UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-K

(Mark One)

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

2019

Commission file number0-10792

0000-10792

Horizon Bancorp,

Inc.

(Exact name of registrant as specified in its charter)

Indiana 35-1562417

Indiana
35-1562417
(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

515 Franklin Square, Michigan City 46360
515 Franklin Street, Michigan City, Indiana
46360
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:
219-879-0211

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading
Symbol(s)
Name of each exchange
on which registered

Common Stock,stock, no par value
 
HBNC
The NASDAQ Stock Market,
LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes
☐
No
☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act
Yes
☐
No
☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  
☒
    No  
☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to the Form10-K  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated“accelerated filer,” and “smaller reporting company,” and “emerging growth company” inRule
12b-2
of the Exchange Act. (Check One)

Large Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated
Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
 ☐ Accelerated Filer ☒
Non-Accelerated Filer☐  (Do not check if a smaller reporting company)Smaller Reporting Company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined inRule
12b-2
of the Exchange Act).    Yes  
☐
    No  ☒

The aggregate market value of the registrant’s common stock held by
non-affiliates
of the registrant, based on the average bidlast sale price of such stock as of June 30, 2016,28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $294.8$633.4 million.

As of February 28, 2017,27, 2020, the registrant had 22,195,62544,882,894 shares of common stock outstanding.

Documents Incorporated by Reference

Document 

Document
Part of Form
10-K
into which

portion of document is incorporated

Portions of the Registrant’s Proxy Statement to be filed for its
Part III
May 4, 20177, 2020 annual meeting of shareholders
 Part III

HORIZON BANCORP

2016

Horizon Bancorp, Inc.
2019 Annual Report on Form
10-K

Table of Contents

    Page 
Page
FORWARD-LOOKING STATEMENTS
  
3
 
PART I
 

Item 1

Business

  4 

Item 1A

1
 

Risk FactorsBusiness

  20
4
 

Item 1B

1A
 

Unresolved Staff CommentsRisk Factors

  29
23
 

Item 2

1B
 

PropertiesUnresolved Staff Comments

  29
34
 

Item 3

2
 

Legal ProceedingsProperties

  31
35
 

Item 4

3
 

Mine Safety DisclosuresLegal Proceedings

  31
35
 

Special Item:

Item 4
 

Executive Officers of RegistrantMine Safety Disclosures

  31
35
 
Special Item:
Information about our Executive Officers
35
PART II
 

Item 5

 

Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  32
36
 

Item 6

 

Selected Financial Data

  33
39
 

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  34
40
 

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk

  57
63
 

Item 8

 

Financial Statements and Supplementary Data

  58
64
 

Item 9

 

Changes in and Disagreement withDisagreements With Accountants on Accounting and Financial Disclosure

  132
139
 

Item 9A

 

Controls and Procedures

  132
139
 

Item 9B

 

Other Information

  132
139
 
PART III
 

Item 10

 

Item 10
Directors, Executive Officers and Corporate Governance

  133
140
 

Item 11

 

Executive Compensation

  133
140
 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  134
141
 

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

  134
141
 

Item 14

 

Principal AccountantAccounting Fees and Services

  134
141
 
PART IV
 

Item 15

 

Item 15
Exhibits and Financial Statement Schedules

  134
141
 

Item 16
SIGNATURESForm 10-K Summary

  135
144
 

EXHIBIT INDEXSIGNATURES

  137
145
 

HORIZON BANCORP

2016

2
Horizon Bancorp, Inc.
2019 Annual Report on Form
10-K

FORWARD-LOOKING STATEMENTS

Acautionarynoteaboutforward-lookingstatements:
In addition to historical information, information included and incorporated by reference in this Annual Report on Form
10-K
contains certain “forward-looking statements” within the meaning of the federal securities laws. Horizon Bancorp, Inc. (“Horizon”) intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking those safe-harbor provisions. Forward-looking statements can include statements about estimated cost savings, plans and objectives for future operations and expectations about Horizon’s financial and business performance as well as economic and market conditions. They often can be identified by the use of words such as “expect,” “may,” “likely,” “could,” “should,” “will,” “intend,” “project,” “estimate,” “believe,” “anticipate,” “seek,” “plan”“plan,” “goals,” “strategy,” “future” and variations of such words and similar expressions.

Horizon may include forward-looking statements in filings it makes with the Securities and Exchange Commission (“SEC”), such as this Form
10-K,
in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media and others. Horizon intends that these forward-looking statements speak only as of the date they are made, and Horizon undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events.

Although management believes that the expectations reflected in forward-looking statements are reasonable, actual results may differ materially, whether adversely or positively, from the expectations of Horizon that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause Horizon’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to the following:

economic conditions and their impact on Horizon and its customers;

changes in the level and volatility of interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity;

rising interest rates and their impact on mortgage loan volumes and the outflow of deposits;

loss of key Horizon personnel;

increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks;

loss of fee income, including interchange fees, as new technologiesand emerging alternative payment platforms (e.g., Apple Pay or Bitcoin) take a greater market share of the payment systems;

estimates of fair value of certain of Horizon’s assets and liabilities;

volatility and disruption in financial markets;

prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;

sources of liquidity;

potential risk of environmental liability related to lending and acquisition activities;

changes in the competitive environment in Horizon’s market areas and among other financial service providers;

legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular, including the effects resulting from the reforms enacted byof the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the adoption of regulations by regulatory bodies under the Dodd-Frank Act;

the possible impact of whole or partial dismantling of provisions of the Dodd-Frank Act under a newthe current federal administration;administration, including the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act;

the impact of the Basel III capital rules;

changes in regulatory supervision and oversight, including monetary policy and capital requirements;

changes in accounting policies or procedures as may be adopted and required by regulatory agencies;

3
Horizon Bancorp, Inc.
rapid technological developments and changes;

HORIZON BANCORP

the risks presented by cyber terrorism and data security breaches;

the rising costs of effective cybersecurity;
containing costs and expenses;

the slowing or failure of economic recovery;

the ability of the U.S. federal government to manage federal debt limits;
the potential influence on the U.S. financial markets and economy from the effects of global warming;

the potential influence on the U.S. financial markets and economy from material changes outside the U.S. or in overseas relations, including changes in U.S. trade relations related to imposition of tariffs, Brexit, and the phase out in 2021 of the London Interbank Offered Rate (“LIBOR”);
the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings.savings;

You are cautioned that actual results may differ materially from those contained in the forward-looking statements. The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form
10-K
lists some of the factors that could cause Horizon’s actual results to vary materially from those expressed in or implied by any forward-looking statements. We direct your attention to this discussion.

Other risks and uncertainties that could affect Horizon’s future performance are set forth below in Item 1A, “Risk Factors.”

PART I

ITEM 

ITE
M
1.   BUSINESS

The disclosures in this Item 1 are qualified by the disclosures below in Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other cautionary statements set forth elsewhere in this Annual Report on Form
10-K.

General

Horizon Bancorp, Inc. (“Horizon” or the “Company”) is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northernnorthern and Centralcentral Indiana and Southwesternsouthern and Centralcentral Michigan through its bank subsidiary, Horizon Bank N.A. (the(“Horizon Bank” or the “Bank”) and other affiliated entities and Horizon Risk Management, Inc. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. TheHorizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. Prior to that date, Horizon was chartered as a national banking association founded in 1873 and has operated continuously since that time.1873. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services and other services incident to banking. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly owned subsidiary of Horizon. LSB Risk Management, Inc. is a captive insurance company incorporated in Nevada and was acquired by
On March 26, 2019, Horizon throughcompleted the acquisition of LaPorteSalin Bancshares, Inc. (“Salin”), an Indiana corporation, and Horizon Bank’s acquisition of Salin Bank and Trust Company (“Salin Bank”), an Indiana commercial bank and wholly-owned subsidiary of Salin, through mergers effective March 26, 2019. Under the terms of the Merger Agreement, shareholders of Salin received 23,907.5 shares of Horizon common stock and $87,417.17 in cash for each outstanding share of Salin common stock. Salin shares outstanding at the closing to be exchanged were 275, and the shares of Horizon common stock issued to Salin shareholders totaled 6,563,697. The Salin shareholders received cash in lieu of fractional shares. Based upon the March 25, 2019 closing price of $15.65 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $126.7 million. As a result of the acquisition, the Company was able to increase its loan and deposit base and expects to reduce costs through economies of scale.
4
Horizon Bancorp, Inc.
On October 17, 2017, Horizon completed the acquisition of Wolverine Bancorp, Inc., a Maryland corporation (“Wolverine”) and Horizon Bank’s acquisition of Wolverine Bank, a federally-chartered savings bank and wholly-owned subsidiary of Wolverine, through mergers effective October 17, 2017. Under the terms of the Merger Agreement, shareholders of Wolverine received 1.5228 shares of Horizon common stock and $14.00 in July 2016.

cash for each outstanding share of Wolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331, and the shares of Horizon common stock issued to Wolverine shareholders totaled 3,241,045. Based upon the October 16, 2017 closing price of $19.37 per share of Horizon common stock immediately prior to the effectiveness of the merger, less the consideration used to pay off Wolverine Bancorp’s ESOP loan receivable, the transaction has an implied valuation of approximately $93.8 million. As a result of the acquisition, the Company was able to increase its loan and deposit base and expects to reduce costs through economies of scale.

On September 1, 2017, Horizon completed the acquisition of Lafayette Community Bancorp, an Indiana corporation (“Lafayette”) and the Bank’s acquisition of Lafayette Community Bank, a state-chartered bank and wholly-owned subsidiary of Lafayette, through mergers effective September 1, 2017. Under the terms of the Merger Agreement, shareholders of Lafayette received 0.8817 shares of Horizon common stock and $1.73 in cash for each outstanding share of Lafayette common stock. Lafayette shareholders owning fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,636,888. Based upon the August 31, 2017 closing price of $17.45 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million. As a result of the acquisition, the Company was able to increase its loan and deposit base and expects to reduce costs through economies of scale.
On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction of $3.4 million and a 3.0% premium on deposits. Customer deposit balances were recorded at $14.8 million and a core deposit intangible of $452,000 was recorded in the transaction which will be amortized over ten years on a straight line basis. There was no goodwill generated in the transaction.
On November 7, 2016, Horizon completed the acquisition of CNB Bancorp, an Indiana corporation headquartered in Attica, Indiana (“CNB”) and the Bank’s acquisition of The Central National Bank and Trust Company (“Central National Bank & Trust”), through mergers effective November 7, 2016. Under terms of the acquisition, shareholders of CNB received merger consideration in the form of cash. The total value of the consideration for the acquisition was $5.3 million. As a result of the acquisition, the Company will have an opportunitywas able to increase its loan and deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and the Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the merger agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.94351.4153 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte Bancorp stockholder stock and cash elections and the related proration provisions of the merger agreement, Horizon issued 3,421,4885,132,232 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36$12.24 per share of Horizon common stock, less the consideration used to pay off LaPorte Bancorp’s ESOP loan receivable, the

HORIZON BANCORP

transaction had an implied valuation of approximately $98.6 million. As a result of the acquisition, the Company was able to increase its loan and deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

5
Horizon Bancorp, Inc.
On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and the Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the merger agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.51836.7775 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the merger agreement, Horizon issued 873,4301,310,145 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57$11.04 per share of Horizon common stock, the transaction had an implied valuation of approximately $23.0 million. As a result of the acquisition, the Company was able to increase its loan and deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and the Bank’s acquisition of Peoples Federal Savings Bank of DeKalb County (“Peoples FSB”), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 1.4252.1375 shares of Horizon common stock and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 3,288,303.4,932,454. Horizon’s stock price was $16.88$11.25 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. As a result of the acquisition, the Company experienced, and expects to continue to experience, increases in its deposit base, reductions in transaction costs and reduced costs through economies of scale.

On April 3, 2014 Horizon completed its acquisition of SCB Bancorp, Inc. (“Summit”) and the Bank’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.7356 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 856,230. Horizon’s stock price was $14.82 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt). As a result of the acquisition, the Company experienced, and expects to continue to experience, increases in its deposit base, reductions in transaction costs and reduced costs through economies of scale.

On July 17, 2012, Horizon completed its acquisition of Heartland Bancshares, Inc. (“Heartland”) and Heartland’s wholly owned subsidiary, Heartland Community Bank (“Heartland Bank”). Heartland was merged into Horizon, and Heartland Bank was merged into the Bank. The exchange ratio was 1.215 shares of Horizon’s common stock for each share of Heartland common stock outstanding. Horizon acquired the 1,442,449 outstanding shares of Heartland common stock in exchange for 1,752,574 shares of Horizon common stock, which had a market price of $11.22 per share at the close of business on July 17, 2012. Horizon also purchased and retired all shares of preferred stock that Heartland had issued pursuant to the Troubled Asset Relief Program Capital Purchase Program (“TARP”). Based upon the $11.22 market price and the TARP preferred stock purchase, the total value of the consideration for the acquisition was $26.9 million. As a result of the acquisition, the Company experienced, and expects to continue to experience, increases in its deposit base, reductions in transaction costs and reduced costs through economies of scale.

The Bank maintains 5674 full service offices and 31 loan and deposit production offices.office. At December 31, 2016,2019, the Bank had total assets of $3.14$5.2 billion and total deposits of $2.47$3.9 billion. The Bank has wholly-owned direct and indirect subsidiaries: Horizon Investments, Inc. (“Horizon Investments”), Horizon Properties, Inc. (“Horizon Properties”), Horizon Insurance Services, Inc. (“Horizon Insurance”) and, Horizon Grantor Trust.Trust, The Loan Store, Inc. and Wolverine Commercial Holdings, LLC. Horizon Investments manages the investment portfolio of the Bank. Horizon Properties manages the real estate investment trust. Horizon Insurance is used by the Company’s Wealth Management to sell certain life insurance products.products through a third party. Horizon Grantor Trust holds title to certain company owned life insurance policies
.

HORIZON BANCORP

The Loan Store, Inc. does not presently engage in any business activities. Wolverine Commercial Holdings, LLC currently holds one piece of property but does not otherwise engage in significant business activities.
Horizon formed Horizon Bancorp Capital Trust II in 2004 (“Trust II”) and Horizon Bancorp Capital Trust III in 2006 (“Trust III”) for the purpose of participating in pooled trust preferred securities offerings. The Company assumed additional debentures as the result of the acquisition of Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I (“Alliance Trust”). The Company also assumed additional debentures as the result of the acquisition of American Trust & Savings Bank (“American”) in 2010, which formed Am Tru Statutory Trust I (“Am Tru Trust”). The Company also assumed additional debentures as the result of the Heartland transaction, which formed Heartland (IN) Statutory Trust II (“Heartland Trust”). In 2016, the Company also assumed additional debentures as the result of the LaPorte Bancorp transaction. LaPorte Bancorp acquired City Savings Financial Corporation in 2007. City Savings Financial Corporation issued the debentures and formed City Savings Statutory Trust I (“City Savings”) in 2003. The Company also assumed additional debentures as the result of the Salin transaction, which formed Salin Statutory Trust I (“Salin Trust”) in 2003. See Note 1516 of the Consolidated Financial Statements included at Item 8 for further discussion regarding these previously consolidated entities that are now reported separately.

The business of Horizon is not seasonal to any material degree. No material part of Horizon’s business is dependent upon a single or small group of customers, the loss of any one or more of which would have a materially adverse effect on the business of Horizon. In 2016,2019, revenues from loans accounted for 63.4%73.0% of the total consolidated revenue, and revenues from investment securities accounted for 10.4%9.8% of total consolidated revenue.

6
Horizon Bancorp, Inc.
Available Information

The Company’s Internet address is www.horizonbank.com. The Company makes available, free of charge through the “About Us - Us—Investor Relations – Documents - Documents—SEC Filings” section of its Internet website, copies of the Company’s Annual Report onForm
10-K,
Quarterly Reports on Form
10-Q,
Current Reports on Form
8-K
and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after those reports are filed with or furnished to the SEC.

Employees

The BankCompany and its subsidiaries employed approximately 665839 full and part-time employees as of December 31, 2016. Other than the Bank, neither Horizon nor any of its direct or indirect subsidiaries have employees.

2019.

Competition

Horizon faces a high degree of competition in all of its primary markets. The Bank’s primary market consists of areas throughout the northern northwest and northeastern portionscentral regions of the state of Indiana along with the southern and central Indianaregions of the state of Michigan. The Bank’s primary market is further defined by the Indiana and Michigan counties of Lake, Porter, La Porte, St. Joseph, Elkhart, Kosciusko, LaGrange, DeKalb, Noble, Whitley, Allen, Fountain, Hamilton, Marion and Johnson Counties Indiana, along with the counties of Berrien, Cass, St. Joseph, Kalamazoo, and Ingham Counties located in southwest and southern Michigan.identified below. The Bank competes with other commercial banks, as well as with savings and loan associations, consumer finance companies, credit unions and other
non-bank
and digital financial service providers. In addition, Financial Technology, or FinTech,
start-ups
are emerging in key banking areas. To a more moderate extent, the Bank competes with Chicago money center banks, mortgage banking companies, insurance companies, brokerage houses, other institutions engaged in money market financial services and certain government agencies.

Based Many

non-financial
institution competitors face fewer regulatory restrictions and have greater capital.
The following table estimates the number of financial institution competitors in Horizon’s primary market areas, along with Horizon’s competitive position in these areas, based on deposits as ofthe June 30, 2016,2019 Federal Deposit Insurance Corporation (“FDIC”) Deposit Market Share Report (available at
www.fdic.gov
):
                   
INDIANA
 
MICHIGAN
 
County
 
Number of
Institutions
  
Horizon
Market
Share
  
County
 
Number of
Institutions
  
Horizon
Market
Share
 
Allen
  
21
   
0.68
% 
Berrien
  
9
   
9.21
%
Bartholomew
  
9
   
7.92
% 
Cass
  
5
   
5.84
%
Carroll
  
6
   
27.23
% 
Ingham
  
17
   
2.38
%
Cass
  
6
   
19.91
% 
Kalamazoo
  
15
   
1.58
%
DeKalb
  
11
   
18.69
% 
Kent
  
26
   
0.45
%
Elkhart
  
17
   
0.30
% 
Midland
  
8
   
13.99
%
Fountain
  
4
   
10.40
% 
Ottawa
  
16
   
0.32
%
Grant
  
7
   
9.11
% 
Saginaw
  
13
   
0.89
%
Hamilton
  
27
   
0.29
% 
St. Joseph
  
9
   
5.18
%
Howard
  
10
   
3.83
%       
Johnson
  
19
   
11.92
%       
Kosciusko
  
10
   
5.90
%       
La Porte
  
8
   
59.15
%       
LaGrange
  
4
   
4.79
%       
Lake
  
16
   
1.65
%       
Marion
  
23
   
0.79
%       
Noble
  
6
   
7.17
%       
Porter
  
11
   
11.00
%       
St. Joseph
  
15
   
0.23
%       
Tippecanoe
  
16
   
7.57
%       
Whitley
  
8
   
7.28
%       
7
Horizon Bancorp, Inc.
At the time of the FDIC report, Horizon was the largest of the nine8 bank and thrift institutions in La Porte County, with a 36.68% market share. On July 18, 2016,the largest of the 6 institutions in Carroll County, the second largest of the 20 institutions in Johnson County, the third largest of the 11 institutions in DeKalb County, the third largest of the 6 institutions in Cass County, the fifth largest of the 16 institutions in Tippecanoe County, and the fifth largest of the 11 institutions in Porter County.
In Michigan, Horizon completed its acquisition of The LaPorte Savings Bank which was the second largest of the nine7 bank and thrift institutions in La PorteMidland County with a 19.92% market share as of June 30, 2016. In Porter County, Horizon wasand the fifthfourth largest of the 14 institutions with a 9.56% market share while The LaPorte Savings Bank was the ninth largest with a 1.22% market share as of June 30, 2016. On June 1, 2016, Horizon completed its acquisition of Farmers State Bank which held 9.25% of the market share in Kosciusko County, Indiana as of June 30, 2016. In the northeastern Indiana counties where Horizon acquired Peoples FSB, Horizon held the largest market share of 11 banks at 25.14% market share in DeKalb County; 6.24% in LaGrange County; 8.08% in Noble County; 9.24% in Whitley County and then less than 1% in Allen County where the newest branch of the former Peoples FSB is located. The branches in Michigan that were formerly with Peoples FSB are in the counties of Cass and St. Joseph with 5.99% and 5.87% market share, respectively. On November 7, 2016, Horizon completed its acquisition of Central National Bank & Trust which held 12.63% of the market share in Fountain County Indiana as of June 30, 2016. In Johnson County,

HORIZON BANCORP

Indiana, where Horizon acquired the branches of Heartland Bank, the Bank enjoys a 12.15% market share as the third largest of the 209 institutions in that county. In Berrien County, Michigan, Horizon was the fifth largest of the 11 bank and thrift institutions with a 8.22% market share. Horizon’s market share of deposits in Lake County, Indiana was just over 1% at 1.53%, a little over 1% at 1.40% in Kalamazoo County, Michigan, and less than 1% in each of St. Joseph, Elkhart, Marion, and Hamilton Counties in Indiana. The branches the Bank acquired in the acquisition of Summit Community Bank are located in Ingham County, Michigan and had a 2.62% market share. (Source: FDIC Summary of Deposits Market Share Reports, available at www.fdic.gov.)

County.

Regulation and Supervision

General
As a bank holding company and a financial holding company, the Company is subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “Federal Reserve”) as its primary federal regulator. regulator under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company is required to file annual reports with the Federal Reserve and provide other information that the Federal Reserve may require. The Federal Reserve may also make examinations and inspections of the Company.
The Bank, as a nationally charteredan Indiana-chartered bank, is subject to extensive regulation, supervision and examination by the OfficeIndiana Department of the Comptroller of the CurrencyFinancial Institutions (“OCC”DFI”) as its primary federal regulator and,state regulator. Also, as to certain matters, by the Federal Reserve BoardBank is under the supervision of, and subject to examination by, the Federal Deposit Insurance Corporation (“FDIC”). Both federal and state law extensively regulate various aspects of because the banking business, such as reserve requirements,truth-in-lending andtruth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Branching byFDIC provides deposit insurance to the Bank and is subject to the jurisdiction and requires notice to, or the prior approval of, the OCC. The Dodd-Frank Act permits the establishment of de novo branches in states where such branches could be opened by a state bank chartered by that state. The consent of the state is no longer required. Bank’s primary federal regulator.
The supervision, regulation and examination of Horizon and the Bank by the bank regulatory agencies are intended primarily for the protection of depositors rather than for the benefit of Horizon’s shareholders. In January 2017, the Bank filed an application with the Indiana Department of Financial Institutions to convert from a national bank to an Indiana state commercial bank. If the application to convert
Horizon is approved, and the Bank becomes an Indiana state commercial bank, then its primary regulator would become the Indiana Department of Financial Institutions rather than the OCC, and its primary federal regulator would become the FDIC.

Horizon also is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Horizon’s common stock is listed on Thethe NASDAQ Global Select Stock Market under the trading symbol “HBNC,” and Horizon is subject to the NASDAQ rules applicable to listed companies.

Included below is a brief summary of significant aspects of the laws, regulations and policies applicable to Horizon and the Bank. This summary is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are referenced and is not intended to be an exhaustive description of the statutes, regulations and policies applicable to the business of Horizon and the Bank. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and by federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Horizon and the Bank could have a material effect on Horizon’s business, financial condition and results of operations.

The Bank Holding Company Act

The Bank Holding CompanyBHC Act of 1956, as amended (“BHC Act”), generally limits the business in which a bank holding company and its subsidiaries may engage to banking or managing or controlling banks and those activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. BankThose closely related activities currently can include such activities as consumer finance, mortgage banking and securities brokerage. Certain well-managed and well-capitalized bank holding companies such as Horizon, that qualify as, andmay elect to be financialtreated as a “financial holding companies, however, maycompany” and, as a result, will be permitted to engage in any activity, or acquire and retain the sharesa broader range of a company engaged in any activity,activities that is either (i)are financial in nature orand in activities that are determined to be incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury) or (ii) complementary to activities that are financial in nature. Horizon has both qualified as, and elected to be, a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board), without prior approval of the Federal Reserve Board.holding company. Activities that are considered financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.

For a bank holding company to remain qualified as a financial holding company, the company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.”

To commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository

HORIZON BANCORP

institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act. The Federal

8
Horizon Bancorp, Inc.
Reserve Board has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve Board has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

Federal Reserve Board policy has historically required bank holding companies to act as a source of financial and managementmanagerial strength for their subsidiary banks. The Dodd-Frank Act, which was signed into law on July 21, 2010, codified this policy. Under this requirement, Horizon is required to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which Horizon might not otherwise do so. For this purpose, “source of financial strength” means Horizon’s ability to provide financial assistance to the Bank in the event of the Bank’s financial distress.

The BHC Act, the Bank Merger Act (which is the popular name for Section 18(c) of the Federal Deposit Insurance Act) and other federal and state statutes regulate acquisitions of banks and bank holding companies. The BHC Act requires the prior approval of the Federal Reserve before a bank holding company may acquire more than a 5% voting interest or substantially all the assets of any bank or bank holding company. Under the Bank Merger Act, theBanks must also seek prior approval of the OCC or anotherfrom their primary state and federal banking agency is requiredregulators for the Bank to merge with another bank or purchase the assets or assume the deposits of another bank.any such acquisitions. In reviewing applications seeking approval for mergers and other acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act and the effectiveness of the subject organizations in combating money laundering activities.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”(“FDICIA”), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” (as defined in FDICIA), with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency.

Bank holding companies, are required to comply with the Federal Reserve’s risk-based capital guidelines. The FDICsuch as Horizon, and the OCC also have risk-based capital ratio guidelines to whichtheir insured depository institutions, under their respective supervisionsuch as the Bank, are subject.subject to various regulatory capital requirements administered by the federal and state regulators. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified
off-balance
sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Recently, the Federal bank regulatory agencies, working jointly, adopted a rule designed to simplify capital requirements for community banks, allowing qualifying community banks to adopt a simple community bank leverage ratio. For Horizon’san additional discussion of the Company’s regulatory capital ratios and regulatory requirements as of December 31, 2016, see2019, please refer to the information subsection titled
“Capital Regulation”
in “Management’s Discussionthis “Regulation and Analysis of Financial ConditionSupervision” section.
Branching and Results of Operations” in Item 7 below, which is incorporated herein by reference.

National BankAcquisitions

Indiana law, the BHC Act

As a national bank, and the Bank isMerger Act restrict certain types of expansion by the Company and the Bank. The Company and the Bank may be required to apply for prior approval from (or give prior notice and an opportunity for review to) the Federal Reserve, the DFI and the FDIC, and or other regulatory agencies as a condition to the acquisition or establishment of new offices, or the acquisition by merger, purchase or otherwise of the stock, business or assets of other banks or companies.

Under current law, Indiana chartered banks may establish branches throughout the state and in other states, subject to certain limitations. Indiana law also authorizes an Indiana bank to establish one or more branches in states other than Indiana through interstate merger transactions and to establish one or more interstate branches through de novo branching or the provisionsacquisition of a branch. The Dodd-Frank Act permits the establishment of de novo branches in states where such branches could be opened by a state bank chartered by that state. The consent of the National Bank Act. The Bankstate in which the new branch will be opened is supervised, regulated, and examined by the OCC, and is subject to the rules and regulations of the OCC, Federal Reserve, Consumer Financial Protection Bureau (“CFPB”) and the FDIC.

no longer required.

