Horizon Bancorp Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 9 speakers on the call.

Operator

Good morning, everyone, and welcome to the Verinten Bancorp Conference Call to discuss Financial Results for the Q1 of 2023. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that 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.

Operator

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 the Horizon's current 10 ks and later filings. 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 contained in the presentation. The company assumes no obligation to update any forward looking statements made during the call.

Operator

For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, They can be accessed at the company's website, horizonbank.com. Representing Horizon today are Chairman and Chief Executive Officer, Craig DeWine President, Thomas Braine EVP and Chief Executive Officer, Mark Secor EVP and Chief Commercial Banking Officer, Lynn Durbin and EVP and Senior Retail and Mortgage London Officer, Moe Mehra. At this time, I'd like to turn the call over to Mr. Craig White. Please go ahead, sir.

Speaker 1

Thank you, Nick, and good morning, and thank you for participating in Horizon Bancorp's 1st quarter's earnings conference call. Our comments today will follow the investor presentation and press release that we published yesterday, April 26. We are proud to announce that Horizon Bank is celebrating its 150th anniversary in business with our original banking charter issued in April of 18/70 3. At the end of the 1st year of business, our total assets were $100,000 150 years later, we now exceed $7,800,000,000 We like to say that we are 150 years strong. Throughout the bank's long history as well as our management team's decades in banking, we have successfully leveraged our experience and operating discipline to guide Horizon through multiple economic cycles and industry challenges.

Speaker 1

As you'll hear in some detail in a moment, our durable deposit relationships with end market clients with average tenure in excess of 10 years, along with our deliberate deposit mix and pricing, has served us well to the banking sector's recent market volatility. Deposit pricing has increased within the local markets we serve, with particular price sensitivity in the public fund sector. The majority of our deposits are in stable markets with several municipal deposit accounts in our legacy markets having banked with Horizon for most of our 150 years. In addition, we are readily able to fund 8.4% annualized loan growth and modest deposit runoff in the quarter with lower cost borrowings and cash flows from the investment portfolio. Today, you'll also learn more about how lending opportunities in our attractive Midwest markets, loan pricing discipline, ample sources of liquidity and active balance sheet and management have allowed us to position Horizon well for continued success through 2023 and beyond.

Speaker 1

As you saw in our earnings release, Horizon did report a decline in quarter over quarter net income driven by lower net interest margin and lower non interest income and partially offset by good expense control and lower marginal tax rate. The end result for the quarter was return on average assets of 0.94% and return on tangible equity of 14.18 percent, which are respective returns given the competition for deposits in volatile markets. Now to give you a quick summary of our resilient Midwest markets, we remind you that Horizon's expansion and growth has occurred primarily in college and university towns and in state or county governmental seats. Therefore, majority of our footprint has an economic base that is traditionally more stable than other areas of Indiana and Michigan and our real estate values do not have the volatility of a typical large metropolitan area. In addition, Horizon's footprint is well positioned due to considerable infrastructure investments and located in fiscally responsible states to take advantage of the outbound migration of Illinois, which continues to increase as consumers and businesses exit dense living spaces, high taxes, high cost of living and high crime rates.

Speaker 1

Our local markets have stabilized. We see the number of open positions Continued decline and unemployment rates remain relatively flat. Given the stable unemployment rates, the improved balance sheets of our commercial customers In our close relationships with these businesses as well as our conservative underwriting culture, Horizon's asset quality remains strong. To conclude my comments, I would like to remind listeners this will be my last earnings call as I move into the Chairman role and Thomas Crane becomes Horizon's next Chief Executive Officer effective June 1. I've enjoyed working with the investment community and shareholders and have always appreciated your insights into our industry.

Speaker 1

It is now my pleasure to turn the call over to Thomas Frayne for Reitens' next Chief Executive Officer. Thomas? Thank you, Craig.

Speaker 2

Earlier this year, we provided 2023 goals for our investors, and we want to take a quick Q1 update to these full year objectives. Our loan growth continues to be strong both in the commercial and consumer sectors, which we expect to be valuable contributors to core earnings in subsequent quarters. Our net interest income and net interest margin are tracking at the lower end of our annual goals, which is not unexpected as we see benefit from our loan growth throughout the year and recognizing the elevated funding costs experienced across the industry in Q1. Expenses continue to be proactively managed across the organization, specifically in segments of our business impacted by rising rates such as mortgage and consumer lending. Our operating metrics of ROAA And ROAE in Q1 is tracking below our full year expectations and as Craig mentioned, was impacted by elevated deposit pricing and seasonal non interest income.

