Horizon Bancorp, Inc. (HBNC) Earnings Call Transcript & Summary

Welcome to the Horizon Bancorp 2023 Virtual Investor Day. Management may periodically reference the investor presentation that will be broadcasted throughout today's event. This presentation, along with a replay of this event, will also be available on the Investor Relations section of horizonbank.com. Before turning the event over to management, please remember that today's presentation 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 investor presentation prepared for today's event. Additional information about factors that could cause actual results to differ materially is contained in Horizon's current 10-K and later filings. Portions of today's event have been prerecorded. Therefore, Q&A relating to prerecorded portions will be available during the live portions of today's event. The company assumes no obligation to update any forward-looking statements made or presented after the date on which the forward-looking statement is made. In addition, management may refer to non-GAAP financial measures, which are intended to help investors understand Horizon's business. Reconciliations for those measures are contained in the company's most recent quarterly financial results news release. In addition to presentations and prepared remarks by Horizon executives, this Investor Day will include Q&A sessions with management. [Operator Instructions] Now at this time, I'd like to turn it over to Horizon's Chairman and Chief Executive Officer, Craig Dwight.

Hello, and welcome to Horizon's Investor Day. Today, you will hear our view what we believe will be an exciting and productive 2023 as we transition the company to a more stable interest rate environment, lower rate of inflation and hopefully a calmer and more rational global community. I'm excited about Horizon's strategy to continue to build shareholder value and the strength of our team going forward. During 2023, Horizon Bank will be celebrating its 150th anniversary, which is an incredible milestone and is a direct result of our core principles of people first, community engagement and the diversified revenue streams. These principles have proven to be effective in why we have weathered many economic storms over the past century and a half. Today, our leadership will be covering a brief review of 2022 results, 2023 market outlook, technology and digital banking, commercial and retail banking and our 2023 financial performance outlook. Now let me refresh your memory on Horizon's footprint. Horizon's footprint is diverse, has a stable economic base and expands from Columbus, Indiana, south of Indianapolis, north through the Michigan State line and includes Southwestern, Central, Northern and Eastern parts of the Lower Peninsula of Michigan. We remind you that Horizon's expansion and growth has occurred in college and university towns and in state or county governmental seats in Indiana and Michigan. Therefore, a majority of our footprint has an economic base that is traditionally more stable than other areas of the Midwest. I'd like to share with you several local initiatives taking place in our primary markets in Indiana and Michigan. First, Northwest Indiana. This area is benefiting from considerable investment in infrastructure and quality of life initiatives. These investments include the Market Greenway project from Chicago to the state line of Michigan, upgrades to the National Lakeshore in Indiana Dune state parks, 2 of the most visited parks in the nation. The expansion of the local metro commuter train lines from Chicago to Michigan City, Indiana and South Lake County, Indiana extension, which will speed up commute times to downtown Chicago. The quantum communication lines that run from south side of Chicago to South Bend and Lafayette, Indiana in support of quantum computing and our natural freshwater supply which is an extremely important resource to cool computer servers in this rapidly expanding information age and its demand for cloud storage. As a result of these current investments, Northwest Indiana is expected to incur billions of dollars in private and public economic investment over the next 5 years. Northeast Indiana, home of Fort Wayne, Auburn and Warsaw, Indiana, cities that are highly ranked in the United States as places to live for both retirees and families. Considerable investments are being made in infrastructure, housing, health care, automotive and the defense and aerospace sectors. Northeast Indiana is ranked sixth in the nation for aerospace manufacturing, #1 globally for orthopedic manufacturing and is the second largest global music equipment supplier. These sectors are typically resilient during varying economic cycles. Central Indiana, home of Indianapolis, Kokomo, Columbus and Lafayette, Indiana. These cities and their surrounding communities continued to experience solid population growth, considerable infrastructure improvements, including expansion of local and international airports, investment in local housing development, expansion of local manufacturing, health care and warehousing hubs as well as an increase in investment in higher education. Recent announcements include 2 new Eli Lilly manufacturing plants, a new automotive battery plant, 2 new semiconductor manufacturing facilities in Purdue University's Tech Park, and a new GM plant to build electric vehicles. Southwest Michigan includes the cities of Grand Rapids, Holland, Kalamazoo, St. Joseph and Benton Harbor. Several of these cities are ranked in the top places in the United States to raise a family, to live, or start a tech career. They all provide an excellent quality of life with considerable access to recreational activities. A recent survey in Grand Rapids, Michigan found that 56% of all local manufacturers plan to expand in 2023. This area has a well-diversified economy with advanced manufacturing, aerospace, food, health care and tourism, leading the way. Recently, a major new battery component manufacturing facility announced a $2.3 billion investment in this region. Northern Michigan is a stable market with a strong manufacturing tourism base throughout the region and enjoys a low cost of living. Recent announcements in this area include reconstruction of the dams in the Midland area, a $400 million expansion of Dow Chemical's research and development facility and a $375 million expansion of an existing semiconductor plant. Across our footprint, Horizon remains positioned well to take advantage of the outbound migration from Illinois, which continues to increase as consumers, retirees, and businesses exit high taxes, increasing crime rates and the high cost of living. Both Indiana and Michigan continue to exhibit strong economies as evidenced by low unemployment and an increase in total workforce participation. Public investment continues to increase in both states and specifically Indiana, which reported a record state surplus in excess of $6 billion at the end of their 2022 fiscal year and plans to spend down this surplus through investments in infrastructure, in education and return of approximately $545 million to individual taxpayers as inflationary relief. This, coupled with the American Rescue Plan Act dollars that will be spent over the next 2 years adds considerable public investment to all of our communities. Michigan State University's 2023 outlook for the state of Michigan is very optimistic. And to quote the survey, "Given that the supply chain disruptions that interfered with 2022 production cycles have abated and despite lower consumer sentiment, they continue to spend." In 2022, Michigan saw a record manufacturing employment base in higher wages and the outlook for 2023 calls for continued expansion in the state manufacturing employment base. In addition, they are forecasting that all of Michigan's business sectors will see expansion in labor force participation, except construction and utility sectors. Therefore, the good news, the state's unemployment rate is expected to fall in 2023. Now for a quick recap of 2022. The 2022 unprecedented increases in short-term interest rates by the Federal Reserve Bank's Open Market Committee, caused an increase in our deposit betas, above the betas that we experienced during the previous rising rate environment. This change has increased the downward pressure on Horizon net interest margin. In addition, higher interest rates have caused a considerable reduction in mortgage loan production. Even with these challenges, Horizon delivered strong returns on average equity and average assets for the year of 13.66% and 1.24%, respectively. In December of 2021 and updated in April 2022, Horizon announced 6 key financial objectives. I'm pleased to report that for the year, Horizon either met or exceeded the majority of these financial objectives, as you can see on this chart. Other highlights during this past year include closure of 7 branch offices compared to 10 that we closed in 2021. Completion of a reduction in workforce at December 31, 2022, continued expansion of our digital brand, increased net income over the prior year's net income which represents beating the prior year's net income 21 of the past 22 years. In addition to the results mentioned above, you will hear later today a continuation of our efforts to offset lower mortgage loan volumes through staff efficiencies and an increase in other noninterest income items. In addition, in 2023, Horizon will continue to moderate growth and use the cash flows from retained earnings and our investment in loan portfolios to invest in higher-yielding assets. Finally, we believe that our diversified balance sheet, both geographically and through a broad mix of varying asset classes, provides a lower credit risk than most community banks. This diversity has historically held up well during prior economic downturns, and we would expect similar performance going forward. Now I'd like to introduce to you our next presenter, who will give you the 2023 outlook and key goals, Horizon's President and our next Chief Executive Officer, Thomas Prame.