9
Horizon Bancorp, Inc.
Deposit Insurance and Assessments

The Bank’s deposits are insured to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC. Generally, deposits are insured up to the statutory limit of $250,000. Banks are subject to deposit insurance premiums and assessments to maintain the DIF. A bank’s deposit insurance premium assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC has authority to raise or lower assessment rates on insured banks in order to achieve statutorily required reserve ratios in the DIF and to impose special additional assessments.

The Dodd-Frank Act has resulted in significant changes to the FDIC’s deposit insurance system. Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the DIF at no less than 1.35%, and must achieve the 1.35% designated reserve ratio by September 30, 2020. The FDIC must offset the effect of the increase in the minimum

HORIZON BANCORP

designated reserve ratio from 1.15% to 1.35% on insured depository institutions of less than $10 billion and may declare dividends to depository institutions when the reserve ratio at the end of a calendar quarter is at least 1.5%, although the FDIC has the authority to suspend or limit such permitted dividend declarations. In December 2010,The FDIC has set the FDIC adopted a final rule settinglong term goal for the designated reserve ratio forof the deposit insurance fund at 2% of estimated insured deposits.

Also as a consequence of the Dodd-Frank Act, the assessment base for deposit insurance premiums was changed effective April 1,in 2011 from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Tangible equity for this purpose means Tier 1 capital. Effective April 1, 2011, theThe initial base assessment rates were as follows:

ranged from
5-35
basis points. For small Risk Category I banks, such as Horizon Bank, the rates rangeranged from
5-9
basis points.

The rates for small institutions in Risk Categories II, III and IV are 14, 23 and 35 basis points, respectively.

For large institutions and large, highly complex institutions, the rate schedule ranges from 5 to 35 basis points.

Adjustments are made to the initial assessment rates based on long-term unsecured debt, depository institution debt, and brokered deposits.

However, effective

Effective as of June 30, 2016, the reserve ratio reached 1.15% and a new assessment rate schedule became effective July 1, 2016, with rates ranging from 3 to 30 basis points instead of 5 to 35 basis points. Assessment rates for all established smaller banks will be determined using financial measures and supervisory ratings derived from a statistical model estimating the probability of failure over three years. The new pricing system eliminates risk categories, but establishes minimum and maximum assessment rates for established small banks based on a bank’s CAMELsCAMELS composite ratings.

Horizon’s FDIC deposit insurance expense increased slightly during 2016 compared to 2015. The FDIC continued to offset the regular insurance assessments until the earlier of the exhaustion of an institution’s prepaid assessments or June 30, 2013. Any prepaid assessment remaining after collection of the amount due on June 30, 2013, was returned to the institution. The FDIC returned to the Bank $2.0 million in prepaid assessments.

ratings (

i.e.
, capital adequacy, asset quality, management, earnings, liquidity and sensitivity).
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.

FDIC-insured institutions arehave also been subject to the requirement to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the insolvent Federal Savings and Loan Insurance Corporation, an early predecessor toof the Savings Association Insurance Fund (“SAIF”). These assessments will continue until theDIF. The FICO bonds arewere scheduled to be repaid between 2017 and 2019. The2019, and the last FICO assessment rateon institutions like Horizon Bank was 0.58 basis points for each $100 of insured deposits forcollected on the first quarter of 2016 and 0.56 basis points for the remaining three quarter of 2016.

March 29, 2019, FDIC Quarterly Certified Statement Invoice.

Transactions with Affiliates and Insiders

Horizon and the Bank are subject to the Federal Reserve Act, which restricts financial transactions between banks, affiliated companies and their executive officers, including limits on credit transactions between these parties. The statute prescribes terms and conditions in order for bank affiliate transactions to be deemed to be consistent with safe and sound banking practices, and it also restricts the types of collateral security permitted in connection with a bank’s extension of credit to an affiliate.

Effective July 21, 2011, among other changes, In general, extensions of credit (i) must be made on substantially the Dodd-Frank Act eliminated the exceptions under Section 23A of the Federal Reserve Act for transactions with financial subsidiariessame terms, including interest rates and expanded the scope of transactions treated as “covered transactions” to include derivatives transactionscollateral, and securities repurchase agreements. The Dodd-Frank Act also expands the types of transactions subject to insider lending limits.

HORIZON BANCORP

credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with

non-affiliates,
and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.
10
Horizon Bancorp, Inc.
Capital Regulation

The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for
off-balance
sheet items. Generally, to satisfy the capital requirements, the Company must maintain capital sufficient to meet both risk-based asset ratio tests and a leverage ratio test on a consolidated basis. Risk-based capital ratios are determined by allocating assets and specified
off-balance
sheet commitments to risk weightedinto various risk-weighted categories, consisting primarily of 0%, 20%, 50%, 100% or 150%, but also including 250% and beyond, with higher levels of capital being required for theweighting assigned to categories perceived as representing greater risk.

A risk-based ratio represents the applicable measure of capital divided by total risk-weighted assets. The leverage ratio is a measure of the Company’s core capital divided by total assets adjusted as specified in the guidelines.

The capital guidelines divide a bank holding company’s or bank’s capital into two tiers. The first tier (“Tier I”) includes common equity, certain
non-cumulative
perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary capital (“Tier II”) includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Also required by theThe regulations isalso require the maintenance of a leverage ratio designed to supplement the risk-based capital guidelines. This ratio is computed by dividing Tier I capital, net of all intangibles, by the quarterly average of total assets. Pursuant to the regulations, banks must maintain capital levels commensurate with the level of risk, including the volume and severity of problem loans to which they are exposed.

In July 2013,

Effective January 1, 2015 (subject to certain
phase-in
provisions through January 1, 2019), the Company became subject to federal banking agencies approved final rules to be phased inimplementing changes arising from 2015 to 2019 implementingDodd-Frank and the U.S. Basel Committee on Banking Supervision’sSupervision, providing a capital framework (“Basel III”) for all U.S. banks and for bank holding companies. Under these final rules,companies (“Basel III”). Basel III increased the minimum requirements have increased for both the quantity and quality of capital held by Horizon and the Bank. The rules include a new common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0% (increased from 4.0%), a total capital ratio of 8 %8.0% (unchanged from prior rules) and a minimum leverage ratio of 4.0%. The final rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain the required capital conservation buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of certain bonuses to senior executive management. The capital conservation buffer requirement will bewas phased in over three years beginning in 2016.2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fullyphased-in basis.

The final rules.

Basel III also introduced other changes, including an increase in the capital required for certain categories of assets, including higher-risk construction real estate loans and certain exposures related to securitizations. The final rules allow bankingBanking organizations with less than $15 billion in assets as of December 31, 2010, such as Horizon, are permitted to retain
non-qualifying
Tier 1 capital trust preferred securities issued prior to May 19, 2010, subject generally to a limit of 25% of Tier 1 capital.

These new minimum

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”) was enacted, to modify or remove certain financial reform rules and regulations, including some implemented under the Dodd-Frank Act. As directed by the Regulatory Relief Act, in October 2019, federal banking regulators established a “Community Bank Leverage Ratio” to replace the leverage and risk-based regulatory capital ratios becamefor qualifying community banking organizations that choose to opt in to the new framework. Any qualifying depository institution or its holding company that exceeds the “Community Bank Leverage Ratio” of 9% will be considered to have met generally applicable leverage and risk-based regulatory capital ratios, and any qualifying depository institution that exceeds the new ratio will be considered to be “well-capitalized” under the prompt correction action rules.
11
Horizon Bancorp, Inc.
The federal banking regulators also adopted additional capital simplification rules effective for Horizon on January2020. The capital simplifications rules increase the individual regulatory limit for mortgage servicing assets and certain deferred tax assets, remove the aggregate 15% common equity Tier 1 2015,capital threshold deduction, streamline the treatment for investments in the capital of unconsolidated financial institutions, and will be fullyphased-in on January 1, 2019. simplify the calculation for minority interest limitations for non-advanced approaches banking organizations.
Horizon’s management believes that, as of December 31, 2016,2019, Horizon and the Bank would meetmet all capital adequacy requirements under the Basel III capital rules on a fullyphased-in basis, as if such requirements were currently in effect.

HORIZON BANCORP

The following is a summary of Horizon’s and the Bank’s regulatory capital and capital requirements at December 31, 2016.

   Actual  Required For Capital1
Adequacy Purposes		  Required For Capital1
Adequacy Purposes
with Capital Buffer		  Well Capitalized Under Prompt1
Corrective Action Provisions		 
   Amount   Ratio  Amount   Ratio  Amount   Ratio  Amount   Ratio 

As of December 31, 2016

             

Total capital1 (to risk-weighted assets)

             

Consolidated

  $316,576    13.87%  $182,596    8.00%  $196,976    8.63%   N/A    N/A 

Bank

   319,013    13.98%  $182,541    8.00%   196,916    8.63%  $228,176    10.00% 

Tier 1 capital1 (to risk-weighted assets)

             

Consolidated

   301,739    13.22%  $136,947    6.00%   151,326    6.63%   N/A    N/A 

Bank

   304,176    13.33%  $136,905    6.00%   151,280    6.63%   182,540    8.00% 

Common equity tier 1 capital1 (torisk-weighted assets)

             

Consolidated

   263,313    11.50%  $103,036    4.50%   117,460    5.13%   N/A    N/A 

Bank

   304,176    13.33%  $102,679    4.50%   117,054    5.13%   148,314    6.50% 

Tier 1 capital1 (to average assets)

             

Consolidated

   301,739    10.44%  $115,609    4.00%   115,609    4.00%   N/A    N/A 

Bank

   304,176    9.93%  $122,521    4.00%   122,521    4.00%   153,151    5.00% 

2019.
                                 
 
Actual
  
Required for Capital
1

Adequacy Purposes
  
Required For Capital
1

Adequacy Purposes
with Capital Buffer
  
Well Capitalized
Under Prompt
1

Corrective Action
Provisions
 
December 31, 2019
 
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
 
Total capital
1
(to risk-weighted assets)
                        
Consolidated
 $
548,364
   
13.95
% $
314,395
   
8.00
% $
412,644
   
10.50
%  
N/A
   
N/A
 
Bank
  
497,227
   
12.65
%  
314,452
   
8.00
%  
412,718
   
10.50
% $
393,065
   
10.00
%
Tier 1 capital
1
(to risk-weighted assets)
                        
Consolidated
  
530,643
   
13.50
%  
235,796
   
6.00
%  
334,044
   
8.50
%  
N/A
   
N/A
 
Bank
  
479,506
   
12.20
%  
235,823
   
6.00
%  
334,082
   
8.50
%  
314,430
   
8.00
%
Common equity tier 1 capital
1
(to risk-weighted assets)
                        
Consolidated
  
473,150
   
12.04
%  
176,846
   
4.50
%  
275,094
   
7.00
%  
N/A
   
N/A
 
Bank
  
479,506
   
12.20
%  
176,867
   
4.50
%  
275,126
   
7.00
%  
255,475
   
6.50
%
Tier 1 capital
1
(to average assets)
                        
Consolidated
  
530,643
   
10.50
%  
202,111
   
4.00
%  
202,111
   
4.00
%  
N/A
   
N/A
 
Bank
  
479,506
   
9.49
%  
202,110
   
4.00
%  
202,110
   
4.00
%  
252,638
   
5.00
%
1As defined by regulatory agencies

The Dodd-Frank Act also requires the Federal Reserve to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries, except that bank holding companies with less than $1 billion in assets are exempt from these capital requirements.

Dividends

Dividends received

Horizon is a legal entity separate and distinct from the Bank are theBank. The primary source of Horizon’s revenues. The Bank’scash flow, including cash flow to pay dividends on its common stock, is the payment of dividends without prior regulatory approval, is subject to regulatory limitations. The National Bank Act requiresHorizon by the Bank. Under Indiana law, the Bank tomay pay dividends of so much of its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered appropriate by the Bank’s Board of Directors. However, the Bank must obtain the prior approval of the OCCDFI for the payment of dividendsa dividend if the total of all dividends declared by it in onethe Bank during the current year, including the proposed dividend, would exceed itsthe sum of retained net profitsincome for the current year to date plus its retained net profitsincome for the previous two preceding years,years. For this purpose, “retained net income” means net income as calculated for call report purposes, less any required transfers to surplus. In addition,all dividends declared for the applicable period. The Bank is generally exempt from this DFI
pre-approval
process for dividends if (i) the Bank may only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed the Bank’s undivided profits after deducting statutory bad debt in excesshas been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the Bank’s allowance for loan losses. Undermost recent federal or state examination; (ii) the Federal Deposit Insurance Act,proposed dividend will not result in a Tier 1 leverage ratio below 7.5%; and (iii) the Bank is prohibitednot subject to any corrective action, supervisory order, supervisory agreement or board approved operating agreement.
The FDIC has the authority to prohibit the Bank from paying any dividends making other distributions or paying any management fees if, after such payment, it would fail to satisfyin its minimum capital requirements.

In 2011, Horizon issued 12,500 shares of SeniorNon-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”) to the U. S. Department of the Treasury (the “Treasury”). The issuance to the Treasury of the Series B Preferred Stock resulted in the imposition of limitations on Horizon’s ability to pay dividends. Under the terms of the Series B Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares rankingparipassu with the Series B Preferred Stock, junior preferred shares, or other junior securities, including the common stock, during the current quarter and for the next three quarters following the failure to declare and pay dividends on the Series B Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares rankingparipassu may be paid to the extent necessary to avoid any resulting material covenant breach. Effective February 1, 2016, Horizon redeemed all the Series B Preferred Stock and, accordingly, the restrictions imposed onopinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank.

In addition, under Federal Reserve supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears
12
Horizon Bancorp, Inc.
consistent with the organization’s capital needs, assets, quality and overall financial condition. The Federal Reserve issued a letter dated February 24, 2009, to bank holding companies informing them that it expects bank holding companies to consult with it in advance of declaring dividends that could raise safety and soundness concerns (
i.e.
, such as when the dividend is not supported by earnings or involves a material increase in the outstanding Series B Preferred Stock no longer had any effect. Further, on May 10, 2016,dividend rate) and in advance of repurchasing shares of common stock or preferred stock. Although the Company amended its Articleseffect of Incorporationthis letter was revised in December 2015 to delete and removebecome inapplicable to certain large U.S. bank holding companies (generally, those with at least $50 billion in average total consolidated assets), the Certificate of Designationsguidance remains effective for the Series B Preferred Stock so it is no longer authorized for issuance.

bank holding companies like Horizon.

Prompt Corrective Regulatory Action

Federal law provides the

Under FDICIA, federal banking regulators with broad powers to require an undercapitalized financial institutionregulatory authorities are required to take promptregulatory enforcement actions known as “prompt corrective actionaction” with respect to resolve the institution’s problems.depository institutions that do not meet minimum capital requirements. The extent of the regulators’ powers depends on whether the institution in question is categorized as “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the submission of a capital restoration plan;

HORIZON BANCORP

(ii) placing limits on asset growth and restrictions on activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions with affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, for critically undercapitalized institutions, appointing a receiver for the institution.

New prompt corrective action requirements that became effective January 1, 2015, and increased the capital level requirements necessary to qualify as “well capitalized.” At December 31, 2016,2019, the Bank was categorized as “well capitalized,” meaning that the Bank’s total risk-based capital ratio exceeded 10%, the Bank’s Tier I1 risk-based capital ratio exceeded 8%, the Bank’s common equity Tier I1 risk-based capital ratio exceeded 6.5%, the Bank’s leverage ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure.

Banking regulators may change these capital requirements from time to time, depending on the economic outlook generally and the outlook for the banking industry. The Company is unable to predict whether and when any such further capital requirements would be imposed and, if so, to what levels and on what schedule.
Anti-Money Laundering and the– The USA Patriot Act

and the Bank Secrecy Act

Horizon is subject to the provisions of the USA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address any or all of the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes.

The regulations promulgated under the USA PATRIOT Act of 2001 require financial institutions such as the Bank to adopt controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of their customers.

The Bank Secrecy Act of 1970, which was amended to incorporate certain provisions of the USA PATRIOT Act of 2001, also focuses on combating money laundering and terrorist financing and requires financial institutions to develop policies, procedures and practices to prevent, detect and deter these activities, including customer identification programs and procedures for filing suspicious activity reports. Banks had until May 2018 at the latest to update their policies with respect to new customer due diligence regulations adopted by the U.S. Department of the Treasury under the Bank Secrecy Act. During 2018, Horizon Bank implemented the Fifth Pillar of the Bank Secrecy Act (“BSA”) which focuses on identifying beneficial ownership. The BSA officer and BSA analysts incorporated these enhanced due diligence requirements into the Bank’s policies, procedures and training programs in 2018.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations relating thereto, could have serious legal and reputational consequences for Horizon and the Bank.
13
Horizon Bancorp, Inc.
Federal Securities Law and NASDAQ
The shares of common stock of Horizon have been registered with the SEC under the Securities Exchange Act (the “1934 Act”). Horizon is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC promulgated thereunder.
Shares of common stock held by persons who are affiliates of Horizon may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933. If Horizon meets the current public information requirements under Rule 144, each affiliate of Horizon who complies with the other conditions of Rule 144 (including those that require the affiliate’s sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of Horizon or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks.
Under the Dodd-Frank Act, Horizon is required to provide its shareholders an opportunity to vote on the executive compensation payable to its named executive officers and on golden parachute payments in connection with mergers and acquisitions. These votes are
non-binding
and advisory. At least once every six years, Horizon must also permit shareholders to determine, on an advisory basis, whether such votes on executive compensation (called “say on pay” votes) should be held every one, two, or three years. In both 2012 and 2018, Horizon’s shareholders voted in favor of presenting the executive compensation “say on pay” question every year.
Shares of common stock of Horizon are listed on The NASDAQ Global Select Market under the trading symbol “HBNC,” and Horizon is subject to the rules of NASDAQ for listed companies.
Sarbanes-Oxley Act of 2002

Horizon also is subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which revised the laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act applies to all companies with equity or debt securities registered under the Securities Exchange Act of 1934.1934 Act. In particular, the Sarbanes-Oxley Act established: (i) new requirements for audit committees, including independence, expertise and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Management expects that significant additional efforts and expense will continue to be required to comply with the provisions of the Sarbanes-Oxley Act.

Pursuant to the final rules adopted by the SEC to implement Section 404 of the Sarbanes-Oxley Act, of 2002, Horizon is required to include in each Form
10-K
it files a report of management on Horizon’s internal control over financial reporting. The internal control report must include a statement of management’s responsibility for establishing and maintaining adequate control over financial reporting of Horizon, identify the framework used by management to evaluate the effectiveness of Horizon’s internal control over financial reporting and provide management’s assessment of the effectiveness of Horizon’s internal control over financial reporting. This Annual Report on Form
10-K
also includes an attestation report issued by Horizon’s registered public accounting firm on Horizon’s internal control over financial reporting. For fiscal years prior to the year ended December 31, 2012,
14
Horizon was not an “accelerated filer” and, therefore, Horizon was exempt from the attestation report requirements.

Bancorp, Inc.

Financial System Reform – The Dodd-Frank Act, the CFPB and the CFPB

2018 Regulatory Relief Act

The Dodd-Frank Act, which was signed into law in 2010, significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that have profoundly affected how community banks, thrifts, and small bank and thrift holding companies are regulated. Among other things, these provisions eliminated the Office of Thrift Supervision and transferred its functions to the other federal banking agencies, relaxed rules regarding interstate branching, allowed financial institutions to pay interest on business checking accounts, changed the scope of federal deposit insurance coverage and imposed new capital requirements on bank and thrift holding companies.

The Dodd-Frank Act created the CFPBConsumer Financial Protection Bureau (“CFPB”) as an independent bureau within the Federal Reserve System with broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain

HORIZON BANCORP

other statutes. In July 2011, many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies were transferred to the CFBP. The CFBP has a large budget and staff, and has the authority to implement regulations under federal consumer protection laws and enforce those laws against financial institutions. The CFPB has examination and primary enforcement authority over depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by the federal banking regulators for consumer compliance purposes. The CFPB also has authority to prevent unfair, deceptive or abusive practices in connection with offering consumer financial products. Additionally, the CFPB is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities.

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including minimum standards for the origination of residential mortgages.focus. The CFPB has published several final regulations impacting the mortgage industry, including rules related to
ability-to-repay,
mortgage servicing, escrow accounts, and mortgage loan originator compensation. The
ability-to-repay
rule makes lenders liable if they fail to assess a borrower’s ability to repay under a prescribed test, but also creates a safe harbor for so called “qualified mortgages.” Failure to comply with the
ability-to-repay
rule may result in possible CFPB enforcement action and special statutory damages plus actual, class action, and attorneys’ fees damages, all of which a borrower may claim in defense of a foreclosure action at any time. Horizon’s management is assessing
The CFPB also amended Regulation C to implement amendments to the impactHome Mortgage Disclosure Act made by the Dodd-Frank Act. The amendment added a significant number of thesenew information collecting and reporting requirements on its mortgage lending business.

for financial institutions, most of which became effective as of January 1, 2018.

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of Horizon in substantial and unpredictable ways. Horizon has incurred higher operating costs in complying with the Dodd-Frank Act, and expects these higher costs to continue for the foreseeable future.
In May 2018, the Regulatory Relief Act was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as Horizon Bank.
Rules promulgated in 2019 pursuant to the Regulatory Relief Act will simplify the regulatory capital calculation and have established a “Community Bank Leverage Ratio” to replace the leverage and risk-based regulatory capital ratios. In addition, the Regulatory Relief Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
15
Horizon Bancorp, Inc.
Horizon’s management continueswill continue to review the status of the rules and regulations adopted pursuant to the Dodd-Frank Act and the Regulatory Relief Act, particularly the Community Bank Leverage Ratio framework, and to assess their probable impact on the business, financial condition and results of operations of Horizon.
Federal Home Loan Bank (“FHLB”) System
The Bank is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLB is funded primarily from funds deposited by banks and savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (
i.e.
, advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board (“FHFB”), an independent agency, controls the FHLB System, including the FHLB of Indianapolis.
The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral to 30% of a member’s capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low and moderate income housing projects.
As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 2019, the Bank’s investment in stock of the FHLB of Indianapolis was $22.4 million. For the year ended December 31, 2019, dividends paid by the FHLB of Indianapolis to the Bank on the FHLB stock totaled approximately $1.1 million, for an annualized rate paid in dividends of 5.0%.
Limitations on Rates Paid for Deposits; Restrictions on Brokered Deposits
FDIC regulations restrict the interest rates that less than well-capitalized insured depository institutions may pay on deposits and also restrict the ability of such institutions to accept brokered deposits. These regulations permit a “well capitalized” depository institution to accept, renew or roll over brokered deposits without restriction, and an “adequately capitalized” depository institution to accept, renew or roll over brokered deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates). The regulations prohibit an “undercapitalized” depository institution from accepting, renewing or rolling over brokered deposits. These regulations contemplate that the definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of FDICIA. The Bank is a well-capitalized institution, and management does not believe that these regulations have a materially adverse effect on the Bank’s current operations.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC in connection with its examination of the Bank, to assess its record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the Bank. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion proposals (e.g., branching and acquisitions of other financial institutions) and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent regulatory examination, the Bank was rated “satisfactory” with respect to its CRA compliance.
16
Horizon Bancorp, Inc.
Gramm-Leach-Bliley Act, Financial Privacy
The Gramm-Leach-Bliley Act adopted in 1999 (“Gramm-Leach”) was intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and Horizon’s management willother financial service providers. Gramm-Leach was responsible for establishing a distinct type of bank holding company, known as a financial holding company, which is allowed to engage in an expanded range of financial services, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. As previously discussed, Horizon has qualified as, and elected to become, a financial holding company under the Gramm-Leach amendments to the BHC Act.
Under Gramm-Leach, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose
non-public
information about consumers to
non-affiliated
third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to
non-affiliated
third parties. The privacy provisions of Gramm-Leach affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.
As a financial institution, the Bank handles a significant amount of sensitive data, including personal information. The Company does not disclose any
non-public
information about any current or former customers to anyone except as permitted by law and subject to contractual confidentiality provisions which restrict the release and use of such information.
We are also continuesubject to guidance from the Federal Financial Institutions Examination Council (“FFIEC”), an interagency body for five federal banking regulators, with respect to such matters as data privacy, disaster recovery and cybersecurity.
Horizon continues to monitor whetherexisting and new privacy and data security laws for their impact on Horizon’s business operations and its customers, including the new federal administration pursues announced plans to repeal or modifyapplicability and effect of laws such as the European Union’s comprehensive 2018 General Data Privacy Regulation and the California Consumer Privacy Act that went into effect on January 1, 2020.
Interchange Fees for Debit Cards
Under the Dodd-Frank Act.

Act, interchange fees for bank card transactions must be reasonable and proportional to the issuer’s incremental cost incurred with respect to the transaction plus certain fraud related costs. Interchange fees are transaction fees between banks for each bank card transaction, designed to reimburse the card-issuing bank for the costs of handling and credit risk inherent in a bank credit or debit card transaction. Although institutions with total assets of less than $10 billion, like the Bank, are exempt from this requirement, competitive pressures are likely to require smaller depository institutions to reduce fees with respect to these bank card transactions.

Other Regulation

In addition to the matters discussed above, the Bank is subject to additional regulation of its activities, including a variety of consumer protection regulations affecting its lending, deposit and debt collection activities and regulations affecting secondary mortgage market activities.

Both federal and state law extensively regulate various aspects of the banking business, such as reserve requirements,

truth-in-lending
and
truth-in-savings
disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations.
Effect of Governmental Monetary Policies

The Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Federal Home Loan Bank (“FHLB”) System

The Bank is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLB is funded primarily from funds deposited by banks and savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board (“FHFB”), an independent agency, controls the FHLB System, including the FHLB of Indianapolis.

HORIZON BANCORP

As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 2016, the Bank’s investment in stock of the FHLB of Indianapolis was $14.9 million. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral to 30% of a member’s capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.

The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low and moderate income housing projects. For the year ended December 31, 2016, dividends paid by the FHLB of Indianapolis to the Bank totaled approximately $529,000, for an annualized rate paid in dividends of 4.3%.

Limitations on Rates Paid for Deposits; Restrictions on Brokered Deposits

FDIC regulations restrict the interest rates that less than well-capitalized insured depository institutions may pay on deposits and also restrict the ability of such institutions to accept brokered deposits. These regulations permit a “well capitalized” depository institution to accept, renew or roll over brokered deposits without restriction, and an “adequately capitalized” depository institution to accept, renew or roll over brokered deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates). The regulations prohibit an “undercapitalized” depository institution from accepting, renewing or rolling over brokered deposits. These regulations contemplate that the definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of FDICIA. Management does not believe that these regulations will have a materially adverse effect on the Bank’s current operations.

17
Horizon Bancorp, Inc.
Legislative Initiatives

Additional legislative and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures and various regulatory agencies, including those referred to above. Itagencies. Horizon cannot be predictedpredict with certainty whether such legislative or administrative action will be enacted or the extent to which the banking industry in general or Horizon and its affiliates in particular will be affected.

