Horizon Bancorp, Inc.

Good morning, everyone, and welcome to the Horizon Bancorp conference call to discuss financial results for the three months ended December 31st, 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. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then 2. We do ask that you please limit yourself to one question and a single follow-up. You may rejoin the queue if you have additional questions. Please note, today's event is being recorded. Before turning the call over to management, please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's current 10-day 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. If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon Today, you can access it at the company's website, www.horizonbank.com. Representing Horizon Today are Chairman and CEO Craig White, President Jim Neff, Executive Vice President and CFO Mark Secor, Senior Vice President for Retail Lending, Noe Nahara, Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn, and Executive Vice President and Senior Commercial Credit Officer, Lynn Kerber. At this time, I'd like to turn the call over to Mr. Dwight. You may go ahead, sir.

Thank you, Rocco, and good morning. And thank you for participating in Horizon Bancorp's fourth quarter earnings conference call. Our comments today will follow the investor presentation and the press releases that we published yesterday, January 26. Horizon is pleased to report record earnings for 2021 in a solid fourth quarter that continues our momentum into 2022 and 2023 with strong commercial consumer loan growth, the successful integration of our fall branch acquisition, efficiencies gained from our late summer consolidation of 10 offices, and continuation of our excellent asset quality. We're very proud of what our associates have accomplished this past year and their incredible work ethic as we continue to build for the future. The momentum taking us into 2022 and 23 is due in part to the new associates and customers we welcomed from the 14 Michigan branches 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 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. Excluding acquisition-related and non-recurring costs, our fourth quarter expense-to-average asset ratio was 195%, support of our 2022 full-year goal to be below 2%. Now I'd like to discuss our promotions and retirement of a senior officer, which was announced yesterday. Jim Neff, president of Horizon Bancorp and Horizon Bank, on Monday shared his decision to retire at the end of the first quarter. Jim has been an integral part of our company's growth during his past 22 years with Horizon. as we grew from approximately $370 million in total assets to our current footings of over $7 billion. We thank Jim for his contributions to our success, and we wish him and his family good health and happiness in his retirement years. The consumer and commercial banking promotions and appointments we announced yesterday are all possible because of the depth of talent we have cultivated in our organization. We are promoting EVP Lynn Kerber to Chief Business Banking Officer and Noe Nahara to EVP and Senior Retail and Mortgage Lending Officer. Both Lynn and Noe are familiar with their expanded area's responsibility, which makes this transition seamless from a cultural standpoint and to maintain our growth momentum. In addition, Dennis Kuhn will move into the role as Regional Market President for Southwest Michigan and return to his hometown of Kalamazoo, where he has a long banking history, deep roots in the community and established our original office in 2010. Dennis's primary focus in his new role will be to grow commercial loans. Starting on slide four of our presentation, Horizon completed the fourth quarter reporting solid quarterly earnings at 49 cents per share or 54 cents per share in adjusted earnings, which compares favorably to the 52 cents per share adjusted earnings for the third quarter. Driving the quarterly results were net interest income growth, Organic Commercial and Consumer Loan Growth, Additional Revenue from the Acquired Offices, and the Cost Saves Achieved in the Ten Branch Closures. 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 opportunities within our attractive Midwestern markets. So why invest in Horizon? Well, our investment thesis is simple. We are a high-performing company located in attractive Midwest growth markets. We are on the right side of Chicago. We are a company that continues to look for opportunities to improve our offering model, as evidenced by the enhancements to our retail network and market area in 2021. We have consistent history of strong ROA and ROE. We have a positive earnings growth outlook for 2022, which we believe provides us another opportunity to favorably distinguish Horizon from its peers. To further support that we are a growth company, Horizon's compounded annual growth rate from 2002 through 2021 was 13% for total assets and 20% for net income. 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 average monthly transactions continue to shift away from branches to our digital virtual channels. As of last month, 75% of all transactions took place through our digital channels compared to 44% in 2018. The good news is throughout this pandemic, Horizon's online activity has stayed relatively constant, even with the reopening and closing of offices. Horizon embraced this shift before the pandemic, which, of course, accelerated the trend, and it was a key consideration in our annual branch performance review and the consolidation of 10 branches in August. Excellent examples of our technology investments that are paying off are trends in the online chat, online deposit account opening, and ability to support the branch network from our three independent call center locations. In 2021, Horizon was able to answer 86% of all online chats through our AI bots. And total chats increased in excess of 300% over the prior year. In addition, Horizon opened 12% of all new checking accounts online during the year, and we expect substantial increase in this effort in 2022. As part of our annual branch rationalization and due to our investments in technology, we see additional opportunities in reducing the number of branches in 2022. Now to talk about capital. Horizon manages and deploys capital well, as evidenced by our recent acquisition, stock buybacks for the year, and 25% increase