Thank you, Craig. And as Craig mentioned, Horizon is located in economically strong and growing markets, allowing Horizon's diversified business model to create significant shareholder value. Our established relationship-centric commercial team is well balanced with solid organic loan growth and significantly funded through a highly skilled treasury management team, expanding our deposit gathering capabilities and driving meaningful noninterest income. The commercial team's ability to consistently gain market share is founded on sensible credit criteria focused on real estate, C&I lending and a variety of loan options to support our small business clients. Additionally, the nimbleness provided by our local president model creates superior response times delivered with great experience without expanding our credit risk, complementing our commercial banking platform is our consumer, mortgage and wealth divisions that are embedded in our local communities, creating significant brand awareness and further expanding our core client base. Consumer banking is focused around our 70-plus local branches, providing loyal and granular low-cost deposits, expansion opportunities in the lending products and significant noninterest income through relationships that call Horizon their primary bank. An extension of our branch banking presence, Horizon's consumer platform encompasses a profitable indirect lending program focused primarily on markets where we have branch presence, increasing our ability to help our communities grow and prosper. Horizon has created an in-market and digitally enabled mortgage division, delivering home lending services to our consumer, commercial and wealth clients, our mortgage platform provides the ability to hold or sell mortgages and the ability to retain client servicing. The flexibility of this platform delivers multiple financing options to our clients and creates flexibility in our balance sheet and fee income strategies. In 2022, within our Wealth division, we invested in new leadership, sales talent and planning capabilities, broadening our ability to provide wealth services to our network of clients who already know Horizon well. The Wealth team offers a wide range of services, including trust, investment management, financial planning as well as retirement plans for employers. All these services are designed around being our clients' financial partner for life and expanding our revenue capabilities. As we look forward, we believe Horizon's diversified business model uniquely positions us to be our clients' full-service financial partner through exceptional experience and quality advice. For our shareholders, our operating model allows Horizon to continuously expand its client base, diversifies our risk and delivers flexible revenue streams that can adjust to changing economic cycles. In 2023, our strategic plan will come to life through our people-first culture. We are confident in our ability to continue to build the highest quality team of advisers through personalized career plans, thoughtful succession planning and stretch assignments. Additionally, we will continue to embrace the diversity of our teams and markets through our adviser resource groups and community development organizations. These organizations enhance our already inclusive culture that appreciates the diversity of individual experiences and viewpoints. The team sees great opportunity in our balance sheet strategies that will be highlighted in more detail by the upcoming presenters. At a high level, we anticipate leveraging the cash flows from our loan amortization, securities portfolio and retained earnings to provide higher funding for targeted higher-yielding loan segments and limiting our need for additional borrowing. Our business divisions will accelerate growth in the more profitable segments of commercial, consumer home equity and mortgage, increasing overall portfolio yield. Moreover, we anticipate Horizon's extensive branch network, relationship commercial banking and treasury management teams to provide meaningful lower-cost funding sources and to expand our market share. This strategy will allow us to position net interest income dollars relatively consistent year-over-year and anticipated growth in new clients and services in our commercial, consumer and wealth divisions, elevating noninterest income results year-over-year. Consistent with prior performance, our goal is to continue to manage expenses well with the team proactively starting this process in the second half of 2022 with adjustments in our consumer lending and mortgage staffing models. Historically, Horizon's strategic plan balanced strong organic growth with financially attractive and culturally aligned acquisitions. With the uncertainty of today's economic and political landscape, we anticipate M&A activity will not be as abundant but we will be open to opportunistic transactions, both with bank partners and potential new lending platforms such as leasing. Additionally, our commitment to creating long-term shareholder value will remain a priority, and our intent is to continue to provide a consistent dividend strategy to our shareholders who trust us as part of their investment plan. As you can tell, I'm very optimistic about our future and what our teams will deliver in 2023, our financial metrics for 2023 display continued solid performance, and the team looks forward to sharing specific strategies and plan initiatives in the upcoming presentations. To help lead us, please allow me to introduce Kathie DeRuiter, Executive Vice President and Senior Operations Officer; and Scott Kosik, Senior Vice President and Director of Digital Banking to provide insight into our technology plan and digital banking road map.