HORIZON BANCORP

BANK HOLDING COMPANY STATISTICAL DISCLOSURES

I.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL

Information required by this section of Securities Act Industry Guide 3 is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as set forth in Item 7 below, herein incorporated by reference.

II.
INVESTMENT PORTFOLIO

A.The following is a schedule of the amortized cost and fair value of investment securities available for sale and held to maturity.

   December 31, 2016   December 31, 2015   December 31, 2014 
(dollars in thousands)  Amortized
Cost		   Fair
Value		   Amortized
Cost		   Fair
Value		   Amortized
Cost		   Fair
Value		 

Available for sale

            

U.S. Treasury and federal agencies

  $8,051   $7,989   $5,940   $5,926   $26,996   $26,823 

State and municipal

   117,327    116,592    73,829    75,095    46,535    47,952 

Federal agency collateralized mtg. obligations

   139,040    137,195    157,291    156,203    122,930    122,860 

Federal agency mortgage-backed pools

   180,183    176,726    206,970    207,704    122,583    125,395 

Private labeled mortgage-backed pools

   —      —      —      —      670    689 

Corporate notes

   1,238    1,329    32    54    32    45 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

   445,839    439,831    444,062    444,982    319,746    323,764 

Total held to maturity

   193,194    194,086    187,629    193,703    165,767    169,904 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

  $639,033   $633,917   $631,691   $638,685   $485,513   $493,668 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                         
 
December 31, 2019
  
December 31, 2018
  
December 31, 2017
 
(dollars in thousands)
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Available for sale
                  
U.S. Treasury and federal agencies
 $
1,415
  $
1,413
  $
16,815
  $
16,608
  $
19,277
  $
19,052
 
State and municipal
  
396,931
   
405,768
   
210,386
   
209,303
   
148,045
   
149,564
 
Federal agency collateralized mortgage obligations
  
267,272
   
269,252
   
187,563
   
185,003
   
132,871
   
130,365
 
Federal agency mortgage-backed pools
  
145,623
   
146,572
   
183,479
   
178,736
   
211,487
   
208,657
 
Private labeled mortgage-backed pools
  
—  
   
—  
   
—  
   
—  
   
1,650
   
1,642
 
Corporate notes
  
10,848
   
11,771
   
10,666
   
10,698
   
272
   
385
 
                         
Total available for sale
  
822,089
   
834,776
   
608,909
   
600,348
   
513,602
   
509,665
 
Total held to maturity
  
207,899
   
215,147
   
210,112
   
208,273
   
200,448
   
201,085
 
                         
Total investment securities
 $
1,029,988
  $
1,049,923
  $
819,021
  $
808,621
  $
714,050
  $
710,750
 
                         
18
Horizon Bancorp, Inc.
B.The following is a schedule of maturities of each category of available for sale and
held-to-maturity
debt securities and the related weighted-average yield of such securities as of December 31, 2016:2019:

   One Year or Less  After One Year
Through Five Years		  After Five Years
Through Ten Years		  After Ten Years 
(dollars in thousands)  Amount   Yield  Amount   Yield  Amount   Yield  Amount   Yield 

Available for sale

             

U.S. Treasury and federal agencies(1)

  $—      0.00%  $7,643    1.43%  $346    2.06%  $—      0.00% 

State and municipal

   7,480    2.27%   29,836    2.91%   20,638    3.88%   58,638    4.42% 

Federal agency collateralized mtg. obligations(2)

   —      0.00%   5,559    3.10%   27,655    2.93%   103,980    2.55% 

Federal agency mortgage-backed pools(2)

   —      0.00%   3,390    3.26%   23,946    2.47%   149,391    2.53% 

Corporate notes

   —      0.00%   —      0.00%   —      0.00%   1,329    0.00% 
  

 

 

    

 

 

    

 

 

    

 

 

   

Total available for sale

  $7,480    2.27%  $46,428    2.71%  $72,585    3.04%  $313,338    2.88% 

Total held to maturity

  $—      0.00%  $35,446    4.08%  $95,872    3.77%  $62,768    4.09% 
  

 

 

    

 

 

    

 

 

    

 

 

   

Total investment securities

  $7,480    2.27%  $81,874    3.31%  $168,457    3.46%  $376,106    3.08% 
  

 

 

    

 

 

    

 

 

    

 

 

   

                                 
 
One Year
or Less
  
After One Year
Through Five
Years
  
After Five Years
Through Ten
Years
  
After Ten Years
 
(dollars in thousands)
 
Amount
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
 
Available for sale
                        
U.S. Treasury and federal agencies
(1)
 $
—  
   
0.00
% $
1,413
   
1.50
% $
—  
   
0.00
% $
—  
   
0.00
%
State and municipal
  
36,006
   
2.04
%  
39,661
   
2.44
%  
112,412
   
3.68
%  
217,689
   
3.39
%
Federal agency collateralized mortgage obligations
(2)
  
—  
   
0.00
%  
—  
   
0.00
%  
48,207
   
2.55
%  
221,045
   
3.42
%
Federal agency mortgage-backed pools
(2)
  
—  
   
0.00
%  
5,038
   
2.75
%  
70,750
   
2.48
%  
70,784
   
3.25
%
Corporate notes
  
—  
   
0.00
%  
1,535
   
3.24
%  
9,732
   
2.88
%  
503
   
0.00
%
                                 
Total available for sale
  
36,006
   
2.04
%  
47,647
   
2.47
%  
241,101
   
3.07
%  
510,021
   
3.38
%
Total held to maturity
  
7,874
   
3.52
%  
66,048
   
3.52
%  
100,110
   
3.83
%  
41,115
   
3.33
%
                                 
Total investment securities
 $
43,880
   
2.30
% $
113,695
   
3.08
% $
341,211
   
3.29
% $
551,136
   
3.38
%
                                 
(1)Fair value is based on contractual maturity or call date where a call option exists
(2)Maturity based upon final maturity date

The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields are not presented on a
tax-equivalent
basis.

HORIZON BANCORP

Excluding those holdings of the investment portfolio in Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer that exceeded 10% of the consolidated stockholders’ equity of Horizon at December 31, 2016.

2019.
III.
LOAN PORTFOLIO

A.
A.    
TypesofLoans
-
Total loans on the balance sheet are comprised of the following classifications for the years indicated.

(dollars in thousands)  December 31
2016		  December 31
2015		  December 31
2014		  December 31
2013		  December 31
2012		 

Commercial

  $1,069,956  $804,995  $674,314  $505,189  $460,471 

Real estate

   531,874   437,144   254,625   185,958   189,714 

Mortgage warehouse

   135,727   144,692   129,156   98,156   251,448 

Consumer

   398,429   362,300   320,459   279,525   289,084 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   2,135,986   1,749,131   1,378,554   1,068,828   1,190,717 

Allowance for loan losses

   (14,837)   (14,534)   (16,501)   (15,992)   (18,270) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans

  $2,121,149  $1,734,597  $1,362,053  $1,052,836  $1,172,447 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
(dollars in thousands)
 
December 31
2019
  
December 31
2018
  
December 31
2017
  
December 31
2016
  
December 31
2015
 
Commercial
 $
2,046,651
  $
1,721,590
  $
1,669,934
  $
1,069,956
  $
804,995
 
Real estate
  
770,717
   
668,141
   
609,739
   
531,874
   
437,144
 
Mortgage warehouse
  
150,293
   
74,120
   
94,508
   
135,727
   
144,692
 
Consumer
  
669,180
   
549,481
   
460,999
   
398,429
   
362,300
 
                     
Total loans
  
3,636,841
   
3,013,332
   
2,835,180
   
2,135,986
   
1,749,131
 
Allowance for loan losses
  
(17,667)
   
(17,820)
   
(16,394)
   
(14,837)
   
(14,534)
 
Loans, net
 $
3,619,174
  $
2,995,512
  $
2,818,786
  $
2,121,149
  $
1,734,597
 
                     
B.
B.    
MaturitiesandSensitivitiesofLoanstoChangesinInterestRates
-
The following is a schedule of maturities and sensitivities of loans to changes in interest rates, excluding real estate mortgage, mortgage warehouse and consumer loans, as of December 31, 2016:2019:

(dollars in thousands)

Maturing or repricing

  One Year
or Less		   One Through
Five Years		   After Five
Years		   Total 

Commercial, financial, agricultural and commercialtax-exempt loans

  $658,783   $365,370   $45,803   $1,069,956 

                 
(dollars in thousands)
 
One Year
or Less
  
One Through
Five Years
  
After
Five Years
  
Total
 
Maturing or repricing Commercial, financial, agricultural and commercial
tax-exempt
loans
 $
1,303,544
  $
676,459
  $
66,648
  $
2,046,651
 
19
Horizon Bancorp, Inc.
The following is a schedule of fixed-rate and variable-rate commercial, financial, agricultural and commercial
tax-exempt
loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)

(dollars in thousands)  Fixed
Rate		   Variable
Rate		 

Total commercial, financial, agricultural and commercialtax-exempt loans due after one year

  $297,424   $113,749 

HORIZON BANCORP

C.RiskElements

         
(dollars in thousands)
 
Fixed
Rate
  
Variable
Rate
 
Total commercial, financial, agricultural,
and commercial
tax-exempt
loans
due after one year
 $
479,727
  $
263,380
 
C.    
Risk Elements
Non-accrual,PastDueandRestructuredLoans
- The following schedule summarizes
non-accrual,
past due and restructured loans.

(dollars in thousands)  December 31
2016		   December 31
2015		   December 31
2014		   December 31
2013		   December 31
2012		 

Non-performing loans

          

Commercial

          

More than 90 days past due

  $183   $—     $—     $45   $—   

Non-accrual

   2,249    5,030    10,024    4,014    5,754 

Trouble debt restructuring - accruing

   —      60    610    1,296    1,265 

Trouble debt restructuring -non-accrual

   —      1,915    1,221    2,116    3,674 

Real estate

          

More than 90 days past due

   —      1    40    2    2 

Non-accrual

   2,959    4,354    2,297    2,459    4,565 

Trouble debt restructuring - accruing

   1,254    808    2,526    2,686    1,761 

Trouble debt restructuring -non-accrual

   809    1,074    1,031    999    2,827 

Mortgage warehouse

          

More than 90 days past due

   —      —      —      —      —   

Non-accrual

   —      —      —      —      —   

Trouble debt restructuring - accruing

   —      —      —      —      —   

Trouble debt restructuring -non-accrual

   —      —      —      —      —   

Consumer

          

More than 90 days past due

   58    27    75    2    52 

Non-accrual

   2,728    2,878    2,991    3,275    3,055 

Trouble debt restructuring - accruing

   238    350    1,236    1,072    676 

Trouble debt restructuring -non-accrual

   205    183    391    311    148 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totalnon-performing loans

   10,683    16,680    22,442    18,277    23,779 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned and repossessed collateral

          

Commercial

   542    161    411    830    1,337 

Real estate

   2,648    3,046    636    1,277    1,228 

Mortgage warehouse

   —      —      —      —      —   

Consumer

   26    —      154    14    11 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned and repossessed collateral

   3,216    3,207    1,201    2,121    2,576 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totalnon-performing assets

  $13,899   $19,887   $23,643   $20,398   $26,355 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(dollars in thousands)    

Gross interest income that would have been recorded onnon-accrual loans outstanding as of December 31, 2016, in the period if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period.

  $690 

Interest income actually recorded onnon-accrual loans outstanding as of December 31, 2016, and included in net income for the period.

   204 
  

 

 

 

Interest income not recognized during the period onnon-accrual loans outstanding as of December 31, 2016.

  $486 
  

 

 

 

                     
 
December 31
  
December 31
  
December 31
  
December 31
  
December 31
 
(dollars in thousands)
 
2019
  
2018
  
2017
  
2016
  
2015
 
Non-performing loans
               
Commercial
               
More than 90 days past due
 $
—  
  $
208
  $
—  
  $
183
  $
—  
 
Non-accrual
  
4,782
   
6,094
   
6,902
   
2,249
   
5,030
 
Trouble debt restructuring - accruing
  
1,484
   
109
   
1
   
—  
   
60
 
Trouble debt restructuring -
non-accrual
  
1,081
   
492
   
451
   
—  
   
1,915
 
Real estate
               
More than 90 days past due
  
1
   
180
   
—  
   
—  
   
1
 
Non-accrual
  
7,614
   
2,846
   
3,693
   
2,959
   
4,354
 
Trouble debt restructuring - accruing
  
1,561
   
1,558
   
1,672
   
1,254
   
808
 
Trouble debt restructuring -
non-accrual
  
708
   
423
   
351
   
809
   
1,074
 
Mortgage warehouse
               
More than 90 days past due
  
—  
   
—  
   
—  
   
—  
   
—  
 
Non-accrual
  
—  
   
—  
   
—  
   
—  
   
—  
 
Trouble debt restructuring - accruing
  
—  
   
—  
   
—  
   
—  
   
—  
 
Trouble debt restructuring -
non-accrual
  
—  
   
—  
   
—  
   
—  
   
—  
 
Consumer
               
More than 90 days past due
  
145
   
180
   
167
   
58
   
27
 
Non-accrual
  
3,283
   
2,608
   
2,681
   
2,728
   
2,878
 
Trouble debt restructuring - accruing
  
309
   
335
   
285
   
238
   
350
 
Trouble debt restructuring -
non-accrual
  
217
   
142
   
211
   
205
   
183
 
Total
non-performing
loans
  
21,185
   
15,175
   
16,414
   
10,683
   
16,680
 
Other real estate owned and repossessed collateral
                    
Commercial
  
3,698
   
1,967
   
578
   
542
   
161
 
Real estate
  
28
   
60
   
200
   
2,648
   
3,046
 
Mortgage warehouse
  
—  
   
—  
   
—  
   
—  
   
—  
 
Consumer
  
—  
   
48
   
60
   
26
   
—  
 
Total other real estate owned and
repossessed collateral
  
3,726
   
2,075
   
838
   
3,216
   
3,207
 
Total
non-performing
assets
 $
24,911
  $
17,250
  $
17,252
  $
13,899
  $
19,887
 
     
(dollars in thousands)
  
Gross interest income that would have been recorded on
non-accrual
loans outstanding as of December 31, 2019, in the period if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period.
 $
1,129
 
Interest income actually recorded on
non-accrual
loans outstanding as of December 31, 2019, and included in net income for the period.
  
808
 
     
Interest income not recognized during the period on
non-accrual
loans outstanding as of December 31, 2019.
 $
321
 
     
20
Horizon Bancorp, Inc.
Discussion of
Non-Accrual
Policy

 1.From time to time, the Bank obtains information which may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of such, it is management’s policy to convert the loan from an “earning asset” to a
non-accruing
loan. Further, it is management’s policy to place a commercial loan on a
non-accrual
status when delinquent in excess of 90 days or itmanagement has haddetermined that the accrual of interest discontinued by management.borrower’s ability to continue to make payments is in doubt. The officer responsible for the loan, the Executive Vice President and Chief CreditCommercial Banking, Officer and the senior commercial loan workout officer must review all loans placed on
non-accrual
status.

HORIZON BANCORP

 2.Potential Problem Loans:

Impaired and
non-accrual
loans for which the discounted cash flows or collateral value exceeded the carrying value of the loan totaled $10.7$21.2 million and $16.7$15.2 million at December 31, 20162019 and 2015.2018. The allowance for impaired and
non-accrual
loans included in the Bank’s allowance for loan losses totaled $4,000$459,000 and $202,000$1.0 million at those respective dates. The average balance of impaired loans during 20162019 and 20152018 was $2.9$10.4 million and $7.1$7.4 million.

 3.Foreign Outstandings:

None.

 4.Loan Concentrations:

As of December 31, 2016,2019, there are no significant concentrations of loans exceeding 10% of total loans. See Item III A above for a listing of the types of loans by concentration.

D.
OtherInterest-BearingAssets

There are no other interest-bearing assets as of December 31, 2016,2019, which would be required to be disclosed under Item III C.1 or 2 if such assets were loans.

IV.
SUMMARY OF LOAN LOSS EXPERIENCE

A.The following is an analysis of the activity in the allowance for loan losses account:

(dollars in thousands)  December 31
2016		   December 31
2015		   December 31
2014		   December 31
2013		   December 31
2012		 

Loans outstanding at the end of the period(1)

  $2,135,986   $1,749,131   $1,378,554   $1,068,828   $1,190,717 

Average loans outstanding during the period (1)

   1,948,580    1,593,790    1,247,510    1,092,662    1,043,620 

                     
 
December 31
  
December 31
  
December 31
  
December 31
  
December 31
 
(dollars in thousands)
 
2019
  
2018
  
2017
  
2016
  
2015
 
Loans outstanding at the end of the period
(1)
 $
3,636,841
  $
3,013,332
  $
2,835,180
  $
2,135,986
  $
1,749,131
 
Average loans outstanding during the period
(1)
  
3,500,649
   
2,910,741
   
2,335,126
   
1,948,580
   
1,593,790
 
(1)Net of unearned income and deferred loan fees

(dollars in thousands)  December 31
2016		  December 31
2015		  December 31
2014		  December 31
2013		  December 31
2012		 

Balance at beginning of the period

  $14,534  $16,501  $15,992  $18,270  $18,882 

Loanscharged-off:

      

Commercial

   758   3,437   1,802   2,532   2,388 

Real estate

   213   288   328   1,055   597 

Consumer

   1,689   2,374   1,999   2,663   2,958 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loanscharged-off

   2,660   6,099   4,129   6,250   5,943 

Recoveries of loans previouslycharged-off:

      

Commercial

   210   192   773   668   782 

Real estate

   97   69   21   114   77 

Consumer

   814   709   786   1,270   948 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loan recoveries

   1,121   970   1,580   2,052   1,807 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loanscharged-off

   1,539   5,129   2,549   4,198   4,136 

Provision charged to operating expense

   1,842   3,162   3,058   1,920   3,524 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at the end of the period

  $14,837  $14,534  $16,501  $15,992  $18,270 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percent of net charge-offs to average loans outstanding for the period

   0.08%   0.32%   0.20%   0.38%   0.40% 

HORIZON BANCORP

21
Horizon Bancorp, Inc.
                     
 
December 31
  
December 31
  
December 31
  
December 31
  
December 31
 
(dollars in thousands)
 
2019
  
2018
  
2017
  
2016
  
2015
 
Balance at beginning of the period
 $
17,820
  $
16,394
  $
14,837
  $
14,534
  $
16,501
 
Loans
charged-off:
               
Commercial
  
863
   
473
   
629
   
758
   
3,437
 
Real estate
  
93
   
76
   
89
   
213
   
288
 
Consumer
  
2,312
   
2,003
   
1,535
   
1,689
   
2,374
 
                     
Total loans
charged-off
  
3,268
   
2,552
   
2,253
   
2,660
   
6,099
 
Recoveries of loans previously
charged-off:
               
Commercial
  
199
   
176
   
298
   
210
   
192
 
Real estate
  
46
   
27
   
44
   
97
   
69
 
Consumer
  
894
   
869
   
998
   
814
   
709
 
                     
Total loan recoveries
  
1,139
   
1,072
   
1,340
   
1,121
   
970
 
Net loans
charged-off
  
2,129
   
1,480
   
913
   
1,539
   
5,129
 
Provision charged to operating expense
  
1,976
   
2,906
   
2,470
   
1,842
   
3,162
 
                     
Balance at end of the period
 $
 17,667
  $
17,820
  $
16,394
  $
14,837
  $
14,534
 
                     
Percent of net charge-offs to average loans
outstanding for the period
  
0.06
%  
0.05
%  
0.04
%  
0.07
%  
0.26
%
B.The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and the percentage of loans in each category to total loans.

  December 31
2016		  December 31
2015		  December 31
2014		  December 31
2013		  December 31
2012		 
(dollars in thousands) Allowance
Amount		  % of Loans
to Total
Loans		  Allowance
Amount		  % of Loans
to Total
Loans		  Allowance
Amount		  % of Loans
to Total
Loans		  Allowance
Amount		  % of Loans
to Total
Loans		  Allowance
Amount		  % of Loans
to Total
Loans		 

Commercial, financial and agricultural

 $6,579   50%  $7,195   46%  $7,910   50%  $6,663   48%  $7,771   39% 

Real estate

  2,090   25%   2,476   25%   2,508   18%   3,462   17%   3,204   16% 

Mortgage warehousing

  1,254   6%   1,007   8%   1,132   9%   1,638   9%   1,705   21% 

Consumer

  4,914   19%   3,856   21%   4,951   23%   4,229   26%   5,590   24% 

Unallocated

  —     —     —     —     —     —     —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $14,837   100%  $14,534   100%  $16,501   100%  $15,992   100%  $18,270   100% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
 
December 31, 2019
  
December 31, 2018
  
December 31, 2017
 
(dollars in thousands)
 
Allowance
Amount
  
% of Loans to
Total Loans
  
Allowance
Amount
  
% of Loans to
Total Loans
  
Allowance
Amount
  
% of Loans to
Total Loans
 
Commercial, financial and agricultural
 $
11,996
   
68
% $
10,495
   
59
% $
9,093
   
56
%
Real estate
  
923
   
5
%  
1,676
   
9
%  
2,188
   
13
%
Mortgage warehousing
  
1,077
   
6
%  
1,006
   
6
%  
1,030
   
6
%
Consumer
  
3,671
   
21
%  
4,643
   
26
%  
4,083
   
25
%
Unallocated
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                         
Total
 $
  17,667
   
100
% $
  17,820
   
100
% $
  16,394
   
100
%
                         
                 
 
December 31, 2016
  
December 31, 2015
 
(dollars in thousands)
 
Allowance
Amount
  
% of Loans to
Total Loans
  
Allowance
Amount
  
% of Loans to
Total Loans
 
Commercial, financial and agricultural
 $
6,579
   
45
% $
7,195
   
49
%
Real estate
  
2,090
   
14
%  
2,476
   
17
%
Mortgage warehousing
  
1,254
   
8
%  
1,007
   
7
%
Consumer
  
4,914
   
33
%  
3,856
   
27
%
Unallocated
  
—  
   
—  
   
—  
   
—  
 
                 
Total
 $
14,837
   
100
% $
14,534
   
100
%
                 
In 1999, Horizon began a mortgage warehousing program. This program is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 below and in the Notes to the Consolidated Financial Statements in Item 8 below, which are incorporated herein by reference. The greatest risk related to these loans is transaction and fraud risk. During 2016,2019, Horizon processed approximately $3.6$2.935 billion in mortgage warehouse loans.

V.DEPOSITS

Information required by this section is found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 below and in the Consolidated Financial Statements and related Notes in Item 8 below, which are incorporated herein by reference.

VI.RETURN ON EQUITY AND ASSETS

Information required by this section is found in “Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations in Item 7 below and in the Consolidated Financial Statements and related notesNotes in Item 8 below, which are incorporated herein by reference.

22
Horizon Bancorp, Inc.
VII.VIISHORT TERM BORROWINGS

The following is a schedule of statistical information relative to securities sold under agreements to repurchase which are secured by Treasury and U.S. Government agency securities and mature within one year. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30% or more of stockholders’ equity at the end of the period.

(dollars in thousands)  December 31
2016		  December 31
2015		 

Outstanding at year end

  $57,144  $59,399 

Approximate weighted-average interest rate atyear-end

   0.18%   0.13% 

Highest amount outstanding as of anymonth-end during the year

  $62,703  $61,205 

Approximate average outstanding during the year

  $54,737  $54,899 

Approximate weighted-average interest during the year

   0.17%   0.13% 

HORIZON BANCORP

         
 
December 31
  
December 31
 
(dollars in thousands)
 
2019
  
2018
 
Outstanding at
year-end
 $
90,941
  $
52,116
 
Approximate weighted-average interest rate at
year-end
  
0.70
%  
0.64
%
Highest amount outstanding as of any
month-end
during the year
 $
97,301
  $
61,383
 
Approximate average outstanding during the year
  
81,264
   
51,385
 
Approximate weighted-average interest during the year
  
0.84
%  
0.43
%
ITEM
1A. RISK FACTORS

An investment in Horizon’s securities is subject to risks inherent to our business. The material risks and uncertainties that management believes currently affect Horizon are described below.below, categorized as risks related to our business and risks related to our common stock. Before making an investment decision, you should carefully consider these risks as well as information we include or incorporate by reference in this report and other filings we make with the SEC. The risks and uncertainties we have described are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may affect our business operations.

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, our results could differ materially from the forward-looking statements. All forward-looking statements in this report are current only as of the date on which the statements were made. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

Risks Related to Our Business

As a financial institution, we are subject to a number of risks relating to our daily business. Although we undertake a variety of efforts to manage and control those risks, many of the risks are outside of our control. Among the risks we face are the following:

Creditrisk
: the risk that loan customers or other parties will be unable to perform their contractual obligations;

Marketrisk
: the risk that changes in market rates and prices will adversely affect our financial condition or results of operation;

Liquidityrisk
: the risk that Horizon or the Bank will have insufficient cash or access to cash to meet its operating needs;

Operationalrisk
: the risk of financial and reputational loss resulting from fraud, inadequate or failed internal processes, cyber-security breaches, people and systems, or external events;

Economicrisk
: the risk that the economy in our markets could decline further resulting in increased unemployment, decreased real estate values and increased loan charge-offs; and

Compliancerisk
: the risk of additional action by our regulators or additional regulation that could hinder our ability to do business profitably.profitably;

Regulatory risk
: the risk presented by the need to comply with all laws, rules and regulations from multiple regulatory agencies, including but not limited to the FDIC, CFPB, Indiana Department of Financial Institutions, Federal Reserve Bank and the Board of Governors of the Federal Reserve, and the Department of Labor; and
Fiduciary risk:
the risk of failing to act in our fiduciary capacity in the best interests of the grantors and beneficiaries of trust accounts and benefit plans.
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Horizon Bancorp, Inc.
The current economic environment poses significant challenges for us andthat could adversely affect our financial condition and results of operations.

We are operating

For many years, we operated in a challenging and uncertain economic environment including generally uncertain world, national and local conditions in our markets. The capital and credit markets have been experiencingdue to the volatility and disruption sincecaused by the major recession that began in 2008. This presents financial institutions with unprecedented circumstances and challenges that in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. Our financial statements have been prepared using values and information currently available to us, but given this volatility, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset valuesThe housing market was significantly impacted, several major banks collapsed, and the allowance for loan losses, which could negatively impact our abilityU.S. economy continued to meet regulatory capital requirementsshrink through the third quarter of 2009, representing the longest downturn since the Great Depression. Now, a decade later and maintain sufficient liquidity.through 2019, the U.S. economy continues to recover, but unevenly. The risks associated with our business become more acute in periods of a slowinglabor market has seen significant recovery and employment levels are returning to
pre-2008
recession levels, but many challenges face the economy or slow growthgoing forward, such as we began experiencing inelevated pension and medical costs, government budget deficits, looming escalation of trade conflicts with China, threats of escalated foreign conflicts, the latter halfglobal impact of 2008BREXIT, the economic impact related to the Coronavirus, and which continued through 2016. Althoughothers. In addition, the Federal Reserve has reduced interest rates three times during 2019, reversing nearly all of the rate increases of 2018, primarily reacting to uncertainty over trade issues and slowing global growth. Global and national economic forecasters discusschanges will ultimately have local economic impact, and can impact us directly and indirectly. Financial institutions, such as the potential for more robust growth in 2017, financial institutions continue to be affected by sluggish real estate markets and constrained financial markets. While we continue to take steps to decrease and limit our exposure to residential construction and land development loans and home equity loans, we nonethelessBank, retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

Continuedlocal declines in real estate values, home sales volumes, and financial stress onloss of confidence in the U.S. economy or loss of employment by borrowers, as a result of the uncertain economic environment, including job loss, could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations. Further deteriorationIn general, any loss confidence in the U.S. or local economic conditions in our

HORIZON BANCORP

marketseconomy could drivecause financial stress on borrowers and their customers, driving losses beyond that which is provided for in our allowance for loan losses and resultpotentially resulting in the following otheradditional consequences: increases in loan delinquencies, problem assets and foreclosures; declining demand for our products and services may decline;services; decreased deposits, may decrease, which would adverselynegatively impact our liquidity position; and collateral for our loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assetsdeclining asset and collateral values associated with our existing loans, reducing a customer’s borrowing power and our security for the loans.

