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spk06: Good morning. Welcome to the Horizon Fan Corp Inc. conference call to discuss financial results for the second quarter of 2024. All participants will be in listen-only mode. Should you need assistance, please send in a conference specialist by pressing the silver key followed by zero. After today's presentation, you have the opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Before turning the call over to management, please note that today's call may contain statements that are forward-looking in nature. These are subject to risks, uncertainties, and factors that could cause actual results to differ materially from those discussed in factors noted in
spk08: the presentation. Additional information about factors that could cause the most risk-marked A and B filings to be inefficient, managed, and not as fair
spk06: as they are in the first half of the process. Reconciliation for these measures is contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. 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. Presenting Horizon today are Executive Vice President and Senior Operations Officer Kathy DeRouder, Executive Vice President, Corporate Secretary, and General Counsel Todd Ester, Executive Vice President and Chief Commercial Banking Officer Lynn Kerber, Executive Vice President and Chief Financial Officer John Stewart, Executive Vice President and Chief Administration Officer Mark Zucker, and Chief Financial Officer and President Tom Prane. At this time, I would like to turn the call over to Mr. Thomas Prane. Please go ahead, sir.
spk11: Good morning, and thank you for participating in today's call. As we begin this morning, I wanted to introduce John Stewart, Horizon's new Chief Financial Officer. He's offered his various leadership roles, financial services, for the last two decades. From this job onboarding during his time, and we look forward to the contributions he brings to our leadership team and organization. Thank you, John. Again, welcome to Horizon. Horizon's positive second quarter results displayed on the board reflect the organization's commitment to continually enhance our financial performance. The core is sequential growth in revenue and pre-tax, pre-revision income, driven by a third consecutive quarter of expanded net interest margin, fee income growth, as well as prudent expense management. Loan growth in the quarter was robust, driven primarily by our relationship with these commercial lending teams. Growth was complemented by consistent positive credit trends in non-performing loans and charge-offs. The team continues to find ample opportunities on our local markets while maintaining our positive credit trends through proactive portfolio management and maintaining a diversified loan portfolio. Horizon's deposit portfolio had a solid quarter with stability in its core consumer and commercial relationships that was balanced with a cost-effective approach to public funds balances. The granular and tender deposit base is still balanced in the quarter, and core balance deposit costs increasing minimally. As our first quarter results displayed, the company has positive momentum on many fronts through a more profitable balance sheet, realizing investments in our fee income businesses and a well-managed expenses. As highlighted in my opening comments, we were very pleased with success in the quarter. A significant part of success was loan growth and continued equity and equality. To provide additional insight in this part of our business model, I'll transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber.
spk07: Thank you, Thomas. Beginning with, we have an overview of the loan portfolio as of June 30th with a mix of 60% commercial, 17% residential, and 22% consumer, which remains relatively unchanged from our prior quarter. Loan growth was strong in the quarter, with an increase in the amount of $205 million, or .8% annualized. The new production, predominantly in commercial loans and mortgage loans, lower yielding consumer originations, consistent with our ongoing balance
spk08: sheet repositioning. Resulted in the average .93% loans, including equipment finance, increased $155