Thank you, Thomas, and thank you all for joining us today. I'm excited about the progress we have made at Horizon towards our strategic objective to invest in technology that advances our corporate strategy as well as enhances our customers' experience and improves internal efficiency. Horizon is a company that continues to drive innovation in the community banking space. Our growth strategy, M&A success and our ability to pivot and change to beat the many challenges that community banks face demonstrates Horizon's ability to innovate. We believe what sets us apart is our true commitment to community banking, team collaboration and our creative problem-solving skills to position Horizon to create long-term shareholder value. When we review our technology spend, we break this down into 5 categories: strategic applications, electronic remote delivery, data communications, infrastructure and core. Today, we will drill down on the spend in the category of strategic applications that will showcase our investments in technology, and we believe differentiate Horizon from its peers. Horizon periodically conducts a corporate-wide GAAP analysis related to technology. Our Board of Directors has made a strategic commitment to increase technology spend by at least 10% annually to enhance the customers' experience growth and improve operational efficiencies. As this chart exhibits, we have increased our strategic application spend that is focused on improving sales effectiveness and client experience by 297% since 2018. Horizon continues its investment commitment in technology to advance client-facing applications, improve internal workflows and strengthen our infrastructure. Another important initiative that is supporting Horizon's ability to innovate is our strategic decision to maintain an in-house core banking platform. This provides us the ability to pivot quickly to fully integrate best-in-class applications and to control costs. So now let's drill down into these new technology investments and our progress. High priority projects that we've implemented over the past 5 years and which have driven our key strategies and objectives include the following: 2019, with the acquisition of Salin Bank, Horizon entered the video banking space with the conversion of 24 ITMs, interactive teller machines. Since market entry, Horizon has expanded the fleet to 50 ITM machines. The video banking model is a key component to our branch rationalization project that is currently underway. In addition, in the same year, we implemented Weiland, our commercial relationship pricing model, which supports our treasury management team and has driven a 6-figure improvement in service charge income. 2020 Live Chat went live providing 24/7 customer communications with an 84% block containment, which represents the equivalent of 6 FTEs. In 2020, the bank's in-house development continued to deliver with the go live of Horizon's Secure Portal and Digital Signature solutions. These technology enhancements supported the origination and efficient forgiveness of $452 million in PPP loans. 2021, we launched Encompass with our partner, Ellie Mae, as an end-to-end digitally enabled platform, which includes integrated compensation and construction modules. In addition, we rolled out a person-to-person payment platform through the adoption of Zelle. Since adoption in 2021, we have experienced over 400% increase in transaction volume in this channel. 2022 Horizon introduces CreditAdvisor, a savvy money product, which has seen strong adoption since rollout late 2022. Our delivery and investment continues in 2023, with investments being made not only in our digital channel, but also enhancements planned for Horizon debit card offerings and Horizons move to real-time payments with the early adoption of FedNow later this year. We believe investment in applications to enhance customer experience and improve operational efficiency, coupled with talent investment is a recipe for successful implementation and value creation. As we continue down the path of innovation and vision, a key driver to our success will be talent. There are many, many choices in technology being provided from the core banking providers to fintech startups. We must focus and keep in mind that systems with bells and whistles or the newest thing in fintech do not alone return results, people do. Strengthening our bench in digital technology, data and development have also been a key focus in our overall strategy. This investment in talent is making a significant impact in leveraging our data analytics to improve our client calling efforts and marketing campaigns. We have added talent both in business intelligence and technology to allow us to take off-the-shelf technology and connect directly to our core banking platform. The bank continues to maintain our key talent in our risk areas. This ensures safety and soundness in our infrastructure, including maintaining a strong cybersecurity posture. At this time, I am pleased to introduce Scott Kosik, Senior Vice President and Director of Digital Banking to provide insight into our digital banking road map.