An economic slowdown in our primary market areas could affect our business.
Our primary market area for deposits and loans consists of northern and central Indiana and southern and central Michigan. An economic slowdown could hurt our business and the possible consequences of such a downturn could include the following:
increases in loan delinquencies and foreclosures;
declines in the value of real estate and other collateral securing loans;
an increase in loans charged off;
an increase in the Company’s expense to fund loan loss reserves;
an increase in collection costs;
a decline in the demand for our products and services; and
an increase in
non-accrual
loans and other real estate owned.
We face intense competition in all phases of our business from other banks, financial institutions and
non-banks.

The banking and financial services business in most of our markets is highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions,
neo-banks
(a digital or mobile-only bank that exists without any physical bank branches), and other
non-bank
financial and digital service providers, many of which have greater financial, marketing and technological resources than us. Many of these competitors are not subject to the same regulatory restrictions that we are and may be able to compete more effectively as a result.

Also, technology and other changes have lowered barriers to entry and made it possible for customers to complete financial transactions using
neo-banks,
non-banks
and financial technology (“FinTech”) companies that historically have involved banks at one or both ends of the transaction.Non-banks These entities now offer products and services traditionally provided by banks.community banks and often at lower costs. The wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems, deposit and lending platforms in which banks play only minor roles. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. Use of emerging alternative payment platforms, such as Apple Pay or Bitcoin or other cryptocurrencies, can alter consumer credit card behavior and consequently impact our interchange fee income.
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Horizon Bancorp, Inc.
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The effects of disintermediation can also impact the lending business because of the fast growing body of financial technologyFinTech companies that use software to deliver mortgage lending and other financial services. A related risk is the migration of bank personnel away from the traditional bank environments into financial technology
neo-banks,
FinTech companies and other
non-banks.

Increased competition in our market may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to maintain our earnings record, grow our loan portfolios and obtain
low-cost
funds. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to relax
our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than we can offer.

Our commercial

Annually, the number of banks and consumer loans expose usthe number of bank branches continues to increaseddecrease, which decreases the opportunities to expand through acquisitions. Horizon is also experiencing an increase in competition to acquire other banks, due to the overall strength of financial institutions and their high capital levels. In addition, credit risks.

We have a large percentage of commercialunions and consumer loans. Commercial loans generally have greater credit risk than residential mortgage loans because repayment of these loans often depends on the successful business operations of the borrowers. These loans also typically have much larger loan balances than residential mortgage loans. Consumer loans generally involve greater risk than residential mortgage loans because theyFinTech companies are unsecured or secured bynow actively pursuing small bank acquisitions. Increased competition for bank acquisitions may slow Horizon’s ability to grow earning assets that depreciate in value. Although we undertake a variety of underwriting, monitoring and reserving protections with respect to these types of loans, there can be no guarantee that we will not suffer unexpected losses.

Our holdings of construction, land and home equity loans may pose more credit risk than other types of mortgage loans.

Construction loans, loans secured by commercial real estate and home equity loans generally entail more risk than other types of mortgage loans. When real estate values decrease, the developers to whom we lend are likely to experience a decline in sales of new homes from their projects. Land and construction loans are more likely to becomenon-performing as developers are unable to build and sell homes in volumes large enough for orderly repayment of loans and as other owners of such real estate (including homeowners) are unable to keep up with their payments. We strive to establish what we believe are adequate reserves on our financial statements to cover the credit risk of these loan portfolios. However, there can be no assurance that losses will not exceed our reserves, and ultimately result in a material level of charge-offs, which could adversely impact our results of operations, liquidity and capital.

HORIZON BANCORP

The allowance for loan losses may prove inadequate or be negatively affected by credit risk exposures.

Our business depends on the creditworthiness of our customers. We periodically review the allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including pastcharge-off experience and levels of past due loans andnon-performing assets. There is no certainty that the allowance for loan losses will be adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.

at comparable historical growth rates.

Changes in market interest rates could adversely affect our financial condition and results of operations.

Our financial condition and results of operations are significantly affected by changes in market interest rates. We can neither predict with certainty nor control changes in interest rates. These changes can occur at any time and are affected by many factors, including international, national, regional and local economic conditions, competitive pressures and monetary policies of the Federal Reserve.

Our results of operations depend substantially on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. Our profitability depends on our ability to manage our assets and liabilities during periods of changing market interest rates. If rates increase rapidly as a result of an improving economy, we may have to increase the rates paid on our deposits and borrowed funds more quickly than loans and investments
re-price,
resulting in a negative impact on interest spreads and net interest income. The impact of rising rates could be compounded if deposit customers flow funds away from us into direct investments, such as U.S. Government bonds, corporate securities and other investment vehicles, including mutual funds, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than those offered by financial institutions such as ours. These consequences and consumer reactions may be more likely to occur during a future rise in interest rates as a result of, and in reaction to, the historically low interest rates that have persisted for an extended period of time since 2008.from 2008 until the rates started to rise again slowly in late 2015. In other words, historical consumer behavior may not be a reliable predictor of future consumer behavior in a period of rising interest rates (such as 2018 and 2019), resulting in a larger outflow of deposits or a higher level of loan prepayments than we would expect. In either case, our deposit costs may increase and our loan interest income may decline, either or both of which may have an adverse effect on our financial results.

Changes in interest rates also could affect loan volume. For instance, an increase in interest rates could cause a decrease in the demand for mortgage loans (and other loans), which could result in a significant decline in our revenue stream.

Conversely, should market interest rates fall below current levels, our net interest margin could also be negatively affected, as competitive pressures could keep us from further reducing rates on our deposits, and prepayments and curtailments on assets may continue. Such movements may cause a decrease in our interest rate spread and net interest margin, and therefore, decrease our profitability.

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Horizon Bancorp, Inc.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities.

HORIZON BANCORP

An economic slowdown

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need to raise additional capital in the future to fund acquisitions and to provide us with sufficient capital resources and liquidity to meet our primary market areas could affectcommitments, regulatory capital requirements and business needs, particularly if our business.

asset quality or earnings were to deteriorate significantly. Although we are currently, and have historically been, “well capitalized” for regulatory purposes, in the past we have been required to maintain increased levels of capital in connection with certain acquisitions. Additionally, we periodically explore acquisition opportunities with other financial institutions, some of which are in distressed financial condition. Any future acquisition, particularly the acquisition of a significantly troubled institution or an institution of comparable size to us, may require us to raise additional capital in order to obtain regulatory approval and/or to remain well capitalized.

Our primary market area for depositsability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and loans consists of Northern and Central Indiana and Southwestern and Central Michigan. An economic slowdown could hurt our businessfinancial performance. Economic conditions and the possible consequencesloss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve.
We cannot guarantee that such a downturn could includecapital will be available on acceptable terms or at all. Any occurrence that may limit our access to the following:

increases in loan delinquencies and foreclosures;

declines in the value of real estate and other collateral securing loans;

an increase in loans charged off;

an increase in the Company’s expense to fund loan loss reserves;

an increase in collection costs;

capital markets, such as a decline in the demandconfidence of debt purchasers, our depositors or counterparties participating in the capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition and results of operations and may restrict our ability to grow.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.
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Horizon Bancorp, Inc.
Our commercial, residential mortgage and consumer loans expose us to increased credit risks.
We have a large percentage of commercial, residential mortgage and consumer loans. Commercial loans generally have greater credit risk than residential mortgage loans because repayment of these loans often depends on the successful business operations of the borrowers. These loans also typically have much larger loan balances than residential mortgage loans. Consumer loans generally involve greater risk than residential mortgage loans because they are unsecured or secured by assets that depreciate in value. Although we undertake a variety of underwriting, monitoring and reserving protections with respect to these types of loans, there can be no guarantee that we will not suffer unexpected losses. Residential mortgage loans are at risk due to rising unemployment rates and increasing interest rates, which may adversely affect the underlying real estate value.
Our holdings of construction, land and home equity loans may pose more credit risk than other types of mortgage loans.
Construction loans, loans secured by commercial real estate and home equity loans generally entail more risk than other types of mortgage loans. When real estate values decrease, the developers to whom we lend are likely to experience a decline in sales of new homes from their projects. Land and construction loans are more likely to become
non-performing
as developers are unable to build and sell homes in volumes large enough for orderly repayment of loans and as other owners of such real estate (including homeowners) are unable to keep up with their payments. We strive to establish what we believe are adequate reserves on our financial statements to cover the credit risk of these loan portfolios. However, there can be no assurance that losses will not exceed our reserves, and ultimately result in a material level of charge-offs, which would adversely impact our results of operations, liquidity and capital.
The allowance for loan losses may prove inadequate or be negatively affected by credit risk exposures.
Our business depends on the creditworthiness of our customers. We periodically review the allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past
charge-off
experience and levels of past due loans and
non-performing
assets. There is no certainty that the allowance for loan losses will be adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.
In addition, Horizon is adopting FASB’s new current expected credit loss (“CECL”) accounting standard, which will change the process by which we account for our Allowance for Loan and Lease Loss Reserve. As a new standard, it is subject to possible change and uncertainty about how the new process may impact Horizon’s financial statements.
Our mortgage warehouse and indirect lending operations are subject to a higher fraud risk than our other lending operations.
We buy loans originated by mortgage bankers and automobile dealers. Because we must rely on the mortgage bankers and automobile dealers in making and documenting these loans, there is an increased risk of fraud to us on the part of the third-party originators and the underlying borrowers. In order to guard against this increased risk, we perform investigations on the mortgage companies with whom we do business, and we review the loan files and loan documents we purchase to attempt to detect any irregularities or legal noncompliance. However, there is no guarantee that our procedures will detect all cases of fraud or legal noncompliance.
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Horizon Bancorp, Inc.
Our mortgage lending profitability could be significantly reduced if we are not able to resell mortgages at a reasonable gain on sale or experience other problems with the secondary market process or we are unable to retain our mortgage loan sales force due to regulatory changes.
Currently, we sell a substantial portion of the mortgage loans we originate. The profitability of our mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.
Our ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae, Freddie Mac and Ginnie Mae (the “Agencies”) and other institutional and
non-institutional
investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Some of the largest participants in the secondary market, including the Agencies, are government-sponsored enterprises whose activities are governed by federal law. Any future changes in laws that significantly affect the activity of such government-sponsored enterprises could, in turn, adversely affect our operations.
In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. government. Although to date, the conservatorship has not had a significant or adverse effect on our operations, and during 2010 and 2012 the Federal Housing Finance Agency indicated that the Treasury Department is committed to fund Fannie Mae and Freddie Mac to levels needed in order to sufficiently meet their funding needs, it is currently unclear whether further changes would significantly and adversely affect our operations. Members of the present federal administration have expressed an intent to seek an end to the conservatorship and to privatize the Agencies, and it is unclear how that might impact us. In addition, our ability to sell mortgage loans readily is dependent upon our ability to remain eligible for the programs offered by the Agencies and other institutional and
non-institutional
investors. Our ability to remain eligible may also depend on having an acceptable peer-relative delinquency ratio for the Federal Housing Administration (“FHA”) and maintaining a delinquency rate with respect to Ginnie Mae pools that are below Ginnie Mae guidelines. In the case of Ginnie Mae pools, we have repurchased delinquent loans from them in the past to maintain compliance with the minimum required delinquency ratios. Although these loans are typically insured as to principal by the FHA, such repurchases increase our capital and liquidity needs, and there can be no assurance that we will have sufficient capital or liquidity to continue to purchase such loans out of the Ginnie Mae pools if required to do so.
Any significant impairment of our eligibility with any of the Agencies could materially and adversely affect our operations. Further, the criteria for loans to be accepted under such programs may be changed from
time-to-time
by the sponsoring entity which could result in a lower volume of corresponding loan originations. The profitability of participating in specific programs may vary depending on a number of factors, including our administrative costs of originating and purchasing qualifying loans and our costs of meeting such criteria.
Our mortgage lending profitability could be significantly reduced as changes in interest rates could affect mortgage origination volume and pricing for selling mortgages on the secondary market.
Currently, we sell a substantial portion of the mortgage loans we originate. The profitability of our mortgage banking operations depends in large part upon our ability to originate and sell mortgages to the secondary market at a gain. A higher interest rate environment can negatively affect the volume of loan originations and refinanced loans reducing the dollar amount of loans available to be sold to the secondary market. Higher interest rates can also negatively affect the premium received on loans sold to the secondary market as competitive pressures to originate loans can reduce pricing.
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Horizon Bancorp, Inc.
We may be exposed to risk of environmental liabilities with respect to real property to which we take title.
In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties (including liabilities for property damage, personal injury, investigation and
clean-up
costs incurred by these parties in connection with environmental contamination), or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property.
We are exposed to intangible asset risk in that our goodwill may become impaired.
As of December 31, 2019, we had $177.9 million of goodwill and other intangible assets. A significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, or slower growth rates could result in impairment of goodwill. If we were to conclude that a future write-down of our goodwill is necessary, then we would record the appropriate charge, which could be materially adverse to our operating results and financial position. For further discussion, see Notes 1 and 11, “Nature of Operations and Summary of Significant Accounting Policies” and “Goodwill and Intangible Assets,” to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form
10-K
for the year ended December 31, 2019.
Our role as a fiduciary trustee for corporate employee stock ownership plans (“ESOPs”) may expose us to increased risk of litigation due to heightened scrutiny of this role by the U.S. Department of Labor and the plaintiffs’ bar.
The U.S. Department of Labor and the plaintiffs’ bar have been aggressively targeting ESOP trustees and transactions on a variety of fronts, including valuations and the amount that ESOP trustees pay to buy back stock from selling shareholders, as well as the indemnity agreements commonly used by ESOP companies to protect ESOP fiduciaries from undue risk and exposure. We act as an independent trustee for corporate ESOP plans throughout the U.S., which may expose us to an increased risk of litigation from the U.S. Department of Labor and the plaintiffs’ bar.
We may be adversely impacted by the discontinuance of LIBOR as a short-term interest rate utilized for loans and other financing agreements.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to
USD-LIBOR
for use in derivatives and other financial contracts that are currently indexed to
USD-LIBOR.
ARRC has proposed a paced market transition plan to SOFR from
USD-LIBOR
and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to
USD-LIBOR.
The Company has material contracts that are indexed to
USD-LIBOR
and is monitoring this activity and evaluating the related risks.
The preparation of our financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not have to increase the allowance for loan losses and/or sustain loan losses that are significantly higher than the provided allowance.
We are subject to extensive regulation and changes in laws and regulatory policies could adversely affect our business.
Our operations are subject to extensive regulation by federal agencies. See “Regulation and Supervision” in the description of our Business in Item 1 of Part I of this report for detailed information on the laws and regulations to which we are subject. Changes in applicable laws, regulations or regulator policies can materially affect our business. The likelihood of any major changes in the future and their effects are impossible to determine. As an example, the Bank could experience higher credit losses because of federal or state legislation or by regulatory or bankruptcy court action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that limits its ability to foreclose on property or other collateral or makes foreclosure less economically feasible.
29
Horizon Bancorp, Inc.
We face other risks from recent actions of the U.S. Treasury and the Internal Revenue Service. In November 2016, these agencies issued a Notice making captive insurance company activities “transactions of interest” due to the potential for tax avoidance or evasion. We have a captive insurance company and it is not certain at this point how the Notice may impact us on our operation of the captive insurance company as a risk management tool.
Legislation enacted in recent years, together with additional actions announced by the U.S. Treasury and other regulatory agencies, continue to develop. It is not clear at this time what impact legislation and liquidity and funding initiatives of the U.S. Treasury and other bank regulatory agencies, and additional programs that may be initiated in the future, will have on the financial markets and the financial services industry.
We may also face compliance risks arising from the new and growing body of privacy and data security laws enacted by foreign governments, such as the European Union’s comprehensive 2018 General Data Privacy Regulation, and by U.S. state governments, such as the California Consumer Privacy Act that went into effect on January 1, 2020.
The full impact of the Tax Cuts and Jobs Act on us and our customers continues to be uncertain.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Tax Reform Act”), which introduced broad and complex tax reforms. Among other changes, the Tax Reform Act reduced the corporate tax rate for 2018 and limited the utilization of net operating losses to offset taxable income. As a result, during the fourth quarter of 2017, Horizon recognized an increase in income tax expense because of a $2.4 million adjustment of Horizon’s net deferred tax assets to the new corporate rate. Many aspects of the Tax Reform Act were clarified during 2018 by the U.S. Treasury and the Internal Revenue Service, but many others remain unclear. As recently as December 2019, these agencies released proposed regulations on the tax deductibility of officers’ compensation by publicly held corporations. As additional clarification and implementation guidance is issued on the Tax Reform Act, we may need to make further adjustments, which could have an impact on our earnings.
In short, the Tax Reform Act may have wide-ranging, unexpected and material effects on our business practices, financial condition and results of operations, and we are not able to predict all of these effects at this time.
In the long-term, U.S. corporate tax rates may increase and therefore would have an adverse impact on earnings.
Our inability to continue to process large volumes of transactions accurately could adversely impact our business and financial results.
We process large volumes of transactions on a daily basis and are exposed to numerous types of operational risk. Operational risk resulting from inadequate or failed internal processes, people and systems includes the risk of fraud by persons inside or outside Horizon, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards. Accordingly, if systems of internal control should fail to work as expected, if systems are used in an unauthorized manner, or if employees subvert the system of internal controls, significant losses could result.
We establish and maintain systems of internal operational controls that are designed to provide us with timely and accurate information about our level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost-effective levels. Procedures also exist that are designed to ensure that policies relating to conduct, ethics and business practices are followed. If these systems fail, significant losses could result.
While we continually monitor and improve the system of internal controls, data processing systems and corporate-wide processes and procedures, there can be no assurance that future losses will not occur.
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Horizon Bancorp, Inc.
Our information systems may experience cyber-attacks or an interruption or breach in security. Our cybersecurity systems could be inadequate or fail.
We rely heavily on internal and outsourced technologies, communications, and information systems to conduct our business. Additionally, in the normal course of business, we collect, process and retain sensitive and confidential information regarding our customers. As our reliance on technology has increased, so have the potential risks of a technology-related operation interruption (such as disruptions in our customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of cyber-attacks (such as unauthorized access to our systems, computer viruses or other malicious code). These risks have increased for all financial institutions as new technologies, including the use of the Internet and telecommunications technologies (including mobile devices), have become commonly used to conduct financial and other business transactions, during a time of increased technological sophistication of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, which are designed to disrupt key business services, such as customer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources, both domestic and foreign. However, we have analyzed and will continue to analyze security related to device-specific considerations, user access topics, transaction-processing and network integrity.
We also face risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and our processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. Further cyber-attacks or other breaches in the future, whether affecting us or others, could intensify consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material adverse effect on our business.
To the extent we are involved in any future cyber-attacks or other breaches, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance we maintain. We could also suffer significant damage to our reputation. Although we are insured against many of these risks, including privacy breach response costs, notification expenses, breach support and credit monitoring expenses, cyber extortion and cyber terrorism, there can be no assurances that such insurance will be sufficient to cover all costs arising from a data or information technology breach and our exposure may exceed our coverage.
We continually encounter technological changes.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services and;that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

an increase innon-accrual loans
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Horizon Bancorp, Inc.
We rely on other companies to provide key components of our business infrastructure.
Third-party vendors provide key components of our business infrastructure, including Internet connections, mobile and internet banking, statement processing, loan document preparation, network access and transaction and other real estate owned.processing services. Although we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of inadequate or interrupted service or breach of customer information, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. In addition, any breach in customer information could affect our reputation and cause a loss of business. Replacing these third-party vendors also could result in significant delay and expense.

Damage to our reputation could damage our business.
Our business depends upon earning and maintaining the trust and confidence of our customers, investors and employees. Damage to our reputation could cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, compliance failures, litigation or regulatory outcomes or governmental investigations. In addition, a failure to deliver appropriate standards of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation, privacy breach and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to our reputation. Adverse publicity about Horizon, whether or not true, may result in harm to our existing business, customer relationships and prospects. Should any events or factors that can undermine our reputation occur, there is no assurance that the additional costs and expenses that we may need to incur to address the issues giving rise to the reputational harm would not adversely affect our earnings and results of operations.
The loss of key members of our senior management team and our lending teams could affect our ability to operate effectively.

We depend heavily on the services of our existing senior management team, particularly our CEO Craig M. Dwight, to carry out our business and investment strategies. As we continue to grow and expand our business and our locations, products and services, we will increasingly need to rely on Mr. Dwight’s experience, judgment and expertise as well as that of the other members of our senior management team. We also depend heavily on our experienced and effective lending teams and their respective special market insights, including, for example, our agricultural lending specialists. In addition to the importance of retaining our lending team, we will also need to continue to attract and retain qualified banking personnel at all levels. Competition for such personnel is intense in our geographic market areas. If we are unable to attract and retain an effective lending team and other talented people, our business could suffer. The loss of the services of any senior management personnel, particularly Mr. Dwight, or the inability to recruit and retain qualified lending and other personnel in the future, could have a material adverse effect on our consolidated results of operations, financial condition and prospects.

Potential acquisitions may disrupt our business and dilute stockholder value.

We periodically evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. We generally seek merger or acquisition partners that are culturally similar and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:

potential exposure to unknown or contingent liabilities of the target company;

exposure to potential asset quality issues of the target company;

potential disruption to our business;

potential diversion of our management’s time and attention away from
day-to-day
operations;

the possible loss of key employees, business and customers of the target company;

difficulty in estimating the value of the target company, and;company; and

potential problems in integrating the target company’s data processing and ancillary systems, customers and employees with ours.

32
Horizon Bancorp, Inc.
As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving the payment of cash or the issuance of our debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. To the extent we were to issue additional shares of common sharesstock in any such transaction, our current shareholders would be diluted and such an issuance may have the effect of decreasing our stock price, perhaps significantly. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.

HORIZON BANCORP

In addition, merger and acquisition costs incurred by Horizon may temporarily increase operating expenses.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We may need to raise additional capital in the future to fund acquisitions and to provide us with sufficient capital resources and liquidity to meet our commitments, regulatory capital requirements and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Although we are currently, and have historically been, “well capitalized” for regulatory purposes, our capital levels are not far in excess of the well capitalized threshold, and in the past we have been required to maintain increased levels of capital in connection with certain acquisitions. Additionally, we periodically explore acquisition opportunities with other financial institutions, some of which are in distressed financial condition. Any future acquisition, particularly the acquisition of a significantly troubled institution or an institution of comparable size to us, may require us to raise additional capital in order to obtain regulatory approval and/or to remain well capitalized.

Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance. Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve.

We cannot guarantee that such capital will be available on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, our depositors or counterparties participating in the capital markets may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our businesses, financial condition and results of operations and may restrict our ability to grow.

The preparation of our financial statements requires the use of estimates that may vary from actual results.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not have to increase the allowance for loan losses and/or sustain loan losses that are significantly higher than the provided allowance.

Our mortgage warehouse and indirect lending operations are subject to a higher fraud risk than our other lending operations.

We buy loans originated by mortgage bankers and automobile dealers. Because we must rely on the mortgage bankers and automobile dealers in making and documenting these loans, there is an increased risk of fraud to us on the part of the third-party originators and the underlying borrowers. In order to guard against this increased risk, we perform investigations on the mortgage companies with whom we do business, and we review the loan files and loan documents we purchase to attempt to detect any irregularities or legal noncompliance. However, there is no guarantee that our procedures will detect all cases of fraud or legal noncompliance.

Our mortgage lending profitability could be significantly reduced if we are not able to resell mortgages or experience other problems with the secondary market process or are unable to retain our mortgage loan sales force due to regulatory changes.

Currently, we sell a substantial portion of the mortgage loans we originate. The profitability of our mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.

HORIZON BANCORP

Our ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae, Freddie Mac and Ginnie Mae (the “Agencies”) and other institutional andnon-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Some of the largest participants in the secondary market, including the Agencies, are government-sponsored enterprises whose activities are governed by federal law. Any future changes in laws that significantly affect the activity of such government-sponsored enterprises could, in turn, adversely affect our operations.

In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. government. Although to date, the conservatorship has not had a significant or adverse effect on our operations, and during 2010 and 2012 the Federal Housing Finance Agency indicated that the Treasury Department is committed to fund Fannie Mae and Freddie Mac to levels needed in order to sufficiently meet their funding needs, it is currently unclear whether further changes would significantly and adversely affect our operations. Members of the present federal administration have expressed an intent to seek an end to the conservatorship and to privatize the Agencies, and it is unclear how that might impact us. In addition, our ability to sell mortgage loans readily is dependent upon our ability to remain eligible for the programs offered by the Agencies and other institutional andnon-institutional investors. Our ability to remain eligible may also depend on having an acceptable peer-relative delinquency ratio for the Federal Housing Administration (“FHA”) and maintaining a delinquency rate with respect to Ginnie Mae pools that are below Ginnie Mae guidelines. In the case of Ginnie Mae pools, we have repurchased delinquent loans from them in the past to maintain compliance with the minimum required delinquency ratios. Although these loans are typically insured as to principal by the FHA, such repurchases increase our capital and liquidity needs, and there can be no assurance that we will have sufficient capital or liquidity to continue to purchase such loans out of the Ginnie Mae pools if required to do so.

Any significant impairment of our eligibility with any of the Agencies could materially and adversely affect our operations. Further, the criteria for loans to be accepted under such programs may be changed fromtime-to-time by the sponsoring entity which could result in a lower volume of corresponding loan originations. The profitability of participating in specific programs may vary depending on a number of factors, including our administrative costs of originating and purchasing qualifying loans and our costs of meeting such criteria.

We are exposed to intangible asset risk in that our goodwill may become impaired.

As of December 31, 2016, we had $86.3 million of goodwill and other intangible assets. A significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, or slower growth rates could result in impairment of goodwill. If we were to conclude that a future write-down of our goodwill is necessary, then we would record the appropriate charge, which could be materially adverse to our operating results and financial position. For further discussion, see Notes 1 and 11, “Nature of Operations and Summary of Significant Accounting Policies” and “Intangible Assets,” to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2016.

We are subject to extensive regulation and changes in laws and regulatory policies could adversely affect our business.

