Horizon Bancorp , Inc. (NASDAQ:HBNC) has reported a solid performance in its fourth quarter and full year 2023 financial results, with notable growth in its commercial banking sector and a strong credit outlook. The company's balance sheet restructuring towards the end of the quarter has set a positive stage for 2024, with a strategy focused on deploying excess cash into higher-yielding assets. Despite challenges in non-interest income and increased non-interest expenses, Horizon expects sustainable loan growth and a net interest margin of over 2.5% moving forward.
Key Takeaways
- Horizon Bancorp announced a 13% annualized growth rate in commercial banking loans.
- The company experienced strong credit metrics with low non-performing loans and charge-offs.
- A balance sheet restructuring has positioned Horizon well for 2024.
- Non-interest income declined due to lower mortgage sales gains and BOLI income.
- Non-interest expenses rose, attributed to personnel changes and investments in new divisions.
- The investment portfolio was reduced by $383 million, with a book yield of 2.25%.
- Horizon anticipates a net interest margin greater than 2.5% and non-interest expenses between $37 million and $38 million in Q1 2024.
- The company maintains solid regulatory capital ratios and expects capital growth to outpace total assets.
- Horizon expressed optimism for 2024, citing strong lending platform momentum and excess liquidity.
Company Outlook
- Horizon expects loan growth without the need for additional borrowings.
- The deposit margin is projected to be positive, with potential reductions in funding costs if interest rates are cut.
- Non-interest expenses are forecasted to increase in the latter half of the year, with hopes of being offset by revenue generation.
- The tax rate should remain between 7% and 9%.
- Horizon believes the current reserve level is adequate, with provisions driven by credit quality trends and loan growth.
Bearish Highlights
- Non-interest income has seen a slight decline, impacted by the lower gain on sale of mortgages and reduced BOLI income.
- An increase in non-interest expenses is anticipated due to personnel changes and investments in technology and digital banking.
Bullish Highlights
- The company's lending platforms are gaining momentum, particularly in commercial banking and equipment financing.
- Horizon's balance sheet restructuring and excess liquidity are seen as advantageous for the upcoming year.
- The company's investment thesis includes attractive Midwest growth markets and a resilient deposit base.
Misses
- Horizon reported a reduction in its investment portfolio, which may affect future interest income.
- The softer mortgage sector in Q1 is expected, with a recovery anticipated in Q2.
Q&A Highlights
- Horizon's mortgage sector is expected to align with 2023 production in the second half of the year, following a softer Q1.
- The company's mortgage asset credit quality remains strong, with no significant issues reported.
- Horizon is optimistic about 2024, with a well-positioned balance sheet for potential rate cuts.
- Condolences were offered for the passing of independent director Spero Valavanis, reflecting the company's community values.
Horizon Bancorp's earnings call has outlined a company poised for growth in 2024, backed by a disciplined operating model and a conservative credit profile. With a focus on high-quality client acquisition and a robust lending platform, Horizon is navigating the challenges of the financial sector with strategic foresight. The next update from the company is expected in April, where further details on the company's performance and strategies will be shared.
InvestingPro Insights
Horizon Bancorp, Inc. (HBNC) has demonstrated a commitment to shareholder returns, as evidenced by its track record of raising dividends for 8 consecutive years and maintaining dividend payments for an impressive 38 years. This consistent approach to dividends is a testament to the company's financial stability and dedication to its shareholders.
InvestingPro Data reveals a market capitalization of $591.49M, with a P/E ratio standing at 21.14 for the last twelve months as of Q4 2023. This valuation metric provides insight into how the market currently prices the company's earnings. Despite a challenging revenue growth rate, which saw a decline of 24.54% during the same period, the company's gross profit margins have been identified as a point of weakness. On the brighter side, the company's operating income margin was robust at 25.09%, showcasing efficient operational management.
InvestingPro Tips highlight that analysts are optimistic about Horizon's future, with two analysts having revised their earnings estimates upwards for the upcoming period. Additionally, the company has delivered a strong return over the last three months, with a 42.95% price total return, reflecting positive investor sentiment.
For readers looking to delve deeper into Horizon Bancorp's financials and strategic outlook, InvestingPro offers additional tips that can provide a comprehensive analysis of the company's potential. There are currently 6 more InvestingPro Tips available for Horizon Bancorp, which can be accessed through an InvestingPro+ subscription. With the special New Year sale, subscribers can receive up to a 50% discount, and by using the coupon code SFY24 for a 2-year subscription or SFY241 for a 1-year subscription, an additional 10% off can be claimed.
