Horizon Bancorp, Inc.

Good morning, everyone, and welcome to the Horizon Bancorp conference call to discuss financial results for the three months ended March 31st of 2022. All participants will be in a 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 touchtone phone. And to withdraw your question, please press star then two. We ask that you please limit yourself to one question and one follow-up, and if you have further questions, you may re-enter 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 risk 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 at www.horizonbank.com. Representing Horizon Today are Chairman and CEO Craig Dwight, Executive Vice President and Chief Financial Officer Mark Secor, Executive Vice President and Senior Operations Officer Kathy DeRuiter, Executive Vice President and Chief Commercial Banking Officer Lynn Kerber, and Executive Vice President, Senior Retail and Mortgage Lender Officer Lending Officer, excuse me, Noe Nahira. And at this time, I would like to turn the call over to Mr. Dwight. Please go ahead, sir.

Thank you, Chuck, 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 27th. Horizon is pleased to report a continuation of record earnings for the first quarter 2022 and solid momentum going into the second quarter with strong commercial consumer loan growth. The successful integration and stabilization of our branch acquisitions, the efficiency gained from the late summer consolidations of 10 offices, the recently announced plans to close an additional seven offices, and continuation of our excellent asset quality. We are very proud of our associates at Horizon and how they successfully shifted from an internal pandemic-related focus in 2020 to return to our growth and efficiency initiatives in 2021 and 2022. Starting on slide four of the presentation, Horizon completed the first quarter reporting record earnings of $0.54 per share, which compares favorably to the $0.49 per share reported for the fourth quarter. Verizon's financial metrics are notable. At quarter end, as we reported, return on average assets of 1.31%, return on average tangible equity of 17.7%, and an efficiency ratio of 58.7%. Driving the first quarter results were an increase in net interest margin, annualized double-digit organic commercial and consumer loan growth, additional revenue from the acquired offices, and the cost saves achieved from the 10 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 growth opportunities within our attractive Midwestern markets. So why invest in Horizon? 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're located in attractive Midwest growth markets. Regional infrastructure improvements are attracting record inflows of private investment into Indiana and Michigan and include the commuter rail line expansion in northwest Indiana known as Double Track and West Lake County extensions. The creation of a regional transportation authority focused on promoting transportation-oriented development. University partnerships to promote the quality of life. Investment in quantum communication lines between Chicago, Lafayette, and South Bend. The American Rescue Plan dollars being invested in roads and infrastructure to support workforce housing. Both Indiana and Michigan are ranked in the top quartile for manufacturing output, and we are seeing considerable investment rolling back into manufacturing as they creatively manage through supply chain and labor force availability challenges. We have a positive earnings outlook for 2022, which we believe will provide us another opportunity to favorably distinguish horizon from our peers. To further support that we are a growth company, Horizon's compounded annual growth rate from 2002 to 2021 were 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 key advantage to technology over community banks include our in-house CRM and core platforms. Due to lower costs for transactions than our peers and the 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 proven very effective for when you're integrating acquisitions, including the last 14 branch transaction. 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. As you can see on page 11, Horizon has more than doubled its 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 2021. Our digital transactions increased from 44% in 2018 to over 75% in 2021. We increased online consumer deposit account opening from 12% over the past 12 months to 20% in the first quarter of 2022, which compares favorably to our peer average of only 4%. And 86% of our online chats are answered by our bots. Horizon 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, our commitment to opportunistic stock buybacks, dividend increases aligned with earnings growth, and effective use of capital to organic initiatives. Our shift this year is the rising interest rates and the investment analysts focused on accumulative other comprehensive income and the mark-to-market adjustments occurring on 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 companies based on recent reporting. As a result of the unrealized losses, Horizon's TCE declined to 6.94% as of March 31st. All regulatory capital ratios continue to be robust, and our economic value portfolio equity actually reports an increase in total capital when you mark an entire balance sheet. This valuation also reflected in our earnings results for the first quarter. Due to the bank's strong capital position, we believe that we still have significant flexibility to pursue our organic and acquisitive growth strategies and discipline stock buybacks. In addition, Horizon sees no change in our dividend policy as we fully expect to continue our 30 years plus of uninterrupted quarterly cash dividends and dividend increases aligned with earnings. Now it's my pleasure to turn this over to our Executive Vice President and Chief Financial Officer, Mark Secor. Mark?

