Horizon Bancorp, Inc. (NASDAQ:HBNC) Q2 2022 Earnings Conference Call July 28, 2022 8:30 AM ET
Craig Dwight - Chairman and Chief Executive Officer
Mark Secor - Executive Vice President and Chief Financial Officer
Kathie DeRuiter - Executive Vice President and Senior Operations Officer
Lynn Kerber - Executive Vice President and Chief Commercial Banking Officer
Noe Najera - Executive Vice President and Senior Retail and Mortgage Lending Officer
Conference Call Participants
Terry McEvoy - Stephens, Inc.
David Long - Raymond James
Nathan Race - Piper Sandler
Damon DelMonte - KBW
Brian Martin - Janney Montgomery Scott
Good morning, everyone and welcome to the Horizon Bancorp Conference Call to discuss financial results for the three months ended. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity for you to ask questions. [Operator Instructions] Please note this event has been recorded.
Before turning the call over to the 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 the 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 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. If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, you can access it at the company's website, www.horizonbank.com.
Representing Horizon today are Chairman and Chief Executive Officer, Craig Dwight; EVP and Chief Financial Officer, Mark Secor; EVP and Senior Operations Officer, Kathie DeRuiter; 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. Dwight. Thank you and over to you, sir.
Thank you, Jacob, and good morning. And thank you for participating in Horizon Bancorp's second quarter earnings conference call. Our comments today will follow the investor presentation and press release that we published yesterday, July 27. Horizon is pleased to report a continuation of record earnings for the second quarter. And solid momentum going into the third quarter, with strong commercial and consumer loan growth and pipelines.
The plans to close an additional seven offices in 2022 and the continuation of our excellent asset quality. We are very proud of our associates at Horizon how they've successfully implemented our growth strategies.
Starting on Slide 4 are the company highlights. Horizon completed the second quarter reporting record earnings of $0.57 per share, which compares favorably to the $0.54 reported in the first quarter and $0.49 reported in the fourth quarter of 2021. This represents a quarter-over-quarter increase of 5.6%.
Other notable financial metrics for the quarter ended, as reported pretax pre-provision net income of $29.1 million, which represents a 13.1% increase over the prior quarter's pretax pre-provision net income; a 3% reduction in our efficiency ratio to 55.6%; a return on average assets of 1.33% and a return on average tangible equity at 19.9%. Overall just an outstanding quarter for Horizon Bancorp.
Driving the first quarter's results, annualized double-digit organic commercial and consumer loan growth, additional revenue from the acquired offices, cost saves achieved from last year's branch closures and an increase in net interest margin. Given the size of our balance sheet, highly efficient operations, talented workforce and solid recruitment efforts, we believe Horizon is well positioned to capitalize on significant organic and strategic growth opportunities within our attractive Midwestern markets.
So why invest in Horizon? Our investment thesis is simple. Horizon continues to report superior returns with a lower risk profile due to our diversified balance sheet, excess liquidity and low-cost core deposits. We are located in attractive Midwest growth markets.
Considerable regional infrastructure improvements are attracting record inflows of private investments in Indiana and Michigan and include the commuter rail line expansion in Northwest Indiana known as a double track and West Lake County extensions. The creation of the regional transportation development authorities has focused on promoting transportation-oriented development in the region.
Our universities are partnering with local communities to promote an enhanced quality of life. There is continued investment in quantum communication lines between Chicago, Lafayette and South Bend. And then yesterday, the Senate approved the CHIPS and Science Act, which is anticipated to provide additional support to this quantum communications corridor.
The American Rescue Plan dollars are just beginning to be spent over the next two years and will include a considerable infrastructure build-out in the region. Indiana has a $6 billion state surplus with plans to increase infrastructure spending over the next couple of years. And finally, relocations continue to accelerate out of Illinois into our attractive markets due to quality of life, affordability and lower taxes.
