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Edited Transcript of HBNC earnings conference call or presentation 30-Apr-20 12:30pm GMT

Q1 2020 Horizon Bancorp Inc Earnings Call

Michigan City Jun 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Horizon Bancorp Inc earnings conference call or presentation Thursday, April 30, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig M. Dwight

Horizon Bancorp, Inc. - Chairman & CEO

* Dennis J. Kuhn

Horizon Bancorp, Inc. - EVP

* James D. Neff

Horizon Bancorp, Inc. - President

* Mark E. Secor

Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer

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Conference Call Participants

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* Brian Joseph Martin

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

* Nathan James Race

Piper Sandler & Co., Research Division - Director & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Horizon Bancorp Conference call to discuss financial results for the 3 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 29 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.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [2]

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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, as you can imagine, the COVID-19 national emergency accelerated our plans. Horizon issued its first quarter earnings release and supplemental deck on Wednesday, April 29. 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 20. And soon thereafter, on January 31, the United States Secretary of Health and Human Services declared a public health emergency. Then on March 13, 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 12, we implemented a business travel ban for all employees. Shortly thereafter, on March 19, we limited access to our offices and lobbies to by appointment only. And effective March 24, the governors of Michigan and Indiana implemented a statewide emergency order to stay at home.

The response by our employees this national emergency has been incredible. This is best evidenced by the fact that all offices and departments remain open for business and are fully staffed; Horizon Bank's quick implementation of social distancing with approximately 42% of our employees working at remote locations; the quick expansion of the number of call center locations from 3 to 4 to better serve our customers and to handle the increase in call volume; the expansion of our interactive teller machines, also known as ITMs, to provide extended banking hours for our customers; and the long hours put forth by our lending and operational teams to manage record mortgage and commercial loan volume. So thank you to all of our employees for their amazing work to serve our customers.

On Page 5 of the supplemental slide deck, you will see a slide that states Indiana and Michigan are on the right side of Chicago. This has always been one of my favorite slides in our investor deck. Prior to COVID-19, we were experiencing population growth related to Illinois residents looking to move to Indiana and Michigan to avoid high taxes and other burdens associated with living and doing business in Illinois. Post COVID-19, our hospitals, especially those located along the border of Chicago, are seeing the large influx in Illinois patients. In addition, second homes owned by Illinois residences and located in Indiana and Michigan, are fully occupied as they seek safety for dense urban living. Being located in the right side of Chicago is even more relevant today as people seek safe environments and opportunities to lower their cost of living. Horizon Bank is located on the right side of Chicago.

Slide 6 reflects our current footprint in the states of Indiana and Michigan. And similar to the rest of the United States, our markets are experiencing a rise in COVID-19 cases. We are hopeful that the curve will start to bend and our governors will continue to move forward for plans to reopen. As of today, that -- it appears that Indiana will reopen before Illinois and Michigan.

Horizon is well positioned going into this national emergency. In addition to solid earnings, strong liquidity and being well capitalized, which you will hear more about later this morning from our Chief Financial Officer, Horizon's leadership team has collectively more than 200 years of banking and related field experience. We have managed through multiple recessions. Our Board of Directors provide sound oversight. As a group, they are well diversified in Board tenure, demographics, experience and skill sets. The Horizon team has completed 14 acquisitions and 11 de novo market expansions over the past 16 years, and therefore, we know what it means to work hard, to get the job done and to adapt to ever-changing conditions.

Slide 9 exhibits Horizon's customer-centric and multichannel delivery systems, which have been resilient during this time and helped deliver to our customers the level of service that they've grown to expect even during the current stay-at-home environment.

Slide 10 speaks to Horizon's strength of our nonbranch delivery channels. Turns of delivery channels have been an integral part of our long-term strategic plan for some time. As of March 31, 2020, 68% of our accounts are active users of our online and mobile banking platforms. Not surprising, during the first quarter of 2020, Horizon's digital transactions and call center volume increased by 35% and 32%, respectively, for the fourth quarter of 2019. Horizon's branch transactions continue to decline due to customer migration to digital banking channels and Horizon's efforts to consolidate offices.

To conclude my comments, I'd like to focus on Slide 11, titled multiple revenue streams diversifies risk. Horizon has included this slide in our investor presentation since the Great Recession. This slide represents management's philosophy to diversify revenue streams, to manage concentration risk and balance revenue during counter economic cycles. Today, Horizon's mortgage origination volume is robust and offsets headwinds related to pressure on net interest margin and slow loan growth. In addition, Horizon's balance sheet mix of investments, consumer and mortgage and commercial loans further diversifies credit risk and helps to manage net interest margin during a period of declining interest rates. Horizon is well positioned going into this state of emergency.

