Horizon Bancorp, Inc.

Good morning, everyone, and welcome to the Horizon Bancorp conference call to discuss financial results for the three months ended June 30th, 2020. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. We do ask that you please limit yourselves to one question and a single follow-up. Please note this event is being recorded. Before turning the call over to management, I would like to remind everyone that today's call may contain forward-looking statements related to Horizon that may generally be identified as describing the company's future plans, objectives, or goals. Such forward-looking statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially. from those currently anticipated. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For further information about the factors that could affect Horizon's future results, please see the company's most recent annual and quarterly reports filed on forms 10-K and 10-Q. You should keep in mind that any forward-looking statements made by Horizon speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and management cannot predict these events or how they may affect the company. Horizon has no duty to and does not intend to update or revise forward-looking statements after the date on which they are made. To the extent non-GAAP financial measures are discussed in this call, comparable GAAP measures and reconciliations can be found in Horizon's April 29th news release, which is available on its website At Horizon Bank, Horizon also published an investor presentation on Wednesday afternoon on the company's website with information that will be addressed this morning. Representing Horizon today is Chairman and CEO Craig Dwight, as well as Executive Vice President and CFO Mark Secor, President Jim Ness, and Executive Vice President and Chief Commercial Banking Officer Dennis Kuhn. At this time, I would like to turn the conference over to Mr. Dwight.

Thank you, Kate, and good morning, and thank you for participating in Horizon Bancorp's earnings conference call. Our comments today will follow our investor presentation that was published after the close of trading on July 29th. So starting on slide four, we summarize and highlight what we believe was a very solid quarter during these unprecedented times as evidenced by a 26.9% increase over the first quarter's earnings per share. These results were supported by good loan and deposit growth of 8% and 7% respectively, excellent expense management, and record residential mortgage loan volume. In addition, during the quarter, we demonstrated our ability to effectively access the capital markets through the issuance of $60 million in subordinated ventures. This capital raise provided our holding company with a considerable cash cushion to protect the dividend to its common shareholders and provides us with the optionality on how to deploy capital in the future. Slide 5, titled Season Management Team, we are very proud of our entire Horizon Bank team and what they've accomplished. Slide 6 reflects our accomplishments and excellent history of financial performance over the past 17 years. Slide 7, titled Diversified and Attractive Footprint, I'm going to spend a little more time on the next two slides so you have a better understanding of our footprint and what's taking place in the markets we do business. Horizon's focus has been consistent over a long period of time to grow four revenue streams, which diversifies risk and stabilizes earnings in varying economic cycles. For example, today our mortgage teams are doing very well, which offsets slow growth in other business lines. The map to the left reflects Horizon's 73 locations. Horizon has a great footprint with our loans distributed throughout the states of Indiana and Michigan, which represents good geographic diversity. As of June 30th, Indiana's unemployment rate was approximately 11 percent and Michigan's was approximately 14. Both states saw a considerable drop in unemployment rates from their peak in April and May. Currently, we're experiencing a slight increase in unemployment claims in Michigan while Indiana claims continue to decline. Horizon's expansion and growth is occurring primarily in cities and towns with colleges or universities and 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 now to give you a current status of the COVID-19 by state. Indiana's positive COVID-19 case peaked on April 26, and then again on July 23, and over the past week, we've seen the number of cases start to decline. The utilization rate at Indiana's intensive care units is below 60%, with a substantial decline in COVID patient hospitalization rates since its peak in April. Currently, Michigan has eight counties reporting an increase in COVID-19 cases. However, they are concentrated in the more populous Detroit metro area and in the southeast portion of the state. While Horizon Bank's branches and customers are concentrated in western and central Michigan, overall, the state's recent total confirmed cases are down considerably from the peak periods in April and May. As many of you know, we bank customers in a number of college towns. All major universities in both Indiana and Michigan plan to open in the fall under certain safety protocols, which include shorter fall semesters, classes with a mixture of virtual and in-classroom, and requiring fewer occupants in student housing. Most universities are requiring single occupancy unless you pre-select a roommate. The new college student housing occupancy standards will bode well for Horizon's multifamily loans located near college campuses. Slide 8 talks about our attractive and stable Midwest markets. Horizon's focus has been on mid-sized cities as we've grown our footprint through 11 organic expansions and 14 mergers and acquisitions. We have no plans to be a Chicago bank. However, we do enjoy the benefits of consumers and businesses escaping its higher cost of living, high taxes, and dense population. Our legacy market is in the Michigan City-LaPorte area, where we have approximately 60% market share, has historically been a slow-growth market. However, with recent and pending investments by the Chicago Metro Commuter Rail Line, this market is positioned well for future growth. The greater Indianapolis area is a well-diversified economy with strong growth, large employers, including Fortune 500 companies, state government, and universities. Northwest Indiana has considerable appeal in Chicago companies and residents. due to its close proximity with short commute times as well as several quality school systems. Southwest Michigan is not as volatile as the other parts of the state. They have an excellent business climate, good owner-operators, has less automotive influence, and considerable personal wealth. This area also includes several college towns. Finally, the greater Lafayette area, home of Purdue University, has established incredible partnerships with local cities for infrastructure and quality of life improvements. Purdue recently announced record freshman enrollment for the fall of 2020. Just last week, Subaru broke ground on major expansion of its only U.S. assembly plant, which plans to add 350 jobs in this market. Now, slide nine exhibits Horizon's response to the COVID-19 pandemic. As most community banks, Horizon Bank is very proud of our employees and how they've managed through this pandemic and provided assistance to our customers and communities during these unique times. Slide 10 talks about our digital transformation. Horizon was well on its way to transforming our customer base to our digital platform, as evidenced by the chart on the left, titled Active Online Bank Users, as more than 98,000 or 71% of all of our checking accounts are active users. As expected during this pandemic and presented on the chart to the right, Horizon's digital transactions increased and branch transactions declined due to limiting office traffic to appointment only until June 15th. Fortunately, Horizon was well prepared for this increase in digital transactions. Now, it's my privilege to turn it over to Mark Secor, our CFO, who will give you the financial update.

