Horizon Bancorp Inc
NASDAQ:HBNC
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Horizon Bancorp Inc
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Good morning, everyone. Welcome to the Horizon Bancorp Conference Call to discuss Financial Results for the First Quarter of 2023. All participants will be in listen-only. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. These statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those disclosed, including those factors noted in the slide presentation. Additional information on factors that could cause actual results to differ materially is contained in Horizon’s current 10-K 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 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 Chairman and Chief Executive Officer, Craig Dwight; President, Thomas Prame; EVP and Chief Executive Officer, Mark Secor; EVP and Chief Commercial Banking Officer, Lynn Kerber; and EVP and Senior Retail and Mortgage Lending Officer, Noe Najera.
At this time, I’d like to turn the call over to Mr. Craig Dwight. Please go ahead, sir.
Thank you, Nick, and good morning. And thank you for participating in Horizon Bancorp’s first quarter earnings conference call. Our comments today will follow the investor presentation and press release that we published yesterday, April 26th.
We are proud to announce that Horizon Bank is celebrating its 150th anniversary in business, with our original banking charter issued in April of 1873. At the end of the first year of business, our total assets were $100,000, and 150 years later, we now exceed $7.8 billion. 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.
As you will 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 through the banking sector’s recent market volatility.
Deposit pricing has increased within the local markets we serve, with particular price sensitivity in the public funds 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 will also learn more about how lending opportunities in our attractive Midwest markets, loan pricing discipline, ample sources of liquidity and active balance sheet management have allowed us to position Horizon well for continued success through 2023 and beyond.
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 a return on average assets of 0.94% and a return on tangible equity of 14.18%, which are respectable 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, a 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.
Our local markets have stabilized. We see the number of open positions continue to decline and unemployment rates remain relatively flat. Given the stable unemployment rates, the improved balance sheets of our commercial customers and 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 Prame becomes Horizon’s next Chief Executive Officer effective June 1st. I have enjoyed working with the investment community and shareholders and have always appreciated your insights into our industry.
It is now my pleasure to turn the call over to Thomas Prame, Horizon’s next Chief Executive Officer. Thomas?
Thank you, Craig. Earlier this year, we provided 2023 goals to 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. We will provide more detail on these segments of our business within the presentation.
Transitioning to lending, highlighting the quarter was our commercial loan balances increasing $38 million or 6.1% annualized. Net commercial funding of $109 million was strong and again well balanced across our diverse asset classes and geography. The commercial pipeline is well positioned at $130 million 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. Consistent with previous quarters, our commercial loan portfolio continues to display strong credit metrics, with 1 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 that are experiencing excess demand for rental properties and strong occupancy rates.
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 million, 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. We continue to actively match 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. 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 portfolios we continue to be smart in our balance sheet deployment, with mortgage balances increasing approximately $5 million in Q1.
As seen with previous quarters, new production yields compare very favorably to those on payoffs and paydowns. Our production is aligned with the industry trends of a modest Q1 in 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 zero 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 goal [ph] levels of non-performing loans. Additionally, our allowance for credit losses remains about $150 million or about $50 million or 1.17% 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 other U.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. Each 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. They 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 client’s balances collateralized or insured through the FDIC or IntraFi. Additionally, in Indiana, public funds of the state and 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 are very upbeat and positive about the strength of our portfolio throughout the first quarter. 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%. 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 this 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 will return to public funds bidding in subsequent quarters.
As Mark will outline in the upcoming slides, Horizon maintains significant excess available liquidity and attractive borrowing cost. Overall, we are 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 advisers 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 first quarter.
I will 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.
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 eight quarters.
Many of you will also remember our decision to acquire nearly $1 billion 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.
Starting with slide 21, heading into March 2023, we were well served by our liquidity focus and balance sheet structure, including a majority of our investment portfolio unpledged. This enabled us to pledge approximately $1.5 billion of investments to provide immediate access to the liquidity if needed.
At March 31st, we had available secured borrowing lines of over $1.5 billion, with access to additional liquidity through secured lines, brokered CDs and additional unpledged investments. Altogether, this totaled more than $2.7 billion of available liquidity or 47% of total deposits as of March 31st.
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, $1.1 billion of our borrowings were at an average fixed rate of 3.52% with an expected duration of approximately one year.
Moving to slide 22. Horizon continues to maintain solid regulatory capital ratios 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.
Slide 23. For the second 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 three months to 6.87%.