Thank you, Craig. Horizon reported record net income in the first quarter due to strong loan growth and moving excess cash into higher yielding investments. We are pleased with these results we achieved in the first quarter and see strong momentum going into the second quarter. Starting with slide 15, the company's first quarter results were positively impacted by the recapture of all the prior impairment on the mortgage servicing asset, totaling $2.6 million, along with the slowing of depreciation on the servicing asset due to slower prepayment speeds. Net interest income for the quarter was down from last quarter primarily due to $900,000 less from purchase accounting loan marks and $1.7 million less in PPP income. We expect to see growth in net interest income as PPP income has been replaced by loan growth, cash deployed into higher yielding assets, and increasing interest rates. We had a $1.4 million release for credit losses compared to a $2.1 million release in a linked quarter. We see continued strong credit performance, low non-performing loans, and low charge-offs and believe we are appropriately reserved given the current state of our portfolio and the current economic outlook for our CECL modeling. Slide 16, as we continue to focus on increasing net income in an expectation of a rising rate environment, we wanted to provide a few details on our balance sheet. As of March 31st, we are in an asset-sensitive position with a 12-month gap ratio of 125% that includes approximately $1.9 billion of adjustable rate assets, of which approximately $1.1 billion would move with a rate change to their index. Asset sensitivity was reduced during the quarter as additional cash was moved to higher-yielding assets in loans and investments to generate more net interest income. This increase This increased the March 31st base case in our interest rates risk model by $14 million of net interest income from our September 30-21 base case. As a result of being less asset sensitive, there is less volatility when modeling a shock to our balance sheet. At a 100 basis point increase as of March 31st, we would generate an increase in net interest income of approximately 1.21%, or $2.5 million. Contributing to this increase are the expected deposit betas used for the rising rates, which is currently in a range from 4% for consumer deposits to 45% on money market and public funds. As additional increases in short-term rates are expected, our asset sensitivity sensitive position will enable our net interest income and earnings to benefit from these increases. Slide 17. The adjusted margin increased seven basis points during the quarter and was positively impacted by only two basis points from PPP income, as most of this revenue has now been realized. This was offset by 11 basis points of margin compression from the high average cash balance held during the quarter. This increase in the margin was expected as cash was deployed to higher-yielding assets and funding costs decreased. With cash deployed and the impact of PPP loans reduced, along with the expected loan growth and rising interest rates, the margin is expected to continue to expand during 2022. Slide 18, the investment portfolio was at $3.1 billion at quarter end, and it increased $405 million since the end of last quarter. We expect to maintain the portfolio during 2022, which has a book yield of 2.23% and an effective duration of 6.8 years. Also during the quarter, we increased held to maturity investments to 64% of the investment portfolio from 57% at December 31st, 2021, which helped lessen the impact of the increase in longer-term rates. Slide 19. The unrealized loss on avail-for-sale securities in the first quarter reduced tangible common equity by 67 basis points, which is in line with what we are seeing in the industry. As we have the ability and intent to hold these investments to maturity, these losses in addition, the current reduction to TCE would have been earned back in approximately three quarters from retained earnings. As a jump in longer term rates, specifically in the two to seven year range, resulted in unrealized loss being more in line with the rate increase of over 100 basis points. We currently estimate that an additional 100 basis point rate shock over the next quarter would result in approximately another 40 basis point decline in TCE. The move of approximately $450 million of available for sale securities to held to maturity in the fourth quarter, along with purchases of longer-term investments being put into held to maturity, has helped manage the impact of the rising rates to our TCE. The impact of rising rates only recognize certain items, like unrealized losses on available for sale investments, and not the increase in value of liabilities, like core deposits. When the entire balance sheet is valued, our economic value of equity increased in the first quarter compared to the fourth quarter. With this decrease in TCE, 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 activities in the future. Slide 20 Margin improvement was slightly tempered by our continued improvement in funding costs, which reflected the low-cost funding acquired in the branch acquisition in September. We believe that our valuable low-cost core deposits will provide significant opportunity and flexibility going into a rising rate environment. Slide 21. Core operating expenses were impacted by higher healthcare costs, seasonal maintenance expense, and continued investments in technology. Expenses continued to be leveraged as non-interest expense to total average assets was 2.3% for the first quarter. Continuing to leverage the expense run rate in the first quarter during 2022 to generate additional revenue will help move non-interest expenses to total average assets to our goal of 2% or less. To help with this goal, the PPE income seen in the past quarters has been absorbed by strong commercial and consumer loan growth along with cash moved to higher yielding assets. Mortgage servicing income will continue to help hedge the anticipated lower mortgage gain on sale income as refinancing and prepayment speeds have slowed. Due to our commercial loan growth, we have also seen a strong pipeline in our treasury management services and anticipate growth in fee and merchant income. As part of our annual branch optimization process, we announced plans to consolidate seven branches in 2022, which will continue to help manage expenses. The one-time charge on fixed assets of approximately $432,000 before tax will be realized in the second quarter with an anticipated payback of approximately six months. We also have made additional investments in tax credits that will continue to support and improve our effective tax rate. Now I'll turn it back over to Craig to provide an update on our lending activities.