Now to give you an update on our first quarter earning results and liquidity management, it's my pleasure to introduce you to our Chief Financial Officer, Mark Secor. Mark?

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [3]

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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 preprovision 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 1 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 rates to better keep up with the asset pricing adjustments. Currently, our transactional deposit rates are at levels they were post the Great Recession when the overnight rate was where it is today.

Noninterest income for the first quarter was stable compared to the fourth quarter, but service charge and interchange fees were down due to both typical seasonality and some impacts of the shutdown, and we experienced $322,000 of impairment on the mortgage servicing right asset. Higher gain on sale of mortgage loans helped to offset the lower fee income and impairment. Noninterest expense was higher in the first quarter compared to the linked fourth quarter of last year. Employing merit increases for 2020, seasonal increases in facility maintenance, additional investments in IT, additional investments in online customer service, new consulting services and accruing for the FDIC insurance expense all contributed to the increase. The increases were partially offset by a reduction in the 2020 bonus accrual based on the current level of earnings.

Slide 14. Managing net interest margin over time to keep it stable through various interest rate cycles is key to maintaining earnings. Pricing disciplines in place allow for quick reaction as the market rates move on both assets and funding and to help manage the margin in times when the market is more volatile. As we remain in this low rate environment, there will be pressure on asset yields as new and term product will be at lower rates. However, to partially offset this, additional deposit repricing will come from the time deposits and long-term debt roll-off.

Slide 15. The interest rate-bearing deposit rates have been lowered to reflect the current overnight discount rate. The average cost of interest-bearing accounts for the first quarter was 53 basis points. To show the quick reduction to these costs, for the month of December 2019, the average cost was 61 basis points. For the month of March 2020, it was 38 basis points as rates were lower during the month. As stated earlier, at the end of March, interest-bearing accounts were priced at rates post the last recession. 24% of our deposits are in CDs. The opportunity for additional repricing will be in this portfolio over the next several quarters as CDs mature. The average remaining term for the CD portfolio is 9.8 months.

Slide 16. Horizon maintains a strong capital position going into this next period, significantly stronger than in 2007 and 2008, even with the implementation of CECL. We have paused on share repurchases, and we consider a possible capital raise for future optionality in these uncertain times. We are committed to maintain the quarterly shareholder cash dividend. In fact, we currently have cash at the holding company to sustain 10 quarters of fixed costs, including dividends. The management has been diligent in performing capital stress testing to ensure Horizon maintains adequate capital that remains strong in a range of scenarios from mild to extreme. This is done in order to determine what action plans would need to be taken in these scenarios.

Slide 17. Liquidity and liquidity management are key to withstanding an economic downturn. Horizon has a strong liquidity position, starting with a $1.1 billion investment portfolio. This portfolio is 20.6% of total assets at March 2020, higher than peer median of 15.1%. Having access to liquidity on a daily basis to manage cash needs is part of liquidity management. Currently, approximately 3/4 of our municipal securities in the investment portfolio are pledged to the Federal Reserve Bank discount window for immediate access as the FRB is the only institution that accepts municipal securities as collateral. With Fed fund lines, available borrowing at the FHLB and the pledge of municipal securities, Horizon currently has immediate availability of approximately $800 million of additional liquidity. In addition, we are participating in the FRB's program to fund PPP loans as we originate. The security portfolio is managed for liquidity and holds high-quality investments. The largest segment of the portfolio are municipal securities, which are comprised almost entirely of general obligation or essential service bonds. The remaining investments are federal agency products, except for a small portfolio of highly rated corporate product.

Slide 18. As the details to the CARES Act and the potential delay to CECL were discussed, a lot of debate and discussion about what was best for the company took place regarding the implementation of CECL. We were ready to implement CECL but also had our prior incurred model prepared. Based on the final guidance, we determined to move forward with the planned implementation of CECL. The severity and the breadth of the pandemic was not fully known at the time of adoption, but economic forecasts were not positive. So at January 1, our modeling determined the need for a day 1 charge to equity of $19.8 million. Having a significant portfolio of acquired performing loans, it created 37% of this charge and the negative economic outlook at the beginning of the year also contributed. We also transferred $2.8 million of acquired loan discounts to the allowance from purchased credit impaired loans that are now classified as purchased credit deteriorated loans. This was a 128% increase to the previous allowance of $17.7 million.