Thank you, Kathie. It is my pleasure to present Horizon's digital banking road map to you today. As Kathie mentioned, Horizon has made strategic investments in the technology and talent that we believe will enable us to deliver digital banking solutions that create significant value for our customers and the bank, coinciding with our bank-wide growth Horizon experienced a significant increase in our digital banking client base as well as their overall engagement through the digital channel, whether it is opening accounts, remote depositing checks or interacting with our live chat solution, Horizon has a large, digitally engaged client base who wants to accomplish more of their everyday banking needs to the digital channel than ever before. We have a tremendous opportunity to deliver the right solutions to these clients and produce meaningful results such as increased wallet share and customer retention as well as new client acquisition and effective onboarding. There are 4 pillars guiding Horizon's digital banking road map that will provide focus and priority in areas our clients find value and fit well within our community banking strategy. These pillars are financial wellness, customer experience, payments and sales and offers. There is significant potential to create value by making digital enhancements in our core community banking products and services. Starting with financial wellness, Horizon will invest in solutions that provide more insight and control to our customers and increase engagement by integrating valuable tools into our digital banking platform. I am excited to highlight 2 of these solutions, CreditAdvisor and CardHub in more detail with you today. We are also executing several projects in 2023 that will create a seamless and robust yet simple digital customer experience, focused on integrating new services and making real-time enhancements by leveraging our API and software development kit architecture. Deploying value-added solutions will enable Horizon to compete in the rapidly evolving payment space and position the bank to be the top of wallet choice for our customers. As previously mentioned, we anticipate deploying the FedNow technology this year allowing commercial clients immediate receipt and transmittal of payments. This will be coupled with our consumer strategy of migrating our debit cards to enable contactless transactions. As customers increasingly want their banking to be on demand, there is a remarkable opportunity for Horizon to integrate our core product and sales journeys into the digital banking channel. Our 2023 sales initiatives will center on improving the client experience and KPIs for digital deposit and loan account opening, understanding industry trends continue to shift in this direction. Integrating our core product journeys into digital banking will allow Horizon to capture additional wallet share which we believe we can scale profitably over the long term. We are excited to announce the successful rollout of our new credit score monitoring solution, aptly named CreditAdvisor in December 2022. This is a big win for our customers and a great example of our strategy to enhance the financial wellness benefits we provide and increase customer engagement. In addition to providing numerous financial wellness benefits to our consumer customers, CreditAdvisor will provide Horizon with rich data and the opportunity to present personalized money-saving offers through its seamless integration to digital banking. CreditAdvisor has a very easy enrollment workflow and has been well received by our customers, as evidenced by the 6,000 enrollments in the first 30 days, representing 8% of our active digital consumer customers. We are optimistic that up to 25% of our active digital customers will enroll in CreditAdvisor by the end of 2023. Horizon's digital team will be implementing Fiserv's CardHub in 2023 as well. CardHub is a card management solution that will drive debit card acquisition, usage and growth on a single unified platform. With CardHub, users can get digital debit cards quicker and add to mobile wallet with 1 touch so they can be used right away. The solution will provide our customers with more control to manage their cards on the go and enable real-time spending alerts, allowing them to easily track where their card is being used. CardHub will deliver numerous value-added benefits to our customers to ensure Horizon cards, our top of wallet and drive interchange revenue to the bank. Additionally, and key to all of our digital investments, CardHub will be seamlessly integrated into our digital banking platform, ensuring an exceptional and engaging experience for our customers. Horizon's digital team is working hard to build on the successful introduction of our digital account opening platform that went live in the fourth quarter of 2020. Our digital account opening rollout came at just the right time, enabling Horizon to serve our customers and capture new accounts through the pandemic. Building on this success is a key long-term strategy as customers increasingly transition to digital channels and desire an experience that is quick, easy and convenient. Key components to our strategy include creating additional automation that will enable us to scale efficiently, enhanced fraud reduction capabilities, integrating the application into our digital banking platform, and an expanded product suite. With these enhancements, we believe Horizon will be able to expand our new relationships and attract new profitable customers to the bank. Our teams have made great progress investing in our digital capabilities, and we anticipate 2023 to be another successful year creating value for our clients and shareholders through our investments in technology. At this time, I will transition back to Craig to lead us through our question-and-answer session. Thank you.

Are there any major technology initiatives on the near-term horizon? And do you have the talent in place to successfully accomplish those initiatives?

Sandra, thanks for the question. Kathie DeRuiter can you handle this question?

Yes. Thank you, Craig. I appreciate the question. And yes, we do have some technology initiatives that are currently going on. As we talked, we had implemented an end-to-end digital mortgage platform, currently in the process of leveraging that platform to be able to provide the support of our home equity lending, which does become important as you see interest rates increase. We also are focusing a lot on real-time payments. We're an early adopter to FedNow and we'll see real-time payments come late summer, early fall based on the Fed schedule. Do we have the talent to get this done, yes. We have been very fortunate that we have been investing in talent over many years, not just only in technology and data, but also in our digital with increasing our leadership within our digital banking channel. So I'm excited about the future.

And to add to that, Kathie, our local university over the last 4 or 5 years have expanded their education curriculum to include business analysts and IT people. So the talent is available in our Midwest market. So we're pretty pleased with that. Let's go to the next question.

Our next question is from Terry. How are your real estate lending groups positioned to benefit from the economic trends Craig discussed in his opening remarks. How is this incorporated into your 2023 loan growth outlook?

Well, Terry, there's a couple of different real estate sectors we probably need to talk about. The first is the commercial real estate sector, which we are positioned extremely well on in growth markets in the Midwest that typically outperform other markets to the Midwest. We have a seasoned lending team. In fact, I just spoke with one of our market presidents from Troy, Michigan over the weekend, and they commented that they're getting calls on a regular basis because their customer base and applications, they want to deal with a community bank or a regional bank. And so I think we're positioned well on the commercial side. On the mortgage side, we'll talk about that a little bit more in our mortgage discussion and lending discussion coming up in the next segment. However, that's going to be challenged with the rising rates as it continues to look at least through May of this year. Thanks for your question, Terry. That concludes our questions for this segment. We're going to move on to the Lending segment, and I'm proud to introduce our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber. Lynn?

