Good morning, everyone and welcome to the Horizon Bancorp Conference call to discuss financial results for the three months ended March 31, 2020. Before turning the call over to management, I would like to remind everyone that today's call may contain forward-looking statements related to Horizon that may generally be identified as describing the company's future plans, objectives, or goals. Such forward-looking statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For further information about the factors that could affect Horizon's future results, please see the company's most recent annual and quarterly reports filed on Forms 10-K and 10-Q. You should keep in mind that any forward-looking statements made by Horizon speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and management cannot predict these events or how they may affect the company. Horizon has no duty to, and does not intend to, update or revise forward-looking statements after the date on which they are made. To the extent non-GAAP financial measures are discussed on this call, comparable GAAP measures and reconciliations can be found in Horizon's April 29th news release, which is available on its website at horizonbank.com. Horizon also published an investor presentation on Wednesday afternoon, and it is available on the company website with information that will be addressed this morning. Representing Horizon today is Chairman and CEO, Craig Dwight; as well as Executive Vice President and CFO, Mark Secor; President, Jim Neff; and Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn. At this time, I would like to turn the conference over to Mr. Dwight.

Thank you, Grant and good morning. We appreciate the listening audience joining us for Horizon's first earnings call. Horizon once contemplated the initiation of an earnings call in late 2020, however, you can imagine the COVID-19 national emergency accelerated our plans. Horizon issued its first quarter earnings release and supplemental deck on Wednesday, April 29th. Our comments today will closely follow the supplemental slide deck with our focus on Horizon's response to COVID-19, first quarter financial results and other key areas of operations. At the conclusion of our comments, we'll open up the call for a question-and-answer session. Now to discuss Horizon's response to COVID-19, this national emergency moved quickly. The first COVID-19 case in the United States was reported on January 20th and soon thereafter, on January 31st, the United States Secretary of Health and Human Services declared a public health emergency. Then on March 13th, the President of the United States declares a national emergency concerning COVID-19. We are now in day 48 of this national emergency. Amazing how fast things have gone. Horizon Bank's team response to the national emergency has been phenomenal. We mobilized our management team in February to review our existing pandemic plan, including preparation for the safety and well-being of our employees, customers and community. This early review of our pandemic plan helped our managers to better prepare for what was to come. The duty to provide a safe work environment for employees and customers is always paramount in our discussions. On March 12th, we implemented a business travel ban for all employees. Shortly thereafter, on March 19th, we limited access to our offices and lobbies to by appointment only. And effective March 24th, the Governors of Michigan and Indiana implemented a statewide emergency order to stay at home. The response by our…

Thank you, Craig. I want to briefly summarize some of our first quarter results, which we believe underscore the strong position we put ourselves in headed into the current environment. For those of you following on our slide deck, I will begin on Slide 13. As many of you know, we believe an important measure of our profitability is core net income, which excludes gain on sales investments and BOLI death benefits. Core net income for the first quarter was $11.2 million, down from the trailing fourth quarter of 2019, primarily due to the $8.6 million of credit loss expense. Core diluted earnings per share was $0.24, down from the fourth quarter of $0.41 per share. Pretax pre-provision income was $21.8 million for the first quarter compared to $22.8 million for the fourth quarter of 2019. This decrease was primarily due to one less day in the first quarter and a slight drop in the margin, along with an increase in noninterest expense. The core net interest margin declined 5 basis points during the first quarter compared to the fourth quarter of 2019. The stated margin of 3.56% was down 2 basis points due to higher purchase accounting adjustments recognized in the first quarter. The drastic rate cuts during the quarter created a need to react fast to reduce funding costs as adjustable rate assets adjusted down. Our response was to drop deposit rates to follow the rate cuts. While we did not predict the speed or the magnitude of the Fed's March policy actions, we were ready to move rates quickly. This was due to work done in 2019 to align deposit products, interest plans, and pricing data to be prepared for something like this. Within a few days of each rate cut, we were able to lower deposit…

Thank you, Mark. Good morning. I'd like to spend a little time talking about Horizon's consumer and mortgage portfolios. We feel we have a strong and conservative credit culture. And overall, these portfolios are expected to perform relatively well. The consumer is being supported by the government with stimulus checks and state and federal unemployment, averaging $900 a week, along with mortgage and consumer forbearance and extension programs. The level of deterioration will depend on the duration of the pandemic and lingering impacts it will have in our economy. If you turn to Slide 20, I'd like to talk about the characteristics of our consumer portfolio. We are predominantly a secured lender, with less than 1% of our consumer portfolio being unsecured. 95% of the portfolio was considered prime credit, with over 80% having a credit score of 700 or greater. And only 5% of the portfolio was considered subprime with a credit score less than 640. We rescore the entire consumer portfolio on an annual basis. This data is based on the customer's most recent rescore. On the equity side, we limit the CLTV on home equity lines of credit and equity term loans to 89.9%. And we only lend within our branch footprint, in the states of Indiana and Michigan. We had strong asset quality when the crisis hit and as of March 31st, delinquent loans over 30 days were just under half of 1% at 0.49%. NPAs were at 0.60%. We are receiving requests for payment extensions, and the average consumer extension is for a 60 day period. Through April 24th, consumer extensions represent 2.6% of our portfolio balances. Turning to Slide 21, our retail mortgage portfolio, the majority of our new mortgage production is sold on the secondary market, roughly 70% year-to-date. The majority of our…