Now moving forward to the first quarter. The credit loss expense, the knowledge of a global pandemic and shutdown had to be included in the model. In a short time, analysis of our loan portfolios and those loan categories expected to have the most immediate impact were looked at in detail. More on this will be discussed later in the call. Based on moving our model's forward-looking calibration to current highest levels and additional allocation for specific risk categories, the credit loss expense in the first quarter was $8.6 million. With these allocations, the allowance for credit loss was at 1.3% of total loans at the end of March. And with the additional acquired loan discounts for performing purchase credit, the allowance for credit loss and acquired loan discounts to total loans was at 1.74%.

For some additional comments on our strong asset quality as well as Morgan and Consumer Banking, I would like to introduce our President, Jim Neff.

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James D. Neff, Horizon Bancorp, Inc. - President [4]

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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 is considered prime credit, with over 80% having a credit score of 700 or greater. And only 5% of the portfolio is 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 31, delinquent loans over 30 days were just under 0.5% 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 24, 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 portfolio is owner-occupied property and located within our branch footprint. Rental properties total less than 1% of the overall portfolio. Our portfolio loans are underwritten to Fannie Mae guidelines and require full documentation, including verification of employment, income and assets. And any loan-to-value that exceeds 80%, we require private mortgage insurance, with the exception of our specialty doctor program and some CRA products. 97% of the portfolio is considered prime with credit scores of 670 or greater; and 71% have a credit score of 700 or greater; with only 3% of the portfolio has a score less than 670, which the industry considers to be a nonprime loan.

We have taken steps to tighten underwriting guidelines where warranted and made pricing adjustments to compensate for increased risk. Our end investors continue to tweak their underwriting guidelines, which Horizon immediately has adopted. And as with the consumer portfolio, the mortgage portfolio also had a strong asset quality at March 31, with delinquent loans over 30 days at 0.18%, NPAs were at 1.37% and other real estate owned, 6 properties, totaling $336,000. We are offering deferments for our mortgage customers an average of 90 days for portfolio loans and up to 180 days for loans that we're servicing for others. Through April 24, mortgage deferments represented 4.5% of our portfolio balances.

Those are the highlights of the consumer and mortgage portfolio. And now it's my pleasure to introduce Horizon's Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn. Dennis?

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Dennis J. Kuhn, Horizon Bancorp, Inc. - EVP [5]

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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, than 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, nonowner-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 nonowner-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 as well as our first quarter credit loss expense. I'd like to provide some additional insight into our special allocation of $7 million, which was near equally split between the hotel and restaurant portfolios, 2 categories immediately impacted by the COVID-19 measures initiated by the states.

With regard to the hotel portfolio, this category represented $135 million outstanding at quarter end or 3.6% of our total bank loans. We have very strong metrics in this category in spite of the challenges being faced. 31 properties financed with 19 relationships, all highly experienced operators and very well-known to us. We have a solid loan-to-value of approximately 50% across the portfolio. And the portfolio also includes select service, and close proximity to interstates are predominant. Borrowers have been very open in communicating with us. We're doing additional analysis weekly with breakeven information provided by them. In addition, we have provided modifications to many of these clients, and they have accessed the SBA PPP loan program as well. The issue at this point will be how long things last with regard to the executive orders and ultimate reopening.

With regard to the restaurant portfolio, that totals $65 million or just under 2% of our total bank loans. That group is made up of $35 million in outstandings to full-service establishments with another $31 million to the limited service restaurants. The full-service category includes an additional $7.5 million of loans with SBA guarantees, and it also has a number of borrowers who are successful long-time operators of 1 or more locations. The limited service portfolios comprised of borrowers operating national chains, the names of which are very recognizable. Within that category, our discussions with our borrowers have indicated an approximately -- a range of 20% to 30% drop in their weekly revenues, which is typically putting them near-breakeven performance. Historically, that group, the limited service, has been the first to recover. And our estimates of -- so in the end, our estimate of our exposure in the restaurant category really comes down to a larger number of smaller loans to independent operators.

Additional categories we are closely monitoring include nonowner-occupied retail and lessors of residential multifamily. Horizon is assisting our clients impacted by COVID-19 through 2 primary initiatives: first, loan modifications; second, SBA payroll protection. At the same time, we continue to entertain conventional loan requests with our borrowers. With regard to modifications, most have been -- or approximately 2/3 actually have been interest-only extensions, the balance principal and interest deferrals. Borrowers must be less than 30 days delinquent at the time of the extension. 75% of our modifications have been to borrowers in the not -- excuse me, in the owner-occupied real estate and C&I portfolios with a balance of 25% in the nonowner-occupied commercial real estate category.

