Good morning, everyone, and welcome to the Horizon Bancorp Conference Call to discuss financial results for the three months ended March 31, 2021. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 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. 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, www.horizonbank.com. Representing Horizon today are Chairman and Chief Executive Officer, Craig Dwight; and Executive Vice President and Chief Financial Officer, Mark Secor. They will be joined by Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn, for the question-and-answer session. At this time, I'd like to turn the call over to Horizon’s Chairman and CEO, Craig Dwight.

Thank you, Debbie and good morning. Thank you for participating in Horizon Bancorp's first quarter’s earnings conference call. Our comments today will follow the investor presentation we published yesterday, April 28. Starting on Slide 4, company highlights Horizon completed the first quarter with over $6 billion in total assets, strong profitability as evidenced by return on average assets of 1.4% and return on average equity of 1.8%. Key drivers for the quarter were good expense control, modest provision expense, further reductions in deposit costs and continued improvements in key asset quality metrics. 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 with our attractive Midwestern markets. As you see on Slide 6, we've completed 12 new organic market expansions and 14 mergers and acquisitions during this time period. We’re a company on the move and we continue to look for new opportunities in our current and adjacent Indiana and Michigan markets. With our proven track record as a successful consolidator and the pressures that other banks are facing related to succession planning, low interest rates in the challenging operating environment, we’re seeing the pickup in merger and acquisition discussions. Slide 7 clearly demonstrates Horizon’s track record for achieving our well established long-term goals. They include meaningfully outpacing GDP and industry growth and achieving balanced growth with approximately 50% organic and 50% through mergers and acquisitions. In 2020, Horizon, grew the balance sheet by 8%, excluding PPP loans. As we've shared with you since last fall, our expectations for the full-year 2021 is that total assets will remain relatively stable compared to the prior-year with significant opportunities for merger and acquisitions and organic growth starting in late 2021 and continuing through 2022…

Thank you, Craig. Horizon’s first quarter results demonstrated our ability to realize strong operating results in earnings, positioning us for opportunities that we might see become available in the recovering economy. Starting with Slide 12, the company's strong first quarter results were supported by stable core earnings. Several activities during the first quarter impacted these results compared to the fourth quarter of 2020, we recorded lower PPP income from fewer loans forgiven, lower purchase accounting income and a reduction in average loans primarily attributed to the mortgage warehouse lending. Non-interest income reflected record first quarter mortgage gain on sale income, which nonetheless declined from historic levels recorded at the end of 2020. First quarter results benefited from lower credit expense due to continued strong credit performance in low charge-offs. We continue to believe we’re appropriately reserved given the current state of our portfolio, the recovering economy, additional Government stimulus and our CECL modeling. Slide 13, the 27 basis point decrease in the adjusted margin during the quarter was positively impacted by 10 basis points from the PPP income as net deferred fees were recognized for loan forgiveness. This compares to the positive impact of 18 basis points in the fourth quarter. In addition, excess liquidity compressed the margin an additional 16 basis points compared to seven basis points in the fourth quarter. We also saw lower rates on the investment portfolio as well as more competitive loan pricing. This was expected and will continue to negatively impact the margin as we focus on maximizing net interest income with liquidity we continue to see increasing by continuing to invest the excess funding while creating adequate cash flows for future loan demand and reinvestment. Moving on to Slide 14, in the first quarter loan yield was positively impacted from PPP loan fees…

