HORIZON BANCORP INC /IN/ Q3 FY2024 earnings call

• Positive net income growth with expansion of net interest income and fee income. - Average loan growth was solid at 10% annualized, with continued growth in revenue models. - Deposit portfolio showed solid growth with stable core noninterest bearing balances. - Strategic actions in the fourth quarter include selling about $325 million in securities, intent to sell mortgage warehouse business, and ongoing strategic tax planning to improve structural profitability and simplify the business model.

The loan portfolio as of September 30 had a mix of 60% commercial, 17% residential, and 21% consumer loans. Average loans increased 10% annualized. Commercial loans rose $9.5 million (1.3% annualized growth), consumer loans decreased $43 million, and mortgage loans grew $3 million (2% annualized). Credit quality metrics were strong: past dues at 3 basis points, nonperforming loan ratio at 24 basis points, net charge-offs for the third quarter were $375,000 (three basis points annualized), and the allowance for credit losses modestly increased to $52.9 million, resulting in an allowance to loan ratio of 1.10%.

• Expect Q4 net interest margin expansion of 15 to 20 basis points from Q3's 2.66%, driving net interest income growth in the upper single digit percentage range. - Q4 expenses likely approximate $42 million but not run rate for 2025. - Effective tax rate for 2025 expected to be in the range of 10% to 12%. - End of period total loan balances likely relatively unchanged excluding warehouse balances, with core commercial growth offset by indirect auto runoff.

Q: Good morning, folks. Hope you're doing well. Maybe just starting off here on the margin, a lot of moving pieces and can certainly do the math on the 4Q improvement plus the FHLBs. Just kind of curious where you see the margin kind of settling once all is said and done in 2025, and then how much additional benefit you're expecting across next year as the Fed continues to cut rates modestly.

A: Hey Brendan, it's John. Thanks for the question. So, rather than giving you a landing point for 2025, we'll just talk through some of the moving pieces. So, as you noted, I think the guidance is pretty straightforward on where we generally expect Q4 to land. From there we have a couple of things that are generally favorable to the margin outlook. So, the continuation of the earning asset mix changes that you've been seeing. So, core commercial loan growth offset by lower yielding runoff in the loan portfolio, cash flow, securities portfolio moving to higher yielding assets, all of that will continue for the foreseeable future through '25. So that's generally favorable rate cuts. We said in the prior quarter and continue to believe it to be true, modestly favorable to the net interest margin. So, however, you assume those in your model, I think that would be our base case assumption around rate cuts. And then, of course, net of all the transactions that we see on slide 14 will end up with a fairly high cash position. And so, over the course of 2025, we would be looking to place those assets into higher yielding assets as well, place the cash in higher yielding assets as well. So, I think, generally some favorable organic momentum on the margin. And then, of course, you noted the benefit that we're likely to see just mathematically with the paydown and the borrowing position -- excuse me -- at the end of 1Q, at the beginning of 2Q. So that will flow through the margin in the second quarter.

Q: Hi, good morning, everybody. Maybe start with number. Another NIM question for John. Just to help us kind of back into that 4Q guide. Do you have the -- kind of back into that 4Q guide, do you have the yields on total maturities in the fourth quarter? I know CRE is 6.48. Just so I can compare that to the 6.30 October yield that was disclosed. And then thanks for providing the October interest bearing deposit costs of 250. Where do you see that headed in the fourth quarter assuming the rate cuts that you discussed earlier?

A: Yeah. Hey, Terry, thanks for the question. Are you talking about maturities in the loan portfolio? Is that what you were asking? Terry McEvoy: Yeah. Thank you very much. Yeah, loans.

A: Yeah. So, without assuming any material change in prepayments, the total maturities in the loan portfolio in the fourth quarter, generally around 6%. So, there's some favorable roll on, roll off effect of the new production as Lynn and her team are doing a really great job holding spreads. In terms of your question on the deposit costs, so a nice realized beta you can see from the peak 272 down to about a 250 range in the month of October here. We would expect a similar beta in these next 25 or 50 basis points of cuts as we look forward. So, depending on what you're assuming for your base case on rate cuts, I think you can apply a similar sort of roughly 40-ish, 35, 40-ish beta to those incremental cuts.