Both Indiana and Michigan are ranked in the top quartile of a manufacturing output, and we are seeing considerable investment rolling back into manufacturing as they creatively managed through supply chain and labor force availability challenges. Horizon has increased earnings outlook for 2022, which we believe will provide us additional opportunities to favorably distinguish Horizon from its peers. Today, Horizon is considered both a growth in value stock with an attractive dividend of 3.7% as of June 30.
To further support that we are a growth company, Horizon's compounded annual growth rate in 2002 through 2021 were 13% for total assets and 20% for net income. Horizon has historically outpaced the change in GDP. For the past four years, we grew 4.9x the change in GDP. This clearly demonstrates our ability to target market share and attract talent. In addition, Horizon's ability to grow earnings faster than total assets illustrates the company's ability to efficiently increase the bottom line.
Moving on to digital transformation. Horizon's key advantage to technology over community banks include our in-house CRM and core platforms due to lower cost per transaction than our peers, ability to expedite the onboarding of new Fintech partners and flexibility in data management. By not relying on a core service provider, Horizon is able to select technology partners based on best-in-class and who can deliver strategic products and services at the best price and with optimum flexibility. Our in-house core strategy has also proven very effective when we integrate acquisitions, including the last Fall's 14 branch deal.
In addition, our Fintech partners are nimble, have considerable resources focused on improving the customer experience and allow Horizon to be an active voice on future developments as we have representatives on most of these entities advisory boards or user groups.
As you can see on Slide 11, pricing more than doubled the proportion of total tech spend devoted to strategic customer and employee-facing applications over the last four years. As a result of our investments in technology, Horizon has improved its productivity as measured in assets per employee from $5.4 million in 2016 to $8.7 million in assets per employee in 2021.
Our digital transactions increased from 44% in 2018 to over 75% in 2021. We increased online consumer deposit account openings from 12% last year to over 19% year-to-date. And finally, 86% of our online chats are now answered by our programmed bots.
Horizon's technology plan over the next two years will continue to see an increase in our annual spend to enhance the customer experience and make our model ever more scalable. As in prior years, we intend to offset these investments by continually improving efficiencies in our retail network and throughout the organization. Even with these technology investments, for example, we continue to target non-interest expense levels at 2% or less than average assets for the full-year of 2022.
Horizon manages and deploys capital efficiently, as evidenced by our recent acquisition of 14 branches in the Fall of 2021, a dividend yield at 3.7% as of June 30, a dividend guidelines to increase dividends aligned with earnings growth and effective deployment of capital to organic growth initiatives. Rising interest rates has increased the investment in the analysts focus on accumulative other comprehensive income and the mark-to-market adjustments occurring in the bank's balance sheet as a result of unrealized losses reported in the investment portfolio.
Horizon's unrealized losses appear to be comparable to most financial holding companies based on recent reporting. As a result of the unrealized loss, Horizon's TCE declined to 6.48% at quarter end June 30, from 6.94% as of March 31. Due to the bank's strong capital position and quick payback period on the AOCI dilution, we believe that we still have significant flexibility to continue to pursue our organic growth strategies.
In addition, Horizon has a consistent dividend policy as we fully expect to continue our 30-year plus of uninterrupted quarterly cash dividends. We just announced in June a 6.3% increase in our quarterly dividend from $0.15 to $0.16 per share. Again, our dividends are aligned with earnings growth.
Now for the financial update, it's my privilege to introduce to you, Horizon Bank's Executive Vice President and Chief Financial Officer, Mark Secor. Mark?
Thank you, Craig. Horizon reported its second consecutive quarter of record net income as a result of strong loan growth and improving net interest margin. We are very pleased with the results achieved in the second quarter as they reflect solid core earnings without noise and with continued momentum going into the third quarter.
Starting with Slide 15. The company's strong results in the second quarter was primarily driven by the increase in interest-earning assets with annualized total loan growth of 24.6% during the quarter. Disciplined deposit pricing increasing deposit costs only one basis point and expense control. The 10.6% increase in adjusted pretax pre-provision income compared to the first quarter of 2022 demonstrates the successful strategies put in place to increase interest-earning assets along with maintaining an asset-sensitive balance sheet, which are driving core income growth.