Commercial Banking is a core offering of Horizon Bank with a history of consistent performance and continued growth. Total commercial loans represented 59% of the bank's loan portfolio as of December 31, 2022, with a growth of commercial loans of 11% in 2022. Commercial lending and treasury management will continue to be an area of long-term focus as the bank leverages its investment in its expanded markets and staff and the ongoing expansion of additional products and services. As we look ahead to 2023, we'll continue to build upon the momentum we gained in 2021 and 2022. While economic conditions will likely temper growth, we have commercial loan growth in a range of 6% to 9% for 2023. As Craig previously mentioned, Horizon has a presence in most of the key growth markets across both Indiana and Michigan. Our predominant markets include our legacy Northwest Indiana markets, West and Southwest Michigan, and growth markets of Maryville, Indianapolis, Holland, Grand Rapids and Troy. We underwrite on a tailored basis enabling us to consider a variety of industry and borrower needs. We focus on established businesses with experienced management, strong sponsors and demonstrated repayment ability. In addition, our in-house lending limits enable us to meet the needs of the vast majority of clients within our communities. Horizon's commercial loan portfolio is also well diversified by business sector with less than 10% of total commercial loans in any one [indiscernible] super sector. Horizon believes in establishing lifelong business relationships by offering a full array of products and services to our customers and communities. While we are relationship-centric bankers, we have core product offerings that will remain part of our business strategy as well as continued development of new products and services. Commercial real estate represents 74% of our portfolio. As we look to 2023, we believe there's continued opportunity in this sector in industrial and warehouse, multifamily, including affordable and workforce housing, medical office and student housing segments. In 2022, we enhanced our construction loan underwriting and management capabilities, and we expect to leverage this competency and technology to support our customers. Commercial and Industrial represents 26% of our portfolio with a primary focus on professional, medical and light industrial manufacturing. Furthermore, we plan to expand our equipment finance capabilities in 2023. Through the origination of paycheck protection loans in 2020 and 2021, we provided access to capital and peace of mind to our customers as they navigated the impacts of COVID-19. We continue to expand and enhance our SBA lending program capabilities, assisting our customers as they grow and navigate a potential recession in 2023. Our treasury management capabilities continue to be enhanced with the rollout of FedNow for real-time business to business payments with plans to offer integrated payables and receivable services. In 2022, we invested in the addition of 2 regional merchant business development officers, and this is a growing segment of our treasury suite of products. We expect this to have a positive impact on treasury management fee income with a contribution of 10% to 15% annually. In 2022, we added a seasoned team of wealth management professionals with the hiring of a President of Wealth Management, a highly experienced Trust and Investment Director and a Director of Employee Benefit Programs, which complements our commercial banking relationships. We expect our employee benefit programs to have a positive impact on wealth management revenues with a contribution of 7% to 15% annually over the next 3 years. Horizon is focused on continuous improvement efforts with the goal of exemplary customer service and operational efficiency. In the past 2 years, commercial lending initiatives surrounding automation of internal processes resulting in enhanced productivity. In addition, Horizon has implemented and is leveraging its proprietary CRM platform to manage business development and pipeline management. As we enter 2023, the bank will be expanding its capabilities for digital, small business and commercial loan applications. The bank has also kicked off a due diligence and selection process for an enhanced loan origination system further supporting the customer and the adviser experience, productivity as well as streamlined operational and compliance support. In summary, we continue to invest in our commercial banking capabilities and are excited to continue to grow this segment of our business. It is my pleasure to introduce Horizon's Executive Vice President and Senior Retail and Mortgage Lending Officer, Noe Najera.