Our operations are subject to extensive regulation by federal agencies. See “Regulation and Supervision” in the description of our Business in Item 1 of Part I of this report for detailed information on the laws and regulations to which we are subject. Changes in applicable laws, regulations or regulator policies can materially affect our business. The likelihood of any major changes in the future and their effects are impossible to determine. As an example, the Bank could experience higher credit losses because of federal or state legislation or by regulatory or bankruptcy court action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that limits its ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

Corporate tax reform continues to be a priority in the U.S., and the present federal administration proposes reducing the corporate income tax rate. Changes to the U.S. tax system could have significant effects, positive and negative, on our

HORIZON BANCORP

effective tax rate, and on our deferred tax assets and liabilities. In addition, changes to the tax system could impact our ability to utilize our federal and state net operating loss carryforwards. Accordingly, a decline in the U.S. corporate tax rate or other changes to the U.S. tax system could have a material adverse effect on Horizon’s earnings in the quarter and year in which the legislation is enacted.

We face other risks from recent actions of the U.S. Treasury and the Internal Revenue Service. In November 2016, these agencies issued a Notice making captive insurance company activities “transactions of interest” due to the potential for tax avoidance or evasion. We have two captive insurance companies (one was acquire in 2016 as part of the LaPorte Bancorp acquisition), and it is not certain at this point how the Notice may impact us on our operation of the captive insurance companies as a risk management tool.

Legislation enacted in recent years, together with additional actions announced by the U.S. Treasury and other regulatory agencies, continue to develop. It is not clear at this time what impact legislation and liquidity and funding initiatives of the U.S. Treasury and other bank regulatory agencies, and additional programs that may be initiated in the future, will have on the financial markets and the financial services industry.

Our inability to continue to accurately process large volumes of transactions could adversely impact our business and financial results.

In the normal course of business, we process large volumes of transactions. If systems of internal control should fail to work as expected, if systems are used in an unauthorized manner, or if employees subvert the system of internal controls, significant losses could result.

We process large volumes of transactions on a daily basis and are exposed to numerous types of operational risk. Operational risk resulting from inadequate or failed internal processes, people and systems includes the risk of fraud by persons inside or outside Horizon, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.

We establish and maintain systems of internal operational controls that are designed to provide us with timely and accurate information about our level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost-effective levels. Procedures also exist that are designed to ensure that policies relating to conduct, ethics and business practices are followed. From time to time, losses from operational risk may occur, including the consequences of operational errors.

While we continually monitor and improve the system of internal controls, data processing systems and corporate-wide processes and procedures, there can be no assurance that future losses will not occur.

Our information systems may experience cyber-attacks or an interruption or breach in security.

We rely heavily on internal and outsourced technologies, communications, and information systems to conduct our business. Additionally, in the normal course of business, we collect, process and retain sensitive and confidential information regarding our customers. As our reliance on technology has increased, so have the potential risks of a technology-related operation interruption (such as disruptions in our customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of cyber-attacks (such as unauthorized access to our systems, computer viruses or other malicious code). These risks have increased for all financial institutions as new technologies, including the use of the Internet and telecommunications technologies (including mobile devices), have become commonly used to conduct financial and other business transactions, during a time of increased technological sophistication of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, that are designed to disrupt key business services, such as customer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources, both domestic and foreign. However, we have analyzed and will continue to analyze security related to device-specific considerations, user access topics, transaction-processing and network integrity.

HORIZON BANCORP

We also face risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and our processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. Further cyber-attacks or other breaches in the future, whether affecting us or others, could intensify consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material adverse effect on our business.

To the extent we are involved in any future cyber-attacks or other breaches, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance we maintain. We could also suffer significant damage to our reputation. Although we are insured against many of these risks, including privacy breach response costs, notification expenses, breach support and credit monitoring expenses, cyber extortion and cyber terrorism, there can be no assurances that such insurance will be sufficient to cover all costs arising from a data or information technology breach and our exposure may exceed our coverage.

We continually encounter technological changes.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

We rely on other companies to provide key components of our business infrastructure.

Third-party vendors provide key components of our business infrastructure, including Internet connections, mobile and internet banking, network access and transaction and other processing services. Although we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of inadequate or interrupted service or breach of customer information, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. In addition, any breach in customer information could affect our reputation and cause a loss of business. Replacing these third-party vendors also could result in significant delay and expense.

Damage to our reputation could damage our business.

Our business depends upon earning and maintaining the trust and confidence of our customers, investors and employees. Damage to our reputation could cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, compliance failures, litigation or regulatory outcomes or governmental investigations. In addition, a failure to deliver appropriate standards of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation, privacy breach and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to our reputation. Adverse publicity about Horizon, whether or not true, may result in harm to our existing business, customer relationships and prospects. Should any events or factors that can undermine our reputation occur, there is no assurance that the additional costs and expenses that we may need to incur to address the issues giving rise to the reputational harm would not adversely affect our earnings and results of operations.

HORIZON BANCORP

The soundness of other financial institutions could adversely affect us.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.

Risks Related to our Common Stock

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell our common stock at times or at prices you find attractive.

Although our common stock is listed on the NASDAQ Global Select Market, our stock price constantly changes, and we expect our stock price to continue to fluctuate in the future. Our stock price is impacted by a variety of factors, some of which are beyond our control.

These factors include:

variations in our operating results or the quality of our assets;

operating results that vary from the expectations of management, securities analysts and investors;

increases in loan losses,
non-performing
loans and other real estate owned;

changes in the U.S. corporate tax rates;
changes in expectations as to our future financial performance;

announcements of new products, strategic developments, new technology, acquisitions and other material events by us or our competitors;

ability to fund Horizon’s assets through core deposits and/or wholesale funding;
the operating and securities price performance of other companies that investors believe are comparable to us;

loss of
our inclusion on the Russell 3000 or other indices;

actual or anticipated sales of our equity or equity-related securities;

our past and future dividend practice;

our creditworthiness;

interest rates;

the credit, mortgage and housing markets, and the markets for securities relating to mortgages or housing;

developments with respect to financial institutions generally; and

economic, financial, geopolitical, regulatory, congressional or judicial events that affect us or the financial markets.

In addition, the stock market in general has recently experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies and particularly those in the financial services and banking sector, including for reasons unrelated to their operating performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results.

Because our stock is moderately traded, it may be more difficult for you to sell your shares or buy additional shares when you desire to do so and the price may be volatile.

Although our common stock has been listed on the NASDAQ stock market since December 2001, our common stock is moderately traded. The prices of moderately traded stocks, such as ours, can be more volatile than stocks traded in a large, active public market and can be more easily impacted by sales or purchases of large blocks of stock. Moderately traded stocks are also less liquid, and because of the low volume of trades, you may be unable to sell your shares when you desire to do so.

HORIZON BANCORP

33
Horizon Bancorp, Inc.
Provisions in our articles of incorporation, our
by-laws,
and Indiana law may delay or prevent an acquisition of us by a third party.

Our articles of incorporation and
by-laws
and Indiana law contain provisions that have certain anti-takeover effects. While the purpose of these provisions is to strengthen the negotiating position of the board of directors in the event of a hostile takeover attempt, the overall effects of these provisions may be to render more difficult or discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a larger block of our shares, and the removal of incumbent directors and key management.

Our articles of incorporation provide for a staggered board, which means that only
one-third
of our board can be replaced by shareholders at any annual meeting. Our articles also provide that our directors may only be removed without cause by shareholders owning 70% or more of our outstanding common stock. Furthermore, our articles provide that only our board of directors, and not our shareholders, may adopt, alter, amend and repeal ourby-laws.

Our articles also preempt Indiana law with respect to business combinations with a person who acquires 10% or more of our common stock and provide that such transactions are subject to independent and super-majority shareholder approval requirements unless certain pricing and board
pre-approval
requirements are satisfied.

Our
by-laws
do not permit cumulative voting of shareholders in the election of directors, allowing the holders of a majority of our outstanding shares to control the election of all our directors, and our directors are elected by plurality (not majority) voting. Our
by-laws
also establish detailed procedures that shareholders must follow if they desire to nominate directors for election or otherwise present issues for consideration at a shareholders’ meeting. We also have a maximum age for new directors and a mandatory retirement age for directors.

These and other provisions of our governing documents and Indiana law are intended to provide the board of directors with the negotiating leverage to achieve a more favorable outcome for our shareholders in the event of an offer for the Company. However, there is no assurance that these same anti-takeover provisions could not have the effect of delaying, deferring or preventing a transaction or a change in control that might be in the best interest of our shareholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

34
Horizon Bancorp, Inc.

ITEM 2. PROPERTIES

The main office and full service branch of Horizon and the Bank is located at 515 Franklin Square,Street, Michigan City, Indiana. The building located across the street from the main office of Horizon and the Bank, at 502 Franklin Square,Street, houses the credit administration, operations, facilities and purchasing, and information technology departments of the Bank. In addition to these principal facilities, the Bank has 5573 sales offices and one loan production office located at:

3631 South Franklin StreetMichigan CityIndiana
113 West First StreetWanatahIndiana
1500 West LincolnwayLaPorteIndiana
423 South Roosevelt StreetChestertonIndiana
4208 North Calumet AvenueValparaisoIndiana
902 East LincolnwayValparaisoIndiana
455 Morthland DriveValparaisoIndiana
2650 Willowcreek RoadPortageIndiana
8590 BroadwayMerrillvilleIndiana
10429 Calumet AvenueMunsterIndiana
17400 State Road 23South BendIndiana
1909 East Bristol StreetElkhartIndiana
1321 119th StreetWhitingIndiana
1349 Calumet AvenueHammondIndiana

HORIZON BANCORP

1300 North Main StreetCrown PointIndiana
420 North Morton StreetFranklinIndiana
151 Marlin DriveGreenwoodIndiana
942 South US 31GreenwoodIndiana
507 Three Notch LaneBargersvilleIndiana
302 North Alabama StreetIndianapolisIndiana
1216 West Carmel DriveCarmelIndiana
212 West Seventh StreetAuburnIndiana
105 North Main StreetAvillaIndiana
507 North Main StreetColumbia CityIndiana
123-129 South Main StreetColumbia CityIndiana
1212 South Randolph StreetGarrettIndiana
303 Defiance StreetHoweIndiana
116 West Mitchell StreetKendallvilleIndiana
114 South Detroit StreetLaGrangeIndiana
210 West Lake StreetTopekaIndiana
625 South Wayne StreetWaterlooIndiana
22730 Main StreetWoodburnIndiana
200 Main StreetLeesburgIndiana
102 East Main StreetMentoneIndiana
411 South Huntington StreetSyracuseIndiana
2102 East Center StreetWarsawIndiana
433 Anchorage RoadWarsawIndiana
301 Boyd BoulevardLaPorteIndiana
6959 West Johnson RoadLaPorteIndiana
710 Indiana AvenueLaPorteIndiana
1 Parkman DriveWestvilleIndiana
307 East Jackson StreetAtticaIndiana
2 South Perry StreetAtticaIndiana
811 Ship StreetSt. JosephMichigan
2608 Niles RoadSt. JosephMichigan
1041 East Napier AvenueBenton HarborMichigan
500 West Buffalo StreetNew BuffaloMichigan
6801 West US 12Three OaksMichigan
3250 West Centre AvenuePortageMichigan
1600 Abbot RoadEast LansingMichigan
2151 West Grand RiverOkemosMichigan
500 North Grand StreetSchoolcraftMichigan
123 Portage AvenueThree RiversMichigan
1213 West Michigan AvenueThree RiversMichigan
15534 US 12UnionMichigan

in various cities and towns in northern and central Indiana and southern and central Michigan. Horizon maintains such branches and offices as it believes are necessary for the convenience of its customers and the community, and Horizon frequently assesses the suitability of all its business locations.

Horizon owns all of theseits facilities except for theleased offices in East Lansing, Michigan office located at 1600 Abbot Road, which is leased.and Grand Rapids, Michigan . The Bank also has threeleases one loan production offices which are all leased located at:

10020 Auburn Park DriveFort WayneIndiana
7100 Tower Road, Suite ABattle CreekMichigan
250 Pearl Street NWGrand RapidsMichigan

HORIZON BANCORP

office in Troy, Michigan.

ITEM 3. LEGAL PROCEEDINGS

Horizon and its subsidiaries are involved in various legal proceedings incidental to the conduct of their business. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

SPECIAL ITEM: INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF REGISTRANT

Craig M. Dwight
 60
63
 
Chairman of Horizon since July 2014; Chairman and Chief Executive Officer of the Bank since January 2003; Chief Executive Officer of Horizon and the Bank since July 2001; President of the Bank from 1998 to January 2003.
Thomas H. Edwards 64 
James D. Neff
60
President of Horizon and the Bank since January 2018; Executive Vice President – Consumer and Mortgage Banking of the Bank from 2016 to January 2018; Executive Vice President – Mortgage Banking of the Bank from January 2004 to 2016; Senior Vice President of the Bank sincefrom October 1999 to January 2003.2004; Corporate Secretary of Horizon from 2007 to 2017.
Mark E. Secor
 50
53
 
Executive Vice President of Horizon since January 2014
;
Chief Financial Officer and Executive Vice President of Horizon and the Bank since January 2009; Vice President, Chief Investment and Asset Liability Manager from June 2007 to January 2009; Chief Financial Officer of St. Joseph Capital Corp., Mishawaka, Indiana from 2004 to 2007.
James D. Neff 57 Corporate Secretary of Horizon since 2007; Executive Vice President-Mortgage Banking of the Bank since January 2004; Senior Vice President of the Bank from October 1999 to January 2004.
Kathie A. DeRuiter
 55
58
 
Executive Vice President of Horizon and Senior Bank Operations Officer since January 2014; Senior Vice President, Senior Bank Operations Officer from January 2003 to January 2014; Vice President, Senior Bank Operations Officer from January 2000 to January 2003.
Dennis J. Kuhn
60
Executive Vice President and Chief Commercial Banking Officer since October 2017; Regional Market President for Michigan and Northeast Indiana from February 2014 to October 2017; Chair of the Regional Loan Committee; Market President for Kalamazoo, Michigan from May 2010 to October 2017.
Todd A. Etzler
53
Senior Vice President and General Counsel since July 2018; Vice President and General Counsel since March 2017; Corporate Secretary since January 2018. General Counsel of Family Express Corporation from July 2011 to March 2017.

All officers are appointed annually by the Board of Directors of Horizon and the Bank, as applicable.

HORIZON BANCORP

35
Horizon Bancorp, Inc.
PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock and Related Stockholder Matters
Horizon common stock is traded on the NASDAQ Global Select Market under the symbol “HBNC.”
The approximate number of holders of record of Horizon’s outstanding common stock as of February 27, 2020 was 1,509.
The Equity Compensation Plan Information table appears under the caption “Equity Compensation Plan Information” in Item 12 below and is incorporated herein by reference.
Repurchases of Securities

There were no purchases by the Company of its common stock during the fourth quarter of 2016.

2019.

36
Horizon Bancorp, Inc.
Performance Graph

The SEC requires Horizon to include a line graph comparing Horizon’s cumulative five-year total shareholder returns on the common shares with market and industry returns over the past five years. SNL Financial LCS&P Global Market Intelligence prepared the following graph. The return represented in the graph assumes the investment of $100 on December 31, 2011,2014, and further assumes reinvestment of all dividends. The Company’s common stock began trading on the NASDAQ Global Market on February 1, 2007, and on the NASDAQ Global Select Market on January 2, 2014. Prior to that date, the common stock was traded on the NASDAQ Capital Market.

   Period Ending 
Index  December 31
2011		   December 31
2012		   December 31
2013		   December 31
2014		   December 31
2015		   December 31
2016		 

Horizon Bancorp

   100.00    173.93    228.51    240.98    262.38    403.16 

Russell 2000

   100.00    116.35    161.52    169.43    161.95    196.45 

SNL Bank$1B-$5B

   100.00    123.31    179.31    187.48    209.86    301.92 

SNL Micro Cap Bank

   100.00    126.37    163.04    184.90    205.62    252.77 

Source : SNL Financial LC, Charlottesville, VA
Copyright 2017www.snl.com

HORIZON BANCORP

                         
Index
 
December 31
2014
  
December 31
2015
  
December 31
2016
  
December 31
2017
  
December 31
2018
  
December 31
2019
 
Horizon Bancorp, Inc.
  
100.00
   
108.88
   
167.30
   
169.07
   
146.83
   
181.60
 
Russell 2000 Index
  
100.00
   
95.59
   
115.95
   
132.94
   
118.30
   
148.49
 
SNL Bank
$1B-$5B
Index
  
100.00
   
111.94
   
161.04
   
171.69
   
150.42
   
182.85
 
SNL Micro Cap Bank Index
  
100.00
   
111.20
   
136.72
   
167.25
   
158.70
   
177.22
 
Source: S&P Global Market Intelligence
©
2020
37
Horizon Bancorp, Inc.
The following chart compares the change in market price of Horizon’s common stock since December 31, 20112014 to that of publicly traded banks in Indiana and Michigan with assets greater than $500 million, excluding the reinvestment of dividends.

   Period Ending 
Index  December 31
2011		   December 31
2012		   December 31
2013		   December 31
2014		   December 31
2015		   December 31
2016		 

Horizon Bancorp

   100.00    170.08    219.24    226.26    242.01    363.53 

Indiana Banks(1)

   100.00    110.30    144.28    153.88    172.82    225.46 

Michigan Banks(1)

   100.00    123.05    147.57    158.96    173.88    209.68 

                         
Index
 
December 31
2014
  
December 31
2015
  
December 31
2016
  
December 31
2017
  
December 31
2018
  
December 31
2019
 
Horizon Bancorp, Inc.
  
100.00
   
106.96
   
160.67
   
159.53
   
135.83
   
163.54
 
Indiana Banks 
(1)
  
100.00
   
111.81
   
156.16
   
186.91
   
190.71
   
201.38
 
Michigan Banks 
(1)
  
100.00
   
110.52
   
130.62
   
140.61
   
157.23
   
179.68
 
(1)excludes merger targets

Source : SNL Financial LC, Charlottesville, VA
Copyright 2017www.snl.com

The other information regarding Horizon’s common stock, including the approximate number of holders of the common stock, is included under the caption “Horizon’s Common Stock and Related Stockholders Matters” in Item 8 below, which is incorporated by reference.

Source: S&P Global Market Intelligence
©
2020
38
Horizon Bancorp, Inc.

ITEM 6.  SELECTED FINANCIAL DATA

The information required under this item is incorporated by reference to the information appearing under the caption “Summary of Selected Financial Data” in Item 8 of this Form10-K.

HORIZON BANCORPAND SUBSIDIARIES

                     
 
Years Ended December 31
 
 
2019
  
2018
  
2017
  
2016
  
2015
 
Earnings
               
Net interest income
 $
160,791
  $
134,569
  $
112,100
  $
85,992
  $
74,734
 
Provision for loan losses
  
1,976
   
2,906
   
2,470
   
1,842
   
3,162
 
Non-interest
income
  
43,058
   
34,413
   
33,136
   
35,455
   
30,402
 
Non-interest
expense
  
122,032
   
102,516
   
94,813
   
86,892
   
74,193
 
Income tax expense
  
13,303
   
10,443
   
14,836
   
8,801
   
7,232
 
                     
Net income
  
66,538
   
53,117
   
33,117
   
23,912
   
20,549
 
Preferred stock dividend
  
—  
   
—  
   
—  
   
(42
)  
(125
)
                     
Net income available to common shareholders
 $
66,538
  $
53,117
  $
33,117
  $
23,870
  $
20,424
 
                     
Cash dividends declared
 $
20,835
  $
15,418
  $
11,720
  $
8,382
  $
6,216
 
                     
Per Share Data
               
Basic earnings per share
(1)
 $
1.53
  $
1.39
  $
0.96
  $
0.79
  $
0.87
 
Diluted earnings per share
(1)
  
1.53
   
1.38
   
0.95
   
0.79
   
0.84
 
Cash dividends declared per common share
(1)
  
0.46
   
0.40
   
0.33
   
0.27
   
0.26
 
Book value per common share
(1)
  
14.59
   
12.82
   
11.93
   
10.25
   
9.47
 
Weighted-average shares outstanding:
               
Basic
(1)
  
43,493,316
   
38,347,059
   
34,553,736
   
29,981,592
   
23,648,166
 
Diluted
(1)
  
43,597,595
   
38,495,231
   
34,760,439
   
30,123,615
   
24,295,968
 
Period End Totals
               
Loans, net of deferred loan fees and unearned
income
 $
3,636,841
  $
3,013,332
  $
2,831,995
  $
2,135,986
  $
1,749,131
 
Allowance for loan losses
  
17,667
   
17,820
   
16,394
   
14,837
   
14,534
 
Total assets
  
5,246,829
   
4,246,688
   
3,964,303
   
3,141,156
   
2,652,401
 
Total deposits
  
3,931,002
   
3,139,376
   
2,881,003
   
2,471,210
   
1,880,153
 
Total borrowings
  
606,052
   
588,221
   
601,810
   
304,945
   
482,144
 
Ratios
               
Loan to deposit
  
92.62
%  
96.02
%  
98.30
%  
86.43
%  
93.03
%
Loan to total funding
  
80.25
%  
80.87
%  
81.31
%  
76.94
%  
74.04
%
Return on average assets
  
1.35
%  
1.31
%  
0.97
%  
0.81
%  
0.87
%
Average stockholders’ equity to average total assets
  
12.28
%  
11.65
%  
11.15
%  
10.22
%  
9.30
%
Return on average stockholders’ equity
  
10.98
%  
11.22
%  
8.74
%  
7.92
%  
9.87
%
Dividend payout ratio (dividends divided by basic earnings per share)
  
31.31
%  
29.03
%  
34.78
%  
34.33
%  
29.85
%
Price to book value ratio
  
130.27
%  
123.09
%  
155.28
%  
182.13
%  
131.26
%
Price to earnings ratio
  
12.42x
   
11.35x
   
19.45x
   
23.56x
   
14.78x
 
(1)Adjusted for 3:2 stock splits on June 15, 2018 and November 14, 2016.
39
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

ITEM
 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northernnorthern and Centralcentral Indiana and Southwesternsouthern and Centralcentral Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873, until its conversion to an Indiana commercial bank effective June 23, 2017, and has operated continuously since that time.1873. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. All share data included below has been adjusted to reflect Horizon’s
three-for-two
stock splitssplit paid on November 14, 2016, November 9, 2012 and December 9, 2011.

June 15, 2018.

2019 Highlights
Following are some highlights of Horizon’s financial performance during 2016:

2019:
Net income for the year endingended December 31, 20162019 was $23.9$66.5 million, or $1.19$1.53 diluted earnings per share, compared to $20.5$53.1 million, or $1.26$1.38 diluted earnings per share, for the year ended December 31, 2015.

Excluding acquisition-related expenses, gain on sale of investment securities,2018. This represents the death benefit on bank owned life insurance, prepayment penaltieshighest annual net income and purchase accounting adjustments,diluted earnings per share in the Company’s history.
Core net income for the year ending December 31, 20162019 increased 34.5%31.6% to $29.2$70.7 million, or $1.45$1.63 diluted earnings per share, compared to $21.7$53.7 million, or $1.33$1.40 diluted earnings per share, for the year 2018. (See the
“Non-GAAP
Reconciliation of Net Income and Diluted Earnings per Share” table under the heading “Use of
Non-GAAP
Financial Measures” below for the definition of core net income.)
Return on average assets was 1.35% for the year ended December 31, 2015.2019 compared to 1.31% for the year ended December 31, 2018.

Total
Core return on average assets for the year ended December 31, 2019 was 1.43% compared to 1.33% for the year ended December 31, 2018. (See the
“Non-GAAP
Reconciliation of Return on Average Assets and Return on Average Common Equity” table under the heading “Use of
Non-GAAP
Financial Measures” below for the definition of core return on average assets.)
Consumer loans increased 22.0%at a rate of 21.8%, or $387.0$119.7 million, during the year ended December 31, 2016.

Total loans, excluding2019. Excluding acquired loans, mortgage warehouseconsumer loans and loans held for sale, increased 4.3%at a rate of 6.3%, or $69.6$34.6 million during the year ended December 31, 2016.2019.

Net interest income increased $26.2 million, or 19.5%, to $160.8 million for the year ended December 31, 2016 increased 15.1% or $11.3 million2019 compared to the year ended December 31, 2015.

Net interest margin was 2.92% for the fourth quarter of 2016 compared to 3.37% for the prior quarter and 3.50% for the same period in 2015.

Net interest margin, excluding the impact of the prepayment penalties on borrowings and purchase accounting adjustments (“core net interest margin”), was 3.45% for the fourth quarter of 2016 compared to 3.31% for the prior quarter and 3.38% for the same period in 2015.

Non-interest income$134.6 million for the year ended December 31, 2016 increased 24.9% or $7.6 million compared to2018.
Net interest margin was 3.69% for the year ended December 31, 2015.2019 compared to 3.71% for the year ended December 31, 2018.

Horizon’s tangible book value per share roseincreased to $11.48$10.63 at December 31, 2016,2019, compared to $11.02$9.43 at December 31, 2015.2018.

The Bank’s capital ratios, including Tier 1 Capital
On March 26, 2019, Horizon announced the completion of the previously announced acquisition of Salin Bancshares, Inc. (“Salin”) and its wholly-owned subsidiary, Salin Bank and Trust Company (“Salin Bank”), headquartered in Indianapolis, Indiana.
On June 18, 2019, Horizon’s Board of Directors approved an increase in the Company’s quarterly cash dividend from $0.10 to Average Assets$0.12 per share.
On July 16, 2019, Horizon’s Board of 9.93%Directors authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and Total Capital to Risk Weighted Assets of 13.98% asoutstanding common stock, no par value. As of December 31, 2016, continue to be well above the regulatory standards for well-capitalized banks.2019, Horizon had repurchased a total of 99,407 shares at an average price per share of $16.04.

40
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Critical Accounting Policies

The Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K
for 20162019 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified the allowance for loan losses, goodwill and intangible assets, mortgage servicing rights, derivative instruments and valuation measurements as critical accounting policies.

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Allowance for Loan Losses

An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. The identification of loans that have probable incurred losses is subjective; therefore, a general reserve is maintained to cover all probable losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and address asset quality problems in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (FASB ASC
310-30)
and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Accordingly, allowances for credit losses related to these loans are not carried over and recorded at the acquisition dates. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC
310-30,
but for which a discount is attributable, at least in part to the credit quality, are also accounted for under this guidance. As a result, related discounts are recognized subsequently through accretion based on the expected cash flows of the acquired loans. For purposes of applying FASB ASC
310-30,
loans acquired in business combinations are aggregated into pools of loans with common risk characteristics.

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC
350-10
establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At December 31, 2016,2019, Horizon had core deposit intangibles of $9.4$26.7 million subject to amortization and $76.9$151.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC
350-10
requires an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on December 30, 201631, 2019 was $28.00$19.00 per share compared to a tangible book value of $11.48$10.63 per common share. Horizon’s return on average assets was 81135 basis points for the year ending December 31, 2016.

2019.

41
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Mortgage Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into
non-interest
income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value.

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, from
time-to-time,
interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC
815-10.
Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in
non-interest
income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.

42
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Valuation Measurements

Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post-retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Analysis of Financial Condition

Horizon’s total assets were $3.1$5.2 billion as of December 31, 2016,2019, an increase of $488.8 million$1.0 billion from December 31, 2015.

2018. The increase was primarily in net loans of $623.7 million, investment securities available for sale of $234.4 million, cash and due from banks of $40.3 million, goodwill of $31.4 million, other intangible assets of $16.3 million and premises and equipment of $17.9 million primarily due to the acquisition of Salin Bancshares, Inc.