Speaker 2

We will provide more detail on these segments of our business within the presentation. Transitioning to lending, highlighting the quarter was our commercial loan Increasing $38,000,000 or 6.1 percent annualized. Net commercial funding of $109,000,000 was strong and again well balanced across our diverse asset classes and geography. The commercial pipeline is well positioned at $130,000,000 and continues to provide confidence in our ability to generate full year mid to high single digit growth. Importantly, portfolio yields continue to improve as new production replaces paydowns and payoffs.

Speaker 2

Consistent with previous quarters, our commercial loan portfolio continues to display strong credit metrics with one basis point of charge off. As we transition to Slide 12, we have included a breakdown of our commercial loan portfolio to show its granularity and also its diversification across multiple asset classes. Horizon's non owner occupied office represents just 7% of commercial loans, consisting of properties in Midwestern cities that have not experienced the vacancy rates found in major metropolitan markets and across the country. Horizon's non owner occupied multifamily represents only 10% of commercial loans and is focused on properties in major university towns and growing local markets. They are experiencing excess demand for rental properties and strong occupancy rates.

Speaker 2

We emphasize creating relationships with borrowers who are seasoned operators with strong balance sheets and cash flows. We continue to experience positive performance in these portfolios, while remaining conservative in new project approvals and managing our exposures. On Slide 13 for consumer loans. Consumer loan balances increased $56,000,000 primarily through the addition of a high quality HELOC portfolio yielding over 9%. Organic balances are relatively flat, reflective of the seasonal nature of the portfolio.

Speaker 2

We continue to actively manage new production yields, improving the overall portfolio performance. Our credit quality remains consistent with higher quality borrowers with proven credit and income capacity to navigate the higher rate environment. This is reflective of the consumer loan portfolio displaying net recoveries for the quarter. Moving to indirect lending on Slide 14. As we previously outlined, our intent is to keep our indirect auto portfolio relatively flat in 2023, focusing on increasing yields and consistent positive credit performance.

Speaker 2

Yields on new production in the portfolio continued to increase in Q1. Additionally, the short duration of the portfolio allows new originations to quickly impact the portfolio yields and it's also providing flexibility for our ALCO strategies on loan growth and mix. Credit performance continues to perform well with 26 basis points in annualized charge offs in Q1. As we transition over to mortgage, in concert with consumer and indirect portfolio, we continue to be smart in our balance sheet deployment with mortgage balances increasing approximately $5,000,000 in Q1. As seen with previous quarters, new production yields compare very favorably to those on payoffs and paydowns.

Speaker 2

Our production is aligned with the industry trends of a modest Q1 and originations, and the team has expanded its core spending lending products to provide additional flexibility and financing options for the highly competitive purchase market. With 0 charge offs for the quarter, our portfolio continues to reflect high credit quality borrowers with significant payment capacity and also equity in their homes. Slide 16 displays our credit performance and overall Horizon's credit metrics remain strong as evidenced by the 0.01% charge offs and the continued low levels of non performing loans. Additionally, our allowance for credit losses remains about $150,000,000 or 1.17 percent of total loans, which we believe is appropriate given the level of charge offs and non performers, the condition of our high quality portfolio and market and economic conditions, Credit quality across all of our lending classes is performing well and reflects our history of consistent and well balanced approach to lending. Slide 17 is reflective of Horizon's historical credit performance relative to the other U.

Speaker 2

S. Commercial banks. Horizon has a history of outperforming the market through prior economic cycles and we anticipate this consistent outperformance as we progress throughout 2023. Reviewing our deposits on Slide 18. Horizon's deposit portfolio is very granular and seasoned.

Speaker 2

Peep's segment consists of clients With an average tenure of over 10 years and with average balances reflective of our relationship banking model focused on helping businesses, Consumers and communities in and around the Midwestern markets we call home. Additionally, as we examined our portfolio, Over 50% of our balances are in transactional checking accounts. These are predominantly tenured operating accounts of our local clients. We are not online generated deposit accounts sourced through high introductory rates, but relationships with clients that know and trust Horizon Bank. We have 75% of our clients' balances collateralized or insured through the FDIC or Intrify.