Thank you, Lynn. Our diverse retail consumer lending platform has proven to be vital for the ongoing success here at Horizon Bank. Our historic focus on prime secured lending and our footprint of Indiana and Michigan has contributed to strong asset quality metrics. The emphasis on this type of lending remains unchanged, as we look at 2023 strategies during the rising interest rate environment. Our primary focus is achieving growth in retail consumer lending. Horizon Bank's retail branch network is located in attractive markets. which provide an opportunity to capitalize on and service our customers' needs. The recent expansion into Gary, Indiana and later this year into Marion County, Indiana, will open up the ability to capitalize on more opportunities in mortgage direct and indirect lending. During this past year, the retail team produced over $983 million in loan originations. We believe with a broader lending spectrum in mortgage and consumer products, we will remain strong in existing markets where we have established Horizon as a top prime lender. Our focus is to establish specific strategies for each region, tailoring our products, lending within our parameters and remaining competitive in each market. To accomplish our loan growth objectives, we will continue to focus on operational efficiencies, leveraging technology with the goal of reducing any friction with loan closings, resulting in an unsurpassed experience for customers. The 5-year growth trend in the retail loan balances has remained strong, and we expect 2023 will be no different. Horizon's originated volume during the past 12 months has met expectations, in large part due to consistencies in our underwriting and processing standards. Across our auto, HELOC and other prime consumer products, we believe we have the right products, advisers, technology and responsive decision-making needed to achieve our performance goals for these offerings. For 2023, our goals include annual growth in total consumer lending in the 4% to 6% range. while also increasing our yield during the process and providing a best-in-class experience for all customers, leading the way will be our direct lending platform with flexible and diverse loan offerings. Our goal remains to increase HELOC production and expect that line utilizations and balances will increase as consumers use this as an alternative to refinancing their first mortgage in this rising rate environment. Direct consumer loans account for 41% of our total consumer loans and are predominantly comprised of home equity lines of credit. Due to the ever-changing market conditions, we are consistently reevaluating Horizon's lending products focusing on yields, adjusting parameters accordingly while maintaining historic lending standards. We are committed to increasing yields for the long term, and we believe we will achieve this with consistent buying of home equity products in this rising rate environment, which will positively impact loan balances. This will allow us to grow balances at a much higher rate than in previous years due to the record low mortgage rates over the past several years. And now on to the consumer and direct portfolio. While analyzing the performance of the portfolio, we believe there is potential in all markets to originate higher-yielding loans. We plan to continue with prudent underwriting in our indirect channel. To accomplish this task, we recognize it is sensible to give some of the focus on efficiencies, leveraging technology to close loans with less friction, which in turn, we believe, can increase volume exponentially. We have remained selective in our dealer network partners, aligning with those with excellent reputations, sharing the same values of best-in-class experience for the customer. Horizon Bank has a respected indirect leadership team that leverages their experience and relationships, delivering a consistent and competitive message. We are anticipating this portfolio to remain relatively flat in 2023 with our focus on higher new origination yields while not compromising existing credit standards. Now I would like to provide some insight on what we expect with retail mortgages in 2023, with tactics on how we plan to recover for the rising interest rates we experienced during this past year. We believe the retail mortgage team has a best-in-class reputation from customers and vendors. As interest rates stabilize or reset to a new normal, we are prepared and have developed strategies to capture new business. Our sales team is well embedded in the communities they live in and serve. We believe that this, along with new electronic delivery methods for our various products will allow us to maintain a competitive advantage in those communities. We continue to have a solid partnership with internal stakeholders and a strong comradeship between sales and operations staff, which further supports our success with staff retention. We have also added investors to better diversify our pool, which expands our ability to offer competitive pricing while managing spread and product mix. We feel the Northern and Central Michigan markets have potential for growth and additional MLOs will be recruited to help support these growth areas. These markets provide great opportunities for second home construction and jumbo loans which are strong portfolio products we offer. We are poised for modest growth in mortgage balances in the 2% to 4% range in 2023 with the return to prepandemic levels. I now turn it over to Craig Dwight to lead our question-and-answer session.

Can you discuss what types of higher-yielding lending segments you will focus on?

Damon, thank you for the question. Thomas, do you want to try this on that first and maybe Noe and Lynn can jump in too.

Thank you. I appreciate that, Craig, very much. I'll pass it over to Neo and Lynn afterwards. As we talked about before, we have an extremely diversified platform across our lending segments, everything from consumer across multiple platforms and also on the commercial side. We talked about in our previous quarterly earnings. This gives us the ability to leverage our balance sheet the way we want to, as we look for different ALCO strategies. On the consumer side, of course, we'll be leveraging our 70-plus local locations that we talked about before, leveraging into our HELOC and also our closed-end consumer loans. And then on the commercial side, and I'll pass it over to Lynn to talk about each one of our individual markets, what we see there. Lynn, I'll pass it over you.

Thank you very much, Thomas. As noted earlier by Craig, we are very seeing a lot of positive activity in our markets despite some of the transition out of the COVID pandemic, and its lingering effects. But our market teams are optimistic, as far as focusing on areas that are higher yielding lending segments than others in the commercial area, I would really say that our focus always has been and continues to be on quality relationships and managing our overall credit quality. So while we are always managing our interest rate yields, the goal, of course, is to do business with our customers and strong sponsors and manage the yields through those negotiations and our product mix. So as far as our key areas of focus, we continue to focus on those key areas of commercial real estate, particularly medical, apartments, student housing and industrial. Those are all very strong segments for us. And then on the commercial and industrial side, also medical professional, and we're seeing some increase in municipal tax exempt type financing.

And on the consumer side, I would add that within this rising rate environment, we understand that there's not going to be refinances out there. So we will be focusing on HELOCs that will provide a stronger yield for the overall portfolio. But we are well balanced throughout our footprint, and we'll provide all consumer products to our customers.

Our next question comes from Terry. Can you expand on equipment finance build-out in terms of products, any teams and growth expectations?

Terry, thanks for the question. And as we've been talking about for a couple of quarters now, one of our objectives has been to enter into equipment leasing financing and it's still part of our plans. And I'll turn it over to Thomas, if he wants to add any comments to that or Lynn.

Thank you, Craig. And as Craig mentioned earlier, that has been part of our plan for the last several years, and it's truly a -- it's an opportunistic match for both sellers and buyers right now, and we're actively out in the marketplace, engaging with different -- various entities in those opportunities and also looking for talent to perhaps even do a lift out this year.

So I would just add to that, that we are seeing with our clients that after the pandemic there is some pent-up demand for capital expenditures and investment, particularly in transportation as well as the industrial sector and so we do feel that there's an opportunity there. So in addition to perhaps a leasing program, also just our continued focus on calling efforts and building out our teams and our calling efforts to focus on that area.

And a follow-up question from Terry. Are you seeing credit deterioration within the indirect auto portfolio? Why keep the book flat in 2023?

Noe, I think this goes to you.

Thank you, Terry, for the question. We are seeing an increase, a slight increase in delinquencies, but nothing out of the extraordinary. I think we've grown the portfolio significantly over the course of the last 2 years. The question on why keep it flat. I think at this point, we have the opportunity to reinvest that money into other products, such as the HELOC, which is stronger yield. We also have to let the customers reset to this new adjustment of higher interest rates and maybe even a larger payment. So as the auto market resets, I think that we'll be positioned well for second half growth.