Thank you, Mark. Looking at the chart on Slide 20, Horizon’s $3.7 billion in total loans are well diversified, with 59% in commercial and 41% in residential mortgage and consumer loans. At Horizon, we like this loan mix as it diversifies our credit risk and provides advantages to managing our net interest margin. The table on the right provides the granularity within our commercial loan portfolio, which itself is well diversified and our single largest sector is in residential multifamily housing loans at 6% of total loans and this segment continues to perform well. Other key points to Horizon’s risk profile, Horizon manages capital at risk by maintaining an in-house lending limit at $30 million which is well below our legal lending limit of approximately $80 million. Our granularity is further enhanced by the fact that Horizon’s average commercial loan is less than $400,000, excluding PPP loans. As of March 31, Horizon’s loan deferrals continued to decline to 2.5% of total loans primarily in our commercial loan portfolio. Total consumer and mortgage loan deferrals remain low at less than 1% of total loans. The number of commercial loans on payment deferral as of March 31 totaled only 36 down from year-end total of 55. Horizon’s commercial lending team has been diligent in meeting with our business customers to update their financial plans and to place loans back on a regularly scheduled payment. Of the commercial loans and deferral, 93% of the dollars are making interest only payments and only three loans or 7% of the total modified loans are making principal and deferred principal interest. The three principal interest deferrals include two hotels, with the same sponsor in one restaurant. The two hotels are in various stages of construction or remodeling with strong sponsors, and we expect they will resume…

We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Nathan Race with Piper Sandler. Please go ahead.

Yes, hi guys. Good morning.

Good morning.

Craig, I was maybe hoping to expand on kind of your outlook for the back half of this year, from a loan growth perspective ex-PPP in the warehouse. So it sounds like there's some optimism and you guys are seeing kind of increased activities across your footprint lately, so just hoping you can kind of frame up your expectations as to kind of the low single digit range. If we exclude those items that are more volatile in nature, and obviously transitory in the case of PPP?

Nathan, first of all, thanks for the question. Indiana, Michigan are in the top three or four manufacturing states in the country and manufacturing is doing extremely well across our footprint. Their challenge right now is hiring employees as most of our customers are doing. Our pipelines are very strong. And I'm going to turn that comment over to our Executive Vice President, Senior Commercial Lending Officer, Dennis Kuhn, to give you some more detail. But we also had some pay downs from substandard and non-performing assets, the first quarter that were pretty high that we were glad to see get paid-off that did slower growth rates in the first quarter. So Dennis, you want to add to that?

Sure. Thank you, Craig. Again, as Craig mentioned, our second quarter pipeline outlook is very positive and increased quite significantly from first quarter, when we originated $92 million in commercial, funded about $54 million of that, that's pretty consistent from a percentage standpoint of closed versus funded if you look over prior periods and again, we see a second quarter outlook is favorable with approved pipeline pending closing of about $115 million. So again, activity generally is picking-up, certainly first quarter, a couple of items of note as Craig mentioned, elevated payoffs, but much significant portion of that was watch list credits, both substandard and watch. So again, those are workout activities coming to fruition. The other thing we continue to see in the first quarter was a reduction in revolving line of credit usage down another $12 million. And if you look at first quarter ‘21 versus first quarter ’20, revolving line usage is down by $48 million. So again, customers have benefited but from PPP, their balance sheets are in good order. And certainly that's showing on our deposit side as well.

Nathan, just on the consumer and mortgage side, we’re still having a robust mortgage production activity. Although the Mortgage Bankers Association is predicting that to fall-off later this year, and we're about 65% refinance, 35% purchases. The consumer activity, we actually had record volume in home equity lines last year, the challenge has been the payoffs due to first mortgage, refinancing cash out to reduce the line balances and the stimulus money coming in. But with that said, we're seeing a pickup in remodeling projects and Do it Yourself projects, we’re hopeful fall back into the usage of those lines of credit. So thank you for your question.

Got it, that's great color and encouraging commentary, particularly on the commercial side going forward, just changing gears a little bit, as my follow-up question. You guys put up a pretty strong profitability quarter, excess capital levels are continuing to build and I expect that will persist over the next few quarters here. Any updated thoughts on capital priorities? It sounds like you guys are having an increase in M&A discussions. And just curious if your increased optimism for an acquisition, perhaps later this year, would preclude you guys from being maybe more active on share repurchases in the near-term or other capital deployment options in terms of returning capital shareholders?

Nathan, again, thanks for the question. As you are aware, we have a repurchase plan in place. We have not used it for 2021. Some of our thought process one, it's better to deploy our capital through mergers and acquisitions, the current time versus the price of our stock is not hitting some of our hurdle rates of the stock buyback. With that said, if we cannot deploy the capital through emerging acquisitions, we will use our excess cash of the holding company for some stock buybacks.