Speaker 2

Additionally, in Indiana, Public funds of the state, its counties, cities, towns, schools and the like are insured through the Indiana Public Deposit Fund to the extent they exceed federal coverage. As we move to Slide 19, this provides detail on the deposit flows in the quarter. We're very upbeat and positive about the strength of our portfolio throughout the Q1. Our core relationships consisting of consumer and commercial were relatively unchanged in total balances with modest movement between deposit classes. During Q1, the consumer portfolio was down about 0.54% with commercial deposits modestly down 1.14%.

Speaker 2

The combined change of these two portfolios was minimal at 0.78%. In response to the events in Q1, Deposit balances within our public funds portfolio was down about 7.9%. Approximately 60% of this change occurred in March as the market experienced significant increases in the bids for liquid municipal funds in this highly fluid marketplace. Without the significant shift in market pricing, our public funds portfolio was aligned with its historical seasonal patterns. Understanding our overall core deposit portfolio was performing well, we elected to fund the balance sheet at more attractive rates With the anticipation of a normalized pricing structure, we'll return to public funds bidding in subsequent quarters.

Speaker 2

As Mark will outline in the upcoming slides, Horizon maintained significant excess available liquidity and attractive borrowing costs. Overall, we're very positive and delighted with the stability and resiliency of our core deposit base in Q1. Additionally, we were pleased with the proactive engagement of our advisors with our clients, helping them understand the events in the marketplace during March and reassuring their confidence in Horizon Bank. This was a key part of our success in retaining our core clients and experiencing minimum deposit funding impact in the Q1. I'll transition over to Mark to provide additional insight in our Q1 results and what we believe is an excellent positioning for the balance of 2023.

Speaker 3

Thank you, Thomas. In the current environment, we wanted to begin with the company's liquidity position and availability. We certainly didn't predict the events of mid March, but at Horizon, We have long subscribed to the view that liquidity availability is important. For years, many of you have heard us regularly highlight The number of quarters worth of cash we maintain at the holding company to cover fixed costs, including the dividend, currently that stands at 8 quarters. Many of you will also remember our decision to acquire nearly $1,000,000,000 in deposits with our Michigan branch deal in 2021 when the industry was flush with liquidity, reflecting our commitment to protecting and enhancing the value of Horizon's deposit franchise.

Speaker 3

Starting with Slide 21. Heading into March 2023, we were well served by our liquidity focus including a majority of our investment portfolio unpledged. This enabled us to pledge approximately $1,500,000,000 of investments to provide immediate access to the liquidity if needed. At March 31, we had available secured borrowing lines of over $1,500,000,000 with access to additional liquidity through secured lines, broker CDs and additional unpledged investments. Altogether, this totaled more than $2,700,000,000 of available liquidity or 47% of total deposits as of March 31.

Speaker 3

In addition, we continue to be proactive in our balance sheet management and moved existing short term borrowings and higher cost funding toward lower cost Term borrowings at attractive rates. At the end of the quarter, dollars 1,100,000,000 of our borrowings were at an average fixed rate of 3.52% with an expected duration of approximately 1 year. Moving to Slide 22. Horizon continues to maintain Solid regulatory capital ratio is well above the requirements to be considered well capitalized, and we have sufficient capital to continue to fund our expected growth in the foreseeable future. We anticipate that growth in capital will outpace the growth in total assets during the year, providing for additional capital strength.

Speaker 3

Slide 23. For the 2nd consecutive quarter, Lower unrealized losses on available for sale and earnings retention helped increase tangible common equity, which is up 31 basis points over the last 3 months to 6.87%. This is in part the result of the inversion of the yield curve reducing losses on the longer term duration of the for sale investments. Because we have the ability to hold all investments to maturity and pledge for secured borrowing, These unrealized losses are expected to decline over time as investments pay down and mature. Slide 24.

Speaker 3

Core deposit premiums have remained at historic lows since the Great Recession, dampened by low rates and excess deposits. As the value of deposits are increasing with higher interest rates and liquidity being a key commodity, it is expected Deposit premiums will continue their trend upward. In addition, historically, when there is a rising rate environment and there are unrealized losses in the security portfolio. The banking sector also experiences an increase in deposit premiums and the value of deposits. This correlation helps demonstrate how Franchise value can be impacted in a rising rate environment.

