.
  • The core deposit base stayed resilient and granular—less than 20% uninsured and brokered CDs flat quarter-over-quarter—supported by $72 million of Fed funds sold and ample wholesale borrowing capacity.
  • Net interest margin faced pressure late in Q3 but is expected to stabilize at 2.33%–2.38% in Q4 (2.50%–2.55% for FY23), with modeling indicating a trough in Q1 2024 before gradual improvement.
  • Non-interest expenses were held to 1.81% of average assets, and management maintains an expense ratio target below 1.85%, while regulatory capital ratios remain well above “well-capitalized” thresholds—with TCE expected at 6.6%–6.8% year-end and $2.8 billion of excess liquidity.
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Earnings Conference Call
Horizon Bancorp Q3 2023
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