This is in part the result of the inversion of the yield curve reducing the unrealized losses on the longer term duration of available-for-sale investments, because we have the ability to hold all investments to maturity and pledge for secured borrowings, these unrealized losses are expected to decline over time as investments pay down and mature.
Slide 24. 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, is expected -- 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 in the value of deposits. This correlation helps demonstrate how franchise value can be impacted in a rising rate environment.
Slide 25. Horizon’s current focus for the use of capital is organic growth, as opportunities and market conditions make M&A less likely. We would like to continue to diversify by adding a more robust leasing platform 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. As I mentioned earlier, the 8 quarters of cash held at the holding company to cover fixed costs, including the shareholder dividend, help provide additional stability in uncertain times.
Slide 26. Turning to earnings in the first quarter, 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 million of securities also impacted the results.
In the first quarter, the adjusted net interest margin decreased by 18 basis points and adjusted net interest income decreased by $3.5 million. With the pace of rate increases anticipated to slow and perhaps decreasing towards the end of 2023, we believe that Horizon is nearing the low end of its margin and expect it to begin to stabilize over the next three quarters. This will 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 first 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 will have cash flows from lower-yielding loans reinvested at higher rates.
Slide 28. As we discussed, we are very pleased with the strength and resiliency of our deposit base in the first quarter. Overall deposits were down a modest 2.7% with our mix shifting to more time deposits. On March 31st, loans represented approximately 74% of deposits, which continue to readily provide core funding.
The increase in 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 first quarter with a total cost of deposits of 1.04%. The beta for the interest rate cycle starting March 31, 2022, through the first quarter of 2023 has been 23% for total deposits.
With the projection of interest rates peaking in the second quarter of 2023, the full interest rate cycle beta 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 billion at quarter end, a reduction of $81 million in balances from December 31st. The portfolio had a book yield of 2.22% and an effective duration of 6.58 years at the end of the quarter.
Within the quarter, we sold $64 million in securities, with a $500,000 loss with an estimated six-month payback period. Expected cash flows for the remainder of 2023 are estimated to be approximately $100 million, but we will 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. We have approximately $2.3 billion 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 million, that adjust immediately with short-term rate moves, an additional $400 million that adjust within 90 days and $60 million that will adjust throughout the year.
The estimated remaining $940 million in assets that will reprice 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 increased 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.
As a result, in an up rate 100-basis point parallel shock as of March 31st, we have a minimal decrease to net interest income of approximately $2 million or 1.09%. Also with a parallel shock day one 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 the 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% of average assets for the quarter, compared to 1.84% last quarter.
Our longstanding 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 first quarter and you can expect it to remain our focus throughout 2023.
As we review Q1 non-interest 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 turn -- now I will turn it over to Thomas. He will provide some final thoughts.
Thank you, Mark, and appreciate your insights. So why invest in Horizon? Our investment thesis is simple. We are 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 growth -- loan growth is coupled with a low credit risk profile that has proven to outperform other U.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 $2.7 billion in liquidity available.
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 P/E 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 will ask our Operator, Nick, to please open up the line for questions.
Thank you. [Operator Instructions] First question will be from Terry McEvoy of Stephens. Please go ahead, sir.
Thanks. Good morning. First off, for Craig, I have obviously enjoyed working with you, and best of luck in your new role.
Thank you, Terry.
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, it looks like you said you would spend about $5.5 million on tech spending, is that still the case and still in the budget for the year?
Yes. For your first question, we still are spending on tech to continue to enhance and develop our platforms. The first quarter salary and benefits was a little lower than we anticipated, so I think if there’s any areas of the expense side that there might be some increase would be on the salary and benefits, as we had increases in or raises were put into play during the second -- starting the second quarter.
Thanks. And then just a 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?
This is Thomas. Thank you for the question. As we look at our different asset classes, again, most of our new production is going to come from commercial. That number is running closer to 7%.
In our indirect auto, we are north of 8%, and if you look at our consumer lending, we are probably in the 7.5%. Mortgage, we are very -- we are being very deliberate on what we are putting on the balance sheet, and again, that will be reflective of what you see mostly in the marketplace at somewhere in the high 6%s, low 7%s.
Thanks. And then one last quick question, I am just curious, do you pay into the Indiana Public Deposit Insurance Fund, who supports that?
Yeah. Terry, the banks have paid into it, but no one’s paid into it for probably over 30 years and the fund also has the capacity to borrow monies if necessary as well.
Perfect. Thanks, guys. Have a nice day.
