Horizon Bancorp, Inc.

Good morning, everyone, and welcome to Horizon Bancorp conference call to discuss financial results for the three months ended September 30th, 2021. 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. Please note this event is being recorded. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up. If you have further questions, you may reenter the question queue. Before turning the call over to management, please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's 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 this 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 DeWitt and Executive Vice President and Chief Financial Officer Mark Seeker. They will be joined for the question and answer session by President Jim Nuff, Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn, and Senior Vice President for Customer Banking, Noe Nakar. At this time, I'd like to turn the call over to Horizon's Chairman and CEO, Greg DeWitt. Please go ahead.

Thank you, Emily. Good morning, and thank you for participating in Horizon Bancorp's third quarter earnings conference call. Our comments today will follow the investor presentation we published yesterday, October 27. Horizon's third quarter exemplifies that we are a company on the move and represents perhaps the busiest quarter in our company's 148-year history. We consolidated 10 offices during the quarter, acquired 14 Michigan branches, and sold our ESOP trustee accounts as we focus on more profitable growth opportunities. Horizon's third quarter represents our efforts to allocate resources and capital to where we can achieve better returns, and the results are proving to be successful, with organic loan growth and record earnings during the quarter. The momentum taking us into 2022 and 2023 is due in part to the new associates and customers we welcomed from the 14 Michigan branches we acquired on September 17th. This logical extension of our franchise includes adding approximately 50,000 new households, three commercial lenders, and low-cost and stable core deposits. Horizon has already proven that the mass and scale work to drive shareholder value, and our recent branch acquisition only contributes to that momentum. In addition, the 10 branches we closed on August 27th is a continuation of our ongoing effort to maximize the efficiency of our retail franchise. This focus results in our consistently low non-interest expense to average asset ratio, which was just 2.09% in the third quarter, down from 2.18% in the second. We expect to continue to improve efficiency even as we redeploy employees from the closed branches to fill open positions and reinvest much of the savings into technology designed to enhance sales and customer experience. As far as building for the future, We increased the number of commercial lenders since December 2020 by approximately 20% with additional offers pending. And we've added capacity to our in-market indirect auto lending program in our new Michigan footprint. Horizon is well positioned to seize upon future opportunities and increase returns as we shift earning assets from the investment portfolio into higher yielding loans. Starting on slide four, company highlights. Horizon completed the third quarter reporting record quarterly earnings at $23 million, or $0.52 per share. Driving the quarterly results were record net interest income, organic commercial and consumer loan growth, and continued focus on efficiency. Given the size of our balance sheet, Highly efficient operations and talented workforce, 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. We are a high-performing company in growth markets. Horizon has a disciplined operating culture. We accomplish goals, get things done. This is best represented by a return on average assets of 1.41% and a return on average equity of 12.64% for the quarter. In effect, we continue to focus on efficiency as evidenced by consolidating 35 branches over the past six years. Horizon is a compelling value play as represented by trading multiples at quarter end of 1.51% price to tangible book value and 9.2 times price to earnings for the trailing 12 months. We operate in attractive Midwest markets. As we like to say, we are on the right side of Chicago. Finally, our risk profile is lower than most Midwest banks as our operating model in loan mix consistently performs well in varying economic cycles. As you'll see on slides 7 and 8, we are clearly demonstrated consistent growth over the last 18 years. Compounded annual growth rate for total assets, 13.5%, and compounded annual growth rate for net income, 18.8%. For the past five years, 2016 through 2020, the compounded annual growth rate for assets was 18%, which is 5.5 times the rate of change to our gross domestic product, and 2.9 times the average growth rate for community banks. Horizon is a growth company. On slide 9, we remind you that Horizon's expansion and growth has occurred primarily in college and university towns, in the state or county government seats. Therefore, a majority of our footprint has an economic base that is traditionally more stable than other areas of Indiana and Michigan. Our recent branch acquisition expands our presence into college towns, and an eight of the 11 counties where the acquired branches are located. Horizon will either be number one, two, or three in deposit market share. Horizon remains positioned well to take advantage of the outbound migration from Illinois, which continues to increase as consumers and businesses exit, dense living spaces, high taxes, increase in crime rates, and a high cost of living. Both Indiana and Michigan continue to show improving economies as evidenced by low unemployment rates in an increase in total workforce. As a result of the tight labor market, we are starting to see some wage inflation. On slide 10, you'll see highlights at primary markets where we are engaged in some exciting economic events creating new business opportunities for Horizon. Moving on to digital transformation, Horizon's average monthly transactions continue to shift away from branches to our digital and virtual channels. As of last month, 76% of all transactions took place through our digital channels compared to 44% in 2018. The good news is that since our branch network's second reopening in January 2021, the online activity has stayed relatively constant. Horizons embraced this shift before the pandemic, which of course, accelerated the trend. It was a key consideration in our annual branch review in the consolidation of 10 branches in August. Horizon's focus on our retail network's efficiency has helped increase our average deposit per branch over the last four years from $46 million to $72 million. Horizon manages and deploys its capital well, as evidenced by our recent acquisition, stock buybacks for the quarter, and increase in our quarterly dividends. Year-to-date, we increased our quarterly dividend twice for an aggregate year-to-date increase of 25% and a dividend yield of 3.3% at quarter end. Now for the financial updates, my privilege to introduce to you Horizon Bank's Executive Vice President and Chief Financial Officer, Mark Secor. Mark?