Thank you, Jim. Good morning, everyone. I'd like to provide some additional insight into Horizon's commercial loan portfolio as well as our response to COVID-19. Horizon is a traditional community bank offering a standard lineup of commercial loan products through a highly experienced group of lending professionals dispersed throughout our Indiana and Michigan footprint. We are relationship-driven, primarily a secured lender and typically require recourse to the owners of a business or the sponsors of a project. Please refer to Slide 22, which will provide an overview of our diversification within the commercial portfolio by both type and geography. From a geographical standpoint, 59% of our commercial loans have been originated through our Indiana offices, while 40% are Michigan based. The remaining 1% is in Ohio, Columbus, more specifically. Within Indiana, Indianapolis represents our largest single market followed by Northwest Indiana, our legacy market, then Lafayette and Fort Wayne. In Michigan, our largest market is Kalamazoo, which is followed by Grand Rapids, Midland and Lansing. Our concentration of loans in larger growth markets has been a strategic priority in recent years and should assist in the post COVID-19 recovery. By broad category, non-owner occupied commercial real estate accounts for 54% of commercial loans, while the owner-occupied commercial real estate and C&I portfolios represent a combined 46%. Next, if you please move to Slides 23 and 24, you'll see a more granular view of our portfolios. Within the non-owner occupied category, our largest concentration by type is multifamily followed by retail, hotels, and office. With regard to the owner-occupied real estate and C&I portfolios, no category exceeds 5% of total commercial loans. We believe this information demonstrates our well diversified portfolio, both geographically and by type. Now please refer to Slide 25, Mark Secor provided an overview of our CECL adoption…

Thank you, Dennis, for the detailed disclosures. Our last slide displays an isosceles triangle. At the pinnacle is employees, the most important aspect of any business. The next two points are customers and community. These three points surround the middle of the triangle that represents shareholders. At Horizon, we believe to deliver shareholder value that we must first deliver on the three points of the employees, customers, and community. If we do that well we will continue to retain and build market share and brand awareness. A strong brand builds long-term shareholder value. In the near-term and during this national emergency, our immediate focus is to support our employees, customers and community. For the shareholders, it's about building and preserving tangible book value and protecting dividends. Horizon has a long history of uninterrupted dividend payments even during the Great Recession. Horizon Bank looks forward to adopting to the new norms, whatever they may be, as we prepare for the opportunities that will emerge from this national emergency. Thank you, and we'll now turn it back over to the moderator for questions.

[Operator Instructions]. Our first question will come from Nathan Race with Piper Sandler. Please go ahead.

Hi guys, good morning. Hope everyone's doing well, and I really appreciate all the added disclosures in the slide deck. I was hoping to maybe just start on credit. You guys obviously performed fairly well relative to peers during the Great Recession between 2008 and 2011. So just curious as you guys look at the portfolio today and stress that, maybe what you guys kind of anticipate in a stress scenario, and I'd be curious to hear some of the underlying economic assumptions within that scenario going forward?

Nathan, thanks for the question. And everyone's doing well, thank goodness. In our CECL model, the econometrics that we use are U.S. leading indicators, Michigan and Indiana indicators, Chicago Fed Midwest Economy Index, and some other factors including the unemployment claims which we're looking at here in the March time period. Some people are comparing that to the Moody's 12 models they've issued. And Moody's is focusing primarily at unemployment rates, which is kind of a lagging indicator. Our model that we benchmarked over the last 50 years to other recessions has a directional alignment with the history of our economy. So we feel very comfortable with our econometrics. Regarding the portfolio, we feel good about the asset quality and the mix, the concentrations, but who knows what's going to happen and how long the stay-at-home orders are going to remain in place. That's a difficult question to answer going forward.

Understood, that's helpful. And just curious, just putting in context kind of what you're hearing from borrowers, I think Dennis alluded to some loan modification requests and I don't know if I caught the total number across the entire portfolio, if you have that. And then along those lines, just curious what the amount of C&I line of credit draws that you guys have seen recently, perhaps late in the quarter or thus far in 2Q.

Dennis and Jim can you talk about the modifications and I will talk about the C&I portfolio.