Comparing to the second quarter of 2021, the second quarter of 2022 absorbed a reduction of $6.8 million in revenue from PPP, gain on sale of mortgages and mortgage servicing net of impairment revenues while increasing adjusted net income by 9.1%.
Slide 16, as we continue to focus on increasing net interest income and with more rate increases, we wanted to provide a few more details on our balance sheet. As of June 30, we are more asset sensitive compared to the previous quarter end with a 12-month GAAP ratio of 1.16% that includes approximately $2 billion of adjustable rate assets, of which $1.2 billion would move with a rate change to their index.
As a result of our deposit betas lagging as interest rates rose, helped to increase the margin and the growth in interest-earning assets during the second quarter, the base case for net interest income increased $21 million. With a higher margin, growth in earning assets, along with growth in adjustable rate assets at a 100 basis point increase as of June 30, we would generate an increase in net income of approximately 3.13% or $7 million.
Contributing to the increase in net interest income in the model are the expected deposit betas used for rising rates, which currently range from 4% for consumer deposits to 45% on money markets and public funds with an average beta of 35%. The actual beta for the second quarter from rising rates was 3% for total deposits, well below what is being modeled. We will continue to use these more conservative betas in our model as we anticipate more pressure to increase deposit rates as short-term rates continue to increase. But this initial ability to lag increasing deposit costs will continue to support the margin.
Slide 17, the adjusted margin increased 19 basis points during the quarter due to rising interest rates, the growth in higher-yielding assets and disciplined deposit cost management. With more short-term rate increases anticipated, the margin is expected to continue to expand during 2022 due to our asset-sensitive balance sheet.
Slide 18, the investment portfolio was $3.1 billion at quarter-end, no change from the end of the last quarter. We started using the cash flows from the portfolio to help fund loan growth during the quarter and expect to continue this through year-end. The portfolio had a book yield of 2.26% and an effective duration of 6.9 years at quarter-end and cash flows of approximately $400 million are expected over the next two years.
Slide 19, the unrealized loss on available-for-sale securities in the second quarter reduced tangible common equity 46 basis points from the end of the first quarter. Because we have the ability and the intent to hold these investments to maturity, these losses are expected to recover over time as investments pay down and cash flow is reinvested at higher rates. The impact of rising rates only recognizes certain items like unrealized losses on available-for-sale investments and not the increase in the value of liabilities like core deposits. When the entire balance sheet is valued, our economic value of equity increased in the second quarter compared to the end of 2021.
With this decrease in tangible common equity, we believe the bank's capital is strong and sufficient enough to fund growth and will not restrict our ability to consider merger or share repurchase activity in the future.
Slide 20, by maintaining a disciplined approach on increasing deposit rates, the total cost of deposits only increased one basis point during the second quarter. This allowed the increase in the yield earning assets to positively impact the margin by 24 basis points, offset by a four basis point increase in the cost of interest-bearing liabilities. The actual beta for the quarter was 3% and was due to the ability to lag raising deposit rates from the rate increases. We do expect that this beta will increase with additional rate increases. Our targeted beta is around 20% to 25% for total deposits if short-term rates reaches 3.25% or higher.
However, the ability to lag our deposit rates initially will help maintain our spread on interest-earning assets. We believe that our valuable low-cost core deposits will provide significant opportunity and flexibility going into this rising rate environment.
Slide 21. The core operating expenses were slightly down compared to last quarter. As we continue to leverage our core expenses, noninterest expenses were 1.95% to average assets for the quarter and now at 1.99% year-to-date, achieving our goal of 2% or less. We achieved this goal by growing core net interest income, absorbing the reduction in PPP and mortgage-related revenue, increasing deposit service charge and interchange income and controlling core operating expenses. We do anticipate additional increases in salaries and employee benefits as incentive compensation plans will need to reflect the positive results in loan growth and overall performance.
Last quarter, we announced plans to consolidate seven branches in 2022, which will continue to help manage expenses. The onetime charge on fixed assets was $380,000 before tax and was expensed in the second quarter. This onetime charge has an anticipated payback of approximately six months. We also continue to make investments in tax credits to support our effective tax rate.