Mark? Thank you, Craig. I will briefly summarize the second quarter results, which we believe continues to demonstrate the strong position we are in as we navigate the current environment. Starting with slide 12, you will recall that in the first quarter, our results reflected are nearly three times increase in our allowance after we implemented CECL on January 1st and built general reserves in the early days of the pandemic-driven economic emergency. We continue to provide for growing reserves in the second quarter, but at a slower rate than in the first three months of the year. We believe we are appropriately reserved given the current state of our portfolio and our CECL modeling. Our profitability metrics, including pre-tax pre-provision earnings, also benefited from growth in net interest income supported by higher average balances of interest earning assets resulting from the PPP program participation. Linked quarter net interest income growth of 5% allowed us to outpace net interest margin compression of nine basis points during the quarter. Slide 13, the nine basis point decline in margin during the quarter was relatively modest. with approximately three basis points attributed to lower yielding PPP loans. In addition, as customers deposited PPP loan proceeds and other stimulus funds, we sold excess cash at very low rates, impacting the margin by approximately four basis points. Our ability to quickly and decisively lower funding costs since March has helped us keep pace with lower asset yields. Slide 14. Loan yields were reduced during the quarter as variable rate loans repriced lower. PPP loans contributed approximately 10 basis points of this reduction. 36% of our commercial loans are variable and the vast majority repriced. 21% of our variable rate commercial loans have floors and 67% are not at their floors. 74% of our mortgage loans are variable and adjust over a longer period of time. 98% of variable rate mortgages have floors, with 5% of them at their floor. As loans continue to reprice and new product is originated at lower rates, additional downward pressure on asset yields is expected. Slide 15, our strong core deposits were key in the second quarter, further bolstered by customer deposits of stimulus funding. The 29% growth in non-interest-bearing deposits and the interest-bearing deposit costs lowered to 15 basis points significantly contributed to stabilizing the margin during the volatile rate moves. The CD portfolio also helped reduce funding costs as high-cost CDs matured during the quarter. To provide an offset to the expected asset yield pressure, over the next two quarters, $40 million of CDs will mature, with a weighted average rate of 1.64%. The duration of the entire CD portfolio is just over 10 months with a weighted average rate of 1.55%. The continued repricing of the CD portfolio and the expected shift in CD balances to transactional accounts should provide support to the margin. Slide 16. The two biggest drivers of non-interest income in the second quarter are both related to the mortgage business. To the downside, national increases in prepayment speeds and past due levels were a significant factor in our third-party valuation of Horizon's mortgage servicing asset, requiring us to accrue a $2.9 million non-cash impairment charge in the second quarter. Additional impairment would be expected for service mortgages that refinance, and if the national prepayment speeds and delinquency percentages increase. Even with the MSR impairment in the second quarter, mortgage-related revenues grew on record gains from the sale of mortgage loans. The continued refinancing activity and strong percentage gain we are receiving on the sale of mortgage loans is providing revenue to help offset lower non-sufficient fund fees and lower fiduciary income. Based on local and national refinancing activity, We expect strong top-line contributions to continue from this business through the end of the year. During the second quarter, we continue to manage operating expenses with our usual discipline. Even adding back in the $1.1 million of deferred PPP loan origination costs to salaries and benefits, Annualized non-interest expense was still 2.26% of average assets in the second quarter. The efficiency ratio of 56.2% was lower than the previous two quarters due to both higher revenue and lower expenses during the second quarter. This is a very positive trend in this environment and demonstrates the strong core results for the company. We will continue to focus on expense control by ongoing rationalization of our retail locations looking for discretionary spending cuts and leveraging the current infrastructure. Slide 18, as we discussed last quarter, we did adopt C-SLAN January 1st, and we believe this is allowing us to make more relevant reserve builds based on the current economic conditions impacting our loan portfolios. This quarter, we added weekly indicators to our economic forecast to assist in capturing the volatility we are seeing in the economy. The $6.7 million reserve bill in the second quarter was primarily driven by allocations made from continuing to analyze sectors of loans that potentially have a higher risk of loss. Craig will provide more details on these sectors later in the presentation. The percentage of allowance to loan total loans was 1.38% at June 30, or 1.49% when excluding PPP loans. A balance of $14.5 million remains for discounts on acquired loans. Slide 19, Horizon continues to maintain a strong capital position in these uncertain times. Management has been diligent in performing capital stress testing to ensure Horizon maintains adequate capital in a range of scenarios from mild to extreme. This is done in order to determine what action plans would need to be taken in these scenarios. To add to the capital position, during the second quarter, the company issued $60 million in subordinated debt at a rate of 5.625. This debt raise was to provide additional capital support and optionality as we navigate through and out of this economic downturn. Also during the quarter, the bank provided a $34 million dividend to the holding company to even be better prepared for the uncertainties still facing the economy in the months ahead. Accordingly, June 30, the holding company had just over $125 million in cash, representing nearly 18 quarters of fixed costs, which include interest on all debt, operating expenses at the holding company, and the current shareholder dividend level, which we are committed to maintaining. Now, for some additional comments on our loan portfolios, I'll turn it back over to Craig.