On the consumer and mortgage side, I highlighted in the slides, but on the mortgage overall, it was 4.5% of the portfolio. On the consumer, it was 2.6% of the portfolio. As far as line utilization on consumer home equity lines of credit and personal lines of credit, we have not seen any uptick at this point in time.

And regarding line utilization, it's been very limited. It's been flat with hardly any growth, both home equity as well as commercial lines of credit. Dennis, do you want to talk about the modifications?

Sure. On the modifications, again, I gave you a little bit of context from the standpoint of types of modifications, interest-only and painful payment deferrals. Our first line has been typically interest-only for 90 days. So across our commercial portfolio, we've granted $350 million in loans that have been modified. That represents 9.1% of our total outstandings for the bank.

What they set through, is it the 24th or what, April?

Yes, that's April.

So we're giving you a fairly current information, Nathan, April 24th, which may not compare well to other releases that have come out. Just anecdotally, I want to talk about the restaurants briefly here. We're seeing the mass migration into our market areas of the Illinois residents. And therefore, our restaurants are really surprisingly doing pretty well with the takeout/pickup orders, which was a pleasant surprise. It's an anecdotal comment though.

And this is Dennis again. With regard to commercial line usage, as Craig mentioned, we -- through the first quarter, we saw really no uptick against our December line utilization. So it's been -- that's been somewhat surprising and we're closely monitoring it on a daily basis.

Yes. And our borrowing base lines of credit were in sync. We had one margin account that was out of sync, they brought in additional collateral, and now they're back in alignment with the borrowing base from the margin accounts. So far, the tracking has gone well. We did have one construction loan that we elected not to continue to build out with the borrower's agreement. They just broke ground, and we thought it best not to have an undeveloped property. So that was a mutual agreement.

Okay, great. I will step back and appreciate all the color. And I can particularly speak to you going into Indiana these days from Chicago just given all the shelter in place requirements here as well. Just one of your points Craig. So I appreciate the color. Thanks again guys.

Thank you Nathan.

[Operator Instructions]. Our next question will come from Sam Solan [ph] with Retail. Please go ahead.

Thanks for taking the call and glad to hear that everybody's safe and feeling well so far. Initial question here is it looks like the liquidity position is quite strong with around $1 billion in securities and cash. On Slide 16, you mentioned potentially doing a capital raise. I was wondering if you could provide some more color around use of funds and whether that would be a debt or equity raise.

Yes Sam, thanks for asking the question, and I hope everyone's doing well in your family as well. The question on capital raise we are contemplating and investigating a capital raise. And it would be first sub debt or noncumulative preferred. We have no plans to issue common at this current pricing, which I think you can expect. We're not sure if we're going to do it or not. It's just under investigation as we always look at our alternatives. I think with additional capital, it gives us optionality for coming out of this recession that could be very powerful in the offensive. In the meantime, it also helps to support possibly the unknown of what's going to happen during this COVID-19 national emergency. So we're not sure if we're going to do it yet, but we felt we should disclose that it is being discussed. And we've always -- we view it regularly at our Board meetings, look at our capital stack, and we could use additional sub debt and/or noncumulative preferred. Thank you for your question.

That makes sense. I appreciate the update. One quick follow-up, along the lines of the stock buyback program, obviously, a good chunk was repurchased in Q1. So a pause with this uncertainty seems to make sense. Do you have any feel, given all the uncertainty what the time line might look like on getting the buyback program back up and running?

No. It's -- with the additional capital, it sure would give us more power as another part of the optionality with excess capital coming out of this national emergency. So it will always be reviewed on a regular basis. But right now, we can't give you an estimate on the reopening. Thank you.

Yup, I understand. Well appreciate it.

Our next question will come from Brian Martin with Janney Montgomery. Please go ahead.

Hey, good morning guys. Glad to hear you are well.

Good morning Brian.

Hey just maybe one or two things for me. Mark, maybe if you could just touch on the impact of the rate cuts and just kind -- I know -- appreciate the disclosure on the funding cost going a bit lower here and working hard on getting those repriced. Just kind of the full impact of the rate cuts on the core margin, how much of that was in the current quarter and then how much -- if you can give some thought on how that impact flows through in the second quarter with the full impact?

Yes. Thank you, Brian. So we stated in the remarks that the month of March, we were at 38 basis points in funding costs. So just mathematically, we -- that was mid-month, really, that some of that came through. And if you look at our post-recession credit or funding costs back in 2012ish, our entire transactional portfolio was 17 to 19 basis points. So that would be where we were back at that point. And then as stated, obviously, there's a lag in the CDs that will get some more additional benefit. But there's also a lag in assets as they continue to reprice on the maturing or the new product.

Brian, just to give you little color, I'm extremely impressed with how the funding committee, treasury management team led the market down. And there was two rate cuts by the Federal Reserve Bank in March, the 50 then the 100 basis point reductions, and we followed both, like, the next day. So our funding committee, treasury management team were very active, while the other banks were lagging within our markets. So they did a good job.