Now Craig will provide an update on our lending activities.
Thank you, Mark. Now for a quick loan update. We reported strong commercial loan growth for the second quarter and year-to-date, excluding PPP and sold participation, commercial loans reported $108 million in growth for the quarter at an annualized growth rate of 19.7%, as we continue to see loan growth across most business sectors. Contributing to the commercial loan growth, there's an increase in the number of loan officers, an increase in line of credit outstandings, rebounded Midwest manufacturing and regional infrastructure investments.
In addition, we have good momentum going into the second quarter with a commercial pipeline of approximately $150 million, which is comparable to the second quarter's pipeline of [indiscernible]. In addition, we reported excellent consumer loan growth in the first quarter at a pace of 50.5% annualized in loan balances as we continue to experience strong consumer loan demand for home equity, car loans and increase in line of credit balances.
We are pleased with our second and first quarter consumer loan productions of $195 million and $147 million, respectively, which compares favorably to the total production for the entire year of 2021 at $397 million. Given the low employment in our markets, even with high inflation rates, we expect consumer loan demand to remain robust in the third quarter.
Mortgage loan production year-to-date is down 29% over the prior-year period, which compares favorably to Fannie Mae's and The Mortgage Bankers Association's forecast of a reduction of 41% and 39%, respectively.
Loan revenue constituted only 5.6% of Horizon's second quarter total revenue. Overall asset quality remained strong in the first quarter as evidenced by low net charge-offs and nonperforming loans and a solid credit loss reserve total loans at 1.33%. To summarize Horizon Bancorp's key franchise highlights, Horizon is a growth company as evidenced by our 20% compounded annual growth rate for net income and 13% compounded annual growth rate for total assets over the past 19 years.
Our balance sheet has a diversified loan portfolio, both in product mix and geography with ample liquidity and cash flows to fund future growth, which provides for a lower risk profile than many of our peers. The combination of Horizon's higher returns on tangible capital of 19.9% and lower balance sheet risk profile is a sweet spot for investors, especially given the volatility related to rising interest rates, wage inflation and supply chain disruptions.
Horizon is positioned well for earnings growth in '22 and 2023 as a result of an increase in commercial and consumer loan demand, our recent acquisitions of 14 new branches and expanded footprints, low operating cost discipline, investments made in our commercial and consumer lending teams, our disciplined approach to branch rationalization.
As noted on Slide 28 and given our second quarter solid production results, Horizon is beating five to six metrics we announced in December of 2021 and increased our outlooks in the second quarter of this year. Core commercial loan growth, excluding PPP and participations sold is on an annualized growth rate of 16.9%, which exceeds our target range of 10% to 14%.
Consumer loans year-to-date annualized growth is reported at 33.7%, which exceeds our targeted range of 10% to 14%. Return on average assets year-to-date 1.32% exceeds our target of 1.30%. Return on average equity of 14.01% exceeds our target at 12.5%.
Overall, just an outstanding quarter for Horizon Bancorp. This concludes our prepared remarks today. And now I'll ask the operator to please open the lines for questions. Thank you.
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Terry McEvoy with Stephens. Please go ahead.
Hi, good morning everyone.
Good morning, Terry.
Maybe the first question, the seven branches that are scheduled to be consolidated. Could you just talk about the cost savings, whether they'll fall to the bottom line or if you plan on using that to invest in the business? And if so, where across the bank, would you plan on making those investments?
Terry, the branch rationalization really is to help fund our investments in technology to better serve the customer and enhance their experience, and we are adding to our technology team, both in software and people. And that's where we see just to transfer that cost over to that side of the bank. Mark, do you want to add anything else there?
No, I think that's the goal and similar to what we did last year is we've seen technology spend able to keep expenses more flat with having the cost saves from the branches as we expand.
Perfect, and then as a follow-up, the total deposit beta just 3% last quarter versus the 35% model. And Mark, I just want to clarify the 20% to 25% beta that you mentioned in your prepared remarks, was that where you see betas trending by the end of this year? Or was that still a longer-term figure? So I guess my question is, what do you see betas doing in the second half of this year?