Okay, great. I appreciate you guys for taking the questions and all the color. Thank you.

Thank you.

[Operator Instructions] The next question comes from Terry McEvoy with Stephens. Please go ahead.

Good morning, everyone.

Good morning, Terry.

I guess first of all, thanks for providing the online kind of active users and the digital data. I guess my question is and Mark, I think you hinted at this call. As you look at the branch footprint, do you think there's opportunities to reduce the number of locations and any cost savings? Would that fall to the bottom line? Or do you think you would invest it in other areas, particularly on the technology side?

Yes, thanks, Terry. Yes, we definitely think there's some opportunity on the branch side to reduce branches, and also redeploy some of the technology that we have in ATMs to better utilize and be better, more efficient. And with those savings, as we might see, we would expect part of that to drop to bottom line, we do look to reinvest, we might look to reinvest in some of the growth markets, where there's more opportunity coming. So that is a plan, as I said, we're managing what our capacity is, from our team's perspective to make sure we execute on all of these properly, and make sure we're successful.

Thanks. And then just as a follow-up, the increase in the reserve for the commercial portfolio. I didn't quite follow you, Mark, in terms of what was behind that. Are those call it COVID impacted portfolios that you just felt the need to add a bit to reserve? Or was it something different? I was hoping you can clear that up for me.

Yes, any increase that we saw in the reserves on the commercial side would be related to those companies impacted through COVID, specifically hotel industry where we want to make sure that we’re adequately reserved for any losses.

That's great. Thank you very much. Appreciate it.

The next question comes from Brian Martin with Janney. Please go ahead.

Hey, good morning.

Good morning, Brian.

Good morning, Brian.

Hey, Mark could you just give a little more color surrounding kind of just A the margin and just kind of the deployment, I know you talked about the asset yield last year, just in the cost of funds, not having much more room, but just the excess liquidity and the deployment of that and just kind of how you're thinking about that and then the margin over the balance of the year?

Yes, thanks, Brian. The margin has so much noise in it as we all know whereas we have movement in PPP fees and our purchase accounting. And so the mix, so the growth is going to be in the investment portfolio in the short run. And we continue to analyze, what do we think of the surge deposits are going to stay? How long do we want to invest them to increase net interest income. And that is our focus is net interest income, the margins going to continue to have pressure, not only some pricing pressures out there in lower interest rates, but just the mix as we grow the investment portfolio. So we had deployed $200 million in the fourth and into the first quarter of investments, or of cash and investments. And we're currently working on another $300 million and $350 million, as we've seen these deposits grow and not run-off and expect those to be there. But like I said, we're making a strategy so that we will have cash flows coming off of the portfolio to help fund the loan growth and also make sure we can reinvest as we anticipate someday, rates will go up.

Got you. Perfect. And then just one other follow-up, Mark to PPP, what was the round two originations and just kind of what rate are you expecting on those?

Round two year-to-date is $128 million originated.

Okay. And do you have an idea of what the rate is on that or no, if not I can follow-up?

You mean the fees Brian or?

Because the yield you're expecting on that?

Well, I think all of it when we look at the yield on those, it's as amortization of the fees. It's always been in the 2.6% to 2.7% range.

Okay. All right, thank you Mark.

As we amortize until they pay off, and then we get the rest of the theme.

Take care. Got you. Okay, thanks for taking the question.

Thanks, Brian.

Next, we have a follow-up question from Nathan Race with Piper Sandler.

Yes, hi guys. Thank you for taking the follow-up question. Just a question on fee income, mortgage resolved a little over 30% on a gain on sale basis in the first quarter. And that's a little higher than we’ve seen though in some others so far in the first quarter. So just curious to kind of get your outlook on just mortgage on sale revenue over the next couple of quarters or two? Or was it maybe some unique driver that kind of brought down that margin in the first quarter? And just kind of what are your expectations for mortgaging and revenue in 2021, I think relative to expectations for I think a 15% to 20% drop-off in volumes in Horizon share?