The next earnings update, scheduled for April 24, 2024, will be an important event for investors to assess the company's progress and strategic initiatives. Horizon Bancorp's focus on sustainable loan growth and prudent financial management positions it as a company to watch in the financial sector.
Full transcript - Horizon Bancorp (HBNC) Q4 2023:
Operator: Good morning, everyone, and welcome to the Horizon Bancorp, Inc. Conference Call to discuss Financial Results for the Fourth Quarter and Full Year 2023. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission. 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 are 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. Representing Horizon today are Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber; Executive Vice President and Senior Operations Officer, Kathie DeRuiter; Executive Vice President, Corporate Secretary, and General Counsel, Todd Etzler; Executive Vice President and Chief Financial Officer, Mark Secor; and Chief Executive Officer and President, Thomas Prame. At this time, I would like to turn the call over to Mr. Thomas Prame. Please go ahead, sir.
Thomas Prame: Good morning, and thank you for participating in Horizon's earnings call. We are pleased to share our fourth quarter and full year 2023 results. The fourth quarter experienced many positive trends, highlighted by strong lending results that, were led by our commercial banking team, which posted a 13% annualized growth rate in Q4. Horizon also continues to see excellent credit metrics, with low non-performing loans and charge-offs, with provision expense for the quarter primarily reflective of our positive loan growth and modest charge-offs. In Q4, we were pleased to see net interest income expand as a result of our disciplined pricing strategy and the resiliency of our core deposit base. Late in the quarter, we also executed on a balance sheet restructuring, which positioned the company exceptionally well heading into 2024, to further enhance our financial performance with significant excess cash that can be deployed into higher-yielding assets and a meaningful reduction in lower-yielding securities and liquidity ready to fund a robust loan pipeline. Within our comments today, we will update the fourth quarter and full year results. The positive momentum in our core revenue platforms going into 2024, financial details from the balance sheet restructuring, and progress in our new leasing division. Additionally, we will provide insight to our continued disciplined operating model as well as our well-positioned capital, and liquidity levels that will continue to build throughout 2024. To offer more detail into our fourth quarter results, let me introduce Lynn Kerber, our Executive Vice President and Chief Commercial Banking Officer to shed light on our lending and credit performance. Lynn?
Lynn Kerber: Thank you, Thomas. Beginning on Slide 5, we are pleased to report commercial loans increased $85.7 million for the fourth quarter or 13.1% on an annualized basis. Net fundings were $117 million for the quarter versus $96.8 million for the third quarter. Our average commercial loan portfolio yield increased from 5.80% for the third quarter to 6.05% for the fourth quarter and new production yields increased from 7.50% to 7.87% in the fourth quarter. New loan originations continue to be very diverse across our markets and industries. In the fourth quarter, 25% of our new fundings were C&I and 11% owner-occupied commercial real estate, with the balance of 64% being diversified across the various commercial real estate categories. As our equipment finance division ramps up in 2024, we expect C&I production to expand measurably as a proportion of both new originations and a total commercial portfolio. We've hired several key managers for the equipment financing division and expect balance sheet growth in Q1, with continued expansion throughout the second quarter. The overall commercial pipeline increased from $145 million at September 30 to $167 million as of December 31. Activity continues to be well diversified by industry and geography and this pipeline excludes the new equipment and finance business, which we expect to contribute over $100 million in 2024. Commercial credit quality remained strong with year-to-date net charge-offs of two basis points on an annualized basis. On Slide 6, we have an overview of the loan portfolio as of December 31, 2023, with a mix of 61% commercial, 15% residential, and 23% consumer. Year-over-year commercial loans increased $208 million and our residential mortgage increased 4% and consumer loans increased 5%, which is a net effect of an increase in home equity loans and decrease in indirect loans. Also provided for reference is a breakdown of key sectors in our commercial portfolio, which demonstrates no significant concentration in any one sector, including office, which represents just 3.5% of our total portfolio and less than 6% of commercial loans. We believe our portfolio breakdown is well-balanced, and represents the disciplined nature of Horizon's risk profile. Turning to Slide 7, you will see the consumer direct loan balances increased $27 million during the quarter, driven principally by the addition of transactional home equity lines of credit. Indirect auto loans decreased by $38 million in the quarter, which is consistent with our stated strategy of reducing exposure in this lower performing loan category and redeploying