HORIZON BANCORP INC /IN/ Q4 FY2024 earnings call

Thomas Prame:

• Pleased with Q4 results, exceptional loan growth, improved net interest income and margin, positive credit metrics, and restructured expense base.
• Loan growth was 10% annualized excluding warehouse balances, driven by core commercial relationships.
• Deposit portfolio had solid trends with core deposits flat and higher-priced transactional CDs rolled off.

Lynn Kerber:

• Total loans held for investment excluding mortgage warehouse grew $123 million in Q4 (10% annualized), net loan growth for 2024 was $408 million (9%).
• Commercial lending had strong Q4 with net growth $164 million (22% annualized), full-year growth $403 million (15%).
• Consumer loans decreased $42.1 million due to indirect auto lending wind-down; core consumer loans flat excluding indirect auto.
• Residential mortgage lending modestly grew; credit quality satisfactory in consumer and mortgage portfolios.

John Stewart:

• Q4 net interest margin was 2.97%, up 31 basis points, driven by strategic redeployment of securities proceeds, balance sheet mix improvement, Fed rate cuts, and interest recoveries.
• Non-interest income included $39.1 million realized loss on securities sale, non-interest income declined ~$1 million QoQ. Expenses in Q4 impacted by specific initiatives, medical benefits, compensation, etc., but expected lower run rate in 2025.
• Capital ratios improved, strategic actions in Q4 included securities repositioning, tax planning, expense acceleration, and mortgage warehouse sale.

Total loans held for investment, excluding mortgage warehouse grew $123 million in Q4, 10% annualized. Net loan growth excluding mortgage warehouse for 2024 was $408 million (9%). Commercial loans had net growth of $164 million in Q4 (22% annualized), full-year 2024 growth $403 million (15%). Consumer loan balances decreased $42.1 million in Q4 due to indirect auto lending wind-down. Residential mortgage lending modestly grew. Commercial credit quality was strong with past due loans >30 days at 10 basis points, non-performing loan ratio 19 basis points in Dec 2024. Consumer and mortgage portfolios had satisfactory credit quality.

• Full-year 2025 loan growth expected mid-single-digit, with runoff of lower-yielding indirect auto loans (~$100 million).
• Deposit balances expected low single-digit growth, subject to seasonality.
• Net interest income expected mid-teens growth in 2025, driven by net interest margin expansion.
• Total expenses for 2025 flat to low-single digits relative to 2024.
• Effective tax rate for 2025 expected mid-teens, considering stronger pre-tax income and shift in income source from investment subsidiary.

Q: Good morning, folks. Maybe just starting off on loan growth expectations, you're targeting quite strong commercial loan growth to get that mid-single-digit guide while absorbing the runoff in the indirect book. Can you maybe talk about how you aim to get to that growth number while maintaining discipline on pricing and maintaining your credit box?

A: Sure. Good morning. This is Lynn Kerber. Thanks for the question. Overall, I think in a core commercial lending, we're really looking at maintaining the same cadence that we've had, mid to high single digits. Keep in mind that we've added in our equipment finance division in 2024 and so we're also going to see the benefit of that as we move further into 2025. Brendan, this is Thomas. Just to piggyback on some of the comments Lynn made. Also, our markets are growing and thriving. Being located in the North -- Northeast part -- northern part of Indiana, a lot of our franchise in Michigan, those growth markets of Grand Rapid, Southwest Michigan, Lansing, Detroit, we just have the right talent in the right places that are doing well. So I think a bit of it is not only in the marketplace, but also the talent we have in there. And as Lynn said, we'll keep our credit box consistent that we've been a cornerstone of our franchise for a while.

Q: Hi, everyone. Good morning. Thanks for taking the questions. Just going back to Terry's question around the margin cadence over the course of this year. John, just want to clarify that it sounds like more of the expansion that you expect this year is maybe going to be weighted towards the first half of the year, just given what you'll be doing in terms of paying down some wholesale sources.

A: Yes, I would expect it to actually be fairly ratable over the year. We'll get a little bit extra in Q2, all else equal just from the reduction of the $200 million cash coming down yielding kind of IOER today, $440 million, we're going to pay off those borrowings. Those cost 4% today. The replacement cost is actually higher than that if we were to just go back into the market for the same term. So you'll get some margin lift just by the effect of the $200 million reduction there on both sides of the balance sheet, but otherwise, I would anticipate it to be fairly ratable.