Thanks, Terry.
Thank you. Next question will be from Nathan Race of Piper Sandler. Please go ahead.
Yes. Good morning, everyone, and I just also wanted to echo Terry’s comments. It’s been great working with you over the years, Craig and wish you all the best as you enter retirement and transition to Chairman. Going back to the margin question, perhaps, Mark, within the context of some of your more stable margin guidance going forward, what do you guys think the loan yield is peaking at, assuming we get a Fed rate hike in May and then, perhaps, the Fed on pause in the second half of the year?
Yeah. Terry if I -- I don’t know off the top of my head what the peak would be, but I think we will continue to see the increase, maybe a little less than what we had this quarter as we were had the rate hikes. If we have another rate hike, we will pick up the adjustables in those. So I think it would be a little less than this quarter.
Okay. Great. And then it seems like loan growth has obviously remained strong in the first quarter and it seems like you guys are still feeling optimistic about the 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 cost wholesale sources? And just any thoughts just in terms of kind of those dynamics and how it plays into some of the margin pressure that we have seen over the last few quarters at this point?
This is Thomas. I appreciate the question. As far as loan growth and then the funding, it sounds like the question is more on the funding of our continued loan growth. As Mark mentioned, we are anticipating the securities portfolio to have about $100 million continue to come down and be able to fund.
We also -- as we have a deliberate election to go with lower cost funding and borrowings in the first quarter and we believe that there’s a more stable marketplace of pricing that will happen in Q2 and Q3 and going forward. But, again, it’s very similar thoughts that you are having that our incremental loan growth will have to come at a consistent spread over the increase in our deposit costs.
Okay. Great. And I just wanted to clarify Terry’s question on expenses. It sounds like maybe we get a 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?
Yeah. I think that’s the right way to look at it. I think there will be a little bit of an increase in, like I said, salary and benefits. The rest of the expenses are coming in just in line with what we are anticipating.
Okay. Great. And if I could ask just one more, just in terms of the overall balance sheet size from here. Just looking at you met 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?
We are 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 will be managing that with the deposit funding.
Okay. Great. I appreciate you guys taking all the questions. Thanks for the color.
Thank you. Our next question will be from Damon DelMonte, KBW. Please go ahead, sir.
Hey. Good morning, everyone. I hope everybody is doing well. Thanks for taking my questions and I’d also echo the comments around Craig. Congrats and best of luck. It’s been a pleasure working with you over these years.
Thank you.
So I guess my…
Sure.
My first question just to kind of touch on the 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, like, the next quarter or two?
Yeah. I mean, there’s uncertainties, obviously, Damon, in what the competition looks like for funding, but as we came out of the quarter and we were looking at it at where we are. We have 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 will get us between 2.60% and 2.70%, again 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 know what that cost is for the rest of the year. So it will depend a lot on deposit prices.
The 2.50% to 2.70% is like the full year range or is that where you think you could be in the fourth quarter?
In the remaining part of the year.
For the remaining part of the year. Okay.
Yeah. At lease.
Do you happen to have the margin for the month of March?
I don’t have that in front of me. Sorry, Damon.
That number is...
And…
That number is relatively, it’s pretty consistent with what we had for the quarter…
Yeah.
Slightly a couple of basis points down.
Yeah.
Okay. That’s helpful. Thanks. And then with respect to the outlook for provision, credit trends, obviously, remain very strong. But as you are continuing to see loan growth, how should we think about the reserve level and kind of how the provision factors into that?
Sure. I will ask Lynn Kerber and can you give us insight on the reserves? Thank you, Lynn.
Good morning, Damon. How are you today?
I am great, Lynn. How about yourself?
Good. Thank you. Well, as we have already commented, our credit quality remains very good at this point. Our past dues, our non-performings, net charge-offs have all been very stable. As you can see, we have been releasing some of the reserve out. That is a function, as we have previously indicated, of some excess reserves that we held during the COVID pandemic and we have been releasing those out over the last several quarters. Those are now released.
So I don’t see that it’s 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 are at 1.16%, 1.17%, we are pretty close to our peer group. Our historical losses have been less than the peer group. So I don’t see a significant change. Certainly, I don’t see us going any significantly lower at this point.
Got it. Okay. That’s helpful. Thank you. 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 has changed over the last 90 days or 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. Certainly, the increased interest rates, any projects are going to require some additional equity to the table and so developers are having to look at the dynamics. If it’s rental, what are the market rates and what are they commanding and that effects on their return on investment with the additional equity requirement, but we are 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. We are seeing a little bit of noise in the small business area, just small business in general. They have been experiencing inflation for labor costs and input, cost of supplies and so they are just navigating that.