spk07: million. Residential mortgage loans increased $16 million, and consumer loans increased $2 million. Transitioning to some detail on each portfolio, we have commercial loans highlighted on slide six. Commercial loans increased $154.8 million for the second quarter, representing .6% on an annual basis. Loan fundings were very consistent with prior quarters, however, they were influenced by three larger loans that closed the last quarter. Additionally, we experienced modest increased dualization on lines of credit, combined with a higher volume of previously closed funding within the, the pace of unscheduled payoffs flowed within the second quarter, which also helped commercial loan balances. The core commercial pipeline continues to be strong with opportunities for continued growth, with the team remaining diligent on sound credit underwriting and pricing discipline. Activity continues to be well diversified by industry and GI. Portfolio mix continues to be roughly 73% CRE and 27% C&I. You will note that our CRE -owner-actified ratio at 180%, and our CRE three-year growth rate at 20% are conservative and compared favorably to the UBPR peer group ratio of 240% and growth of 55%. Commercial credit quality remains strong, with low past low non-performance and net recoveries of $3,000 year to date 2024. Keeping focused on the elevated interest rate environment, we've included a summary of maturing CRE loans for 24 and 25 on slide seven. CRE loans with interest rates below 7%, 4% of the portfolio for the major of this year, and 6% for 2025. We believe rates and maturities are managed in our CRE portfolio to limit exposure to rate-related credit risk at this time. Turning to slide eight, condolences increased $20 million during the quarter, reflecting over an .4% annualized growth. The mortgage portfolio grew 16 million, representing .1% of annualized growth. The focus remains on high credit quality borrowers with an ability to pay significant equity in their homes. Overall, credit quality remains the consumer and mortgage portfolio, with delinquencies and charge-offs within targeted ranges. Transitions to our asset quality metrics continue to be strong, and on slide nine, the non-performing loans of $1.2 million represented 1.0%, which is well within the range of recent period and levels. Non-performing loans remain low and were relatively unchanged for the quarter at $19.3 million, representing .4% of total loans. Charge-offs for the second quarter were $584,000, representing an annualized charge-off by basis points with charge-offs at consumer bonds. Finally, our allowance of losses increased in the quarter to $52.2 million, primarily attributed to growth within the quarter, offset by small reductions of dedicated specific reserves and economic forecasts. Provision expense of $2.37 million is a combination of the increase of $8 million, represented by loan growth and recognition of the modest quarterly change charge-off of $584,000. The allowance represents .08% of those loans, which we believe is appropriate given credit performance and current economic forecasts. Future reserve amounts and the revision will be driven by loan growth and mix, and credit trends. Now I'd like to turn things back to Thomas, who will provide an overview of our deposit portfolio.
spk11: Thank you, Lynn, and as always, great insight and information. As we mentioned earlier, we're pleased to see the positive momentum in our net interest margin. This momentum is partially a result of the strength and resiliency of our tenured and granular deposit base that's displayed on slides 10 and 11. The rise in poor consumer and commercial balances were consistent from the first quarter, highlighted by stable non-interest bearing deposit balances. Additionally, the company continues to take a practical approach to public funds, focusing on operating a balancing and duration of the portfolio. Our newly added resources to our Treasury Management Team are making an impact, gathering new relationships and expanding wallets share with our core commercial lending clients. As currently positioned, we believe the deposit portfolio will benefit the organization in a downgrade environment with its granular composition and long-standing relationships in our local markets. The portfolio is very stable with approximately 50 percent of the balances in relationship-based checking accounts with clients that know and trust Horizon Well. Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through some additional balance sheet highlights and other key financial metrics. Great. Thank you, Thomas.
spk08: First, let's turn to the primary dryer.
spk02: While the fully tax-equivalent portfolio yield was unchanged when compared to the last quarter at 2.39 percent. Going forward, you can expect similar trends to continue for the foreseeable future, as cash flows from the portfolio are profitably redeployed elsewhere on the balance sheet. At the bottom of the slide, you can see the anticipate flows for the next four quarters, as well as the expected FTE roll-off yield. Disclosure, we hope you will find helpful. Turning to slide 13, the benefits of the asset repositioning strategy were again evident this quarter, driving a mix of earning assets, which coupled with discipline and well-controlled interest-bearing funding costs, drove a 14 basis point increase in the FTE net interest margin during the quarter to 2.64 percent.
spk08: Sure, income
spk02: for
spk08: the quarter.