Thank you, Craig. Horizon had its second consecutive quarter of record net income with new records for net interest income and pre-tax, pre-provision net income. We're very pleased with these results and the positive core trends demonstrated in the third quarter. Starting with slide 15, the company's third quarter results were impacted by two one-time events, the transaction costs for the branch acquisition and the sale of the ESOP trustee accounts. We recorded a $2.4 million gain for the sale of the ESOP trustee accounts and recorded $2.8 million of transaction costs from the branch acquisition. Those include direct transaction costs and one-time credit loss expense for the acquired loans. The record net interest income was partially due to a higher level of interest-earning assets with cash continuing to move to the investment portfolio along with maintaining a steady net interest margin. Continuing to grow net interest income is still one of Horizon's key objectives. Non-interest income reflected an increase over last quarter primarily due to the $2.4 million gain on sale of the ESOP trustee accounts and also a recovery of $867,000 from an acquired charged-off loan. These were partially offset by lower mortgage revenue. We had a $1.1 million increase We had a $1.1 million expense for credit loss compared to a $1.5 million release from the allowance for credit losses in a linked quarter. The day one credit losses allocated to the acquired loans was $2 million. Without that transaction, there would have been another small release of the allowance for credit losses. We see continued strong credit performance, low net charge-offs, and improving econometrics We continue to believe we are appropriately reserved given the current state of our portfolio, the recovering economy, and our CECL modeling. Slide 16, the adjusted margin declined only one basis point during the quarter and was positively impacted by 16 basis points from PPP income as net deferred fees were recognized for loan forgiveness. This was offset by 16 basis points of margin compression from high cash balances held during the quarter. The 13 basis point increase in the loan yield and the 7 basis point decrease in the cost of funding helped manage the impact of the increase in the average balance of lower yielding investments during the quarter. Earning assets averaged $6 billion during the third quarter and reached $7 billion at September 30, 2021. Starting the fourth quarter with an additional $1 billion in earning assets is expected to contribute to an increase in net interest income but may also put pressure on our margin as the majority of the earning assets increase are in lower yielding assets. Slide 17. The loan yield increased for the third consecutive quarter to 4.56% due to PPP loan income recognized and the reduction in the loan mix of lower-yielding PPP and mortgage-related loans. Without the impact from PPP loan income recognized during the quarter, the loan yield would have decreased five basis points compared to the second quarter loan yield without the impact of PPP loan income. As loans continue to reprice, The remaining PVP loan forgiveness or loan fees are recognized and new product is originated at lower rates. Additional downward pressure on the loan yield is expected in the fourth quarter and going into 2022. Slide 18, the investment portfolio was $2.4 billion at the quarter end and has increased $1.1 billion since the end of 2020. 630 million of this growth is directly related to the low-cost liquidity onboarded with our September branch acquisition. During the quarter, deposits grew 1.2 billion, which included 846 million from the branch acquisition and 352 million organically. With 972 million of cash on the balance sheet at the end of the third quarter, additional purchases of investments are expected as we continue to focus on increasing net interest income. Slide 19, margin compression was tempered by our continued improvement in funding costs, which reflect Horizon's valuable and growing core deposit franchise. The CDs portfolio 15 basis point decrease in pricing reduced total funding costs as higher cost term deposits matured during the quarter. 162 million of CDs with an average cost of 50 basis points will mature during 2021 and continue to reduce our cost of funds. The 4% growth in non-interest-bearing deposits also contributed lower funding costs in the third quarter. In addition, the acquired deposits from the branch acquisition will help to reduce deposit costs as their average cost is lower than ours. As total deposits continue to grow, we are also strategically pricing deposits to manage liquidity and stem inflows from transactional and transient sources. This, of course, is balanced against our commitment to stand by our longstanding customer relationships and high potential new opportunities in our growth markets in Indiana and Michigan. Slide 20. Mortgage revenue from gain on sale of mortgage-related income continued to support non-interest income, but at a lower level than in the third quarter of 2020. Year-to-date gain on sale of mortgage-related income was $2.1 million higher in the same period in 2020, as last year's mortgage servicing right impairment was partially offset by mortgage servicing right recovery so far this year. The continued high level of mortgage production, with 61% coming from purchase activity and strong percentage gains, are the primary contributors to our non-interest income for the quarter. Based on local and national refinancing activity, we expect strong line contributions to continue from the mortgage business in 2021 and into 2022. Slide 21, during the third quarter operating expenses increased as we had 799,000 transaction related costs and an increase in salary and benefits costs. Reflecting our investments in talent and higher bonus expense accruals as our team continues to achieve incentive targets. Core operating expenses continue to be leveraged as we saw non-interest expense to total average assets decline to 2.09% or 2.05% when excluding transaction costs. We anticipate with the ability to leverage the asset growth from the branch acquisition that we will be under 2% of non-interest expense to average assets in the fourth quarter or on into the first quarter of 2022. Now for some additional comments on our loan portfolios, I'll turn it back over to Craig. Thank you, Mark.