Yes, that is -- that would be when we're looking at the 3% for the quarter, which we were just able to lag. We started to feel pressure with some of the larger accounts come towards the end of the quarter. So the 20% to 25% guidance would be what we're targeting for the year as rates continue to go up as we saw yesterday, and we expect a couple more. And we do anticipate that we will have to increase our deposit costs, and so that's the range for that for the year.
Understood, I appreciate that. Thank you both.
Thank you. The next question is from the line of David Long with Raymond James. Please go ahead.
Good morning everyone and thanks for taking my questions. Craig, you mentioned a strong loan pipeline still remains in place. Coming off of 20-plus percent loan growth annualized in the quarter, what kind of sustained loan growth do you see here in the third quarter and maybe in the fourth quarter as well?
David, both the consumer and commercial pipelines are comparable to last year, so we expect comparable production in the third quarter. Fourth quarter, there starts to flow in for seasonality, especially on the consumer side. And I'd like to have Lynn and Noe jump in since they head our commercial and consumer side. Lynn, any additional comments?
Sure, good morning. As Craig mentioned, our pipeline projections have been holding. We saw quite a pickup third and fourth quarter of 2021, and that has really held in both our projections and actual originations in the first and second quarter of this year. As we mentioned, our third quarter projection is very consistent with the second quarter. And when we do those projections, it is based on anticipated approved and closed loans.
So we feel pretty good about that. Of course, with the interest rate environment and the rates increasing, there could be some fallout from that. We're just not sure how much at this point. We're looking more ahead to Q4, really where there's possible impact at that point.
Got it, thank you for the additional color there. And then with the loan growth, what -- when you dig down, what's really driving it? Is it -- have you -- is it hiring some veteran bankers from some of your peers? Is it wins from the PPP coming through? Or is it simply just market share gains and the Horizon really doing well in its markets? What -- how do you view the growth among some of those categories? And what's really driving this is where I'm going with the question.
Well, I'll speak to commercial. I think it's a combination of factors really. First, as you know, we did expand our lending team in 2021. Those lenders are very experienced and well-known in their markets. And I feel that we're benefiting from those relationships and their business development efforts, particularly we've added in West Michigan and Troy and also in Central Indiana, and we're seeing the benefit of that.
Additionally, there's been strong demand in the market. I think that some customers, they're looking at the interest rate environment, and they're like if we're going to do a project, you don't know it's the time to make that happen with the rate forecast. And then candidly, there's some market disruption with a few of our competitors in some of our markets, and we've been benefiting from that.
Great, thank you. And then just, okay go ahead.
No, I just wanted to add on the consumer side and echo some of the same sentiments that Lynn Kerber shared. We've had some strong hires and regionally expanded our footprint and are realizing those gains. So I want to echo that same sentiment on the consumer side.
Got it, thank you.
Yes, David, this is Craig Dwight. We have advisory board members in every county that we do business, we host regular meetings with the group and get feedback and the local economic outlook. And overall, very positive, including some gains that improved. They are less concerned about supply chain. The biggest area further expand and some delays in any construction projects partly because of the general contractors actually are so busy. So overall, very positive from our individual Advisory Board members.
Got it, that's lot of color. Thanks. Thanks everyone, I appreciate it.
Thank you. The next question is from the line of Nathan Race with Piper Sandler. Please go ahead.
Yes, hi guys. Good morning.
Good morning, Nathan.
Question is just kind of on overall balance sheet dynamics going forward. We saw a little bit of deposit outflows this quarter. So just curious, perhaps, Mark, how you're kind of thinking about just overall flows in the back half of this year. Obviously, you guys are operating with ample liquidity, augmented by the branch acquisition last year. So I guess you guys have anticipated kind of stable balances in the earning asset mix or are there earning asset base kind of hold stable from what we saw earlier in the second quarter?
