Horizon Bancorp, Inc.

And welcome to the Horizon Band Corps, Inc. conference call to discuss financial results for the second quarter of 2023. 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 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. Before turning the call over to the 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 Horizons' 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 are Chief Executive Officer and President Thomas Prane, EVP and Chief Financial Officer Mark Secor, EVP and Chief Commercial Banking Officer Lynn Kerber, and EVP and Senior Operations Officer Kathy DeRayder. At this time, I would like to turn the call over to Mr. Thomas Frame. Please go ahead, sir.

Thank you. Good morning. And thank you for participating in Horizon Bancorp's second quarter earnings conference call. Our comments today will follow the investor presentation and our press release that was published yesterday on July 26. To begin with, we wanted to thank and recognize our communities, our clients, and our advisors who have joined us throughout the year celebrating our 150th anniversary. The history of our organization is based deep in community involvement, a people-first philosophy, and highly engaged and talented team advisors. We have continually displayed a disciplined and balanced operating model that has successfully navigated economic cycles and consistently produced strong, total shareholder returns to our investors over time. As the leadership team will share in our presentation, our second quarter results were positive on many fronts. Our net income improved through solid quarterly revenue, which included a thoughtful approach to new production loan spreads and daily management of our deposit funding costs. These key revenue drivers were coupled with improved non-interest income in the quarter. The team continues to manage expenses very well, and our credit quality performance remains a positive staple for the franchise. As the industry faced with elevated deposit competition and client demand shifts to higher interest-bearing prospects, Horizon is navigating this environment well with a measured approach to deposit pricing and is continuing to execute on its strategy to accelerate growth and higher yielding assets. Our durable deposit relationships with tenured in-market clients, which is managed through our diversified funding platforms of retail, commercial, and treasury management, performed well this quarter by maintaining and slightly increasing our overall deposit balances. Additionally, today you'll learn about our forward view of our continued lending growth, the positive results of our pricing strategies, our active balance sheet management, and the ample liquidity that we believe positions Horizon Well for continued success through 2023 and beyond. Now to give you a quick summary of our strong core markets across Indiana and Michigan. We remind you that Horizons expansion and growth has occurred primarily in Michigan and Indiana's college and universities towns and within state and county government seats. These markets continue to provide community base that is traditionally more economically stable, which helps limit the real estate volatility of a typically large metropolitan area. Additionally, we continue to see inbound migration from high-cost states and considerable infrastructure investment in our core markets, where we have distribution that has resulted in strong balance sheets of our commercial and our consumer customers and aligns well with Horizon's conservative credit culture. To help communicate and provide insight in our Q2 performance on these fronts, I'm going to turn the call over to Lynn Kerber, our Executive Vice President and Chief Commercial Banking Officer, to provide detail on our loan and credit performance for the quarter. Lynn?

Thank you very much, Thomas. Good morning. Commercial loans for the second quarter had a net increase of $820,000 or one basis point on an annualized basis. Net fundings were 128 million for the second quarter versus 109 million for the first quarter. These results were impacted by extraordinary payoff in the second quarter and the associated participation loan accounting. Without these adjustments, commercial loans would have increased $60 million for the quarter, aligning well with our full-year growth forecast. The overall commercial pipeline remained solid with $118 million as of June 30th, compared to $130 million at the end of the linked quarter. Our customers continue to evaluate new investment opportunities, and we have seen increased activity across the sector, as well as public-private partnerships. partnership developments. Our new loan originations continue to be very diverse across our markets and consistent with our overall portfolio sectors with roughly one-half in non-owner-occupied CRE, 21% in owner-occupied CRE, and 28% in CNI. Consistent with prior periods, our commercial credit quality remains very strong with very low past dues as of June 30th. and one basis point of net charge-offs in the second quarter of 2023. Turning to slide seven, which highlights our overall composition of the commercial portfolio, it has remained very stable. There has been some continued focus on office and retail sectors, and with that in mind, we have highlighted our office and retail portfolios with some additional detail on slide eight. You will note that overall we had 162 million in office CRE representing 6% of our overall portfolio. The office loan portfolio is well diversified across our markets and comprised of properties in Midwestern cities that have not experienced the same vacancy rates found in some major metropolitan markets. Our retail CRE portfolios also totaled roughly 160 million representing 6% of the portfolio and is also well dispersed across our markets. Average loan size for both portfolios was $1.1 million and $777,000 respectively, with both experiencing strong credit quality metrics in both segments with no past dues or non-performing loans as of June 30th. On slide nine, we're providing some additional insight on our maturing CRE loans and interest rate repricing risk. For 2023, the remainder of the year, we have $77 million, or 4%, of our CRE portfolio maturing in the second half of the year. This portfolio currently has an average rate of 6.66%, and only $36 million currently has a rate under 6%, representing only 2% of our overall CRE portfolio. For 2024, there's $178 million in loans maturing, representing 10% of our overall CRE portfolio. This portfolio has an average rate of 6.02, and roughly half has a rate less than 6%, again, representing only 5% of our overall CRE portfolio. With these metrics in mind, we feel we are well-positioned for rate-related credit risk at this time. On slide 10, turning to consumer direct loan balances, you'll see that they increased $2 million through origination efforts of our branch platform. We continue to actively increase new production yields, improving the overall portfolio performance. Indirect auto decreased $25 million for the quarter, which is consistent with our strategic plan of redeploying to higher-yielding product types. And with the short duration, this provides flexibility for us in both the balance sheet and revenue goals. Our credit quality remains consistent in our consumer portfolios with higher quality borrowers with proven credit and income capacity to navigate the higher rate environment. This is reflective of the direct consumer loan portfolio displaying net recoveries for the quarter and 10 basis point year-to-date charge-offs for indirect loans. Slide 11 highlights our mortgage loan performance for the quarter. Our portfolio increased $12 million, which is consistent with expectations for 2023 and reflective of high-quality jumbo loan borrowers. Thus far for 2023, 70% of our year-to-date production is saleable. As seen with previous quarters, new production yields compare very favorably to those on payoffs and paydowns. Our team continues to adapt in the current environment and has expanded its core mortgage products and investors to provide additional flexibility and financing options for our highly competitive purchase market and new construction financing. With zero charge-offs for the quarter, our portfolio continues to reflect high-quality borrowers with significant payment capacity and also equity in their homes. Turning to asset quality metrics, They continue to be very strong, as outlined on slide 12. Net charge-offs for the second quarter were $274,000, representing one basis point of average loans. Our non-performing loans increased by $2.3 million, primarily due to non-accrual mortgage loans. However, these loans are well collateralized, and no loss is expected at this time. Overall, our non-performing loan ratio of 52 basis points is consistent with the prior quarter's performance, and past dues continue to be very low at 26 basis points of our total loans for the quarter. The allowance for credit loss increased slightly to 49.9 million, representing 1.17% of total gross loans, which we believe is appropriate given the level of charge-offs and non-performing loans, the condition of our high-quality portfolio, and market in 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. As noted on slide 13, our historical credit performance compares very favorably to other U.S. commercial banks. We have had a history of outperforming the market through prior economic cycles, and we believe we will outperform the market again as we progress through 2023. Now, I'd like to turn things back to Thomas, and he will provide an overview of our deposit portfolio and trends.