capital to higher yielding product sites. The average consumer direct yield increased from 8.05% to 8.26% for the portfolio, with an average of 8.95% for new production. The average yield for consumer indirect was 3.27%, which is consistent with recent quarters. Credit remains positive and in line with expectations, with year-to-date net recoveries, consumer direct at one basis point, and consumer indirect charge-offs at 36 basis points. Slide 8 highlights our mortgage loan performance through our quarter. Our portfolio was stable and consistent with our expectations for 2023 aligning with industry trends. Mortgages increased $5.7 million in the fourth quarter, representing a 3.4% increase on an annualized basis. The average mortgage loan yield was 4.32% for the portfolio and 7.50% for new production. With zero charge-offs for the quarter, this portfolio continues to reflect high-quality borrowers with significant payment capacity and equity in their homes. Our asset quality metrics continue to be strong as outlined on Slide 9. Past dues over 30 days were 0.38%, a slight increase which was spread across all portfolios. Non-performing loans increased slightly from $19.4 million to $19.6 million. However, they decreased one basis point as a percent of total loans. The increases were primarily in retail loans, offset by a reduction in commercial non-performing loans. Net charge-offs for the fourth quarter were $785,000, representing two basis points of average loans. The provision of $1.1 million was primarily due to loan growth with replenishment of the reserve for charge-off loans in the fourth quarter. The allowance represents 1.13% of total gross loans, which we believe is appropriate given credit performance, and current economic forecast. Future reserve amount and related provision will be driven by loan growth and mix, economic forecasts, and credit trends. 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 how our earnings asset mix, and deposit franchise and flexible funding profile are contributing, to Horizon's performance.
Thomas Prame: Thank you, Lynn, and truly appreciate the insight and detail. On Slide 10, you can see the positive impact of the team's stewardship towards loan pricing and the strategic efforts to shift to higher-yielding assets. We feel confident in continuing this momentum in 2024, as we begin to redeploy our abundant cash position. Horizon is achieving meaningful increases in loan yields with an intentional focus on loan pricing discipline, while we continue to maintain our historical conservative credit culture. Our securities portfolio, is now strategically smaller and exhibits a slightly increased yield from Q3. And our cash position has increased significantly late in the quarter, the impact on our margin was minimal. We will realize the full effect of this balance sheet repositioning in Q1, as we are well-positioned to fund the growth of higher-yielding assets throughout 2024. As I stated in my opening remarks, we are also very pleased with our fourth quarter deposit performance. With Slide 11 providing detail on the resiliency of the portfolio and our upbeat deal about its strength. Our core consumer and commercial relationships were slightly up in Q4, with minimal changes in total balances. The combined portfolio balances experienced a positive growth of 1.14% for the quarter with non-interest-bearing deposits relatively flat from the third quarter. Public funds balances were strategically down in the quarter aligned with the objective to reduce exposure to these higher-cost funding sources. The leadership team will continue to be well balanced in its approach to this segment, focusing on full client relationships, and expansion of treasury management services. The quarter closed out with brokered CDs and other fixed-rate borrowings unchanged with ample capacity if needed. As mentioned previously, we ended the quarter with approximately $416 million in excess cash. Beyond the ability to reinvest into higher-yielding assets, this excess liquidity provides great flexibility and our funding strategies limits our dependency on higher-cost funding sources and provides flexibility to our go-forward deposit pricing. The consistency and discipline of our pricing strategy of loans and deposits has yielded very positive results this quarter, and the added flexibility of excess cash further advances Horizon's revenue growth options. On Slide 12, you'll see that Horizon's margin improved from the third quarter. Horizon's yield on interest-bearing assets increased 23 basis points during the quarter, compared to the liability costs increasing 19 basis points and purchase accounting down two basis points. We believe these results is an indication that, we have hit the floor on margin compression, based on current expectations for short-term rates. The contribution of the balance sheet restructure was minimum during the quarter, due to the timing of settlement throughout December, as the lower-yielding investments were liquidated and moved into cash later in the quarter. As previously mentioned, we anticipate a portion of the cash from the restructure will be redeployed into higher-yielding assets throughout 2024, including funding the growth of our leasing platform. Let me hand the presentation over to Executive Vice President and Chief Financial Officer, Mark Secor, who will walk through some other key financial metrics and our outlook for the beginning of 2024. Mark?
