Horizon Bancorp, Inc.

Good morning, everyone. Welcome to the Horizon Bancorp conference call to discuss financial results for the first quarter of 2023. All participants will be in listen-only mode. If 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 telephone keypad. To withdraw your question, please press star then two. Please note that this 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 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 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'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. For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they can be accessed at the company's website, horizonbank.com. Representing Horizon today, our Chairman and Chief Executive Officer, Craig DeWitt. President Thomas Brain. EVP and Chief Executive Officer, Mark Secor. EVP and Chief Commercial Banking Officer, Lynn Gerber. And EVP and Senior Retail and Mortgage London Officer, Noe O'Hara. This time, I'd like to turn the call over to Mr. Craig DeWitt. Please go ahead, sir.

Thank you, Nick, 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 26. We are proud to announce that Horizon Bank is celebrating its 150th anniversary in business with our original banking charter issued in April of 1873. At the end of the first year of business, our total assets were 100,000. And 150 years later, we now exceed 7.8 billion. We like to say that we are 150 years strong. Throughout the bank's long history, as well as our management team's decades in banking, we have successfully leveraged our experience and operating discipline to guide Horizon through multiple economic cycles and industry challenges. As you'll hear in some detail in a moment, Our durable deposit relationships with in-market clients with average tenure in excess of 10 years, along with our deliberate deposit mix in pricing, has served us well through the banking sector's recent market volatility. Deposit pricing has increased within the local markets we serve, with particular price sensitivity in the public fund sector. The majority of our deposits are in stable markets, with several municipal deposit accounts in our legacy markets having banked with Horizon for most of our 150 years. In addition, we are readily able to fund 8.4% annualized loan growth and modest deposit runoff in the quarter, with lower cost borrowings and cash flows from the investment portfolio. Today you'll also learn more about how lending opportunities in our attractive Midwest markets, loan pricing discipline, ample sources of liquidity, and active balance sheet management have allowed us to position Horizon Wealth for continued success through 2023 and beyond. As you saw in our earnings release, Horizon did report a decline in quarter-over-quarter net income, driven by lower net interest margin and lower non-interest income, and partially offset by good expense control and lower marginal tax rate. The end result for the quarter was return on average assets of 0.94% and return on tangible equity of 14.18%, which are respectable returns given the competition for deposits in volatile markets. Now, to give you a quick summary of our resilient Midwest markets... We remind you that Horizon's expansion and growth has occurred primarily in college and university towns and in 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 our real estate values do not have the volatility of a typical large metropolitan area. In addition, Horizon's footprint is well positioned due to considerable infrastructure investments and located in fiscally responsible states. To take advantage of the outbound migration of Illinois, which continues to increase as consumers and businesses exit dense living spaces, high taxes, high cost of living, and high crime rates. Our local markets have stabilized. we see the number of open positions continue to decline and unemployment rates remaining relatively flat. Given the stable unemployment rates, the improved balance sheets of our commercial customers and our close relationships with these businesses, as well as our conservative underwriting culture, Verizon's asset quality remains strong. To conclude my comments, I would like to remind listeners this will be my last earnings call as I move into the chairman role and Thomas Frame becomes Haridon's next chief executive officer effective June 1st. I've enjoyed working with the investment community and shareholders and have always appreciated your insights into our industry. It is now my pleasure to turn the call over to Thomas Frame, Haridon's next chief executive officer. Thomas.