Nathan, thanks for the question. We expect a strong second quarter in mortgage, it's a third and fourth quarter, I think that the industry is expecting to drop-off. As far as the gain on sale decline as a percent, what took place there if you recall in the first quarter, there was some rising rates in the mortgage portfolio before they fell back down again. And that does impact our pipeline and gain on sale which come back down in the second quarter.

Okay, great. And then just following-up on the margin discussion, Mark, excluding PPP revenue, if you have any kind of margin estimate in the first quarter here?

Excluding PPP, and I exclude to try to get to the core exclude this excess, what we see is excess cash sitting there. And excluding those two pieces, it would have been about 3.23 as a core margin, which is down from the fourth quarter, the same relationship in the fourth quarter would have been 3.33, so that is 10 basis points.

And if you include the excess liquidity, ex-PPP, any sense where that would shake out?

Yes, the excess liquidity was put in a drag about 16 basis points, so you'd add that back, or take that back from 3.23 and there's been the fourth quarter was 7%.

Okay. And it sounds like the expectations release from what you guys are seeing today that the excess liquidity levels are building, perhaps not at the rate that we saw over the course of last year. But as with everything that you're seeing today, those excess liquidity levels are likely to persist at least over the next quarter or two?

Yes, definitely, and then there's going to be additional stimulus coming in to the municipalities through the last CARES Act. So we anticipate to even see more dollars that will be coming in from that sector, which we really haven't seen to this point. And we anticipate elevated liquidity, so a good portion of this year.

And it sounds like, you got a focus on kind of redeploying some of them to securities and to the earlier discussion, just in terms of a pickup in commercial loan growth expectations as well entering Q2 and into the back half of 2021 as well it sounds like.

Correct, correct.

Okay, great. Thanks for taking the follow-up questions guys.

The next is a follow-up question from Terry McEvoy with Stephens. Please go ahead.

Hi, thanks, I really like Slide 7 in terms of just the asset growth going back 20 years. Your outlook this year is for flat. And I'm just wondering, how does that impact your view of M&A and do you think you'd be targeting maybe larger opportunities to kind of fill that void given the lack of organic growth? And maybe just remind me what's your sweet spot in terms of potential M&A targets? Thanks, Craig.

Thank you, Terry, for the question. We have certain hurdle rates that EPS is meaningful to complete an M&A, so it does move our current assets up to $500 million and above, the lower or smaller banks of $500 million or less, we're seeing an increase in Credit Union acquisition activity, which has picked up considerably over the last three years in both Indiana and Michigan, which has taken I think the small deals out of the market anyway, for most acquirers, but we have moved our target up.

Great, thanks again.

You’re welcome.

Next is a follow-up question from Brian Martin with Janney. Please go ahead.

Hey, thanks guys for taking the follow-up. Just one on Terry’s and then my question, but just Craig back to the M&A geography wise. I think you said last quarter, the quarter before that. You were no longer looking at Illinois. Is that I guess is it primarily Indiana and Michigan today? Is that kind of the focus on that?

Brian, yes, that's correct. Indiana, Michigan, and Northwest Ohio.

Northwest Ohio, okay. And then maybe just my follow-up was really just on the reserve outlook, given the improvement you guys talked about in the deposit side, the positive trends you're seeing and maybe some muted growth here maybe picking up now. But how should we think about that reserve over time? I mean, should we start to see a trend back toward pre-pandemic levels given the improving economic conditions and your really strong credit?

Yes, Brian the outlook for the econometrics continues to be strong, so that holds our historical loan loss rates are low as well. So the unknown factor is there going to be another COVID-19 wave? So until we get through and settle down, it's really hard to predict due to the uncertainty, but if we get through that uncertainty, yes, you're right, there would be a release of the credit loss reserve at some point in time. But I'm a little cautious about the pandemic right now.

Okay, thank you very much.

Thank you, Brian.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dwight for any closing remarks.

Yes, thank you for participating in today's earnings call. And we look forward to speaking with you again in the near-future, hopefully in person as we get through the end of this pandemic. Thanks for your questions today. Have a good day. Bye now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.