Mark Secor: Thank you, Thomas. Beginning with Slide 14, excluding the $31.6 million loss on the sale of securities in the quarter, non-interest income was down slightly from the linked quarter, primarily due to lower gain on sale of mortgages, and lower BOLI income from the balance sheet restructure. The company continues to diversify core fee income through key talent adds in treasury management and expanded private wealth capabilities to elevate non-interest income performance and expand our relationship banking model. Slide 15, non-interest expenses were 1.98% of average assets annualized for the fourth quarter, compared to 1.81% in the linked quarter. The increase reflected $705,000 of extraordinary expenses from previously announced personnel changes, the start-up of Horizon's equipment finance and the talent adds in our treasury management division. We also had additional employee benefit cost, due to an adjustment to variable deferred compensation costs, as we ended the year. Excluding extraordinary items, annualized non-interest expenses would have represented 1.94% of average assets in the quarter or 1.85% for all of 2023. On FDIC insurance expense, Horizon was not subject to the special assessment that recently impacted some other banks, given our relatively low level of uninsured deposit. Our regular FDIC assessment was $1.2 million in the fourth quarter, and we currently believe that it is a good baseline run rate for the full year of 2024. Overall, for the full year of 2024, we expect non-interest expenses to be slightly higher than last year. This is primarily due to annual merit increases, the addition of the equipment finance business, and 2024 investments in digital banking and technology that is designed to improve our customer acquisition capabilities and drive additional revenue. We will provide guidance on the first quarter expenses in the upcoming slides. Moving to the investment portfolio on Slide 16. After the sale of $383 million of AFS securities in the fourth quarter, we wanted to provide details on the remaining portfolio. The portfolio totaled $2.5 billion at the end of the quarter, down $339 million from September 30 netting out the cash flows, sales, and the decrease in unrealized losses during the quarter. The portfolio had a book yield of 2.25% and an effective duration of approximately seven years at the end of the quarter. As longer-term investments were originally identified as held to maturity, the duration for that portfolio is approximately one year longer than the available-for-sale portfolio. Expected cash flows from investments, are estimated to be approximately $34 million for the first quarter of 2024, and a total of $105 million over the next 12 months. We will continue to actively manage our portfolio, for opportunities to create shareholder value in the future. Slide 17, Horizon continues to maintain solid regulatory capital ratios after the balance sheet restructure. Capital ratios are well above the requirements to be considered well-capitalized and we believe we have sufficient capital to be opened to additional options to improve our earnings outlook in the foreseeable future. We anticipate that growth in capital will outpace the growth in total assets, during the next 12 months, providing strength and flexibility to pursue strategic growth options. As we deploy the liquidity from the balance sheet restructure, we do anticipate risk-weighted assets, to increase and there will be a slight decline, to risk-weighted capital ratios. Looking ahead, on Slide 18, we provide you with an update on our current expectations for 2024. We expect sustainable loan growth in both our commercial and direct consumer portfolios, which should be valuable contributors to core earnings. For the first quarter of 2024, we expect 4% to 5% total loan growth annualized. Our net interest margin and net interest income trend, should continue to benefit from our balance sheet restructure and pricing management. We expect a net interest margin of greater than 2.5% for the first quarter as well as pre-provision net interest income of greater than $43.8 million. As stated, we believe Horizon's net interest margin, has reached its floor in the third quarter of 2023 assuming the Fed funds target is at its terminal rate. Non-interest income should continue near recent levels, with the anticipation of consistent fee income from our investments in treasury management and private wealth, coupled with seasonal softening in mortgage originations and lower BOLI income. The expected range is $10 million to $10.5 million in non-interest income in the first quarter. Non-interest 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. As discussed, we have invested in revenue generating talent in our lease build out, and our treasury management teams, which are expected to contribute to revenue growth in 2024. As a result, we expect non-interest expense to range from about $37 million to $38 million in the first quarter. We also expect non-interest expense, to continue to remain below 2% of average assets. Now, I will turn it back over to Thomas for some final comments.