So as we have been -- we are seeing financials in on our customers, we are continuing to monitor their 2022 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.
Got it. Okay. Okay. That’s all I have had. Thanks.
I think, Damon, just I’d to add to your question is that, we are seeing a little softness overall in the mortgage market, which would impact both our originations and a little bit on the warehouse lending, but again, a small portion of our overall revenue model for the bank.
Got it. Helpful. Thank you very much.
Thank you. The 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 million in cash flows from the securities for the rest of the year. Is that the contracted number or is that an assumption based on prepayments and what have you, and if they are assumptions, what are the rate assumptions that are built into that? Thank you.
Yeah, 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.
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 have slowed, but it’s started to stabilize, we have seen it more stabilized now.
Okay. Cool. Thanks, Mark. And then my second question, as it relates to non-interest-bearing, your concentration of non-interest-bearing deposits to 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? We have been in essentially a 0 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 are thinking about that concentration and where it can go for Horizon?
Thank you for the question. David, this is Thomas. As we look at the remainder of the year for non-interest-bearing, of course we will have some seasonality here in Q2 as tax payments come out from our commercial clients and then we will have some inflows from our municipals.
We anticipate they 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 this is with our small business and consumer clients. They are going to keep relatively consistent average balances. We will see some moderate fluctuation in our commercial balances and public funds in Q2 and Q3.
Got it. Thanks for comments. Thanks for taking my questions.
Thank you. [Operator Instructions] Next question will be from Brian Martin, Janney Montgomery. Please go ahead.
Hey. Good morning, guys, and again, congrats, Craig, and best of luck in retirement. It’s been great working with you. So maybe just quick one.
Thank you, Brian.
You are welcome. The -- one quick question, Mark, just back to the margin for a moment and just appreciate the color you have already given. Just trying to understand, it sounds as though if the margin does stabilize under your scenario kind of as you go forward here. Is there a little bit more pressure on the margin in the near term, meaning second quarter and third quarter, with the deposit pricing than there is as you kind of get later in the year? Is that how to think about progressing to a stabilization here?
I think that’s logical, Brian, on what we are 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 are not seeing a lot of fluctuations. It’s more the unknown of what we are going to have to do to fund the balance.
But on a -- on our expected how we are 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 it moving towards the other end of the range.
Got you. Okay. And then maybe just jumping, I don’t know if it’s -- who, but as far as on the mortgage outlook, I mean, Thomas, you commented a little bit on it, but just 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 this quarter on a linked-quarter basis, but just wondering how that pipeline is? Is this level kind of a sustainable level or do you expect it to trend up a bit to here on seasonality? Just trying to understand how to think about that gain on sale line?
Yeah. 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 have seen originators -- originations kick back in the March time frame. So as you saw from Q1 results, we anticipate that that would be our lowest quarter.
Going forward I don’t want to predict all the way out, but third and fourth quarters, a lot of this deals with inventory and what’s available out in the marketplace. But I would say, we will see probably something more similar to about a 20% to a 30% pickup in overall fee income in that category here going in the second quarter with the outlook that we can keep that consistent going third quarter and fourth quarter assuming that rates and inventory come back in line.
Got you. That’s helpful. I appreciate the color, Thomas. And maybe just one last and going back to kind of the 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 or just your outlook on commercial and consumer, is it everything consistent with Investor Day or maybe if you could comment on what changes you have seen and you expect here?
As Lynn mentioned earlier, pipelines seem to be still relatively strong on the commercial side, giving us confidence that we will be in those ranges that we talked about from the Investor Day. The consumer side seems to be again aligned.
But I would say to the consumer side, that’s really a balance sheet play for us as we look at the yields that come on and then also how we are 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 play for us.
Our branch distribution with originations had a relatively decent Q1 and we are 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 are electing to sell the asset on the secondary market. So I feel confident in both of those growth numbers that the demand is there. It’s just more of a balance sheet and overall how we want to position going into the second half of the year.
Got it. Okay. I appreciate you taking the questions. Thanks very much.
Thank you for the question.
Thank you. That concludes our question-and-answer session. Now I’d like to turn the conference back over to management for any closing remarks.
Yeah. 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 am 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 and I will now turn the call back to the Operator to conclude today’s call. Have a good day.
Thank you. Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.