spk02: Looking ahead, you'll note -of-period loans are well above the average, which both net interest and both have boxed, furthering an expansion in Q3. Even as funding costs will see a bit more lift relative to Q2, beyond Q3 into Q4, the NIM expansion likely moderates some, absent any rate cuts or changes further out on the curve. As you can see on slide 14, it was a relatively good quarter for the company on the fee income front, delivering 10.5 percent near the upper end of the guidance range for the quarter. Increases in both interchange fees and mortgage gain on sale drove the late quarter increase. Looking ahead to the remainder of the year, target treasury management, mortgage, and private wealth should continue to deliver positive momentum. We would expect fee income to run rate in the 10.5 to $11 million range per quarter for the remainder of the year. As evident on slide 15, it was a good expense quarter for the company, coming in at the low end of the prior guidance. Seasonal declines in occupancy expense and well-controlled outside services expense were generally offset by additional packing of those expenses in the quarter, volume-driven loan fees, and elevated levels of operational. Looking ahead, while investments in the business will drive the quarterly expense run rate in the second half of the year, we would remain disciplined in our approach, and therefore, we do expect annualized expenses to remain less than 2% of average total assets, even with the slowing asset growth we noted earlier. Turning to slide 16, we saw some modest compression-based ratios as strong loan growth late in the quarter helped drive risk-weighted asset growth from Q1. We continue to feel good about the company's capital position, with slower growth anticipated for the back half of the year relative to the first, and continued runoff in investment securities as previously noted. We would expect all regulatory capital increase from here over the second half of the year. Finally, turning to the outlook on slide 17, the reinvestment activities from the security sale in Q4 of 2023 have been completed. We are moving towards a higher-level outlook, which provides you with our current view for the remainder of the year. The balance sheet assumptions articulated in the first two sections on the slide. In short, loan and asset growth is expected to moderate from the recent pace, and deposits should remain relatively stable. Excluding any impact from rate cuts, we would expect modest further expansion in Q3, as the average earning asset mix will benefit from loan growth late in the second quarter. As mentioned previously, the pace of Q4 NIM expansion will likely moderate, again, excluding any impact from rate cuts. Combined, we would anticipate interest income grow in the upper single-digit range for the Q4, when compared with the first. Fee income will be positive momentum through the second half of the year, with the quarterly run rate in the $10.5 to $11 million. The Q4 is expected to remain in the $10.5 to $11 million range. While quarterly expenses in the second half of the year will increase modestly from $37.5 million reported in Q2, they are expected to remain less than 2% annualized of average assets. Finally, the effective tax rate for the full year should be in the 9.5 to 10% range. With that, I'll turn the call back over.
spk11: Thank you, John. As outlined in our presentation, we see continued positive momentum for the horizon. For the south, we are in excellent growth markets in the Midwest. They're economically attractive for businesses and individuals. Our loan growth is strong and aligned with our historical credit risk profile. The commercial pipeline continues to be positive, and the benefits of the cash flows from our securities portfolio will allow for power and security to be on the balance sheet. The resiliency of our core deposit base maintains its great value with additional opportunity to help improve our financial performance as rates decline. The company also continues to have significant funding capacity if needed. Horizon has a lean and operative that fully adapts to its markets and its environment to deliver long-term shareholder value. We are strategically investing in improving our revenue models, maintaining our excellent credit profile, and capturing efficiencies in how we deliver our products and our services. And lastly, we believe Horizon is still a very compelling value, supported by our 30-plus years of commitment to our dividend and recently offering a .2% dividend yield. As always, we thank you in advance for joining our presentation this morning. This concludes our prepared remarks, and I will ask our operator to please open the lines for questions.
spk06: We will now begin the presentation. To ask a question, you may press star, then 1, on your touch-tone phone. If you are using a speaker phone, please pick up your keys. To withdraw your question, please press 1. At this time, we will pause momentarily to assess the question. The first question comes from Terry McEvoy, with Stevens. Please go
spk08: ahead.
spk10: Hello, everyone. Good morning, Terry. The margin outlook, could you talk about the assumption for interest-bearing deposit costs? Looks like last quarter you had a nice benefit from lower time deposits now averaging below 4%. That looks like kind of your promo rates are 4% to 5% when I just look at your website. So it would be helpful if you could kind of run through the underlying assumption.
spk02: Yeah, hey, Terry. Thanks for the question. It's John. Yeah, so we exited the quarter, as I noted in the prepared remarks. We had some pretty strong loan growth in the end of the quarter that was corresponding with some pretty strong funding growth on the balance sheet. So as we think about the starting point for interest-bearing deposit costs, if you will, in the beginning of this quarter, they were $256, if you kind of run through them in the second quarter, they're in the low $260s as a starting point for this quarter.
spk10: Thanks. I apologize if this is a presentation, but could you talk about any purchases of the jumbo mortgages? Did that occur in the second quarter? And then it looks like there was C&I growth. How did leasing come into play in Q2 as well?