Thomas Prame: Thank you, Mark. Appreciate the insight. So, why invest in Horizon? Our investment thesis is simple. As seen on Slide 19, we are located in attractive Midwest growth markets. These markets have desirable economic environments, significant infrastructure investment, and flourishing ecosystems, for both businesses and for our communities. Horizon has made significant progress executing on its strategy of shifting its balance sheet to higher-yielding assets in 2023. We are entering 2024 with an expanding margin, an abundant cash position to further reinvest in higher-yielding assets, fund the growth of our new equipment leasing platform, and to continue the flexibility in our revenue strategies. The franchise has resilient and loyal deposit base that is actively managed by leadership to create shareholder value. Additionally, Horizon has excess liquidity of $2.9 billion, providing nimbleness, to our operating model as needed. Horizon has a disciplined operating culture that consistently displays, a low ratio of operating expenses to average assets. We expect this to remain less than 2% even with the strategic investments in new revenue teams. Additionally, Horizon has a proven conservative credit profile displayed through its practical credit underwriting and proactive portfolio management. These efforts have consistently delivered low nonperforming loans and annual charge-offs. And lastly, even with the recent positive trends in our stock performance, we believe Horizon is still a compelling value, supported by our commitment to our dividend, with shares recently trading less than nine times 2023 adjusted EPS and offering a 4.8% dividend yield. Horizon has a track record of 30-plus years of uninterrupted quarterly cash dividends to our shareholders. As always, we thank you for joining our presentation this morning. This concludes our prepared remarks, and I will now ask our operator, to please open up the lines for questions.
Operator: [Operator Instructions] The first question comes from Terry McEvoy with Stephens. Please go ahead.
Terry McEvoy: Maybe a couple modeling questions. Mark, could you just talk about the size of the balance sheet in 2024? Whether you think the loan growth will be kind of offset by declining cash balances?
Thomas Prame: Thanks, Terry. This is Thomas. Appreciate the question. As we look at our asset growth strategy, you're pretty much spot on. We would see that we use a portion of our cash balances and then reinvest them into our loan growth, but still keep liquidity and our cash position for any type of fluctuations in other parts of the balance sheet.
Terry McEvoy: Thanks. And I think Lynn pointed out about $100 million of new leasing - new leases in 2024. Leases, I'm guessing, carry higher yields. There's a fee component as well as maybe longer term higher charge-offs. So can you just help us kind of understand the growth dynamics, the profitability, and maybe some long-term charge-offs that, you'd expect out of that portfolio?
Lynn Kerber: Sure. Thanks for your question. Good morning. Relative to the lease portfolio, we are focusing on small ticket and lower-end middle market ticket. And as you have probably seen with our press releases, we've hired a very strong and experienced leader. As relative to originations in that portfolio, we're looking at approximately $100 million for the year. You're correct, the yield would be a little bit higher than our normal commercial portfolio, with an anticipated spread that's higher than commercial C&I typically. As far as losses go, we are still modeling some of that based on the credit quality that we're targeting. So, I will probably need to potentially get back to you on that, Terry. But I would expect that it would be a little bit higher than our core commercial experience has been over recent years.
Thomas Prame: Thank you, Lynn, for the answer. Terry, maybe just a little bit more color on that. I think if you look at the balance sheet and look at the momentum that are in different parts, adding the leasing assets at a higher yield, I completely agree with Lynn that we'll probably see somewhere around $100 million or so this year. We're also anticipating our continued trend in indirect auto, which is a much lower-yielding asset with higher credit losses. So as you look at the net-net, I would say from the credit exposure, it's probably going to par out with the two. If not, we might get a slight pickup. So, I wouldn't see the leasing part changing significantly, the overall credit profile of the organization, because the indirect auto will continue to decline.
Terry McEvoy: Right. Thank you, Thomas, and thank you, Lynn.
Operator: The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Nathan Race: Yes. Hi, everyone. Good morning. Thanks for taking the questions?
Thomas Prame: Good morning.
Nathan Race: Was curious, just in terms of thinking about the size of the position of debt going forward. It looks like borrowings were kind of flat quarter-over-quarter. So just curious how you guys are maybe thinking about using some of that dry powder opposed to repositioning in 4Q to maybe pay down some wholesale sources over the next quarter or two?
Mark Secor: Thanks, Nate. Good morning. This is Mark. For the immediate future, the next period, we don't plan on seeing any reduction in the borrowings. It is a desire to reduce the borrowings down the road. We'd like to see that, with deposit growth, but the cash that we have currently is planned to go into the lending, and to be able to keep for liquidity. So, we don't see any additional borrowings either as we see loans grow.
Nathan Race: Got it. And I appreciate the margin guidance for the 1Q. And just kind of think about the cadence of the margin over the course of the rest of this year in terms of just the impact from Fed cuts and kind of maintaining that liability-sensitive balance sheet with the borrowings expected to remain kind of flat and using that dry powder to support loan growth. So, just trying to think about kind of, the liability sensitivity of the balance sheet and how the margin should react to some Fed rate cuts expected at some point this year?