Right, okay. That's helpful. And so Mark, I guess just one last one on the margin. If it was down -- the core margin was down about 6 basis points, is it fair to think that that kind of captured a third of what would come or is it maybe a little bit less given the actions you're taking to mitigate that on the funding side and if you think two third is more of that would come through in the fourth quarter but part of that is being mitigated as you're suggesting on the funding side?

Yes, I think your assumption is right on the funding side just based on the 61 basis points for the quarter.

Okay, perfect. And then just last two things, just the fee income in the quarter, you talked about some of the impact from COVID. Do you expect that to, I guess, continue or I guess what areas do you expect to continue to be impacted by that until we get a little bit more clarity on the duration of this, I think you mentioned -- I thought it was -- was it service charges and one other of area that had declined, maybe wealth?

Yes, I think you're going to see it in overdraft just because there's going to be less activity. There's no people out shopping so that's one area I think we're going to see it and in interchange income just because there's going to be less activity happening. And that's just our assumptions on what we saw, just a little bit of it coming into the first quarter.

Okay, so a little bit more to come possibly.

Yes.

Yes. Okay. And then last one for me was just on the PPP program, if you can just give a little bit of thought on how you guys are expecting to -- how that to perform and just kind of how you view that coming through the P&L in the coming quarters?

Brian, the -- with our average loan size in the $150,000 to $200,000 range, our average fees for the quarter look like 3.6%. We'll amortize those fees in over the 24 month lifetime of the loan. Our loans do start payments after the six months interest moratorium. And so they amortized from years -- month 7 to 24 as a whole. I think most banks have adopted that same amortization schedule. We're not aware of any significant advisory fees that would reduce that at the current time. We keep on tracking that. This program has been changing daily. And so we'll have a better feel as we get into the quarter. Thank you.

Okay, yes thanks. I got it, appreciate the color guys. Thanks so much.

Our next question will come from Nathan Race of Piper Sandler. Please go ahead.

Yeah, hi, thanks. Just a couple of follow-up questions. I apologize if you guys touched on this in the prepared remarks earlier, but just the uptick in NPLs in the quarter, any particular color on that front, albeit relatively small?

As you said, it was pretty small from the standpoint of total increase. It was centered in the commercial loan portfolio. There was some movement both ways. We had several credits that came to resolution but also added a couple totally unrelated. One was a manufacturer, one was a service business. And so no, we don't -- nothing that we see, in general, across the portfolio, totally unrelated.

Okay, that's helpful. And then just on the tax rate going forward, Mark, any kind of color or expectations where that's going to trend back to, perhaps?

Yes. It's basically the same calculations that we had used but as the income -- pretax income comes down or came down from the extra provisioning, the impact of our tax-free investments and other benefits obviously impacts the tax rate. So I think you can just extrapolate it from where we are now to where maybe we were last quarter to try to get a schedule of where it would be, depending on where you come out with your net income per quarter.

Okay. Got it. And then just on accretion expectations, I know that will be impacted by CECL going forward, but I think it was a little elevated in the first quarter relative to the fourth quarter of last year, so just any color on just overall accretion expectations going forward?

Yes, it will probably be impacted slightly just because we moved the $2.8 million into the allowance, so that will get recognized. So -- but I don't foresee any changes from our past. That's why I've always looked at the past history of how it goes. I know it gets chunky here and there, but even an average of what we've seen is still the best scenario.

Got it, that's what I figured but just wanted to clarify. And then maybe just lastly on the securities portfolio, with the PPP funding that you guys are doing thus far in the quarter, do you expect to fund that with maybe some excess liquidity in the bond book or do you kind of expect the securities portfolio on an absolute basis to remain relatively static over the next few quarters just likely just given the kind of temporary nature the PPP loans will be on the balance sheet?

You're on to a good point. We can't -- we're not going to just be able to pledge all of them and get all the funding immediately because we would be selling cash, and we do not want to sell money in this environment. So we're going to be monitoring it closely. And we have until September 30th to take advantage of the lending fund from the Fed. And we also have the opportunity that we're looking at to pledge it into the discount window also so that we can do it more as an opportunity to get in and out of it, and it's not a term product with the actual PPP loan. So we're going to just manage that funding as we need based on different opportunities that they're providing us.

Understood. Okay, that's all I had. Thank you again for taking the follow-ups.

Thanks Nathan.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Dwight for any closing remarks.

Thank you for the callers and listeners for participating in our first earnings conference call, and we look forward to our next call in July. In the meantime, if you have any questions or comments about the company, please feel free to call me or Mark Secor at any time. We always answer our phones and return our phone calls. So thank you for participating today, and we'll talk to you in July. Have a good day.

This concludes our conference call. Thank you for attending today's presentation. You may now disconnect.