We'll refer to Slide 26, please. You'll see an overview of our SBA PPP experience to date. This captures round 1 where we received and processed over 1,700 applications, totaling $280 million. Over 95% of the requests that we submitted were approved during round 1. And 75% of those approved were for $150,000 or less. We are participating in round 2 of PPP as well. And thus far, we are generally seeing lower demand and a smaller average dollar size.

I'd like to recognize the incredible effort of our employees in this effort as many have worked evenings and weekends for weeks. Their work is making a difference for our customers and our communities. Again, Horizon entered this period in a strong position with sound asset quality and a history of withstanding numerous challenges. We will continue to act prudently and in accordance with sound banking practices while helping our clients recover from this unprecedented event.

Thank you for your time, and now back to you, Craig.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [6]

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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 2 points are customers and community. These 3 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 3 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Nathan Race with Piper Sandler.

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Nathan James Race, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [2]

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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 if 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.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [3]

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Nathan, thanks for the question. And everyone's doing well, thank goodness. In our CECL model, our econometrics that we use are U.S. leading indicators, Michigan and Indiana indicators, Chicago Fed Midwest Economy Index and some other factors, and 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 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.

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Nathan James Race, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [4]

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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.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [5]

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

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James D. Neff, Horizon Bancorp, Inc. - President [6]

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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.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [7]

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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?

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Dennis J. Kuhn, Horizon Bancorp, Inc. - EVP [8]

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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.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [9]

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

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Dennis J. Kuhn, Horizon Bancorp, Inc. - EVP [10]

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Yes, that's April.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [11]

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So we're giving you a fairly current information, Nathan, April 24, 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.

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Dennis J. Kuhn, Horizon Bancorp, Inc. - EVP [12]

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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.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [13]

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Yes. And our borrowing base lines of credit were in sync. We had 1 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 so far, the tracking has gone well. We did have 1 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.

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Operator [14]

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(Operator Instructions) Our next question will come from [Sam Solan with Retail].

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Unidentified Analyst, [15]

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Glad to hear 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.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [16]

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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 do 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.

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Unidentified Analyst, [17]

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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?

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [18]

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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 of the reopen. Thank you.

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Operator [19]

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

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [20]

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Glad to hear you well. Just maybe 1 or 2 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 flow-through in the second quarter with the full impact.

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [21]

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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 2012, '12-ish. Our entire transactional portfolio was 17 to 19 basis points. So that would be what we were back at that point. And then as stated, obviously, there's a lag in the CDs that we'll get some more additional benefit. There's also a lag in assets as they continue to reprice on the maturing or the new product.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [22]

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Brian, just to give you color, I'm extremely impressed with how the funding committee, treasury management team led the market down. And there's 2 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.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [23]

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Right. Okay. That's helpful. And so Mark, I guess just one last 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 1/3 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 2/3 more of that would come through in the full quarter? But part of that is being mitigated as you're suggesting on the funding side.

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [24]

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

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [25]

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Okay. Perfect. And then just last 2 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 are 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?

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [26]

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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.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [27]

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Okay. So a little bit more to come possibly.

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [28]

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Yes.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [29]

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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 could perform and just kind of how you view that coming through the P&L in the coming quarters.

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [30]

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Brian, the -- with our average loan size in the $150,000 to $200,000 range, our average fees for the quarter, they 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 6 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.

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Operator [31]

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

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Nathan James Race, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [32]

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

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [33]

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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: 1 was a manufacturer and 1 was a service business. And so no, we don't -- nothing that we see, in general, across the portfolio, totally unrelated.

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Nathan James Race, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [34]

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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?

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [35]

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Yes. It's basically the same calculations that we would use that 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.

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Nathan James Race, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [36]

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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.

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [37]

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Yes, it will probably be impacted slightly just because we moved the $2.8 million into the allowance, so that 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.

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Nathan James Race, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [38]

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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?

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Mark E. Secor, Horizon Bancorp, Inc. - Executive VP, CFO, CAO & Treasurer [39]

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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 30 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 of 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.

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Operator [40]

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

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Craig M. Dwight, Horizon Bancorp, Inc. - Chairman & CEO [41]

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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.

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Operator [42]

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