Mark Secor: Yes. We would expect it to be positive on the borrowing - on the deposit side. The competition will drive a little bit of how quickly we can lower rates when it comes to some of the funding. But we would anticipate, trying to bring down those funding costs if there are rate cuts.
Nathan Race: Okay, great. And then just...
Thomas Prame: This is Thomas. On your question there on liability-sensitive Mark is spot on. Also from our model, we're anticipating rate cuts in the second half of the year. We're not anticipating - I think we have a conservative profile there, with two cuts later in the second half of the year. So, I completely agree with Mark, we're still in a liability-sensitive position and that - we would have - probably a nice pickup if something happened a little bit earlier.
Nathan Race: Okay. So putting those pieces together, it sounds like the margin can continue to trend higher, at least in the second quarter. If there - aren't any rate cuts in 2Q, and then maybe greater expansion in 3Q and 4Q, if we do have those cuts in Fed rates?
Mark Secor: That would be our expectation.
Nathan Race: Okay. Great. And then just one lastly from me on expenses. I appreciate the guidance for 1Q. And just given some of the growth initiatives that you guys have laid out on the equipment leasing side of things and elsewhere. I'm curious, how we should kind of maybe think about the cadence of expense growth in 2Q, 3Q and 4Q. And just kind of - any guideposts that, you can provide in terms of overall year-over-year expense growth in 2024?
Mark Secor: Yes. We gave the guidance for the first quarter, so we don't get too far ahead. But it would be on the higher end of that range as we get into the second half and as we continue to build out. But we also anticipate revenue generation as those teams continue to grow and start to get active, that will start to offset the expense as we get into the later part of the year.
Nathan Race: Okay. Great. And then, I'm sorry, if I could just squeeze one last one on the tax rate going forward. Obviously, some noise this quarter, but I think historically it's been in the 7% to 9% range. Is that still a good target to use going forward?
Mark Secor: Yes. I think you can go back to the norms that we saw this year.
Nathan Race: Got you. All right, great. Thanks.
Operator: [Operator Instructions] The next question comes from Damon DelMonte with KBW. Please go ahead.
Damon DelMonte: Hi, good morning, guys. Hope everybody is doing well today?
Thomas Prame: Good morning, Dan.
Damon DelMonte: Good morning. Just wanted to check on the outlook here for provision. As you onboard these new equipment leasing, or financing loans. Do you feel like you're going to need, to kind of add to the provision since there tend to be shorter duration, higher levels of charge-offs? And I guess kind of, when you look at your reserve, I think it ended at like 1.13% last quarter. Do you think that's an adequate level, or should we kind of plan for some build here?
Lynn Kerber: Yes. Thanks for that question. So as far as the reserve, we do think that's appropriate for our current state, as far as our credit quality and economic forecast, as we sit here today. Moving forward into 2024, the provision is going to be really driven by two main factors. First is credit quality trends. So, we're always going to cover, or look at covering our charge-offs and replenishing those, and then loan growth. And so, it's going to really come down to the mix in the new originations. How much commercial, residential, and adding the leasing. The leasing, as I said, we're working on our credit policy right now, and credit metrics. We have done some modeling around that. As you would expect, it's going to be a little bit different risk profile, but the originations this year, compared to our overall portfolio are still going to be a fairly small portion.
Damon DelMonte: Got it. Okay, that's helpful. Thanks. And then I don't know if this is for Thomas, or for Lynn here. But as far as like, the commercial growth that we saw this past quarter. Can you just talk a little bit about some of the key drivers of that, solid growth and kind of how the pipelines are shaping up, as we head into 2024, please?
Lynn Kerber: Sure. As mentioned in my comments, our pipeline is currently positioned at $167 million as we came into the quarter. That's new originations, it's not always new fundings. For Q4, we really had a very strong quarter. I would say we had several things contributing to that. One, we had some longtime customers that, we had been working with some projects on, and those came together in the fourth quarter. We also had some contribution from some of our construction loans that, we're funding up in late December. And so, we've kept a pretty even cadence on originations. And so, we expect that, to continue at this point in time.
Damon DelMonte: Got it. Okay. Great. That's all I have for now. Thank you very much.
Thomas Prame: Thank you.