No, thanks for the question, Nate. First, on deposits, we had seen deposits stay fairly flat. There's some seasonality with municipal when tax money comes in and out. We have seen a little bit, not anything significant, a little bit of decline in deposits here this month, but nothing significant. So -- but we have -- the loan growth has outpaced what we would have anticipated from our guidance. So we are borrowing and to fund that growth. The other thing I mentioned is that we will -- we're bringing back the cash flows that we can get it back from the investment portfolio.
And we started that in the mid, later half of the second quarter. So we will start to use some of those dollars to help fund the loan growth. But the loan growth will be funded by deposits. We are looking to try to look for deposits at this point because of the loan growth. So that is a strategy that's out there also.
Understood, that's helpful. And then just kind of thinking about the overall margin going forward. It sounds like as we've discussed, loan growth outlook remains pretty solid into the back half of the year despite some uncertainty that may increase perhaps in the fourth quarter relative to a relatively strong production outlook for the third quarter. So I guess, how are you guys kind of thinking about the potential for additional margin expansion execution. Should we expect a similar decrease from what we saw here in the second quarter with around 40% of your loans being variable rates? And just given that deposit beta are trending kind of lower than kind of what you guys have forecast at this point?
Yes, we should still see the margin expand. I do think it looks low because of the deposit -- the funding cost side because we were able to lag so much here at the beginning of this year, we are going to pick that up. As I said, the beta we anticipate for the year would be 20% to 25%. So I think that will slow some of the margin growth from what we saw this quarter, but it still should continue to move upward as we re-price earning assets at higher rates and put on loans at higher rates.
Got it, understood. And if I could just ask one more for Craig perhaps. Just curious to get an update on the search for a President succession as you continue to hold that title on internal base. Are you guys exploring both internal and external candidates? Or kind of where does that process stand today?
Well, Nathan, the Board Search Committee continue to move it forward and -- we plan to have an announcement here in the third quarter. So…
Okay, great. I will step back and congrats on a great quarter. And thanks for taking the questions.
Thank you, Nathan.
Thank you. [Operator Instructions] The next question is from the line of Damon DelMonte with KBW. Please go ahead.
Hey, good morning guys. Hope you all are doing well today. Just wanted to start off with -- on the credit side of things. I mean, obviously, credit trends remain very strong for you guys. But this quarter, we did see the reserve come down probably in light of the combination of the size of the provision and then the growth in the loan portfolio. How are you thinking about reserving going forward? And kind of how does that dovetail into the view of we could be going into a recessionary environment in broader macro issues despite strong trends in your markets?
Good morning, Damon.
Go ahead, Lynn.
Okay, well just a few thoughts on the reserve. We did do a little bit of change in mix in the reserve this quarter. We had some special allocations related to our hotel portfolio that were rather significant through the pandemic. And over the last two quarters, we felt that we could start to release those.
We've seen very positive performance in our Hotel segment. The recent Star report had very high occupancy, RevPAR, is not on par with pre-pandemic numbers but in some cases, even above pre-pandemic numbers. So that segment of our portfolio is performing really well, and that is driving some of the change in mix in the allowance.
Offsetting that, we had some additional allocations for macroeconomic conditions, the inflation, fuel impact on wages and real disposable income, continuation of geopolitical and supply chain. So there's a little bit of a mix going on in the reserve. But I would say our overall philosophy on it is consistent. And we feel that the reserve amount and the ratio is appropriate for our portfolio analysis and metrics at this point in time. So I don't know that I see that changing dramatically. It's going to be more reflective of the general macroeconomic conditions and our credit quality.
Great, that's great color. Thank you. So it's driven then to assume that the provision will kind of help keep the current reserve level in the low 130s at that level? I guess said differently, you're not going to let that drift down into the 120s if you feel good about the level this quarter?
Yes, again, I go back to my comments regarding the general economic conditions, and we're going to be watchful of that. And I think that will be a key driver as we look at the reserve amount.
Got it, fair enough. That's great. Thanks. And then a question for Mark on the expense outlook. Can you provide a little more color around the expectations for the back half of the year? If you take out the $300,000 or $400,000 of nonrecurring charges this quarter puts you close to $36 million as a core number. Do you think you're kind of hold that line? Or does it trend up a little bit from here?