spk11: Thanks, Contreras. As you look at our second quarter, John's comments earlier mentioned the fact that we're done with the redeployment strategy around the security sales from the fourth quarter. In the second quarter, if
spk12: you look at our transactional portfolios, including our indirect auto, that portfolio... So the aggregate growth of $200 million, about 90% growth. I'll pass it over to Linda to talk about that specifically.
spk07: Good
spk08: morning, Jerry. How
spk07: are you? Great. Thanks, Lynn. Yeah. We're working on leasing. Our team is really ramping up very nicely. As you know, we had most of our funding in the first quarter kind of later. Second quarter was really spread more throughout the quarter. I'm sure we went nicely for Q3. I think I had shared previously, you know, we were targeting $120 million from here, and I would say this time aren't paced to achieve that.
spk03: Thanks for that. And I just note your positive comments this morning based on a few other things I've evaluated, which has taken up my time. Thank you for taking my questions.
spk06: Our next question comes from Nathan Grace with Piper Sandler. Please go ahead.
spk04: Yeah. Hi, everyone. Morning. Thanks for taking my questions. Just curious, as you think about kind of the long-growth drivers in the back-end of the year, you know, I think the guidance is kind of low to mid-signal digits. Just curious in terms of how you guys expect to achieve that, as it continues to see an eye in leasing growth, or any of the factors that go into play there?
spk07: Yeah, thanks for the question. Our funding has been... New loan funding has been very consistent year over year, and when I reviewed last year compared to last year, the new funding or initial funding amount was very consistent. We did see a little bit of a difference between Q1 and Q2, and, you know, I don't know, it would always be the same rate as Q2, right? There are some changes from quarter to quarter, but as we look towards the end of the year, there are some things we're looking at. The initial funding, I think, will be pretty consistent, but as noted in my prepared remarks, we are having some construction... on previously approved loans, so I expect that that's going to continue during the building season. In Michigan and Indiana, we've also had some slowdown in the funds scheduled payoffs, I think primarily with the rate environment. So I would say generally our outlook is good. If rates start to be reduced towards the end of the year, that could spark some additional activity.
spk04: Just in terms of funding that loan growth in the back half of the year, I appreciate the added disclosures on slide 12 in terms of the quarterly cash flow coming off the securities portfolio. Should that support the large amount of loan growth in the back half of the year? Do you guys see a need to maybe test in wholesale sources, just given kind of a stable deposit outlook over the next couple quarters?
spk11: Thanks Nathan again for the question. As you look at our loan growth in the mid-single digits, overall in the portfolio, as we mentioned earlier, it's primarily going to be driven at the commercial side with a mix within that commercial growth representing what the portfolio already looks like. That's going to be complemented by our continued mix trends we talked about at the top of the house, taking lower yielding consumer assets, let's go to cash and then be able to fund a lot of the growth in commercial. That combined with the securities run out that John outlined up front, that's going to give us more than enough liquidity to fund any type of loan.
spk12: Have significant deposit growth in the portfolio end of the year.
spk04: Okay, great, very helpful. And if I could just ask one more on the appetite for share repurchases going forward. We had some growth in TCE, but it seems like you guys are still seeing good organic growth opportunities as well. I know the stocks went up over the last several weeks, similar to the group, but just setting up to adopt Thomas on perhaps re-engagement of repurchases going forward.
spk11: Yep, thank you, and we also recognize that the math could be really appealing right now for potential stock buyback and or securities repositioned again. We're going to continue to evaluate the capital allocations options throughout the end of the year as we are earning momentum in two years and we continue to grow capital of this. We're going to remain diligent, examine all potential options, but our primary focus is going to be on making sure we have the right shareholding value.
spk12: Okay, great,
spk04: I appreciate all the color. Thank you. Thank you.
spk06: Our next question comes from Damon DeMont, Davis KBW. Please go ahead.
spk01: Hey, good morning everyone. Thanks for hitting my question. Hope everybody's doing well. Welcome aboard, John. So first question just kind of regarding the margin outlook. I kind of took from the commentary that you're caveatting it with no changes to rates, but what happens if the Fed does cut rates here in the back half of this year and then a few times as we go through 25, how would you expect the margin to respond to that? Damon, thanks for the question.