Operator: The next question comes from Brian Martin with Janney Montgomery Scott. Please go ahead.
Brian Martin: Hi, good morning, guys.
Thomas Prame: Good morning, Brian.
Mark Secor: Good morning, Brian.
Brian Martin: Can you comment at all about these - I know, just expenses, but any other changes you might be making as far as additional hires, as far as the equipment finance team, or just other - considering some of the changes that were made in the fourth quarter. Just - maybe just talk a little bit about, what on the expense side, any other initiatives you have going on as you look into 2024?
Mark Secor: Great. Thank you for the question. I'll let Lynn give detail on the equipment finance. I'd say, we made significant progress in both the treasury management and equipment finance. I'll let Lynn give detail there. More around the leadership team was put in place. We had a couple of strategic hires also in treasury management. We've made nice progress in the fourth quarter, which would be in our run rate. And I'll give Lynn - the floor to talk a little bit more detail what we're going to see, as we add some additional FTE in our leasing vision over the next quarter, quarter and a half.
Lynn Kerber: Yes. Thank you. As far as leasing, we are really focusing on our key leadership roles right now. We've hired three key individuals and have a couple other key management roles that we'll be adding in over the next month. Then we're going to really just start focusing on standing up the tent and getting the operation going as far as new originations and syndication type activity. Don't see a lot of sales and servicing type adds until probably late second quarter, and then wrapping up third quarter, fourth quarter. So as far as dollar amounts, I don't know whether I can give you that specificity this morning. But it's going to ramp up, and I think you'll see it be aligned with new originations, and that cadence will kind of match and align, with some of our expense outlays later in the year.
Brian Martin: Got you. Okay. Thank you for that. And then just two last ones. Just in terms of the mortgage contribution this year. I guess, it sounds like consistent with the industry outlook, I guess your expectations for mortgage would just I guess is it - I guess if mortgage would be improving in 2024. That was number one and number two is just on the credit front, given how strong the performance has been. Any areas you'd point to as far as that you're a little bit more concerned with today, or watching more closely within the portfolio?
Thomas Prame: It's Thomas, thank you for the question. As far as the mortgage piece, we're anticipating aligning with - the MBA forecast is, which would be a little bit softer Q1, some recovery coming back in Q2. And then probably more aligned with 2023 production as we get in the second half of the year. The mortgage piece for us, we have not seen anything material in - credit quality there. Again, most of our assets are sold with servicing retained. The assets that we do put on our balance sheet, are exceptional quality, as you can see from the slide around FICOs and debt-to-income ratios. And I'd say we're pretty - we're relatively conservative in our strategy there. We do feel though, with our excess liquidity that it is going to give us an opportunity to portfolio some higher quality clients as we go forward. Because the rates that are in the market right now and where we have excess liquidity, is going to give us some flexibility there. So, we do think there's an opportunity there, but that would not be fee income-driven, that would be more of a balance sheet growth for us.
Brian Martin: Got you. Okay. Perfect. Thank you very much.
Thomas Prame: Appreciate the questions, Brian.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Thomas Prame: Thank you. And again, thank you for participating in today's earnings call. As stated, we are very optimistic about 2024. The momentum in our lending platforms and our excess liquidity at year-end positions the franchise well, to continue to fuel the strategy of growing high-yielding assets, and increasing top-line revenue. Our core community banking platforms are gaining momentum and we expect to see additional lift as our equipment financing team comes to life in the subsequent quarters. We believe the balance sheet is extremely well positioned for potential lowering rates later in 2024, and the resiliency of our Horizon's deposit portfolio continues to deliver promising results. Even in an extended elevated rate environment, these positive tailwinds add to the value created by Horizon's disciplined operating model and our conservative credit culture. Lastly, as we close out the call today, I wanted to thank our industry partners and peers who reached out to provide support and well wishes regarding the passing of our independent director, Spero Valavanis. Spero was a member of the company's Board of Directors since 2000 and the bank's Board since 1998. The organization significantly benefited from Spero's experience and reputation as a successful entrepreneur and community leader. But he would be most remembered as a dedicated father, a grandfather, and a friend who had all the pleasure of meeting him. On behalf of all of us at Horizon, I want to express our condolences to Spero's family and thank them for sharing Spero with the Horizon family for over two decades. Thank you again for your attendance today. And we look forward to our next update in April.
Operator: This concludes the conference call today. Thank you for attending today's presentation. You may now disconnect.
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