Thank you, Craig. Earlier this year, we provided 2023 goals to our investors, and we wanted to take a quick Q1 update to these full-year objectives. Our loan growth continues to be strong both in the commercial and consumer sectors, which we expect to be valuable contributors to core earnings in subsequent quarters. Our net extra income and net extra margin are tracking at the lower end of our annual goals, which is not unexpected as we see benefit from our loan growth throughout the year and recognizing the elevated funding costs experienced across the industry in Q1. Expenses continue to be proactively managed across the organization. specifically in segments of our business impacted by rising rates, such as mortgage and consumer lending. Our operating metrics of ROAA and ROAE in Q1 is tracking below our full year expectations, and as Craig mentioned, was impacted by elevated deposit pricing and seasonal non-interest income. We will provide more detail on these segments of our business within the presentation. Transitioning to lending, highlighting the quarter was our commercial loan balances increasing $38 million, or 6.1% annualized. Net commercial funding of $109 million was strong and, again, well-balanced across our diverse asset classes and geography. The commercial pipeline is well-positioned at $130 million and continues to provide confidence in our ability to generate full-year, mid- to high-single-digit growth. Importantly, portfolio yields continue to improve as new production replaces paydowns and payoffs. Consistent with previous quarters, our commercial loan portfolio continues to display strong credit metrics with one basis point of charge off. As we transition to slide 12, we have included a breakdown of our commercial loan portfolio to show its granularity and also its diversification across multiple asset classes. Horizon's non-owner-occupied office represents just 7% of commercial loans, consisting of properties in Midwestern cities that have not experienced the vacancy rates found in major metropolitan markets and across the country. Horizon's non-owner-occupied multifamily represents only 10% of commercial loans and is focused on properties in major university towns and growing local markets that are experiencing excess demand for rental properties and strong occupancy rates. We emphasize creating relationships with borrowers who are seasoned operators with strong balance sheets and cash flows. We continue to experience positive performance in these portfolios while remaining conservative in new project approvals and managing our exposures. On slide 13 for consumer loans, consumer loan balances increased $56 million, primarily through the addition of a high-quality HELOC portfolio yielding over 9%. Organic balances are relatively flat, reflective of the seasonal nature of the portfolio. We continue to actively manage new production yields, improving the overall portfolio performance. Our credit quality remains consistent with higher quality borrowers with proven credit and income capacity to navigate the higher rate environment. This is reflective of the consumer loan portfolio displaying net recoveries for the quarter. Moving to indirect lending on slide 14. As we previously outlined, our intent is to keep our indirect auto portfolio relatively flat in 2023, focusing on increasing yields and consistent positive credit performance. Yields on new production in the portfolio continue to increase in Q1. Additionally, the short duration of the portfolio allows new originations to quickly impact the portfolio yields, and it's also providing flexibility for our LCO strategies on loan growth and mix. Credit performance continues to perform well with 26 basis points and analyzed charge-offs in Q1. As we transition over to mortgage, in concert with consumer and indirect portfolio, we continue to be smart in our balance sheet deployment with mortgage balances increasing approximately $5 million in Q1. As seen with previous quarters, new production yields compare very favorably to those on payoffs and paydowns. Our production is aligned with the industry trends of a modest Q1 in originations, and the team has expanded its core spending lending products to provide additional flexibility and financing options for the highly competitive purchase market. With zero charge us for the quarter, our portfolio continues to reflect high credit quality borrowers with significant payment capacity and also equity in their homes. Slide 16 displays our credit performance, and overall, Horizon's credit metrics remain strong, as evidenced by the .01% charge-offs and the continued low levels of non-performing loans. Additionally, our allowance for credit losses remains about $50 million, or 1.17% of total loans, which we believe is appropriate given the level of charge-offs and non-performers, the condition of our high-quality portfolio, and market and economic conditions. Credit quality across all of our lending classes is performing well and reflects our history of consistent and well-balanced approach to lending. Slide 17 is reflective of Horizon's historical credit performance relative to other U.S. commercial banks. Horizon has a history of outperforming the market through prior economic cycles, and we anticipate this consistent outperformance as we progress throughout 2023. Reviewing our deposits on slide 18th, Horizon's deposit portfolio is very granular and seasoned. Each segment consists of clients with an average tenure of over 10 years and with average balances reflective of our relationship banking model focused on helping businesses, consumers, and communities in and around the Midwestern markets we call home. Additionally, as we examined our portfolio, over 50% of our balances are in transactional checking accounts. These are predominantly tenured operating accounts of our local clients. They are not online generated deposit accounts sourced through high introductory rates, but relationships with clients that know and trust Horizon Bank. We have 75% of our clients' balances collateralized or insured through the FDIC or Intrify. Additionally, in Indiana, public funds of the state and its counties, cities, towns, schools, and the like are insured through the Indiana Public Deposit Fund to the extent they exceed federal coverage. As we move to slide 19, this provides detail on the deposit flows in the quarter. We're very upbeat and positive about the strength of our portfolio throughout the first quarter. Our core relationships consisting of consumer and commercial were relatively unchanged in total balances with modest movement between deposit classes. During Q1, the consumer portfolio was down about 0.54%, with commercial deposits modestly down 1.14%. The combined change of these two portfolios was minimal at 0.78%. In response to the events in Q1, deposit balances within our public funds portfolio was down about 7.9%. Approximately 60% of this change occurred in March as the market experienced significant increases in the bids for liquid municipal funds in this highly fluid marketplace. Without this significant shift in market pricing, our public funds portfolio was aligned with its historical seasonal patterns. Understanding our overall core deposit portfolio was performing well, we elected to fund the balance sheet at more attractive rates with the anticipation of a normalized pricing structure where we turn to public funds bidding in subsequent quarters. As Mark will outline in the upcoming slides, Horizon maintains significant excess available liquidity and attractive borrowing costs. Overall, we're very positive and delighted with the stability and resiliency of our core deposit base in Q1. Additionally, we were pleased with the proactive engagement of our advisors with our clients, helping them understand the events in the marketplace during March and reassuring their confidence in Horizon Bank. This was a key part of our success in retaining our core clients and experiencing minimum deposit funding impact in the first quarter. I'll transition over to Mark to provide additional insight in our Q1 results and what we believe is an excellent positioning for the balance of 2023. Thank you, Thomas.