If I can add that the average life of the indirect portfolio is about 30 months. So it's turning quickly. So just to maintain that portfolio takes in considerable volume and it's a great chance to reprice and increase our yield to that portfolio. So thank you, Noe. Thank you, Terry, for the question.

And our next question is from Nathan who's curious on overall 2023 fee income growth expectations based on described initiatives.

Thomas, you want to handle this on the wealth management or Lynn.

I can start with that. Nathan, thank you for the question. Appreciate it very much. As we look at the various fee income initiatives, each one of our line of business will have something that they can grow on this year. From our commercial side, the investment in talent that we've had around treasury management, the growth of our organic growth within our commercial side, which is going to give us an excellent opportunity to continue to deepen wallet share there. We also did some select and targeted talent investments around the merchant card. On the consumer side, we're seeing strength in the card swipes and what we're seeing overall interchange income. Our clients use our bank as their primary checking source, and so we're seeing some nice growth, I'd call in our just core products and our core relationships. And as we look at the wealth side, as we talked a little bit about earlier, we had some great talent investments in wealth this year with the new President and also some key advisers who are to help us out with the advisory services for our clients. This I see as a great long-term investment for us to even get more deeply embedded with our commercial clients and also our high net worth clients in our local markets.

Anything else to add Lynn.

No. Thank you.

Okay. Thank you. That concludes this session of Q&A. We're going to move on to the finance discussion. It is my prolight introduce to you our Executive Vice President, Chief Financial Officer, Mark Secor. Mark?

We appreciate this opportunity to provide an update on key financial highlights, balance sheet strength, capital planning and 2023 objectives. Beginning with key financial highlights, the banking industry is facing a unique economic environment with many uncertainties, which in turn affects Horizon. In previous economic cycles, we have navigated successfully through these challenges, including rising rates, with the core structure of the company remaining stable. In 4 of the last 5 years, Horizon's net income growth has outperformed the peer median of banks with between $5 billion and $10 billion in assets. Through these challenges of the pandemic and economic slowdown, Horizon's return on average assets has continued to show strength and outperformed the peer median as earnings growth has kept pace with asset growth. For 2022, return on average equity has grown to 13.66%, also outperforming peers while continuing to maintain strong regulatory capital ratios as we have deployed capital for bank transactions, stock buybacks and an increasing shareholder dividend. Continued discipline on expense control has lowered the percentage of noninterest expense to average assets to less than 2% and contributed to earnings growth. Over the last few years, stimulus money, PPP loans and our branch acquisition in 2021 resulted in deposits growing faster than loans. Though funding costs declined during this time, lower-yielding cash and investments and the increase in borrowings to fund loan growth has negatively impacted the net interest margin. However, due to the growth in earning assets, net interest income has increased. Now as the transitory inflation has shifted to real inflation and interest rates have rapidly increased, the margin has continued to decline, and as earning asset growth slows to a more moderate pace over the prior year, we expect net interest income will decline slightly in 2023. In the previous 2 rising rate environments, the full cycle betas for our interest-bearing deposit pricing was 28% and for the current rate cycle, we are at a beta of 24% but expect to be in the range of 28% again for this full cycle. Betas in a rising rate environment are not linear and increase deeper into the cycle. This is true of the current rising rate environment, and we anticipate betas for the remaining rate increases to run in the 35% to 45% range. The current view of the impact on net interest margin for 2023 is an 8 to 18 basis point decline for the year compared to 2022. Going into 2023, we have added adjustable rate assets and have increased term CDs to aid in offsetting higher funding costs and manage the balance sheet during the shift in the market. We expect rates to stabilize or start to decline during the second half of 2023. And if they do, we expect that to have a positive impact on our balance sheet and net interest income. In addition, to help drive net interest income in 2023 and continue over the next several years, our goal is to increase our loan-to-deposit ratio with loan growth and using our investment portfolio cash flows to fund higher yielding loans. As competition for funding has increased and is expected to continue into 2023, there is an increased focus on balance sheet liquidity. Due to the structure of our balance sheet, which includes the majority of our investment portfolio unpledged, we have approximately $2.7 billion of available liquidity from borrowings, brokered CDs and unpledged investments. In this time of uncertainty, safe and sound liquidity provides an additional strength to our balance sheet. Strong capital levels also provide strength as we expect to see the percentage growth of capital increasing at a faster pace than total assets over the next year. The current focus for the use of capital is organic growth as opportunities and market conditions make it less likely for M&A activity. We would like to continue to diversify by adding a more robust leasing platform through an opportunistic acquisition of an existing leasing company or a potential talent lift out. We expect to continue our targeted dividend payout ratio of 30% to 40% continuing our 30-plus years of uninterrupted cash dividends. And based on our current stock price, our dividend provides a strong dividend yield. In addition, the 6 months of cash held at the holding company to cover fixed costs, including the shareholder dividend, helps provide additional stability in uncertain times. To summarize, our current expectations for 2023 beginning with loan growth, we expect the growth to come from commercial loans in the range of 6% to 9% and consumer loans growth in the range of 4% to 6%. As we work to shift lower-yielding assets into higher-yielding assets and see an increase in average earning assets, we expect net interest income to be in the range of $185 million to $195 million in 2023. We also expect to continue to manage core expenses to less than 1.9% of average assets. We estimate these objectives will provide a return on average assets greater than 1.1% and a return on average equity greater than 11.7%. Thank you again for joining us today. And now we will open the line for a question-and-answer session.

What is the target duration of the securities portfolio? Has it changed with the rise in interest rates?