Investment Securities

Investment securities carrying values totaled $633.0 million$1.0 billion at December 31, 2016,2019, and consisted of Treasury and federal agency securities of $8.0$1.4 million (1.3%(0.1%); state and municipal securities of $282.2$596.5 million (44.6%(57.2%); federal agency mortgage-backed pools of $197.8$159.1 million and federal agency collateralized mortgage obligations of $143.7$273.8 million (53.9%(41.5%); and corporate securities of $1.3$11.8 million (0.2%(1.1%).

As indicated above, 53.9%41.5% of the investment portfolio consists of mortgage-backed securities and collateralized mortgage obligations. These instruments are secured by residential mortgages of varying maturities. Principal and interest payments are received monthly as the underlying mortgages are repaid. These payments also include prepayments of mortgage balances as borrowers either sell their homes or refinance their mortgages. Therefore, mortgage-backed securities and collateralized mortgage obligations have maturities that are stated in terms of average life. The average life is the average amount of time that each dollar of principal is expected to be outstanding. As of December 31, 2016,2019, the mortgage-backed securities and collateralized mortgage obligations in the investment portfolio had an average duration of 3.753.62 years. Securities that have interest rates above current market rates are purchased at a premium. Management monitors these investments periodically for other than temporary impairment by obtaining and reviewing the underlying collateral details and has concluded at December 31, 2016,2019, any unrealized loss is temporary and that the Company has the intent and ability to hold these investments to maturity.

Available-for-sale
municipal securities are priced by a third party using a pricing grid which estimates prices based on recent sales of similar securities. All municipal securities are investment grade or local
non-rated
issues and management does not believe there is other than temporary deterioration in market value. A credit review is performed annually on the municipal securities portfolio.

43
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
At December 31, 2016, 69.5%2019 and at December 31, 2015, 70.3%2018, 80.1% and 74.1%, respectively, of investment securities were classified as available for sale. Securities classified as available for sale are carried at their fair value, with both unrealized gains and losses recorded, net of tax, directly to stockholders’ equity. Net depreciationappreciation on these securities totaled $6.0$12.7 million, which resulted in a balance of $3.9$10.0 million, net of tax, included in stockholders’ equity at December 31, 2016.2019. This compared to $598,000,net depreciation on securities which totaled $6.8 million, net of tax, included in stockholders’ equity at December 31, 2015.

2018.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is also established which requires an entity to maximize the use of observable and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:

Level 1 
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There are no Level 1 securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and Federal agency securities, State and municipal securities, Federal agency collateralized mortgage obligations, Federal agency mortgage-backed pools and corporate notes. For Level 2 securities, Horizon uses a third party service to determine fair value. In performing the valuations, the pricing service relies on models that consider security-specific

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

details as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities and certain prepayment assumptions. To verify the reasonableness of the fair value determination by the service, Horizon has a portion of the Level 2 securities priced by an independent securities broker-dealer.

Unrealized gains and losses on
available-for-sale
securities, deemed temporary, are recorded, net of income tax, in a separate component of other comprehensive income on the balance sheet. No unrealized losses were deemed to be “other-than-temporary.”

As a member of the Federal Reserve and Federal Home Loan Bank systems,system, Horizon is required to maintain an investment in the common stock of each entity.the Federal Home Loan Bank. The investment in common stock is based on a predetermined formula. At December 31, 2016,2019 and 2018, Horizon had investments in the common stock of the Federal Reserve and Federal Home Loan BanksBank totaling $23.9$22.4 million and at December 31, 2015, investments totaled $13.8 million.

$18.1 million, respectively.

At December 31, 2016,2019, Horizon did not maintain a trading account.

For more information about securities, see Note 4 —– Securities to the Consolidated Financial Statements at Item 8.

44
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Total Loans

Total loans, net of deferred fees/costs, the principal earning asset of the Bank, were $2.1$3.637 billion at December 31, 2016.2019. The current level of total loans increased 22.1%20.7% from the December 31, 2015,2018, level of $1.7 billion.$3.013 billion primarily due to the acquisition of Salin Bancshares, Inc. The table below provides comparative detail on the loan categories.

   December 31
2016		   December 31
2015		   Dollar
Change		   Percent
Change		 

Commercial

        

Working capital and equipment

  $539,403   $381,245   $158,158    41.5% 

Real estate, including agriculture

   485,620    391,668    93,952    24.0% 

Tax exempt

   15,486    8,674    6,812    78.5% 

Other

   29,447    23,408    6,039    25.8% 
  

 

 

   

 

 

   

 

 

   

Total

   1,069,956    804,995    264,961    32.9% 

Real estate

        

1–4 family

   526,024    433,015    93,009    21.5% 

Other

   5,850    4,129    1,721    41.7% 
  

 

 

   

 

 

   

 

 

   

Total

   531,874    437,144    94,730    21.7% 

Consumer

        

Auto

   174,773    168,397    6,376    3.8% 

Recreation

   5,669    5,365    304    5.7% 

Real estate/home improvement

   53,898    47,015    6,883    14.6% 

Home equity

   144,508    127,113    17,395    13.7% 

Unsecured

   3,875    4,120    (245)    -5.9% 

Other

   15,706    10,290    5,416    52.6% 
  

 

 

   

 

 

   

 

 

   

Total

   398,429    362,300    36,129    10.0% 

Mortgage warehouse

   135,727    144,692    (8,965)    -6.2% 
  

 

 

   

 

 

   

 

 

   

Total loans

   2,135,986    1,749,131    386,855    22.1% 

Allowance for loan losses

   (14,837)    (14,534)    (303)   
  

 

 

   

 

 

   

 

 

   

Loans, net

  $2,121,149   $1,734,597   $386,552   
  

 

 

   

 

 

   

 

 

   

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

                 
 
December 31
2019
  
December 31
2018
  
Dollar
Change
  
Percent
Change
 
Commercial
            
Working capital and equipment
 $
938,317
  $
804,083
  $
134,234
   
16.7
%
Real estate, including agriculture
  
978,891
   
834,037
   
144,854
   
17.4
%
Tax exempt
  
63,571
   
48,975
   
14,596
   
29.8
%
Other
  
65,872
   
34,495
   
31,377
   
91.0
%
                 
Total
  
2,046,651
   
1,721,590
   
325,061
   
18.9
%
Real estate
            
1-4
family
  
762,571
   
659,754
   
102,817
   
15.6
%
Other
  
8,146
   
8,387
   
(241
)  
-2.9
%
                 
Total
  
770,717
   
668,141
   
102,576
   
15.4
%
Consumer
            
Auto
  
362,729
   
327,413
   
35,316
   
10.8
%
Recreation
  
16,262
   
13,975
   
2,287
   
16.4
%
Real estate/home improvement
  
43,585
   
39,587
   
3,998
   
10.1
%
Home equity
  
237,979
   
163,209
   
74,770
   
45.8
%
Unsecured
  
7,286
   
4,043
   
3,243
   
80.2
%
Other
  
1,339
   
1,254
   
85
   
6.8
%
                 
Total
  
669,180
   
549,481
   
119,699
   
21.8
%
Mortgage warehouse
  
150,293
   
74,120
   
76,173
   
102.8
%
                 
Total loans
  
3,636,841
   
3,013,332
   
623,509
   
20.7
%
Allowance for loan losses
  
(17,667
)  
(17,820
)  
153
   
-0.9
%
                 
Loans, net
 $
3,619,174
  $
2,995,512
  $
623,662
   
20.8
%
                 
The acceptance and management of credit risk is an integral part of the Bank’s business as a financial intermediary. The Bank has established underwriting standards including a policy that monitors the lending function through strict administrative and reporting requirements as well as an internal loan review of consumer and small business loans. The Bank also uses an independent third-party loan review function that regularly reviews asset quality.

45
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Changes in the mix of the loan portfolio averages are shown in the following table.

   December 31
2016		   December 31
2015		   December 31
2014		 

Commercial

  $918,844   $743,175   $620,809 

Real estate

   497,337    368,653    234,335 

Mortgage warehouse

   159,588    138,137    95,070 

Consumer

   372,811    343,825    297,296 
  

 

 

   

 

 

   

 

 

 

Total average loans

  $1,948,580   $1,593,790   $1,247,510 
  

 

 

   

 

 

   

 

 

 

             
 
December 31
2019
�� 
December 31
2018
  
December 31
2017
 
Commercial
 $
1,980,948
  $
1,676,013
  $
1,227,698
 
Real estate
  
778,844
   
641,161
   
567,581
 
Mortgage warehouse
  
107,259
   
82,240
   
89,212
 
Consumer
  
633,598
   
511,327
   
450,635
 
             
Total average loans
 $
3,500,649
  $
2,910,741
  $
2,335,126
 
             
Commercial Loans

Commercial loans totaled $1.1$2.047 billion, or 50.1%56.3% of total loans as of December 31, 2016,2019, compared to $805.0 million,$1.722 billion, or 46.0%57.1% as of December 31, 2015.2018. The increase during 20162019 was primarily relateddue to the $226.0acquisition of Salin which added $352.8 million ofin commercial loans, acquired in the Kosciusko, LaPorte and CNB acquisitions along with organic growth of $38.9 million net ofoffset by principal reductions from payments.

Commercial loans consisted of the following types of loans at December 31:

   December 31, 2016  December 31, 2015 
   Number   Amount   Percent of
Portfolio		  Number   Amount   Percent of
Portfolio		 

SBA guaranteed loans

   295   $61,503    5.7%   251   $54,549    6.8% 

Municipal government

   1    344    0.0%   1    447    0.1% 

Lines of credit

   1,106    192,178    18.0%   927    153,080    19.0% 

Real estate and equipment term loans

   2,559    815,931    76.3%   1,834    596,919    74.2% 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Total

   3,961   $1,069,956    100.0%   3,013   $804,995    100.0% 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

                         
 
December 31, 2019
  
December 31, 2018
 
 
Number
  
Amount
  
Percent of
Portfolio
  
Number
  
Amount
  
Percent of
Portfolio
 
SBA guaranteed
  
325
  $
65,661
   
3.2
%  
322
  $
68,849
   
4.0
%
Municipal government
  
73
   
63,572
   
3.1
%  
2
   
11,600
   
0.7
%
Lines of credit
  
1,328
   
407,558
   
19.9
%  
1,239
   
306,935
   
17.8
%
Real estate and equipment
  
4,456
   
1,509,860
   
73.8
%  
4,022
   
1,334,206
   
77.5
%
                         
Total
  
6,182
  $
2,046,651
   
100.0
%  
5,585
  $
1,721,590
   
100.0
%
                         
Fixed rate term loans with a book value of $122.4$350.8 million and a fair value of $122.3$363.0 million have been swapped to a variable rate using derivative instruments. The loans are carried at fair value in the financial statements and the related swap is carried at fair value and is included with other liabilities in the balance sheet. The recognition of the loan and swap fair values are recorded in the income statement and for 20162019 equally offset each other. Fair values are determined by the counter partycounterparty using a proprietary model that uses live market inputs to value interest rate swaps. The model is subject to daily market tests as current and future positions are priced and valued. These are Level 3 inputs under the fair value hierarchy as described above.

At December 31, 2016,2019, the commercial loan portfolio held $106.4$112.0 million of adjustable rate loans that had interest rate floors in the terms of the note. Of the commercial loans with interest rate floors, loans totaling $79.1$63.0 million were at their floor at December 31, 2016.

2019.

Residential Real Estate Loans

Residential real estate loans totaled $531.9$770.7 million, or 24.9%21.2% of total loans as of December 31, 2016,2019, compared to $437.1$668.1 million, or 25.0%22.2% of total loans as of December 31, 2015.2018. This category consists of home mortgages that generally require a loan to value of no more than 80%. Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio. The increase during 20162019 was primarily relateddue to the $75.5acquisition of Salin which added $131.0 million ofin residential real estate loans, acquired in the Kosciusko, LaPorte and CNB acquisitions along with organic growth of $19.3 million net ofoffset by principal reductions from payments.

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

In addition to the customary real estate loans described above, the Bank also had outstanding on December 31, 2016, $144.52019, $238.0 million in home equity lines of credit compared to $127.1$163.2 million at December 31, 2015.2018. Credit lines normally limit the loan to collateral value to no more than 89%. Home equity credit lines are primarily not combined with a first mortgage and are therefore evaluated in the allowance for loan losses as a separate pool. These loans are classified as consumer loans in the Loans table above and in Note 5 of the Consolidated Financial Statements at Item 8.

46
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Residential real estate lending is a highly competitive business. As of December 31, 2016,2019, the real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but could generally be categorized as follows:

   December 31, 2016  December 31, 2015 
(dollars in thousands)  Amount   Percent of
Portfolio		  Yield  Amount   Percent of
Portfolio		  Yield 

Fixed rate

         

Monthly payment

  $136,292    25.6%   4.25%  $114,035    26.1%   4.20% 

Biweekly payment

   104    0.0%   6.27%   151    0.0%   6.20% 

Adjustable rate

         

Monthly payment

   395,478    74.4%   3.77%   322,959    73.9%   3.84% 

Biweekly payment

   —      0.0%   0.00%   —      0.0%   0.00% 
  

 

 

   

 

 

   

 

 

   

 

 

  

Sub total

   531,874    100.0%   3.89%   437,145    100.0%   3.93% 
    

 

 

     

 

 

  

Loans held for sale

   8,087      7,917    
  

 

 

     

 

 

    

Total real estate loans

  $539,961     $445,062    
  

 

 

     

 

 

    

                         
 
December 31, 2019
  
December 31, 2018
 
 
Amount
  
Percent of
Portfolio
  
Yield
  
Amount
  
Percent of
Portfolio
  
Yield
 
Fixed rate
                  
Monthly payment
 $
160,742
   
20.9
%  
4.33
% $
116,102
   
17.4
%  
4.38
%
Biweekly payment
  
—  
   
0.0
%  
0.00
%  
3
   
0.0
%  
7.13
%
Adjustable rate
                  
Monthly payment
  
609,975
   
79.1
%  
3.96
%  
552,036
   
82.6
%  
3.90
%
Biweekly payment
  
—  
   
0.0
%  
0.00
%  
—  
   
0.0
%  
0.00
%
                         
Subtotal
  
770,717
   
100.0
%  
4.06
%  
668,141
   
100.0
%  
3.99
%
                         
Loans held for sale
  
4,088
         
1,038
       
                         
Total real estate loans
 $
774,805
        $
669,179
       
                         
The increase in fixed and adjustable rate residential mortgage loans during 20162019 was primarily due to the real estate loans acquired in the Kosciusko, LaPorte and CNB acquisitions as well as organic growth.Salin acquisition. In addition to the real estate loan portfolio, the Bank originates and sells real estate loans and retains the servicing rights. During 20162019 and 2015,2018, approximately $316.9$269.7 million and $302.4$188.8 million, respectively, of residential mortgages were sold into the secondary market. Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1.3$1.447 billion and $1.2$1.299 billion at December 31, 20162019 and 2015.

2018.

The aggregate fair value of capitalized mortgage servicing rights at December 31, 2016,2019, totaled approximately $12.1$14.4 million compared to the carrying value of $11.2$14.3 million. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.

   December 31
2016		   December 31
2015		   December 31
2014		 

Mortgage servicing rights

      

Balances, January 1

  $9,271   $7,980   $7,428 

Servicing rights capitalized

   3,426    2,974    2,280 

Amortization of servicing rights

   (1,016)    (1,683)    (1,728) 
  

 

 

   

 

 

   

 

 

 

Balances, December 31

   11,681    9,271    7,980 
  

 

 

   

 

 

   

 

 

 

Impairment allowance

      

Balances, January 1

   (397)    (338)    (389) 

Additions

   (236)    (130)    (95) 

Reductions

   126    71    146 
  

 

 

   

 

 

   

 

 

 

Balances, December 31

   (507)    (397)    (338) 
  

 

 

   

 

 

   

 

 

 

Mortgage servicing rights, net

  $11,174   $8,874   $7,642 
  

 

 

   

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

             
 
December 31
2019
  
December 31
2018
  
December 31
2017
 
Mortgage servicing rights
         
Balances, January 1
 $
12,876
  $
12,189
  $
11,681
 
Servicing rights capitalized
  
3,547
   
1,883
   
2,109
 
Amortization of servicing rights
  
(1,377
)  
(1,196
)  
(1,601
)
             
Balances, December 31
  
15,046
   
12,876
   
12,189
 
             
Impairment allowance
         
Balances, January 1
  
(527
)  
(587
)  
(507
)
Additions
  
(234
)  
(78
)  
(85
)
Reductions
  
42
   
138
   
5
 
             
Balances, December 31
  
(719
)  
(527
)  
(587
)
             
Mortgage servicing rights, net
 $
14,327
  $
12,349
  $
11,602
 
             
Mortgage Warehouse Loans

Horizon’s mortgage warehousing lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage and the related mortgagee are underwrittenloan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchasesreacquires the loan under its option within the agreement. Due to the repurchasereacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured
47
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can repurchasereacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company repurchasereacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the salespurchase commitment and the mortgage company would not be able to repurchasereacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

At December 31, 2016,2019, the mortgage warehouse loan balance was $135.7$150.3 million compared to $144.7$74.1 million as of December 31, 2015.2018. The decreaseincrease in mortgage warehouse loans reflected an increasea decrease in long-term interest rates in 20162019 and the lowerhigher refinance volume.

Consumer Loans

Consumer loans totaled $398.4$669.2 million, or 18.7%18.4% of total loans as of December 31, 2016,2019, compared to $362.3$549.5 million, or 20.7%18.2% as of December 31, 2015.2018. The increase during 20162019 was primarily relateddue to $85.1 million acquired through the $24.7 millionacquisition of consumer loans acquired in the Kosciusko, LaPorteSalin and CNB acquisitions along with organic growth of $11.4$34.6 million net of principal reductions from payments.

This organic growth is a result of placing additional focus on consumer lending, in addition to recent merger activity providing entry into new market areas.

Allowance and Provision for Loan Losses/Critical Accounting Policy

Losses

At December 31, 2016,2019, the allowance for loan losses was $14.8$17.7 million, or 0.69%0.49% of total loans outstanding, compared to $14.5$17.8 million, or 0.83%0.59%, at December 31, 2015. The decrease in the ratio was primarily due to an increase in total loans from both organic growth and the Kosciusko, LaPorte and CNB acquisitions.2018. During 2016,2019, the expense for provision for loan losses totaled $1.8$2.0 million compared to $3.2$2.9 million in 2015. Horizon’s2018. The ratio of the allowance for loan loss reserve ratio,losses to total loans, excluding loans with credit-related purchase accounting adjustments, was 0.91%0.61% as of December 31, 2016.

2019 compared to 0.72% as of December 31, 2018. The decrease in the ratio of the allowance for loan losses to total loans, excluding loans with credit-related purchase accounting adjustments was due to all-time low historical loss rates and stable economic factors. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was 1.04% as of December 31, 2019 compared to 0.98% as of December 31, 2018. (See the

“Non-GAAP
Allowance for Loan and Lease Loss Detail” table under the heading “Use of
Non-GAAP
Financial Measures” below.)
Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (ALLL)(“ALLL”) by regularly reviewing the performance of all of its loan portfolios. As a result of its quarterly reviews, a provision for loan losses is determined to bring the total ALLL to a level called for by the analysis.

No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. Horizon considers the allowance for loan losses to be adequate to cover losses inherent in the loan portfolio as of December 31, 2016.

HORIZON BANCORPAND SUBSIDIARIES

2019.

48
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non-performing
Loans

Non-performing
loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. Management continues to work diligently toward returning
non-performing
loans to an earning asset basis.
Non-performing
loans for the previous three years ending December 31 are as follows:

   December 31
2016		   December 31
2015		   December 31
2014		 

Non-performing loans

  $10,683   $16,680   $22,442 

             
 
December 31
2019
  
December 31
2018
  
December 31
2017
 
Non-performing
loans
 $
21,185
  $
15,175
  $
16,414
 
Non-performing
loans total 72.0%119.9%, 114.8%85.2% and 136.0%100.1% of the allowance for loan losses at December 31, 2016, 20152019, 2018 and 2014,2017, respectively.
Non-performing
loans at December 31, 20162019 totaled $10.7$21.2 million, a decreasean increase from a balance of $16.7$15.2 million as of December 31, 20152018 and $22.4an increase from the balance of $16.4 million as of December 31, 2014.2017. The increase in
non-performing
loans in 2019 was primarily due to the Salin acquisition.
Non-performing
loans as a percentage of total loans was 0.58% as of December 31, 2019, an increase from 0.50% as of December 31, 2016, a decrease2018 and 0.58% from 0.95% and 1.62% as of December 31, 2015 and December 31, 2014, respectively.

2017.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. (See Note 8 of the Consolidated Financial Statements at Item 8 for further discussion of impaired loans.)

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 – 4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to
non-accrual
status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Other Real Estate Owned (OREO)(“OREO”) net of any related allowance for OREO losses for the previous three years ending December 31 were as follows:

   December 31
2016		   December 31
2015		   December 31
2014		 

Other real estate owned

  $3,190   $3,207   $1,047 

             
 
December 31
2019
  
December 31
2018
  
December 31
2017
 
Other real estate owned
 $
3,726
  $
2,027
  $
778
 
OREO totaled $3.2$3.7 million on December 31, 2016, a decrease of $17,000 from December 31, 2015 and2019, an increase of $2.1$1.7 million from December 31, 2014.2018 and $2.9 million from December 31, 2017. On December 31, 2016,2019, OREO was comprised of nine12 properties. Of these properties, three10 totaling $542,000$3.7 million were commercial real estate and sixtwo totaling $2.6 million$28,000 were residential real estate.

The majority of the increase in OREO during 2019 was because several bank owned properties acquired through acquisitions and listed for sale were

re-classified
to other real estate owned and recorded at fair value during the second quarter of 2019.
No mortgage warehouse loans were
non-performing
or OREO as of December 31, 2016, 20152019, 2018 or 2014.

HORIZON BANCORPAND SUBSIDIARIES

2017.

49
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Deferred Tax

Horizon had a net deferred tax assetliability totaling $7.4 million and $5.2$3.5 million as of December 31, 20162019 and a net deferred tax asset of $4.4 million as of December 31, 2015, respectively.2018. The following table shows the major components of deferred tax:

   December 31
2016		   December 31
2015		 

Assets

    

Allowance for loan losses

  $5,581   $5,329 

Net operating loss (from acquisitions)

   2,368    1,679 

Director and employee benefits

   3,124    2,223 

Unrealized loss on AFS securities and fair value hedge

   937    711 

Accrued Pension

   1,323    1,725 

Fair value adjustment on acquisitions

   2,340    756 

Other

   1,593    273 
  

 

 

   

 

 

 

Total assets

   17,266    12,696 
  

 

 

   

 

 

 

Liabilities

    

Depreciation

   (1,916)    (2,180) 

State tax

   (341)    (192) 

Federal Home Loan Bank stock dividends

   (474)    (343) 

Difference in basis of intangible assets

   (4,654)    (2,938) 

FHLB Penalty

   —      (123) 

Unrealized gain on securities available for sale

   —      —   

Other

   (431)    (264) 
  

 

 

   

 

 

 

Total liabilities

   (7,816)    (6,040) 

Valuation allowance

   (2,018)    (1,407) 
  

 

 

   

 

 

 

Net deferred tax asset

  $7,432   $5,249 
  

 

 

   

 

 

 

         
 
December 31
2019
  
December 31
2018
 
Assets
      
Allowance for loan losses
 $
4,120
  $
3,831
 
Net operating loss and tax credits (from acquisitions)
  
54
   
1,038
 
Director and employee benefits
  
1,890
   
2,392
 
Unrealized loss on AFS securities and fair value hedge
  
—  
   
2,165
 
Accrued pension
  
775
   
801
 
Fair value adjustment on acquisitions
  
—  
   
—  
 
Other
  
2,145
   
670
 
         
Total assets
  
8,984
   
10,897
 
         
Liabilities
      
Depreciation
  
(4,456
)  
(1,850
)
State tax
  
(10
)  
(137
)
Federal Home Loan Bank stock dividends
  
(368
)  
(330
)
Difference in basis of intangible assets
  
(3,427
)  
(2,919
)
Fair value adjustment on acquisitions
  
(2,488
)  
(62
)
Unrealized gain on AFS securities and fair value hedge
  
(1,710
)  
—  
 
Other
  
(63
)  
(119
)
         
Total liabilities
  
(12,522
)  
(5,417
)
Valuation allowance
  
—  
   
(1,038
)
         
Net deferred tax asset/(liability)
 $
 (3,538
) $
4,442
 
         
Deposits

The primary source of funds for the Bank comes from the acceptance of demand and time deposits. However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank and other sources when it can do so at interest rates and terms that are more favorable than those required for deposited funds or loan demand is greater than the ability to grow deposits. Total deposits were $2.5$3.931 billion at December 31, 2016,2019, compared to $1.9$3.139 billion at December 31, 2015.2018. Average deposits and rates by category for the three years ended December 31 are as follows:

   Average Balance Outstanding for the
Year Ending December 31		   Average Rate Paid for the
Year Ending December 31		 
   2016   2015   2014   2016  2015  2014 

Noninterest-bearing demand deposits

  $417,900   $314,840   $258,523     

Interest-bearing demand deposits

   732,117    671,493    582,916    0.12%   0.12%   0.12% 

Savings deposits

   303,229    191,593    142,420    0.06%   0.05%   0.05% 

Money market

   254,453    205,119    161,146    0.26%   0.24%   0.23% 

Time deposits

   462,527    344,464    296,349    1.06%   1.21%   1.39% 
  

 

 

   

 

 

   

 

 

     

Total deposits

  $2,170,226   $1,727,509   $1,441,354     
  

 

 

   

 

 

   

 

 

     

HORIZON BANCORPAND SUBSIDIARIES

                         
 
Average Balance Outstanding for the
Years Ended December 31
  
Average Rate Paid for the
Years Ended December 31
 
 
2019
  
2018
  
2017
  
2019
  
2018
  
2017
 
Non-interest
bearing demand deposits
 $
757,389
  $
624,576
  $
533,852
          
Interest bearing demand deposits
  
1,024,099
   
827,255
   
831,292
   
0.68
%  
0.30
%  
0.14
%
Savings deposits
  
552,101
   
416,404
   
388,953
   
0.32
%  
0.08
%  
0.07
%
Money market
  
483,187
   
403,475
   
310,310
   
1.09
%  
0.72
%  
0.35
%
Time deposits
  
948,550
   
771,853
   
515,341
   
2.07
%  
1.55
%  
1.04
%
                         
Total deposits
 $
3,765,326
  $
3,043,563
  $
2,579,748
          
                         
50
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

The $442.7 million$1.0 billion increase in average deposits during 20162019 was primarily the result of an increase in the depositor base due to organic growth as well as the Kosciusko, LaPorte and CNB acquisitions.Salin acquisition. The transactional accounts average balances, as the lower cost funding sources, increased $343.5$132.8 million and the average balances for higher cost time deposits increased $115.5$220.8 million. Horizon continually enhances its interest-bearing consumer and commercial demand deposit products based on local market conditions and its need for funding to support various types of assets.