Speaker 3

Slide 25. Horizon's current focus for the use of capital as organic growth as opportunities and market conditions make M and A less likely. We would like to continue to diversify by adding a more robust leasing platforms through an opportunistic acquisition or a potential talent lift out. We expect to continue our targeted Dividend payout ratio of 30% to 40%, continuing our 30 plus years of uninterrupted quarterly cash dividends. Based on our current stock price, Our dividend provides a higher yield relative to the sector.

Speaker 3

And as I mentioned earlier, the 8 quarters of cash held at the holding company to cover fixed costs, including the shareholder dividend, helps provide additional stability in uncertain times. Slide 26. Turning to earnings in the Q1. Net income was primarily impacted by lower net interest income and non interest income, offset partially by the reduction in expenses compared to last quarter. A one time $500,000 loss on the sale of $64,000,000 of securities also impacted the results.

Speaker 3

In Q1, the adjusted net interest margin decreased by 18 basis points and adjusted net interest income decreased by 3,500,000 With the pace of rate increases anticipated to slow and perhaps decreasing toward the end of 'twenty three, We believe that Horizon is nearing the low end of its margin and expect it to begin to stabilize over the

Speaker 2

next three quarters. This will

Speaker 3

be the result of assets continuing to reprice, replacing asset cash flows into higher yielding assets, interest earning asset growth and funding cost stabilization. Slide 27. The yield on total loans increased 42 basis points in the 1st quarter, a beta of approximately 66%. This is a result of our disciplined loan pricing for new loan production, more focus on originating higher yield loan products, Adjustable rate loans repricing and lower yielding loan balances paying down. We will continue to focus on product mix with higher yielding loan products and we'll have cash flows from lower yielding loans reinvested at higher rates.

Speaker 3

Slide 28. As we discussed, we are very pleased with the strength and resiliency of our deposit base in the Q1. Overall deposits were down a modest 2.7% with our mix shifting to more time deposits. On March 31, loans represented approximately 74% of deposits, which continue to readily provide core funding. The increasing betas and some deposit flows into higher rate products have increased funding costs, but they still provided a strong spread to earning asset yield of 4.17% for the Q1 with a total cost through deposits of 1.04%.

Speaker 3

The beta for the interest rate cycle starting March 31, 'twenty two through the first Quarter of 'twenty three has been 23% for total deposits. With the projection of interest rates peaking in the Q2 of 2023, The full interest rate cycle data is now estimated to be in the range of 25% to 30%. By maintaining a disciplined approach with deposit pricing, the total cost of deposits increased 33 basis points during the quarter, while deposit account retention remained strong. Slide 29. The investment portfolio was $3,000,000,000 at quarter end, a reduction of $81,000,000 in balances from December 31.

Speaker 3

The portfolio had a book yield of 2.22 percent and an effective duration of 6.58 years at the end of the quarter. Within the quarter, we sold $64,000,000 in securities with a $500,000 loss with an estimated 6 month payback period. Expected cash flows for the remainder of 2023 are estimated to be approximately $100,000,000 but we'll continue to be proactive reviewing additional options for opportunistic sales over the next several quarters. Slide 30. Throughout the quarter, we have been actively managing our balance sheet for what we believe will be elevated rates for the majority of 2023.

Speaker 3

We have approximately $2,300,000,000 of assets, representing 32% of earning assets, which are expected to reprice within the next 12 months. Included in this estimate are adjustable rate loans, representing approximately $900,000,000 that adjust immediately with short term rate move, An initial $400,000,000 that adjusts within 90 days and $60,000,000 that will adjust throughout the year. The estimated remaining $940,000,000 in assets We price represent investment cash flows, principal loan payments and prepayments and loan maturities. This repricing opportunity is forecasted to fund the growth in our higher yielding originations and increase overall portfolio yields. Our balance sheet activities over the last several quarters has reduced our exposure to elevated rates for a longer duration by increasing time deposits and extending overnight funding to approximately a year at favorable rates.