spk02: Yeah, so as the outlook articulated, there's one 25 base point cut in the middle of the year, so that doesn't have much of a, a middle of the fourth quarter, excuse me, so that doesn't have much of an impact on the outlook for this year. As we look at the balance sheet today, on a static balance sheet, a 25 base point rate cut is marginally accreted to the NIM. That would be our expectation in the preceding 30 days. So if you just kind of work through the balance, we have a percent of our loans that will reprice inside 30 days in the very front end of the curve, you know, not much in securities and the cash position. You can see if there is not a contributor. On the other side of the balance sheet, there's not a lot of contractual repricing on the liability base outside of the trust preferreds. So how much margin lift we get from 25 basis points really comes from our ability to manage down non-maturity interest and deposit costs. The team around here has got a lot of experience doing that. Our expectation would be that we could do so such that rate cuts are accreted to the margin in the immediate term. Rate cuts, if you look over the course of the year or the next four quarters, I should say, a lot of the dynamics that we saw in place this quarter will remain in place. As Thomas just mentioned,
spk08: there's a
spk02: mixed shift
spk12: that will take.
spk08: There's
spk12: no plan to re
spk08: -enclose,
spk12: so there will
spk08: be
spk02: no absentee rate cuts. And then, the funding side becomes a little harder to predict looking out that far. And again, I think all things being considered with the growth and dynamics that we see in the balance sheet today, no rate cuts are probably marginally accreted to the NML look over the foreseeable future. Might not necessarily be in a straight line because there are some timing differences between capsules and maturities, but generally over that timeframe, I think that is a reasonable expectation.
spk01: Got it, that's great, Carl, thank you. And then, to my second question, credit trends have obviously been very strong. As you think about the provisioning here in the back half of the year, do you feel like the average of the first two quarters is a reasonable quarterly run rate, or do you think maybe there's some underlying trends that are starting to portfolio a little bit, and you think you need to kinda keep a little bit higher level?
spk08: Yeah, in regards to the ACL,
spk07: one of the people that had a Q1 call, that we had to rebalance and get balance sheet and change and mix with the first quarter. I would say generally speaking, both Q1 and Q2, we have a release of some dedicated specific webinars. So I don't know that I would average of those necessarily, but as far as factors driving it going forward, I think principally this point, that is one growth, as you can see for this quarter, and our credit metrics have been really solid, and so we're just gonna continue to monitor those. So I think it's gonna be primarily driven by growth and the economic
spk01: forecast. Brad?
spk08: Brad? I'm
spk01: sorry,
spk08: that's not what I had everything asked and answered. Thank you. I'm Brian Martin with JANI Montgomery. Please go ahead.
spk09: Good morning, everyone. Just one question on the margin, I think they may just ask my question, but in terms of where the margin ended the month above the quarter, can you tell us where you exited the quarter in the month of June on the margin?
spk02: Yeah, hey, Brian, so the margin in the month of June was pretty consistent with the quarter overall, but as Lynn noted in her prepare remarks, and you can see in the end, the period balance versus the average, most of the growth came after so,
spk08: but
spk02: for the month
spk08: of June, the margin was 64. Gotcha. I think in terms of credit,
spk09: I guess like I said, everything looks really nice. In terms of anything on the horizon, in terms of looking at the CNI portfolio, can you talk about this kind of any trend you're seeing within that CNI portfolio? Is there anything to be mindful of as you kind of trend forward here?
spk07: Yeah, well, so as you can see, our overall metrics are solid, our commercial past use has been extremely low and in that recovery position this year.
spk08: I will talk about some of our
spk07: run rate. Fortunately, we've got some really well seasoned customers and they've made some changes to their business models. So at this point, we're seeing some of them start to actually improve from what we saw in the third and fourth quarter with the better revenue rate. So I'm not seeing anything overly concerning at this point.
spk09: Okay, thank you for that. And then just, I guess one other thing was, well actually it was already estimated, so I'm all good, thank you guys. Thank you.
spk06: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk11: Thank you, Megan. Again, thank you for participating in today's earnings call. The team had a very productive second quarter with positive momentum in our key earning metrics heading into the second half of 2024. We appreciate your attendance today and we look forward to our next quarterly update.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now connect.
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