Q: Hi, everyone. Good morning. Thanks for taking my questions. Just going back on the commentary around expenses to make sure I followed this correctly. So, John, did you kind of when you backed out the strategic initiative expense and then some of the other items that are probably not recurring, that occurred in the fourth quarter, were you implying that kind of like a third-quarter level of a little bit over $39 million is a good starting point for a quarterly run rate? Did I hear that correctly?

A: Yes. The short answer to that question is yes, but maybe we'll just take a quick look at that Slide 13, just so we're clear in talking about the same thing. So reported expenses $44.9 million. You see the three bullets that we summarized there for you, which very clearly are related to some of the strategic actions in the quarter that will not carry -- excuse me, will not carry forward. That's $2.9 million. That will get you down to about $42 million. And then the last bullet, the additional items, those are part of your normal run rate, your compensation expense, your medical benefits expense. They were just elevated in the quarter and relative to what we anticipate on a go-forward basis. In 2025, there were also some episodic items in there that otherwise might not have been anticipated in the original guidance. But if you back that out, as I mentioned, there's $2 million to $2.5 million worth of those in there. And so that would get you right down to that range, $39.5 million to $40 million -- excuse me, Damon, that you just mentioned.

Q: Good morning, everyone. Thanks for taking my question. In 2024, you mentioned this, you added the Equipment Finance division. As you look out to 2025, are there any other lines or commercial areas where you'd like to add? And are such hires considered in your operating expense outlook for the year?

A: It's Thomas, thank you for the question. I wouldn't say we're going to strategically change the profile of our lender, of our portfolio lending portfolio this year. We made some great investments last year in equipment finance and key hires in some markets. So I'd say we're pretty stable from an FTE account going through '25. I would say '25 is going to be a year that we just benefit from the investments made over in early '24, late '24. Equipment finance still, if you go back and look at it, I know we've been talking for a couple of quarters here, it literally started and really kind of the end of the first quarter of last year. So we have a lot of runway in front of us there. And again, we have the right people in the right markets going into '25.

Q: Good morning, guys. Say just one, John, just on the tax rate, is that pretty ratable throughout the year? I guess, is there any lumpiness in that as we think about the new rate getting reset just given the buildup in earnings throughout the year as you benefit? It seemed like that was pretty ratable. So just tax rate pretty similar then?

A: Yes. Thanks for the question. Yes, so that's based on our projected numbers for the full year. You'll see it step up here in the first quarter and then all else equal would remain right in that mid-teens level for the full year.

Q: Good morning, everyone. Thanks for taking my question. In 2024, you mentioned this, you added the Equipment Finance division. As you look out to 2025, are there any other lines or commercial areas where you'd like to add? And are such hires considered in your operating expense outlook for the year?

A: It's Thomas, thank you for the question. I wouldn't say we're going to strategically change the profile of our lender, of our portfolio lending portfolio this year. We made some great investments last year in equipment finance and key hires in some markets. So I'd say we're pretty stable from an FTE account going through '25. I would say '25 is going to be a year that we just benefit from the investments made over in early '24, late '24. Equipment finance still, if you go back and look at it, I know we've been talking for a couple of quarters here, it literally started and really kind of the end of the first quarter of last year. So we have a lot of runway in front of us there. And again, we have the right people in the right markets going into '25.

Q: Good morning, everyone. Thanks for taking my question. In 2024, you mentioned this, you added the Equipment Finance division. As you look out to 2025, are there any other lines or commercial areas where you'd like to add? And are such hires considered in your operating expense outlook for the year?

A: It's Thomas, thank you for the question. I wouldn't say we're going to strategically change the profile of our lender, of our portfolio lending portfolio this year. We made some great investments last year in equipment finance and key hires in some markets. So I'd say we're pretty stable from an FTE account going through '25. I would say '25 is going to be a year that we just benefit from the investments made over in early '24, late '24. Equipment finance still, if you go back and look at it, I know we've been talking for a couple of quarters here, it literally started and really kind of the end of the first quarter of last year. So we have a lot of runway in front of us there. And again, we have the right people in the right markets going into '25.