Speaker 3

As a result, in an up rate 100 basis point parallel As of March 31, we have a minimal decrease to net interest income of approximately $2,000,000 or 1.09 percent. Also with a parallel shock day 1 for 100 basis points down, net interest income is relatively flat. Our down rate scenario does not assume potential proactive actions that might be available to management, such as opportunities to sell additional investments and restructuring of our funding to elevate performance as the market stabilizes. Slide 31, Our efforts to manage our operating expenses to help offset fee income fluctuation is progressing well. Non interest expenses were 1.79 percent of average sets for the quarter compared to 1.84% last quarter.

Speaker 3

Our long standing commitment to being agile in this part of our business model and consistently reviewing opportunities to reduce expenses and streamline processes continued to pay off in the Q1 and you can expect it to remain our focus throughout 2023. As we review Q1 noninterest income, The decline from the linked and year ago periods are primarily due to lower mortgage related income and the securities sale loss in Q1 mentioned earlier. Outside of these items, core non interest income categories have been stable over the last three quarters. Now I will turn it over to Thomas, who will provide some final thoughts.

Speaker 2

Thank you, Mark, and appreciate your insights. So why invest in Horizon? Our investment thesis is simple. We're located in attractive Midwest growth markets, continuing to benefit from the Illinois exodus, experiencing significant infrastructure investment and our markets have multiple growing industries. Horizon's solid loan growth is coupled with a low credit risk profile that has proven to outperform other U.

Speaker 2

S. Commercial banks over time. We have demonstrated a track record of consistent underwriting and active portfolio management to ensure the success of our clients and also our shareholders. Horizon has a granular and tenured deposit base that's displayed its resiliency during Q1, and we believe it will continue to provide benefits going forward. The bank is well funded with over $2,700,000,000 in liquidity available.

Speaker 2

We have a disciplined operating culture with 1.79 Operating expenses to average assets and an annualized net charge off of only 1 basis point and non performing loans to total loans at 0.47%. And lastly, we believe we are a very compelling value stock, supportive of our commitment to our dividend with a 5.8% dividend yield and a 5.5 PE ratio. 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, and I'll ask our operator, Nick, to please open up the line for questions.

Speaker 1

Thank you. We'll now begin the question and answer session.

Operator

First question will be from Terry McEvoy of Stephens. Please go ahead, sir.

Speaker 4

Thanks. Good morning. First off, for Craig, obviously enjoyed working with you and best of luck in your new role.

Speaker 1

Thank you, Terry.

Speaker 4

And then maybe a couple of questions. The Expenses better than expected. I was hoping you could just talk about the outlook for the remainder of the year. And then just reviewing the notes from the virtual Investor Day, looks like you Said you'd spend about $5,500,000 on tech spending. Is that still the case and still in the budget for the year?

Speaker 3

Yes. For your first question, we still are spending on tech to continue to enhance and develop our platforms. The Q1 salary and benefits was a little lower than we So I think if there's any area in the expense side that there might be some increase would be on the salary benefits As we had increase in or the raises were put into play During the 2nd starting in the Q2.

Speaker 4

Thanks. And then just to follow-up, just Thinking about your margin comments, the runoff of the securities portfolio, you say, is 2.49%. Can you just talk about blended new loan yields, so we can think about how the securities cash flow funding loan growth would impact the margin or asset yields?

Speaker 2

This is Thomas. Thank you for the question. As we look at our different asset classes, again, most Our new production is going to come from commercial. That numbers are running closer to 7%. In our indirect auto, we are north of 8%.

Speaker 2

And if you look at our consumer lending, we're probably in the 7.5% mortgage. We're being very deliberate on what we're putting on the balance sheet. And That will be reflective of what you see mostly in the marketplace at somewhere in the high 6s or 7s.

Speaker 4

Thanks. And then one last quick question. I'm just curious, do you pay into the Indiana Public Deposit Insurance Fund? Who supports that?

Speaker 1

Yes, Terry, the banks have paid into it, but no one's paid into it for probably over 30 years. And This fund also has the capacity to borrow monies if necessary as well.

Speaker 5

Perfect.

Speaker 6

Thanks guys. Have a nice day.

Speaker 3

Thank you, Eric.

Operator

Thank you. Next question will be from Nathan Rice, Piper Sandler, please go ahead.