We -- in the last quarter the conventional portfolio is around 6.7 years. It actually had gone down in this quarter to 6.9 years. Given the nature of our portfolio, the volume, the middle of -- the median of the unit curve as rates have changed.

Okay. And our next question is from Damon. What is the expected effective tax rate for the year?

It'd be similar to last year, I would put in the range of 12% to 14% that we would expect to see our effective tax rate for 2023.

And a follow-up question from Damon regarding the outlook for margin, does this range still hold if the Fed hold rates through the end of 2023 and into 2024?

Yes. Because the [indiscernible] it would benefit us if the Fed starts to hold rates for '23, and '24, eventually potentially decrease. So I think the range would be there, moving toward the higher end of that range, the lower end if that was to be the outcome of the Fed's rate [indiscernible].

I can add to that, Mark. We have $2.1 billion in adjustable rate loans, of which $900 million [indiscernible] immediately, $400 million [indiscernible] within 90 days. And there's a little bit of [indiscernible] rates wise. We got another $400 million, $600 million in partial retirement. In addition to that around $1.2 billion in cash flows [indiscernible] roughly half of that will be repriced in 12 months, and it does a little better considering the peak or terminal rate [indiscernible].

Our next question comes from Nancy. What is your off-book exposure, off-balance sheet exposure?

Thank you for the question. Horizon has very little off-balance sheet exposure, except for unused line of credit, which we actually account for in our credit loss reserve calculation. And then there would be less of credit, which are the third parties and are also very nominal part of our programs.

Our next question is from Terry. How should we think about the recapture of AOCI on a quarterly basis? What should accelerate tangible book value growth?

Terry, as we saw last quarter, rate increases and yield curves stay inverted, we saw AOCI improve slightly. So I think as we see the stabilization of rates, I think we should continue to see that stabilize, and we capture the rest and the portfolio rolls up or when rates starts to kind of add-on. The acceleration of tangible book value wouldn't be any change to AOCI, and also as earnings continue to drive equity increase so that would also help to accelerate tangible book value for us.

[indiscernible] 8 to 12 months will be the terminal rates. So what's the Fed gives as terminal rates you'll see AOCI coming that into the TCF or technical value on our balance sheet and at least over the next 2 to 3 years you should see some significant [indiscernible].

Our next question comes from Nathan. Can you speak to the overall core deposit growth expectations for 2023?

When we look at the [indiscernible] we looked at the planning, we anticipated some slight core deposit growth over 2023, but the [indiscernible] space is significantly low. So we anticipate most of our liquidity from repricing of other assets, [indiscernible] investment portfolio would help fund the asset growth that we have coming into 2023.

Also on our core deposit growth, we'll see some [indiscernible] classes that we managed [indiscernible] in interest bearing CD's as clients reacted to different interest rate environment, but overall as we spoke earlier, the diversity of our franchise both having retail, core deposits are very granular and low cost, combined with our commercial relationship banking and our treasury management business has a lot of the ability to fund the balance sheet through various ways and also win it for our customers.

And our next question is from Terry McEvoy. Have you evaluated restructuring in the securities portfolio? And how would you think about the capital impact?

Terry, thanks for the question. We do look at it on a periodic basis and that was [indiscernible] Thomas you want to talk about [indiscernible].

Thank you, Craig. We have part as the market we see several banks who have experienced portfolio structuring either taking one time loss or perhaps combining with other things in the organization. We had some mixed reactions with the market depending on what the longer-term objective is, how long will we earn that loss, we're always tactically managing our balance sheet, looking for different opportunities to create shareholder value. So without proximity something we will continue to manage and we look at it on a frequent basis and the opportunity for ourselves and shareholders and all the stakeholders and we look at moving forward with that.

Our next question is from Brian Martin. Can you update us on mortgage fees outlook in 2023 and the new markets talent?

Brian, thank you for the question. if you look at our mortgage fee, we are anticipating near the market, in the first part of the year we could see a little bit of softness again [indiscernible] anticipating general linear market as far as the new trends. We're seeing -- the outlook for us for the new talent [indiscernible]. Also, [indiscernible] which does have some volatility in that business where we see it creates some movement. And so as we see the market continue up and we anticipate that, that will have more impact on our historical balances.

When we do the reduction in workforce on the mortgage side, we are balancing [indiscernible] put in place [indiscernible] of this year. So we are managing to mitigate expense side. And in the first quarter we're a bit slower [indiscernible] and we hope to pick up in the second half. That concludes our question and answers for this segment and our final segment. It has been a privilege to answer your questions and comments. I present to you our President and next Chief Executive Officer, Thomas Prame. Thomas?

Thank you, Craig. We truly appreciate your participation in Horizon Bank's Investor Day. I'm very positive about our 2023 outlook and we believe Horizon is a value step. We're currently trading at discount to peers with considerable upside potential as future cash flows for investing in higher-yielding assets. This involvement was combined with our current dividend rate of [indiscernible]. Additionally, we're coming in with historical annual growth rate of 13% in the last 21 years, through recruiting top talent and also successfully acquiring other organizations. We have a case to go in managing our capital efficiently with a consistent long-term view to maximizing shareholder value. Our diversified business model and the balance sheet provides multiple income drivers and has delivered prime results, we're going to outperform the market during economic cycles. And lastly, we have a highly engaged and talented team of advisors that are located in some of the most attractive Midwest markets. Our markets are experiencing considerable economic investment and activity, which will drive our growth expectations [indiscernible]. Again, on behalf of the entire management team, thank you for participating in our Investor Day, and we look forward to keeping you updated on our progress throughout 2023. Thank you.