Certificates of deposit of $250,000 or more, which are considered to be rate sensitive and are not considered a part of core deposits, mature as follows as of December 31, 2016:

Due in three months or less

  $17,713 

Due after three months through six months

   30,304 

Due after six months through one year

   25,412 

Due after one year

   31,932 
  

 

 

 
  $105,361 
  

 

 

 

2019:

     
Due in three months or less
 $
186,089
 
Due after three months through six months
  
85,555
 
Due after six months through one year
  
115,967
 
Due after one year
  
73,824
 
     
 $
461,435
 
     
Interest expense on time certificates of $100,000 or more was approximately $2.1$10.7 million, $2.3$6.8 million, and $2.2$3.2 million for 2016, 20152019, 2018 and 2014.2017. Interest expense on time certificates of $250,000 or more was approximately $753,000$7.4 million, $4.6 million and $990,000$1.2 million for 20162019, 2018 and 2015.

2017.

Off-Balance
Sheet Arrangements

As of December 31, 2016,2019, Horizon did not have any
off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term
“off-balance
sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party and under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

Contractual Obligations

The following tables summarize Horizon’s contractual obligations and other commitments to make payments as of December 31, 2016:

   Total   Within
One Year		   One to
Three Years		   Three to
Five Years		   After Five
Years		 

Certificates of Deposit

  $475,843   $257,071   $149,172   $47,380   $22,220 

Borrowings (1)

   267,489    203,610    55,285    8,164    430 

Subordinated debentures(2)

   37,456    —      —      —      37,456 

2019:
                     
 
Total
  
Within
One Year
  
One to
Three Years
  
Three to
Five Years
  
After Five
Years
 
Certificates of deposit
 $
975,612
  $
 747,022
  $
 204,313
  $
 22,995
  $
 1,282
 
Borrowings
(1)
  
549,741
   
276,970
   
67,324
   
80,299
   
125,148
 
Subordinated debentures
(2)
  
56,311
   
—  
   
—  
   
—  
   
56,311
 
(1)Includes debt obligations to the Federal Home Loan Bank and term repurchase agreements with maturities beyond one year borrowed by Horizon’s banking subsidiary. See Note 13 in Horizon’s Consolidated Financial Statements at Item 8.
(2)Includes Trust Preferred Capital Securities issued by Horizon Statutory Trusts II and III and those assumed in the acquisitions of Alliance Bank in 2005, American Trust in 2009, Heartland in 2012, and LaPorte/City Savings in 2016. See Note 152016 and Salin in Horizon’s Consolidated Financial Statements at Item 8.2019.

   Expiration by Period 
   Within One
Year		   Greater
Than
One Year		 

Letters of credit

  $2   $967 

Unfunded loan commitments

   254,063    554,236 

HORIZON BANCORPAND SUBSIDIARIES

See Note 15 in Horizon’s Consolidated Financial Statements at Item 8.
         
 
Expiration by Period
 
 
Within
One Year
  
Greater
Than One
Year
 
Letters of credit
 $
7,053
  $
10,199
 
Unfunded loan commitments
  
310,025
   
648,665
 
51
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Capital Resources

The

Horizon has no material commitments for capital resources of Horizon and the Bank exceed regulatory capital ratios for “well capitalized” banks at December 31, 2016. Stockholders’ equity totaled $340.9 millionexpenditures as of December 31, 2016, compared to $266.8 million as2019. Horizon’s sources of December 31, 2015. Atyear-end 2016, the ratio of stockholders’ equity to assets was 10.85%, compared to 10.06% for 2015. Tangible equity to tangible assets was 8.33% at December 31, 2016, compared to 7.60% at December 31, 2015. Book value per common share at December 31, 2016 increased to $15.37, compared to $14.20 at December 31, 2015. Horizon’s capital increased during 2016 as a result of earningsfunds and common stock issued in acquisitions, partially offset by a decrease in other comprehensive income and dividends declared.

In 2008, in connection with the issuance of preferred stock that was subsequently redeemed, Horizon issued a warrant to the Treasury to purchase shares of Horizon’s common stock. The Treasury sold the warrant to a third party, and at December 31, 2015, the warrant covered 481,510 shares with an exercise price of $7.79 per share. These warrants were exercised during 2015.

On August 25, 2011, the Company sold 12,500 shares of Series B Preferred Stock for aggregate consideration of $12.5 million, to the Treasury pursuant to the Small Business Lending Fund program. Concurrently with this transaction, Horizon redeemed all 18,750 shares of our Series A Preferred Stock that remained outstanding under the Treasury’s Capital Purchase Program. The redemption of the Series A Preferred Stock was funded by the $12.5 million in proceeds from the sale of the Series B Preferred Stock together with other available funds. On February 1, 2016 the Company redeemed all 12,500 shares of Series B Preferred Stock for $12,500,000 along with the final dividend payment of $10,417.

Horizon declared dividendsliquidity are discussed below in the amount of $0.41 per sharesection captioned “Liquidity” in 2016, $0.39 per share in 2015, and $0.34 per share in 2014. The dividend payout ratio (dividends as a percent of net income) was 34.3% for 2016, 29.9% for 2015, and 25.7% for 2014. For additional information regarding dividend conditions, see Note 1 of the Notes to the Consolidated Financial Statements atthis Item 8.

In October of 2004, Horizon formed Horizon Statutory Trust II (“Trust II”), a wholly owned statutory business trust. Trust II sold $10.3 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of90-day LIBOR plus 1.95% (2.95% at December 31, 2016) and mature on October 21, 2034, and securities may be called at any quarterly interest payment date at par.

In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (“Trust III”), a wholly owned statutory business trust. Trust III sold $12.4 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of90-day LIBOR plus 1.65% (2.65% at December 31, 2016) and mature on January 30, 2037, and securities may be called at any quarterly interest payment date at par.

The Company assumed additional debentures as the result of the acquisition of Alliance Bank Corporation in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I, a wholly owned business trust (“Alliance Trust”) to sell $5.2 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Alliance. The junior subordinated debentures are the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of90-day LIBOR plus 2.65% (3.65% at December 31, 2016) and mature in June 2034, and securities may be called at any quarterly interest payment date at par.

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and 7.

Results of Operations

(Table dollars in thousands except per share data)

The Company assumed additional debentures as the result of the American Trust & Savings Bank purchase and assumption in 2010. In March 2004, Am Tru Inc., the holding company for American Trust & Savings Bank, formed Am Tru Statutory Trust I a wholly owned business trust (“Am Tru Trust”), to sell $3.5 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Am Tru Inc. The junior subordinated debentures are the sole assets of Am Tru Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of90-day LIBOR plus 2.85% (3.85% at December 31, 2016) and mature in March 2034, and securities may be called at any quarterly interest payment date at par. The carrying value was $3.2 million, net of the remaining purchase discount, at December 31, 2016.

The Company assumed additional debentures as the result of the Heartland merger in July 2013. In December 2006, Heartland formed Heartland (IN) Statutory Trust II a wholly owned business trust (“Heartland Trust”), to sell $3.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of junior subordinated debentures from Heartland. The junior subordinated debentures are the sole assets of Heartland Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of90-day LIBOR plus 1.67% (2.67% at December 31, 2016) and mature in December 2036, and securities may be called at any quarterly interest payment date at par. The carrying value was $1.7 million, net of the remaining purchase discount, at December 31, 2016.

The Company assumed additional debentures as the result of the LaPorte merger in July 2016. In October 2007, LaPorte assumed debentures as the result of its acquisition of City Savings Financial Corporation (“City Savings”). In June 2003, City Savings formed City Savings Statutory Trust I a wholly owned business trust (“City Savings Trust”), to sell $5.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from City Savings. The junior subordinated debentures are the sole assets of City Savings Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of90-day LIBOR plus 3.10% (4.10% at December 31, 2016) and mature in June 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $4.3 million, net of the remaining purchase discount, at December 31, 2016.

The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1 Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded as interest expense.

Results of Operations

Net Income

Consolidated net income was $23.9$66.5 million, or $1.19$1.53 per diluted share, in 2016, $20.52019, $53.1 million or $1.26$1.38 per diluted share in 2015,2018, and $18.1$33.1 million or $1.27$0.95 per diluted share in 2014.2017. The increase in net income from the previous year reflects an increase in net interest income of $11.3$26.2 million, an increase in
non-interest
income of $7.6$8.6 million and a decrease in the provision for loan losses of $1.3 million,$930,000, partially offset by an increase in
non-interest
expenses of $15.2$19.5 million and income taxestax expense of $1.6$2.9 million. The decreaseincrease in diluted earnings per share compared to the previous year reflects an increase in net income, partially offset by an increase in diluted shares due to the Peoples, Kosciusko and LaPorte acquisitions. Excluding acquisition-related expenses, gain on sale of investment securities, the death benefit on bank owned life insurance, prepayment penalties on borrowings and purchase accounting adjustments,Salin acquisition. Core net income for the year ended December 31, 20162019 was $29.2$70.7 million, or $1.45$1.63 diluted earnings per share, compared to $21.7$53.7 million, or $1.33$1.40 diluted earnings per share, for the year ended December 31, 2015.2018. (See the
“Non-GAAP
Reconciliation of Net Income and Diluted earningsEarnings per share were also reduced by $0.00Share” table under the heading “Use of
Non-GAAP
Financial Measures” below for the twelve months ending December 31, 2016, $0.01 for the twelve months ending December 31, 2015 and $0.01 for the twelve months ending December 31, 2014 resulting from the paymentdefinition of preferred stock dividends.

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

core net income.)

Net Interest Income

The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread which affects the net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

Net interest income during 20162019 was $86.0$160.8 million, an increase of $11.3$26.2 million, or 15.1%19.5%, over the $74.7$134.6 million earned in 2015.2018. Yields on the Company’s interest-earning assets decreasedincreased by 1519 basis points to 4.05%4.75% during 20162019 from 4.20%4.56% in 2015.2018. Interest income increased $17.9$42.2 million to $106.5$208.3 million for 20162019 from $88.6$166.2 million in 2015.2018. This increase was due to increased volume in interest-earning assets partiallyprimarily due to the Salin acquisition, offset by a decrease in the recognition of interest income from the acquisition-related purchase accounting adjustments of approximately $673,000$499,000 from $3.0$6.1 million in 20152018 to $2.3$5.6 million in 2016 and the lower yield on interest-earning assets in 2016.

Rates paid on interest-bearing liabilities increased by 15 basis points during the same period due to the prepayment penalties on borrowings of $4.8 million in 2016. 2019.

Interest expense increased $6.7$15.9 million from $13.9$31.6 million in 20152018 to $20.5$47.5 million in 2016.2019. This increase was due to increased volume ofin interest-bearing liabilities partially offset by lower rates being paid. Dueprimarily due to the decreaseSalin acquisition. The increase in the yield on the Company’s interest-earning assets andcombined with the prepayment penaltiesincrease in rates paid on borrowings,interest-bearing liabilities resulted in a decrease in the net interest margin decreased 27of two basis points from 3.56%3.71% for 20152018 to 3.29%3.69% in 2016.2019. Excluding the interest expense recognized from the prepayment penalties on borrowings and the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.38%3.57% for 20162019 compared to 3.42%3.54% for 2015.2018. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin. Management does not expect significant increases
Net interest income during 2018 was $134.6 million, an increase of $22.5 million, or 20.0%, over the $112.1 million earned in 2017. Yields on the Company’s interest-earning assets increased by 27 basis points to 4.56% during 2018 from 4.29% in 2017. Interest income increased $37.7 million to $166.2 million for 2018 from $128.5 million in 2017. This increase was due to increased volume in interest-earning assets, an increase in the recognition of interest income from the acquisition-related purchase accounting adjustments of approximately $2.6 million from $3.5 million in 2017 to $6.1 million in 2018 and an increase in overall interest rates in the short term, but an increase in rates is expected at some time in the future due to the current historically low interest rate environment.

HORIZON BANCORPAND SUBSIDIARIES

2018.

52
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

  

Twelve Months Ended

December 31, 2016

  

Twelve Months Ended

December 31, 2015

  

Twelve Months Ended

December 31, 2014

 
  Average
Balance		  Interest  Average
Rate		  Average
Balance		  Interest  Average
Rate		  Average
Balance		  Interest  Average
Rate		 

ASSETS

         

Interest-earning assets

         

Federal funds sold

 $17,142  $95   0.55%  $10,264  $11   0.11%  $6,246  $11   0.18% 

Interest-earning deposits

  34,506   278   0.81%   14,045   10   0.07%   7,087   10   0.14% 

Investment securities - taxable

  490,274   9,666   1.97%   394,976   8,700   2.20%   387,013   9,323   2.41% 

Investment securities -non-taxable (1)

  192,881   4,921   3.59%   152,931   4,494   4.32%   146,407   4,426   4.32% 

Loans receivable (2)(3)(4)

  1,948,580   91,569   4.71%   1,593,790   75,373   4.74%   1,247,510   62,435   5.01% 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total interest-earning assets (1)

  2,683,383   106,529   4.05%   2,166,006   88,588   4.20%   1,794,263   76,205   4.36% 

Non-interest-earning assets

         

Cash and due from banks

  37,549     31,692     27,168   

Allowance for loan losses

  (14,439)     (16,351)     (15,945)   

Other assets

  255,129     179,138     144,803   
 

 

 

    

 

 

    

 

 

   
 $2,961,622    $2,360,485    $1,950,289   
 

 

 

    

 

 

    

 

 

   

LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Interest-bearing liabilities

         

Interest-bearing deposits

 $1,752,326  $6,616   0.38%  $1,438,026  $5,559   0.39%  $1,182,831  $5,257   0.44% 

Borrowings

  425,444   11,807   2.78%   336,618   6,286   1.87%   281,649   5,956   2.11% 

Subordinated debentures

  49,834   2,114   4.24%   32,717   2,009   6.14%   32,561   2,009   6.17% 
 

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

  

Total interest-bearing liabilities

  2,227,604   20,537   0.92%   1,807,361   13,854   0.77%   1,497,041   13,222   0.88% 

Non-interest-bearing liabilities

         

Demand deposits

  417,900     317,246     258,523   

Accrued interest payable and other liabilities

  13,574     16,364     12,776   

Stockholders’ equity

  302,544     219,514     181,949   
 

 

 

    

 

 

    

 

 

   
 $2,961,622    $2,360,485    $1,950,289   
 

 

 

    

 

 

    

 

 

   

Net interest income/spread

  $85,992   3.13%   $74,734   3.43%   $62,983   3.48% 
  

 

 

    

 

 

    

 

 

  

Net interest income as a percent of average interest earning assets (1)

    3.29%     3.56%     3.62% 

Interest expense increased $15.2 million from $16.4 million in 2017 to $31.6 million in 2018. This increase was due to increased volume in interest-bearing liabilities and an increase in overall interest rates in 2018. The increase in the yield on the Company’s interest-earning assets combined with the increase in rates paid on interest-bearing liabilities resulted in a decrease in the net interest margin of four basis points from 3.75% for 2017 to 3.71% in 2018. Excluding interest income recognized from acquisition-related purchase accounting adjustments, the margin would have been 3.54% for 2018 compared to 3.64% for 2017. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin.
                                     
 
Twelve Months Ended

December 31, 2019
  
Twelve Months Ended

December 31, 2018
  
Twelve Months Ended

December 31, 2017
 
 
Average Balance
  
Interest
  

Average Rate
  

Average Balance
  
Interest
  

Average Rate
  

Average Balance
  
Interest
  

Average Rate
 
Assets
                           
Interest-earning assets
                           
Federal funds sold
 $
21,301
  $
511
   
2.40
% $
4,696
  $
115
   
2.45
% $
5,450
  $
80
   
1.47
%
Interest-earning deposits
  
19,601
   
342
   
1.74
%  
24,491
   
393
   
1.60
%  
23,865
   
301
   
1.26
%
Investment securities - taxable
  
474,833
   
11,753
   
2.48
%  
431,970
   
10,113
   
2.34
%  
417,993
   
8,705
   
2.08
%
Investment securities - non-taxable
(1)
  
454,066
   
12,095
   
3.34
%  
326,040
   
8,069
   
3.13
%  
292,030
   
7,068
   
3.39
%
Loans receivable
(2)(3)(4)
  
3,500,649
   
183,631
   
5.27
%  
2,910,741
   
147,478
   
5.08
%  
2,335,126
   
112,329
   
4.83
%
                                     
Total interest-earning assets
(1)
  
4,470,450
   
208,332
   
4.75
%  
3,697,938
   
166,168
   
4.56
%  
3,074,464
   
128,483
   
4.29
%
Non-interest-earning assets
                           
Cash and due from banks
  
62,920
         
44,645
         
42,578
       
Allowance for loan losses
  
(18,019
)        
(16,964
)        
(15,226
)      
Other assets
  
417,707
         
337,016
         
295,057
       
                                     
Total average assets
 $
4,933,058
        $
4,062,635
        $
3,396,873
       
                                     
Liabilities and Stockholders’ Equity
                           
Interest-bearing liabilities
                           
Interest-bearing deposits
 $
3,007,937
  $
33,690
   
1.12
% $
2,418,987
  $
18,225
   
0.75
% $
2,045,896
  $
7,901
   
0.39
%
Borrowings
  
468,159
   
10,672
   
2.28
%  
492,830
   
11,009
   
2.23
%  
381,488
   
6,178
   
1.62
%
Subordinated debentures
  
50,134
   
3,179
   
6.34
%  
36,547
   
2,365
   
6.47
%  
36,362
   
2,304
   
6.34
%
                                     
Total interest-bearing liabilities
  
3,526,230
   
47,541
   
1.35
%  
2,948,364
   
31,599
   
1.07
%  
2,463,746
   
16,383
   
0.66
%
Non-interest-bearing liabilities
                           
Demand deposits
  
757,389
         
624,576
         
533,852
       
Accrued interest payable and other liabilities
  
43,720
         
16,275
         
20,566
       
Stockholders’ equity
  
605,719
         
473,420
         
378,709
       
                                     
Total average liabilities and stockholders’ equity
 $
4,933,058
        $
4,062,635
        $
3,396,873
       
                                     
Net interest income/spread
    $
160,791
   
3.40
%    $
134,569
   
3.49
%    $
112,100
   
3.63
%
                                     
Net interest income as a percent of average interest-earning assets
(1)
        
3.69
%        
3.71
%        
3.75
%
(1)Horizon has no foreign office and, accordingly, no assets or liabilities to foreign operations. Horizon’s subsidiary bank had no funds invested in Eurodollar Certificates of Deposit at December 31, 2016.2019.
(2)Yields are presented on atax-equivalent basis.
(3)Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loansloan fees.
(4)Loan fees and late fees included in interest on loans aggregated $5.5$9.8 million, $4.9$7.7 million and $4.3$7.1 million in 2016, 20152019, 2018 and 2014.2017, respectively.

   2016-2015  2015-2014 
   Total
Change		   Change
Due To
Volume		   Change
Due To
Rate		  Total
Change		  Change
Due To
Volume		   Change
Due To
Rate		 

Interest Income

          

Federal funds sold

  $84   $12   $72  $—    $5   $(5) 

Interest-earning deposits

   268    33    235   —     7    (7) 

Investment securities - taxable

   966    1,946    (980)   (623)   189    (812) 

Investment securities -non-taxable

   427    1,550    (1,123)   68   282    (214) 

Loans receivable

   16,196    16,711    (515)   12,938   16,571    (3,633) 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total interest income

   17,941    20,252    (2,311)   12,383   17,054    (4,671) 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Interest Expense

          

Interest-bearing deposits

   1,057    1,189    (132)   302   1,042    (740) 

Borrowings

   5,521    1,942    3,579   330   1,077    (747) 

Subordinated debentures

   105    847    (742)   —     10    (10) 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total interest expense

   6,683    3,978    2,705   632   2,129    (1,497) 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Net interest income

  $11,258   $16,274   $(5,016)  $11,751  $14,925   $(3,174) 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

53
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Net interest income during 2015 was $74.7 million, an increase of $11.8 million or 18.7% over the $63.0 million earned in 2014. Yields on the Company’s interest-earning assets decreased by 16 basis points to 4.20% during 2015 from 4.36% in 2014. Interest income increased $12.4 million to $88.6 million for 2015 from $76.2 million in 2015. This increase was due to increased volume in interest-earning assets and an increase in the recognition of interest income from the acquisition-related purchase accounting adjustments of approximately $300,000 from $2.7 million in 2014 to $3.0 million in 2015, partially offset by the lower yield on interest-earnings assets.

Rates paid on interest-bearing liabilities decreased by 11 basis points during the same period due to the lower interest rate environment. Interest expense increased $632,000 from $13.2 million in 2014 to $13.9 million in 2015. This increase was due to increased volume of interest-bearing liabilities, partially offset by lower rates being paid. Due to a larger decrease in the yield on the Company’s interest-earning assets compared to the decrease in the rates paid on the Company’s interest-bearing liabilities, the net interest margin decreased 6 basis points from 3.62% for 2014 to 3.56% in 2015. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.42% for 2015 compared to 3.47% for 2014. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin. Management does not expect a significant rise in interest rates in the short term, but an increase in rates is expected at some time in the future due to the current historically low interest rate environment.

                         
 
2019 - 2018
  
2018 - 2017
 
 
Total
Change
  
Change
Due To
Volume
  
Change
Due To
Rate
  
Total
Change
  
Change
Due To
Volume
  
Change
Due To
Rate
 
Interest Income
                  
Federal funds sold
 $
396
  $
398
  $
(2
) $
35
  $
(12
) $
47
 
Interest-earning deposits
  
(51
)  
(83
)  
32
   
92
   
8
   
84
 
Investment securities - taxable
  
1,640
   
1,040
   
600
   
1,408
   
298
   
1,110
 
Investment securities -
non-taxable
  
4,026
   
4,239
   
(213
)  
1,001
   
1,100
   
(99
)
Loans receivable
  
36,153
   
30,914
   
5,239
   
35,149
   
28,991
   
6,158
 
                         
Total interest income
  
42,164
   
36,508
   
5,656
   
37,685
   
30,385
   
7,300
 
                         
Interest Expense
                  
Interest-bearing deposits
  
15,465
   
5,137
   
10,328
   
10,324
   
1,677
   
8,647
 
Borrowings
  
(337
)  
(559
)  
222
   
4,831
   
2,101
   
2,730
 
Subordinated debentures
  
814
   
862
   
(48
)  
61
   
12
   
49
 
                         
Total interest expense
  
15,942
   
5,440
   
10,502
   
15,216
   
3,790
   
11,426
 
                         
Net interest income
 $
26,222
  $
31,068
  $
(4,846
) $
22,469
  $
26,595
  $
(4,126
)
                         
Provision for Loan Losses

Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (ALLL)ALLL by regularly reviewing the performance of its loan portfolios. The provision for loan losses totaled $1.8$2.0 million in 20162019 compared to $3.2$2.9 million in 2015.2018. Total loan net charge-offs were $2.1 million, which included commercial loan net charge-offs of $664,000, residential mortgage loan net charge-offs of $47,000 and consumer loan net charge-offs of $1.4 million for the year ending December 31, 2019. The lower level of provision for loan losses in 20162019 was due to all-time low historical loss rates and stable economic factors.
The provision for loan losses totaled $2.9 million in 2018 compared to $2.5 million in 2017. The higher provision for loan losses in 2018 compared to the previous year was due to an increase in specific allocations for loan growth in new markets, higher than anticipated growth of the indirect loan portfolio and an increase in allocation for other economic factors, offset by improving credit trends and a continued improvement innon-performing loans and lower charged off loans.low level of charge-offs. Total loan net charge-offs were $1.5 million, which included commercial loan net charge-offs were $548,000,of $297,000, residential mortgage loan net charge-offs were $116,000of $49,000 and consumer loan net charge-offs were $875,000 for the year ending December 31, 2016.

During 2015, the provision for loan losses totaled $3.2 million, compared to $3.1 million in 2014. The higher provision for loan losses in 2015 compared to 2014 was due to continued loan growth. Commercial loan net charge-offs were $3.2 million, residential mortgage loan net charge-offs were $219,000 and consumer loan net charge-offs were $1.6of $1.1 million for the year ending December 31, 2015.

2018.

Non-interest
Income

The following is a summary of changes in
non-interest
income:

   Twelve Months Ended             2014 - 2015 
   December 31   December 31   Amount  Percent  December 31   Amount  Percent 
   2016   2015   Change  Change  2014   Change  Change 

Non-interest Income

           

Service charges on deposit accounts

  $5,404   $4,807   $597   12.4%  $4,085   $722   17.7% 

Wire transfer fees

   806    633    173   27.3%   557    76   13.6% 

Interchange fees

   7,042    5,591    1,451   26.0%   4,649    942   20.3% 

Fiduciary activities

   6,621    5,637    984   17.5%   4,738    899   19.0% 

Gain on sale of investment securities

   1,836    189    1,647   871.4%   988    (799)   -80.9% 

Gain on sale of mortgage loans

   11,675    10,055    1,620   16.1%   8,395    1,660   19.8% 

Mortgage servicing net of impairment

   1,908    993    915   92.1%   805    188   23.4% 

Increase in cash surrender value of bank owned life insurance

   1,643    1,249    394   31.5%   1,047    202   19.3% 

Death benefit on officer life insurance

   —      145    (145)   100.0%   —      145   0.0% 

Other income

   1,039    1,103    (64)   -5.8%   1,013    90   8.9% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Totalnon-interest income

  $37,974   $30,402   $7,572   24.9%  $26,277   $4,125   15.7% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

HORIZON BANCORPAND SUBSIDIARIES

                                 
 
Twelve Months Ended
  
2018 - 2019
  
Twelve Months Ended
  
2017 - 2018
 
Non-interest
Income
 
December 31
2019
  
December 31
2018
  
Amount
Change
  
Percent
Change
  
December 31
2018
  
December 31
2017
  
Amount
Change
  
Percent
Change
 
Service charges on deposit accounts
 $
9,959
  $
7,762
  $
2,197
   
28.3
% $
7,762
  $
6,383
  $
1,379
   
21.6
%
Wire transfer fees
  
653
   
612
   
41
   
6.7
%  
612
   
658
   
(46
)  
-7.0
%
Interchange fees
  
7,655
   
5,715
   
1,940
   
33.9
%  
5,715
   
5,104
   
611
   
12.0
%
Fiduciary activities
  
8,580
   
7,827
   
753
   
9.6
%  
7,827
   
7,894
   
(67
)  
-0.8
%
Gain (loss) on sale of investment securities
  
(75
)  
(443
)  
368
   
-83.1
%  
(443
)  
38
   
(481
)  
-1265.8
%
Gain on sale of mortgage loans
  
9,208
   
6,613
   
2,595
   
39.2
%  
6,613
   
7,906
   
(1,293
)  
-16.4
%
Mortgage servicing net of impairment
  
1,914
   
2,120
   
(206
)  
-9.7
%  
2,120
   
1,583
   
537
   
33.9
%
Increase in cash surrender value of bank owned life insurance
  
2,190
   
1,912
   
278
   
14.5
%  
1,912
   
1,797
   
115
   
6.4
%
Death benefit on officer life insurance
  
580
   
154
   
426
   
276.6
%  
154
   
—  
   
154
   
100.0
%
Other income
  
2,394
   
2,141
   
253
   
11.8
%  
2,141
   
1,773
   
368
   
20.8
%
                                 
Total non-interest income
 $
43,058
  $
34,413
  $
8,645
   
25.1
% $
34,413
  $
33,136
  $
1,277
   
3.9
%
                                 
54
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

The increase in service charges on deposit accounts and interchange fee income in 2016 compared to 2015 was the result of growth in transactional deposit accounts and volume during 2016. Fiduciary activities income increased $984,000 during 2016 as a result of an increase in assets under management.