Speaker 5

Yes. Good morning, everyone. And just also want to echo Terry's comments. It's been great Working with you over the years, Craig, wishing all of the best business to retirement in terms of the Chairman. Going back to the margin question, perhaps Mark, within the context of kind of your more stable margin guidance going forward, where do you guys kind of see loan yields peaking at assuming we get I'd re hike in May and then perhaps put that on pause

Speaker 7

in the

Speaker 3

second half of the year. Yes. Terry, I probably

Speaker 5

don't know off the top

Speaker 3

of my head what the peak would be, but I think we'll continue to see the increase, Maybe a little less than what we had this quarter as we were had the rate hikes. We have another rate hike. We'll pick up The adjustables in those. So I think it'd be a little less than this quarter.

Speaker 5

Okay, great. And then it seems like the number of those obviously remain strong In the Q1, it seems like you guys are still feeling optimistic about growth going forward. Is there any thought about Just maybe slowing the loan growth, just given that it seems like growth over the last few quarters has largely been funded with higher costs, wholesale sources. And just any thoughts just in terms of kind of those dynamics in house plays into some of the margin pressure that we've seen over the last Few quarters at this point.

Speaker 2

This is Thomas. I appreciate the question. As far as loan growth and in the funding, it sounds like the question is more on the funding of our continued loan growth. As Mark mentioned, we're anticipating the securities portfolio to have About $100,000,000 continue to come down and be able to fund. We also as we have a deliberate election to go with lower cost The borrowings in the Q1, and we believe that there's a more stable marketplace of pricing that will happen in Q2 and Q3 and going forward.

Speaker 2

But again, it's very similar thoughts that you're having that our incremental loan growth will have to come at a consistent spread over the increase in our deposit costs.

Speaker 5

Okay, great. And just wanted to clarify Terry's question on expenses. It sounds like maybe we get Minor uptick or just maybe flattish levels in overall operating expenses in the second quarter and maybe stable from there, right around 35 or so Going forward, is that the right way to think about it, Mark?

Speaker 3

Yes. I think that's the right way to look at it. I think there'll be a little bit of an increase in excess salary and benefits. The rest of the expenses are coming in just in line with What we're anticipating.

Speaker 5

Okay, great. If I could ask just one more, just in terms of the overall balance sheet size in here. Just with the remix that you guys alluded to in terms of securities and the loans, do you kind of expect kind of flattish earning asset growth from here, just maybe given a More stable outlook for deposits and wholesale sources over the next few quarters.

Speaker 2

We're pretty much aligned with that. As we see the securities portfolio decline, we may have a slight Growth in the loans compared to that. But overall, we'll be managing that with the deposit funding.

Speaker 5

Okay, great. I appreciate you guys taking all the questions. Thanks for the color.

Operator

Thank you. Our next question will be from Damon DelMonte, KBW. Please go ahead, sir.

Speaker 7

Hey, good morning, everyone. I hope everyone's doing well. Thanks for taking my questions. And I'd also echo the comments around Craig. Congrats and best of luck.

Speaker 7

It's been a pleasure working with you over these years.

Operator

Thank you.

Speaker 7

I guess my

Operator

first question is

Speaker 8

to kind of touch on the

Speaker 7

margin a little bit more, Mark. I think you kind of implied that you should see some stability kind of as we move through the rest of the year. Can you kind of quantify or frame out maybe the expected pressure you could see over the next quarter or 2?

Speaker 3

Yes. I mean, there's uncertainties, obviously, David, in what the competition looks like for funding. But As we came out of the quarter and we're looking at where we are, we've given A range in our Investor Day, which things have changed, but we think the remaining margin or the margin for the remaining part of the year We'll get us between $260,000,000 $270,000,000 depending on some of the market conditions. But I think that stabilization is going to be happening. It helps to get the term debt fixed so we can So we

Speaker 2

know what that cost is for the rest of

Speaker 3

the year. So it will depend a lot on deposit pricing.

Speaker 7

The $250,000,000 to $270,000,000 is like the full year range or is that where you could be in the Q4?

Speaker 3

In the remaining part of the year. For the new guidance?

Operator

Okay. Yes.

Speaker 6

Do you happen

Speaker 7

to have the margin for the month of March?

Speaker 3

I don't have that in front of me. I'm sorry, Eunice.

Speaker 2

That number is That's relatively it's pretty consistent what we had for the quarter, slightly a couple of basis points down.

