Horizon Bancorp, Inc.

Good morning, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the fourth quarter and full year 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 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 most recent Form 10-K and its later filings with the Securities and Exchange Commission. 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 Executive Vice President and Chief Commercial Banking Officer Lynn Kerber, Executive Vice President and Senior Operations Officer Kathy DeRuiter, Executive Vice President, Corporate Secretary and General Counsel Todd Etzler, Executive Vice President and Chief Financial Officer Mark Secor, and Chief Executive Officer and President Thomas Prame. At this time, I would like to turn the call over to Mr. Thomas Prane. Please go ahead, sir.

Good morning, and thank you for participating in Horizon's earnings call. We are pleased to share our fourth quarter and full year 2023 results. The fourth quarter experienced many positive trends highlighted by strong lending results that were led by our commercial banking team, which posted a 13% annualized growth rate in Q4. Verizon also continues to see excellent credit metrics with low non-performing loans and charge-offs, with provision expense for the quarter primarily reflective of our positive loan growth and modest charge-offs. In Q4, we were pleased to see net interest income expand as a result of our discipline pricing strategy and the resiliency of our core deposit base. Late in the quarter, we also executed on a balance sheet restructuring, which positioned the company exceptionally well heading into 2024, to further enhance our financial performance with significant excess cash that can be deployed into higher-yielding assets and a meaningful reduction in lower-yielding securities and liquidity ready to fund a robust loan pipeline. Within our comments today, we will update the fourth quarter and full-year results, the positive momentum in our core revenue platforms going into 2024, financial details from the balance sheet restructuring, and progress in our new leasing divisions. Additionally, we'll provide insight to our continued discipline operating model, as well as our well-positioned capital and liquidity levels that will continue to build throughout 2024. To offer more detail into our fourth quarter results, let me introduce Lynn Kerber, our Executive Vice President and Chief Commercial Banking Officer, to shed light on our lending and credit performance. Lynn?

Thank you, Thomas. Beginning on slide five, we are pleased to report commercial loans increased $85.7 million for the fourth quarter, or 13.1% on an annualized basis. Net fundings were 117 million for the quarter versus 96.8 million for the third quarter. Our average commercial loan portfolio yield increased from 5.80% for the third quarter to 6.05% for the fourth quarter, And new production yields increased from 7.50% to 7.87% in the fourth quarter. New loan originations continue to be very diverse across our markets and industries. In the fourth quarter, 25% of our new fundings were C&I and 11% owner-occupied commercial real estate, with the balance of 64% being diversified across the various commercial real estate categories. As our equipment finance division ramps up in 2024, we expect C&I production to expand measurably as a proportion of both new originations and a total commercial portfolio. We have hired several key managers for the equipment financing division and expect balance sheet growth in Q1 with continued expansion throughout the second quarter. The overall commercial pipeline increased from 145 million at September 30th to $167 million as of December 31st. Activity continues to be well diversified by industry and geography, and this pipeline excludes the new equipment finance business, which we expect to contribute over $100 million in 2024. Commercial credit quality remains strong, with year-to-date net charge-offs of two basis points on an annualized basis. On slide six, we have an overview of the loan portfolio as of December 31st, 2023, with a mix of 61% commercial, 15% residential, and 23% consumer. Year over year, commercial loans increased $208 million, and our residential mortgage increased 4%, and consumer loans increased 5%, which is a net effect of an increase in home equity loans and decrease in indirect loans. Also provided for reference is a breakdown of key sectors in our commercial portfolio, which demonstrates no significant concentration in any one sector, including office, which represents just 3.5% of our total portfolio and less than 6% of commercial loans. We believe our portfolio breakdown is well-balanced and represents the disciplined nature of Horizon's risk profile. Turning to slide seven, you will see the consumer direct loan balances increase $27 million during the quarter, driven principally by the addition of transactional home equity lines of credit. Indirect auto loans decreased by $38 million in the quarter, which is consistent with our stated strategy of reducing exposure in this lower-performing loan category and redeploying capital to higher-yielding product types. The average consumer direct yield increased from 8.05% to 8.26% for the portfolio with an average of 8.95% for new production. The average yield for consumer indirect was 3.27%, which is consistent with recent quarters. Credit remains positive and in line with expectations with year-to-date net recoveries, consumer direct at one basis point, and consumer indirect charge-offs at 36 basis points. Slide 8 highlights our mortgage loan performance for our quarter. Our portfolio was stable and consistent with our expectations for 2023, aligning with industry trends. Mortgages increased $5.7 million in the fourth quarter, representing a 3.4% increase on an annualized basis. The average mortgage loan yield was 4.32% for the portfolio. and 7.50% for new production. With zero charge offs for the quarter, this portfolio continues to reflect high quality borrowers with significant payment capacity and equity in their homes. Our asset quality metrics continue to be strong as outlined on slide nine. Past dues over 30 days were 0.38%, a slight increase which was spread across all portfolios. Non-performing loans increased slightly from 19.4 million to 19.6 million. However, they decreased one basis point as a percent of total loans. The increases were primarily in retail loans offset by reduction in commercial non-performing loans. Net charge offs for the fourth quarter were 785,000 representing two basis points of average loans. The provision of $1.1 million was primarily due to loan growth with replenishment of the reserve for charge-off loans in the fourth quarter. The allowance represents 1.13% of total gross loans, which we believe is appropriate given credit performance and current economic forecast. Future reserve amount and related provision will be driven by loan growth and mix, economic forecast, and credit trends. Credit quality across all of our lending classes is performing well and reflects our history of consistent and well-balanced approach to lending. Now, I'd like to turn things back to Thomas, who will provide an overview of how our earnings asset mix and deposit franchise and flexible funding profile are contributing to Horizon's performance.