in our quarterly dividend during the year with a 2.9% yield as of December 31, 2021. Horizon has reported in excess of 30 years on uninterrupted quarterly cash dividends. In the fourth quarter of 2021, Horizon Bancorp, Inc. did inject $60 million of cash into the bank to maintain strong bank capital ratios and to lower our FDIC insurance premium in 2022 by $400,000 to $500,000. This is part of our original plan when we announced the TCF acquisition. After this capital injection into the bank, the holding company still has cash on hand to cover more than six quarters of fixed costs and dividends. Now for our 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 had its fourth consecutive quarter of record-adjusted net income with new records for net interest income and adjusted diluted earnings per share. We are very pleased with these results and the continued positive core trends demonstrated in the fourth quarter. Starting with slide 15, The company's fourth quarter results were impacted by a pair of one-time events. The first, $884,000 of additional transaction costs from the recent branch acquisition, and the second is a $1.9 million mediation settlement for a Department of Labor dispute related to the ESOPs where Horizon acted as a trustee. Horizon is no longer in the ESOP trustee business, and as we reported in the fall, we sold all ESOP accounts to another service provider for a $2.3 million gain in the third quarter. The record net interest income for the quarter was primarily due to a higher level of interest-earning assets with cash continuing to move to the investment portfolio, along with growth in commercial and consumer lending and the runoff of lower-yielding PPP loans as they are forgiven. Continued growth in net interest income dollars through 2022 remains one of our goals for the year. We had a $2.1 million release for credit loss compared to $1.1 million provision expense in a linked quarter. We see continued strong credit performance, reductions in non-performing loans, and improving econometrics and believe we are appropriately reserved given the current state of our portfolio, the recovering economy, and our CECL modeling. Slide 16, as we continue to focus on increasing net interest income and an expectation of a rising rate environment, we wanted to provide a few details on our balance sheet. It's currently in an asset-sensitive position with approximately $1.8 billion of adjustable rate assets, of which approximately $925 million would move immediately with a rate change to their index. Shocking our balance sheet with a 100 basis point increase using 2021 net interest income We would generate an increase in net interest income of approximately 5.61%, or $10.2 million. Contributing to the increase are the expected deposit betas for rising rates, which currently range from 4% for consumer deposits to 45% on money market and public funds. Our internal forecast assumes three 25 basis point rate hikes during 2022, with the first in March. And in this scenario, we expect our asset-sensitive position to enable our net interest income and earnings to benefit from increases in short-term rates starting this year. Slide 17, the adjusted margin decline of 26 basis points during the quarter was positively impacted by 10 basis points from PPP income as net deferred fees were recognized for loan forgiveness. This was offset by 32 basis points of margin compression from the high average cash balances held during the quarter. This decrease in the margin was expected as a result of the branch acquisition that closed on September 17th, which resulted in the average balances for Fed funds sold to be $334 million higher in the fourth quarter compared to the third quarter, along with average balance of investments being $459 million higher for the same period. However, even with this drop in the margin, the growth of earning assets in the fourth quarter increased net interest income by $3.4 million. Slide 18, the loan yield decreased four basis points in the fourth quarter, primarily due to the decreasing amount of PPPC income recognized. Excluding PPPCs, the fourth quarter yield would have increased one basis point from the third quarter. The steady loan yield is a result of the growth in commercial and consumer loans changing the portfolio mix to higher yielding assets, helping to offset the lower rates for new loans being originated than the current portfolio rates. As the majority of PPPCs have been recognized, additional downward pressure on the loan yield is expected going into 2022. Slide 19. Thank you for joining us. With $593 million of cash on the balance sheet at the end of the fourth quarter, additional purchases of investments during the first quarter are expected to increase the investment portfolio to approximately $3 billion as we continue to focus on increasing net interest income. Also during the quarter, we increased held to maturity investments to 57% of the investment portfolio. Slide 20. Slide 21. Margin compression was slightly tempered by our continued improvement in funding costs, which reflected the low-cost funding acquired in the branch acquisition in September, which added to Horizon's valuable core deposit franchise. The CD portfolio's 23 basis point decrease in pricing reduced total funding costs as higher-cost term deposits matured during the quarter. 479 million of CDs with an average cost of 49 basis points will mature during 2022 and will continue to reduce our cost of funds. Further improvement in our long-standing low-cost funding model also reflected non-interest bearing deposits growing by 16% in the fourth quarter. Slide 21, setting aside the one-time acquisition and mediation costs, our fourth quarter operating expenses underscored our long-standing ability to manage expenses while continuing to invest in growth opportunities and the business. Even with our first full quarter of costs for the acquired Michigan operation added in late September and higher FDIC insurance premium, our fourth quarter core operating expenses of $36.6 million represented an increase of only 9% from the third quarter and 0.4% from the same period last year. Core operating expenses continued to be leveraged as we saw non-interest expense to total average assets decline 10 basis points to 1.95% annualized, fully supporting our 2022 goal of less than 2%. Now, Noe Navarro will provide an update on mortgage and consumer lending.