Yes, I think it's a good core. I think where we might -- as I mentioned, we probably will trend up as in some of the benefit side that there'll be some increases here going into the third and fourth quarters. But by and large, the rest of the categories are -- should be fairly stable.
Got it, okay. Great, and then I guess just lastly on the tax rate. What's your expectation for the back half of the year?
Yes, it should maintain. We -- with the investment -- in investment portfolio of municipals and then we also are active in the solar credit, low-income housing credits. So we would anticipate that effective tax rate should be good through the year.
All right, great. Thank you very much.
Thank you. The next question is from the line of Brian Martin with Janney Montgomery. Please go ahead.
Hey, good morning guys. Mark, just one follow-up. The effective tax rate, so what rate are you guys expecting, just to be clear on, because of the second half of the year on that?
It should be in the 14% to 15% range.
14%, okay. Perfect, got you. And then maybe just a couple from me. Maybe, Mark, just one more for you on the margin, just in general, if we see rate increases begin to taper off as you get later in the year and kind of think about next year, if you just kind of think about next year's outlook, I mean, as the betas pick up, is your thought process today that, that margin begins to stabilize, maybe I don't know, in the first quarter of next year? Is that just high level, how you're thinking about it based on kind of what the balance sheet is doing and growth outlook here?
Yes, I think that would be accurate, Brian. We'll continue to see assets re-pricing, which will help to higher rates, which will help the margin. And we should see after we get through these rate increases, we should see the funding costs kind of stabilize. So -- but that might be into next year before you see that.
Okay, got you. Okay, that makes sense. And then maybe just on -- touching on the mortgage for a moment, kind of seeing some mixed performance by banks this year, but just you guys had some success here with a little bit of the change in some of your strategies. But is this quarter kind of a baseline for how to think about mortgage? Or is it still on the higher side or the lower side? How are you thinking about mortgage and kind of your outperformance relative to others so far?
Thank you for the question. I'll go ahead and take that. This is Noe Najera. I believe that we are seeing production in the pre-pandemic mode. I think we go back to '18 and '19 and what we were able to accomplish. I think it's going to level off and remain the same trend that we've seen if we go back to those years. So we're going to remain consistent and in that outlook.
Okay, and Noe is that kind of referring to the dollar amount for the production, like the $2.5 million in mortgage, is that kind of you saying that's kind of a consistent level? Just to be clear with your comment.
We do. I do -- that is more consistency that we're going to see moving forward.
Got you, okay. And then maybe just one for me lastly on the loan side. Certainly, the strong production this quarter, how have payoffs been trending relative to originations. I mean is this -- payoffs really been muted and it's just really strong originations? Or have there been payoffs in there kind of masking some of it or not masking it, but making it soft.
We have seen payoffs have remained to our historical trends. So we do monitor very closely. So those continued. So the demand is still there for consumers. So we are seeing payoffs. But I think overall, our performance is continued to shine through overall.
Yes, okay. That makes sense. And maybe one last one if I can sneak it in for Craig. Just Craig, your comments about capital and not to restrict your ability for growth and potential M&A. I mean, given market conditions today, is M&A still on the table given some of the dynamics that are out there today? Or is it in the short term, it's not and just kind of your take on market conditions today in M&A.
Thank you for the question, Brian. First of all, Horizon's three-year plan looking out is pretty robust without M&A. So to look at a transaction, it has to be one very attractive market that complements our growth strategy or to a very low-cost M&A in a transaction. So I would say M&A is not the higher priority today. It's taking our balance sheet, converting those investments to loans, which is our strategy for the next couple of years. That's our primary focus.
Got you, okay, thanks for taking the questions guys and nice quarter.
Thank you, Brian.
Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Craig Dwight for any closing remarks.
Thank you, Jacob, and to all that joined our call this morning, and we look forward to speaking with you again in the near future and hopefully continue this record pace of earnings. Thank you, and have a great day.
The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.