Speaker 7

Okay. That's helpful. Thanks. And then with respect to the outlook for provision, credit trends obviously remain Very strong. But as you're continuing to see loan growth, how should we think about the reserve level and And kind of how the provision factors into that.

Speaker 2

Sure. I'll ask Lynn Syrosan. Can you give us insight on the reserves? Thank you, Lynn.

Speaker 6

Good morning, Damon. How are you today?

Speaker 7

I'm great, Lynn. How about yourself?

Speaker 6

Good. Thank you. Well, as we've already Commented, our credit quality remains very good at this point. Our past dues and non performing net charge offs have all been very stable. As you can see, we have been releasing some of the reserve out.

Speaker 6

That is a function, as we've previously indicated, of some excess Reserves that we held during the COVID pandemic and we've been releasing those out over the last several quarters. Those are now released. So I don't see that, that is going to continue to occur. So at this point, it's going to really be focused on Credit quality and market conditions. And as you can see, we're at 116, 117, we're pretty close to our peer group.

Speaker 6

Our historical losses have been less than your group. So I don't see a significant change. Certainly, I don't see us going I mean, significantly lower at this point.

Operator

Got it. Okay. That's helpful.

Speaker 7

And then I guess just lastly on the outlook for growth. Can you talk a little bit about maybe some of The negative trends you might be seeing in your marketplace, are there any areas that are starting to show signs of slowdown that Maybe it's changed over the last 90 days or

Speaker 6

so? Sure. This is Lynn Kerber again. Just from a commercial outlook, we are Still seeing deal flow. I would say it is softening a little bit.

Speaker 6

Certainly, the increased interest rates, Any projects are going to require some additional equity to the table. And so the developers are having to look at the dynamics, If it's rental, what are the market rates and what are they commanding in that effect Their return on investment would be additional equity requirement. But we're still seeing deal flow. I am obviously watching some of the CRE sectors. So far, our portfolio has been holding up really well and performing well.

Speaker 6

We are seeing a little bit of noise in the small business area, Just small business in general, they've been experiencing inflation for labor costs and input cost of supplies. And so they're just navigating that. So as we've been receiving financials in on our customers, We're continuing to monitor their 'twenty two performance, the quarterlies and their liquidity position. But overall, it's been, I would say, pretty stable. But I would say demand is probably a little bit softer than last year.

Speaker 7

Got it. Okay. That's all that I had. I think the other piece

Speaker 2

I'd add to your question is that we're seeing a little softness overall in the mortgage market, Which would impact both originations and a little bit on the warehouse lending, but again, a small portion of our overall revenue model for the bank.

Speaker 8

Got it. Helpful. Thank you very much.

Operator

Thank you. Next question will be from David Long, Raymond James. Please go ahead, sir. Good morning, everyone, and thanks for taking my question. As it relates to the expected $100,000,000 in cash flows from the securities for the rest of the year, Is that the contracted number or is that assumptions based on prepayments and what have you?

Operator

And if they are assumptions, What are the rate assumptions that are built into that? Thank you.

Speaker 3

Yes, David, thanks. They are assumptions. So it takes into play Anticipated cash flows, it takes into play some maturities of investments. So it is an estimate. Some of it is contractual, if you know when an investment is going to mature.

Speaker 3

But then also the prepayment speeds are probably the one that has impacted it over the last year as rates have come up And prepayment speeds, they have slowed, but it started to stabilize. We've seen it more stabilizing now.

Operator

Okay, cool. Thanks, Mark. And then my second question, as it relates to non interest bearing, your concentration of non interest bearing deposits, total deposits, you guys have been running in the low 20% range. Pre pandemic, you were in the high teens. How are you thinking about that here?

Operator

We've been in essentially a zero interest rate environment for 15 years. And I think for the industry, non interest bearing deposit Expectations still remain higher than where I think they can end up. So just curious how you're thinking about that concentration and where it can go for Horizon?

Speaker 3

Thank you

Speaker 2

for the question, David. This is Thomas. As we look at the remainder of the year for non interest bearing, of course, we'll have some seasonality here in Q2 as tax payments come out from our Commercial clients and then we'll have some inflows from our municipals. We anticipate that it will be down slightly for the remainder of the year, But still at the elevated percentages that you talked about earlier, again, it goes back to the granularity of our portfolio that a lot of the businesses with our small business and consumer clients, Very to keep relatively consistent average balances, we will see some moderate fluctuation in our commercial balances and public funds in Q2 and Q3.