Q: Yeah. Hi, everyone. Good morning. Thanks for taking the questions.

A: Good morning.

Q: Just curious thinking about potential additional balance sheet actions. Obviously, you're restructuring the AFS book, but just curious on thoughts around maybe restructuring the health and maturity portfolio as well and perhaps raising capital. Obviously, you've updated your shelf more recently, but just be curious to hear any thoughts on that front.

A: Thanks, Nathan, for the question. First, on updating our shelf. Our shelf is our typical that we do. It just came at a time when some other institutions may have been talking about raising capital for different strategic actions on their balance sheet. From our standpoint, what we accomplished here in the fourth quarter really sets us up for a positive 2025. We also, as we said before, just our core organic engine and what we're going to see from an efficiency and productivity off the balance sheet. At this time wouldn't lead us to believe that we need to go raise capital and do something differently with the HTM. As always, we will look for opportunities to create shareholder value, and if that comes into play and we believe it's the right mix and return for our long-term value to shareholders. We would entertain that, but at this time we're in a good position.

Q: Hey, good morning, everyone. Hope you're all doing well today. So just want to circle back on the expense question. So kind of good color and disclosure as to what to expect here in the fourth quarter and then also the outlook. But as we kind of think about where within the entire expense bucket some of these expenses are coming through, is it kind of in the salary benefit line or the professional services, could just kind of give us a little guidance as kind of where we can assume higher run rates?

A: The mix will probably be evenly distributed between the two that you mentioned, the accelerated benefits in the third-party.

Q: Hey, good morning, guys.

A: Morning.

Q: Someone might have been answered, but just on the loan pipelines, Lynn, I guess, can you comment on just kind of where the commercial pipeline is today? And then I think you talked about the equipment finance, just kind of where the footings are on the equipment finance level today.

A: Sure. Good morning. Our commercial pipeline has been very steady. Our initial fundings have been really close to average plus or minus per quarter. So, I'm really pleased with that. It's very stable. On the equipment leasing division, we had stated we are targeting roughly 100, 110 million this year. I believe we're just over 85 million as of September 30th. So that's meeting our expectations and having really developing a nice cadence now that the team is fully assembled. So, I think it's really relatively stable. Some of the noise that we had this quarter or last quarter really had to do with just some timing of some larger -- rather large loans, really at the end of the second quarter that probably would have otherwise gone into third quarter and just the payoff and line of credit activity. Second quarter, it was -- line payoffs were much less than average. And third quarter we saw an increase. They were higher than average. That payoff activity is really being driven by customers business model. So, their project reached stabilization. They're either taking it to the secondary market or selling the property. So really just coming down to some movement in the portfolio based on customer activity.

Q: Gotcha. Okay. That's helpful. And then in terms of the indirect portfolio, where does that portfolio land? It was run off this quarter, I guess. In terms of size, where do you expect that portfolio to kind of shake out over time? Is it kind of a continued rundown here?

A: This is Thomas. I'll help you on that one. I'd estimate about 30 million to 35 million a quarter.

Q: Okay. And… A: …accelerated the last two quarters. But as we get to a smaller portfolio, the run rate will decrease a little bit.

Q: Okay. All right. And then just maybe, just secondly, on the mortgage side, obviously a nice lift here this quarter. I guess, is -- given where we are with rates and seasonality, I guess, is the kind of the current level, kind of a sustainable way to think about mortgage here in the near term.

A: I think as John put in, some of his comments are in the slide. We anticipate mortgage would be slightly down here in the fourth quarter with seasonality of the fourth and the first, and then come back in the second quarter. So, I wouldn't anticipate this will be a run rate. We've had a new leadership join mortgage. It's increased our sales productivity and also helped us on the secondary market delivery this quarter was a reflection of that. But we'll move into a little bit more seasonality in Q4 and Q1.