Operator

Got it. Thank you, Thomas. Thanks for taking my questions. Thank you. Next question will be from Brian Martin, Janney Montgomery.

Operator

Please go ahead.

Speaker 8

Hey, good morning, guys. And again, congrats, Craig, and best of luck in retirement. It's been great working with you. So, you're welcome. The One quick question, Mark, on respect to the margin for a moment and just appreciate the color you've already given.

Speaker 8

Just trying to understand, Sounds as though if the margin does stabilize under your scenario as kind of you go forward here, is there a little bit more pressure on the margin in the near term, meaning 2nd and third quarter with deposit pricing And there is as you kind of get later in the year. Is that how to think about progressing to a stabilization here?

Speaker 3

I think that's logical, Brian, what we're seeing, but we see the asset mix that we are doing on the balance sheet and then the rates that are coming on That we're not seeing a lot of fluctuations. It's more the unknown of what we're going to have to do To fund the balance. But on our expected, how we're looking at it, There might be a little pressure here in the short term, but as rates continue to stabilize and the assets continue to reprice, we should see Moving towards the other end of the range.

Speaker 8

Got you. Okay. And then maybe just Jumping, I don't know if it's, who moved, but as far as on the mortgage outlook, I think, Thomas, you commented a little bit on it, but just the Kind of the gain on sale margin, the volume, just kind of how to think about where that's trending from here. I think it was down a little bit Quarter on a linked quarter basis, but just wondering how that pipeline is. Is this level kind of a sustainable level?

Speaker 8

Or do you expect it to Trend up a bit to hear with seasonality, just trying to understand how to think about that gain on sale line.

Speaker 2

Thanks for the question. I appreciate it. So for mortgage being very specific, I would say January was not a very strong month for us, which really impacted our gain on sale in February. We've seen originations tick back in the March timeframe. So as you saw From Q1 results, we anticipate that that would be our lowest quarter.

Speaker 2

Going forward, I don't want to predict all the way up to 3rd and 4th quarters, A lot of this deals with inventory and what's available on the marketplace, but I would say we'll see probably more something more similar to about a 20% to 30% pickup in overall fee income in that category here going in the Q2, but the outlook that we can keep that consistent going 3rd and 4th, assuming the Rates and inventory come back in line.

Speaker 8

Got you. No, that's helpful. I appreciate the color, Thomas. And maybe just one last and going back to kind of commentary from Investor Day. Just wondering, if we look at kind of the growth expectations, kind of the consumer and the commercial, how to think about that, What's changed in your view from that guidance, if at all, on or just your outlook on commercial and consumer?

Speaker 8

Is it everything consistent with Investor Day? Or Maybe comment on what changes you're seeing or you expect here?

Speaker 2

And as we had mentioned earlier, pipelines seem to be Still relatively strong on the commercial side, giving us confidence that we'll be in those ranges that we talked about from the Investor Day. The consumer side seems to be again aligned, but I I would say the consumer side, that's really a balance sheet play for

Speaker 1

us as we look at

Speaker 2

the yields that come on and then also how we're funding. There's more than ample demand out in the marketplace around consumer, specifically in indirect auto. That's a little bit of a bid ask Our branch distribution with originations had a relatively decent Q1, and we're seeing that pick up in Q2. And then for our mortgage piece around our ability to balance sheet, we can balance sheet more, but right now we're electing to sell the asset on the secondary market. So Feel confident in both those growth numbers that the demand is there.

Speaker 2

It's just more of a balance sheet and overall how we want to position going into the second half of the year.

Speaker 8

Got you. Okay. I appreciate you taking the question. Thanks very much.

Speaker 2

Thank you for the question.

Speaker 1

Thank you. This concludes our question and answer session.

Operator

Now I'd like to turn the conference back over to management for any closing remarks.

Speaker 1

Thank you, Nick, and thank you for participating in today's earnings call. It's been my pleasure to speak with all the analysts and shareholders over the past 25 years, And I'm excited about the energy and ability of our executive team to execute our strategies, which will propel the company to new and higher levels of performance. Thank you. I will now turn the call back to the operator to conclude today's call. Have a good day.

Speaker 1

Thank you.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Horizon Bancorp Q1 2023
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