During 2016,2019, the Company originated approximately $316.9$269.7 million of mortgage loans to be sold on the secondary market, compared to $302.4$188.8 million in 2015.2018. This increase in volume and increase in the percentage earned on the sale of mortgage loans, increased the overall gain on sale of mortgage loans by $1.6 million compared to the prior year. Mortgage servicing net of impairment increased by $915,000 during 2016 compared to 2015 due to a larger portfolio of mortgage loans serviced during 2016. The cash surrender value of bank owned life insurance increased by $394,000 in 2016 due to an increase in the number of policies outstanding as a result of the Kosciusko and LaPorte acquisitions. Gain on sale of investment securities increased $1.6 million in 2016 due to security gains used to help offset the penalties paid on the repayment of debt as part of a balance sheet restructuring and the result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. The death benefit on Bank owned life insurance decreased by $145,000 in 2016 due to a payment realized on one of the policies in 2015. These increases were partially offset by a decrease in other income of $64,000 in 2016.

The increase in service charges on deposit accounts and interchange fee income in 2015 compared to 2014 was the result of growth in transactional deposit accounts and volume during 2015. Fiduciary activities income increased $899,000 during 2015 as a result of an increase in assets under management. During 2015, the Company originated approximately $302.4 million of mortgage loans to be sold on the secondary market, compared to $229.2 million in 2014. This increase in volume, partially offset by a decrease in the percentage earned on the sale of mortgage loans, increasedresulted in an increase in the overall gain on sale of mortgage loans by $1.7of $2.6 million compared to the prior year. Gain on the sale of investment securities increased $368,000 in 2019. Mortgage servicing net of impairment increased by $188,000$206,000 during 20152019 compared to 2014 due2018. The increase in service charges on deposit accounts and interchange fee income in 2019 compared to a larger portfolio2018 was the result of the deposits acquired from Salin, in addition to organic growth in transactional deposit accounts and volume during 2019.

During 2018, the Company originated approximately $188.8 million of mortgage loans serviced during 2015. The cash surrender value of bank owned life insurance increased by $202,000to be sold on the secondary market, compared to $218.5 million in 2015 due to an increase2017. This decrease in volume and a decrease in the numberpercentage earned on the sale of policies outstanding as a result of the Peoples acquisition. The death benefit on Bank owned life insurance increased by $145,000mortgage loans, resulted in 2015 due to payment realized on one of the policies. These increases were partially offset by a decrease in the overall gain on sale of mortgage loans of $1.3 million compared to the prior year. Gain on the sale of investment securities decreased $481,000 in 2018. Mortgage servicing net of $799,000impairment increased by $537,000 during 2018 compared to 2017. The increase in 2015 dueservice charges on deposit accounts and interchange fee income in 2018 compared to a gain on sale of securities of $988,000 during the third quarter of 2014. This gain2017 was the result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. The sale of securities was also used to fund loan growth.

growth in transactional deposit accounts and volume during 2018.

Non-interest
Expense

The following is a summary of changes in
non-interest
expense:

   Twelve Months Ended             2014 - 2015 
   December 31   December 31   Amount   Percent  December 31  Amount   Percent 
   2016   2015   Change   Change  2014  Change   Change 

Non-interest Expense

            

Salaries

  $30,445   $25,284   $5,161    20.4%  $22,859  $2,425    10.6% 

Commission and bonuses

   6,484    6,008    476    7.9%   4,111   1,897    46.1% 

Employee benefits

   7,084    6,420    664    10.3%   5,712   708    12.4% 

Net occupancy expenses

   8,322    6,400    1,922    30.0%   5,607   793    14.1% 

Data processing

   5,367    4,251    1,116    26.3%   3,663   588    16.1% 

Professional fees

   2,752    2,070    682    32.9%   1,731   339    19.6% 

Outside services and consultants

   7,863    5,735    2,128    37.1%   3,250   2,485    76.5% 

Loan expense

   5,582    5,379    203    3.8%   4,770   609    12.8% 

FDIC deposit insurance

   1,559    1,499    60    4.0%   1,175   324    27.6% 

Other losses

   684    432    252    58.3%   (70)   502    -717.1% 

Other expense

   13,269    10,715    2,554    23.8%   9,138   1,577    17.3% 
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

   

Totalnon-interest expense

  $89,411   $74,193   $15,218    20.5%  $61,946  $12,247    19.8% 
  

 

 

   

 

 

   

 

 

    

 

 

  

 

 

   

HORIZON BANCORPAND SUBSIDIARIES

                                 
 
Twelve Months Ended
  
2018 - 2019
  
Twelve Months Ended
  
2017 - 2018
 
Non-interest
Expense
 
December 31
2019
  
December 31
2018
  
Amount
Change
  
Percent
Change
  
December 31
2018
  
December 31
2017
  
Amount
Change
  
Percent
Change
 
Salaries
 $
46,319
  $
40,857
  $
5,462
   
13.4
% $
40,857
  $
36,503
  $
4,354
   
11.9
%
Commission and bonuses
  
6,861
   
5,547
   
1,314
   
23.7
%  
5,547
   
6,225
   
(678
)  
-10.9
%
Employee benefits
  
12,026
   
10,219
   
1,807
   
17.7
%  
10,219
   
8,647
   
1,572
   
18.2
%
Net occupancy expenses
  
12,157
   
10,482
   
1,675
   
16.0
%  
10,482
   
9,535
   
947
   
9.9
%
Data processing
  
8,480
   
6,816
   
1,664
   
24.4
%  
6,816
   
5,914
   
902
   
15.3
%
Professional fees
  
1,946
   
1,926
   
20
   
1.0
%  
1,926
   
2,490
   
(564
)  
-22.7
%
Outside services and consultants
  
8,152
   
5,271
   
2,881
   
54.7
%  
5,271
   
7,018
   
(1,747
)  
-24.9
%
Loan expense
  
8,633
   
6,341
   
2,292
   
36.1
%  
6,341
   
4,970
   
1,371
   
27.6
%
FDIC deposit insurance
  
252
   
1,444
   
(1,192
)  
-82.5
%  
1,444
   
1,046
   
398
   
38.0
%
Other losses
  
740
   
665
   
75
   
11.3
%  
665
   
368
   
297
   
80.7
%
Other expenses
  
16,466
   
12,948
   
3,518
   
27.2
%  
12,948
   
12,097
   
851
   
7.0
%
                                 
Total
non-interest
expense
 $
122,032
  $
102,516
  $
19,516
   
19.0
% $
102,516
  $
94,813
  $
7,703
   
8.1
%
                                 
For the twelve months ended December 31, 2019, salaries, commission and bonuses, and employee benefits expense increased by $5.5 million, $1.3 million and $1.8 million, respectively, reflecting the acquisition of Salin, overall company growth and an increase of approximately 123 full and part-time employees. Outside services and consultants expense increased $2.9 million, primarily due to $2.5 million in merger related expenses during 2019. Loan expense increased $2.3 million primarily due to the increased volume in consumer lending and the timing of related origination and amortization costs. The increase in other expenses of $3.5 million, net occupancy expenses of $1.7 million and data processing of $1.7 million reflect the acquisition of Salin during the first quarter of 2019 and overall company growth. Offsetting these increases was a decrease of $1.2 million in FDIC deposit insurance. FDIC insurance decreased due to the assessment credits the Bank received during the third quarter of 2019 as the FDIC reserve is currently overfunded.
For the twelve months ended December 31, 2018, salaries and employee benefits expense increased by $4.4 million and $1.6 million, respectively, reflecting overall company growth and an increase in health insurance expenses. Loan expense increased $1.4 million primarily due to the increased volume in indirect lending and the timing of related origination and amortization costs. The increase in net occupancy expenses of $947,000, data processing of $902,000, other expense of $851,000, FDIC insurance expense of $398,000 and other losses of $297,000 reflect overall company growth and the acquisitions of Lafayette and Wolverine during the third and fourth quarters of 2017. Offsetting these increases was a decrease of $1.7 million and $564,000 in outside services and consultants expense and professional fees, respectively, primarily due to lower acquisition-related expenses in 2018.
55
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Salary

Income Taxes
Income tax expense commission and bonuses, employee benefits, net occupancy expense and other expense increased by $5.2totaled $13.3 million $476,000, $664,000, $1.9for the year ended December 31, 2019, an increase of $2.9 million and $2.6 million, respectively,when compared to the year ended December 31, 2018. The increase was primarily due to an increase in income before income tax expense of $16.3 million when comparing 2019 to the Kosciusko, LaPorte and CNB mergers, Horizon’s investments in growth markets and overall growth. Data processing and other expenses increased during 2016 fromprior year.
Income tax expense totaled $10.4 million for the costyear ended December 31, 2018, a decrease of continued growth and expansion and$4.4 million when compared to the Kosciusko, LaPorte and CNB mergers. Outside services and consultants increasedyear ended December 31, 2017. The decrease was primarily due to the fees associated withimpact of the Kosciusko, LaPortenew corporate tax rate established by the Tax Cuts and CNB acquisitions. Loan expense increased in 2016 comparedJobs Act which was signed into law at the end of 2017 and the benefits from the exercising of stock options. In addition to 2015 duea lower corporate tax rate being applied to company growth and collection costs. Other losses increased in 2016 compared2018 income, a revaluation to 2015 due to the recoveryHorizon’s net deferred tax asset of a previously recorded loss contingency in 2014 and higherone-time losses in 2015.

Salary expense, commission and bonuses, employee benefits, net occupancy expense and other expense increased by $2.4 million $1.9 million, $708,000, $793,000 and $1.6 million, respectively, duewas recorded to the Peoples merger, Horizon’s investment in growth markets and overall growth. Data processing and other expenses increased during 2015 from the cost of continued growth and expansion and the Peoples merger. Outside services and consultants increased primarily due to the fees associated with the Peoples acquisition. Loan expense increased in 2015 compared to 2014 due to company growth and collection costs. Other losses increased in 2015 compared to 2014 due to the recovery of a previously recorded loss contingency in 2014 and higherone-time losses in 2015.

Income Taxes

Income tax expense for 2016 was $8.8 million, compared to $7.2 million ofincome tax expense during 2015. the fourth quarter of 2017. Partially offsetting these decreases to income tax expense was an increase in income before income tax expense of $15.6 million when comparing 2018 to the prior year.

Expected Replacement of London Interbank Offered Rate
The effective taxARRC continues its work to the goal of finding suitable replacements for LIBOR. It is expected that a transition away from the widespread use of LIBOR to alternative reference rates and other potential interest rate benchmark reforms will occur over the course of the next few years. Although the full impact of such reforms and actions, together with any transition away from LIBOR remains unclear, we are preparing to transition from the LIBOR to an alternative reference rate.
Our transition plan includes a number of key steps, including continued engagement with central bank and industry working groups and regulators, active client engagement, internal operational readiness, and risk management, among other things, to promote the transition to alternative reference rates. We are identifying
on-balance
sheet and
off-balance
sheet references to LIBOR, determining appropriate language to replace the LIBOR index language, and determining disclosures necessary for 2016 was 26.9% comparedcustomers, with appropriate procedures and schedules to 26.0%complete the LIBOR transition.
There remain, however, a number of unknown factors regarding the transition from LIBOR or interest rate benchmark reforms that could impact our business, including, for example, the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of the alternative reference rates, prices of and the liquidity of trading markets for products based on the alternative reference rates, and our ability to transition to and develop appropriate systems and analytics for one or more alternative reference rates. For a further discussion of the various risks we face in 2015connection with the expected replacement of LIBOR and 25.4% in 2014.

reform of interest rate benchmarks on our operations, see “Risk Factors – Risks Related to Our Business.”

Use of
Non-GAAP
Financial Measures

Certain information set forth in this report on Form
10-K
refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included
non-GAAP
financial measures of therelating to net interest income, anddiluted earnings per share, net interest margin, excludingtotal loans and loan growth, the allowance for loan and lease losses, tangible stockholders’ equity, tangible book value per share and the return on average assets and average common equity. In each case, we have identified special circumstances that we consider to be
non-recurring
and have excluded them, in order to show the impact of such matters as acquisition-related purchase accounting adjustments, prepayment penalties on borrowings and net incomethe Tax Cuts and diluted earnings per share excluding the impact ofone-time costs related to the acquisitions, acquisition-related purchase accounting adjustments andJobs Act, among other events that are considered to benon-recurring.matters we have identified in our reconciliations. Horizon believes these
non-GAAP
financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and
one-time
costs of acquisitions although theseand
non-core
items. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure.

Non-GAAP Reconciliation See the following tables for reconciliations of Net Interest Margin

(Dollarsthe

non-GAAP
measures identified in Thousands, Unaudited)

   Three Months Ended  Twelve Months Ended 
   December 31  September 30  December 31  December 31 
   2016  2016  2015  2016  2015  2014 

Net Interest Margin As Reported

       

Net interest income

  $20,939  $24,410  $20,222  $85,992  $74,734  $62,983 

Average interest-earning assets

   2,932,145   2,957,944   2,369,301   2,683,383   2,166,006   1,794,263 

Net interest income as a percent of average interest- earning assets (“Net Interest Margin”)

   2.92%   3.37%   3.50%   3.29%   3.56%   3.62% 

Impact of Prepayment Penalties on Borrowings

       

Interest expense from prepayment penalties on borrowings

  $4,839  $—    $—    $4,839  $—    $—   

Impact of Acquisitions

       

Interest income from acquisition-related purchase accounting adjustments

  $(900)  $(459)  $(695)  $(2,304)  $(2,977)  $(2,745) 

Excluding Impact of Prepayment Penalties and Acquisitions

       

Net interest income

  $24,878  $23,951  $19,527  $88,527  $71,757  $60,238 

Average interest-earning assets

   2,932,145   2,957,944   2,369,301   2,683,383   2,166,006   1,794,263 

Core Net Interest Margin

   3.45%   3.31%   3.38%   3.38%   3.42%   3.47% 

HORIZON BANCORPAND SUBSIDIARIES

this Form

10-K
to their most comparable GAAP measures.
56
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non-GAAP
Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Non-GAAP
Reconciliation of Net Interest Margin
         
Net interest income as reported
 $
160,791
  $
134,569
  $
112,100
 
Average interest-earning assets
  
4,470,450
   
3,697,938
   
3,074,464
 
Net interest income as a percentage of average interest-earning assets (“Net Interest Margin”)
  
3.69
%  
3.71
%  
3.75
%
Acquisition-related purchase accounting adjustments (“PAUs”)
  
(5,590
)  
(6,089
)  
(3,484
)
             
Core net interest income
  
155,201
   
128,480
   
108,616
 
             
Core net interest margin
  
3.57
%  
3.54
%  
3.64
%
             
Non-GAAP
Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
                     
 
December 31
2019
  
September 30
2019
  
June 30
2019
  
March 31
2019
  
December 31
2018
 
Total stockholders’ equity
 $
656,023
  $
642,711
  $
626,461
  $
609,468
  $
491,992
 
Less: Intangible assets
  
177,917
   
178,896
   
179,776
   
176,864
   
130,270
 
                     
Total tangible stockholders’ equity
 $
478,106
  $
463,815
  $
446,685
  $
432,604
  $
361,722
 
                     
Common shares outstanding
  
44,975,771
   
44,969,021
   
45,061,372
   
45,052,747
   
38,375,407
 
Tangible book value per common share
 $
10.63
  $
10.31
  $
9.91
  $
9.60
  $
9.43
 
57
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
Non-GAAP
Reconciliation of Net Income and Diluted Earnings per Share

(Dollars in Thousands, Except per Share Data)

   Twelve Months Ended 
   December 31 
   2016  2015  2014 

Non-GAAP Reconciliation of Net Income

    

Net income as reported

  $23,912  $20,549  $18,101 

Merger expenses

   6,827   4,889   1,335 

Tax effect

   (1,998)   (1,585)   (467) 
  

 

 

  

 

 

  

 

 

 

Net income excluding merger expenses

   28,741   23,853   18,969 

Gain on sale of investment securities

   (1,836)   (189)   (988) 

Tax effect

   643   66   346 
  

 

 

  

 

 

  

 

 

 

Net income excluding gain on sale of investment securities

   27,548   23,730   18,327 

Death benefit on bank owned life insurance (“BOLI”)

   —     (145)   —   

Tax effect

   —     51   —   
  

 

 

  

 

 

  

 

 

 

Net income excluding death benefit on BOLI

   27,548   23,636   18,327 

Prepayment penalties on borrowings

   4,839   —     —   

Tax effect

   (1,694)   —     —   
  

 

 

  

 

 

  

 

 

 

Net income excluding prepayment penalties on borrowings

  $30,693  $23,636  $18,327 

Acquisition-related purchase accounting adjustments (“PAUs”)

   (2,304)   (2,977)   (2,745) 

Tax effect

   807   1,042   961 
  

 

 

  

 

 

  

 

 

 

Net income excluding PAUs

  $29,196  $21,701  $16,543 
  

 

 

  

 

 

  

 

 

 

Non-GAAP Reconciliation of Diluted Earnings per Share

    

Diluted earnings per share as reported

  $1.19  $1.26  $1.27 

Merger expenses

   0.34   0.30   0.09 

Tax effect

   (0.10)   (0.10)   (0.03) 
  

 

 

  

 

 

  

 

 

 

Diluted earnings per share excluding merger expenses

   1.43   1.46   1.33 

Gain on sale of investment securities

   (0.09)   (0.01)   (0.07) 

Tax effect

   0.03   0.00   0.02 
  

 

 

  

 

 

  

 

 

 

Net income excluding gain on sale of investment securities

   1.37   1.46   1.28 

Death benefit on BOLI

   —     (0.01)   —   

Tax effect

   —     0.00   —   
  

 

 

  

 

 

  

 

 

 

Net income excluding death benefit on BOLI

   1.37   1.45   1.28 

Prepayment penalties on borrowings

   0.24   —     —   

Tax effect

   (0.08)   —     —   
  

 

 

  

 

 

  

 

 

 

Net income excluding prepayment penalties on borrowings

   1.53   1.45   1.28 

Acquisition-related PAUs

   (0.11)   (0.18)   (0.19) 

Tax effect

   0.03   0.06   0.07 
  

 

 

  

 

 

  

 

 

 

Diluted earnings per share excluding PAUs

  $1.45  $1.33  $1.16 
  

 

 

  

 

 

  

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

Data, Unaudited)

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Non-GAAP
Reconciliation of Net Income
         
Net income as reported
 $
66,538
  $
53,117
  $
33,117
 
Merger expenses
  
5,650
   
487
   
3,656
 
Tax effect
  
(987
)  
(102
)  
(1,003
)
             
Net income excluding merger expenses
  
71,201
   
53,502
   
35,770
 
(Gain)/loss on sale of investment securities
  
75
   
443
   
(38
)
Tax effect
  
(16
)  
(93
)  
13
 
             
Net income excluding loss on sale of investment securities
  
71,260
   
53,852
   
35,745
 
Death benefit on bank owned life insurance (“BOLI”)
  
(580
)  
(154
)  
—  
 
             
Net income excluding death benefit on BOLI
  
70,680
   
53,698
   
35,745
 
             
Core Net Income
 $
70,680
  $
53,698
  $
37,719
 
             
Non-GAAP
Reconciliation of Diluted Earnings per Share
         
Diluted earnings per share (“EPS”) as reported
 $
1.53
  $
1.38
  $
0.95
 
Merger expenses
  
0.13
   
0.01
   
0.11
 
Tax effect
  
(0.02
)  
—  
   
(0.03
)
             
Diluted EPS excluding merger expenses
  
1.64
   
1.39
   
1.03
 
(Gain)/loss on sale of investment securities
  
—  
   
0.01
   
—  
 
Tax effect
  
—  
   
—  
   
—  
 
             
Diluted EPS excluding loss on sale of investment securities
  
1.64
   
1.40
   
1.03
 
Death benefit on BOLI
  
(0.01
)  
—  
   
—  
 
             
Diluted EPS excluding death benefit on BOLI
  
1.63
   
1.40
   
1.03
 
             
Core Diluted EPS
 $
1.63
  $
1.40
  $
1.09
 
             
58
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non-GAAP
Reconciliation of Return on Average Assets and Return on Average Common Equity

(Dollars in Thousands)

   Twelve Months Ended 
   December 31 
   2016  2015  2014 

Non-GAAP Reconciliation of Return on Average Assets

    

Average Assets

  $2,961,622  $2,360,485  $1,950,289 

Return on average assets as reported

   0.81%   0.87%   0.93% 

Merger expenses

   0.23%   0.21%   0.07% 

Tax effect

   -0.07%   -0.07%   -0.02% 
  

 

 

  

 

 

  

 

 

 

Excluding merger expenses

   0.97%   1.01%   0.97% 

Gain on sale of investment securities

   -0.06%   -0.01%   -0.05% 

Tax effect

   0.02%   0.00%   0.02% 
  

 

 

  

 

 

  

 

 

 

Excluding gain on sale of investment securities

   0.93%   1.01%   0.94% 

Death benefit on BOLI

   0.00%   -0.01%   0.00% 

Tax effect

   0.00%   0.00%   0.00% 
  

 

 

  

 

 

  

 

 

 

Excluding death benefit on BOLI

   0.93%   1.00%   0.94% 

Prepayment penalties on borrowings

   0.16%   0.00%   0.00% 

Tax effect

   -0.06%   0.00%   0.00% 
  

 

 

  

 

 

  

 

 

 

Excluding prepayment penalties on borrowings

   1.04%   1.00%   0.94% 

Acquisition-related PAUs

   -0.08%   -0.13%   -0.14% 

Tax effect

   0.03%   0.04%   0.05% 
  

 

 

  

 

 

  

 

 

 

Excluding PAUs

   0.99%   0.92%   0.85% 

Non-GAAP Reconciliation of Return on Average Common Equity

    

Average Common Equity

  $301,485  $207,014  $169,449 

Return on average common equity as reported

   7.92%   9.87%   10.60% 

Merger expenses

   2.26%   2.36%   0.79% 

Tax effect

   -0.66%   -0.77%   -0.28% 
  

 

 

  

 

 

  

 

 

 

Excluding merger expenses

   9.52%   11.46%   11.12% 

Gain on sale of investment securities

   -0.61%   -0.09%   -0.58% 

Tax effect

   0.21%   0.03%   0.20% 
  

 

 

  

 

 

  

 

 

 

Excluding gain on sale of investment securities

   9.12%   11.40%   10.74% 

Death benefit on BOLI

   0.00%   -0.07%   0.00% 

Tax effect

   0.00%   0.02%   0.00% 
  

 

 

  

 

 

  

 

 

 

Excluding death benefit on BOLI

   9.12%   11.36%   10.74% 

Prepayment penalties on borrowings

   1.61%   0.00%   0.00% 

Tax effect

   -0.56%   0.00%   0.00% 
  

 

 

  

 

 

  

 

 

 

Excluding prepayment penalties on borrowings

   10.17%   11.36%   10.74% 

Acquisition-related PAUs

   -0.76%   -1.44%   -1.62% 

Tax effect

   0.27%   0.50%   0.57% 
  

 

 

  

 

 

  

 

 

 

Excluding PAUs

   9.67%   10.42%   9.68% 

HORIZON BANCORPAND SUBSIDIARIES

Thousands, Unaudited)

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Non-GAAP
Reconciliation of Return on Average Assets
         
Average assets
 $
4,933,058
  $
4,062,635
  $
3,396,873
 
Return on average assets (“ROAA”) as reported
  
1.35
%  
1.31
%  
0.97
%
Merger expenses
  
0.11
%  
0.01
%  
0.11
%
Tax effect
  
-0.02
%  
0.00
%  
-0.03
%
             
ROAA excluding merger expenses
  
1.44
%  
1.32
%  
1.05
%
(Gain)/loss on sale of investment securities
  
0.00
%  
0.01
%  
0.00
%
Tax effect
  
0.00
%  
0.00
%  
0.00
%
             
ROAA excluding loss on sale of investment securities
  
1.44
%  
1.33
%  
1.05
%
Death benefit on bank owned life insurance (“BOLI”)
  
-0.01
%  
0.00
%  
0.00
%
             
ROAA excluding death benefit on BOLI
  
1.43
%  
1.33
%  
1.05
%
             
Core ROAA
  
1.43
%  
1.33
%  
1.10
%
             
Non-GAAP
Reconciliation of Return on Average Common Equity
 
Average Common Equity
 $
605,719
  $
473,420
  $
378,709
 
Return on average common equity (“ROACE”) as reported
  
10.98
%  
11.22
%  
8.74
%
Merger expenses
  
0.93
%  
0.10
%  
0.97
%
Tax effect
  
-0.16
%  
-0.02
%  
-0.26
%
             
ROACE excluding merger expenses
  
11.75
%  
11.30
%  
9.45
%
(Gain)/loss on sale of investment securities
  
0.01
%  
0.09
%  
-0.01
%
Tax effect
  
0.00
%  
-0.02
%  
0.00
%
             
ROACE excluding loss on sale of investment securities
  
11.76
%  
11.37
%  
9.44
%
Death benefit on bank owned life insurance (“BOLI”)
  
-0.10
%  
-0.03
%  
0.00
%
             
ROACE excluding death benefit on BOLI
  
11.66
%  
11.34
%  
9.44
%
             
Core ROACE
  
11.66
%  
11.34
%  
9.96
%
             
Non-GAAP Allowance for Loan and Lease Loss Detail
As of December 31, 2019
(Dollars in Thousands, Unaudited)
                                 
 
Loan Balance
  
Allowance for Loan Losses (ALLL)
  


Acquired Loan Discount
  



ALLL + Acquired Loan Discount
  
Loans, net
  


ALLL/ Loan Balance
  


Acquired Loan Discount/ Loan Balance
  



ALLL+ Acquired Loan Discount/ Loan Balance
 
Horizon Legacy
 $
2,881,650
  $
17,534
   
N/A
  $
17,534
  $
2,864,116
   
0.61
%  
0.00
%  
0.61
%
Heartland
  
4,863
   
—  
   
549
   
549
   
4,314
   
0.00
%  
11.29
%  
11.29
%
Summit
  
14,309
   
—  
   
835
   
835
   
13,474
   
0.00
%  
5.84
%  
5.84
%
Peoples
  
66,983
   
—  
   
1,550
   
1,550
   
65,433
   
0.00
%  
2.31
%  
2.31
%
Kosciusko
  
28,249
   
—  
   
417
   
417
   
27,832
   
0.00
%  
1.48
%  
1.48
%
LaPorte
  
62,580
   
—  
   
2,229
   
2,229
   
60,351
   
0.00
%  
3.56
%  
3.56
%
CNB
  
3,210
   
—  
   
78
   
78
   
3,132
   
0.00
%  
2.43
%  
2.43
%
Lafayette
  
57,003
   
—  
   
496
   
496
   
56,507
   
0.00
%  
0.87
%  
0.87
%
Wolverine
  
120,654
   
—  
   
699
   
699
   
119,955
   
0.00
%  
0.58
%  
0.58
%
Salin
  
401,428
   
133
   
13,375
   
13,508
   
387,920
   
0.03
%  
3.33
%  
3.36
%
                                 
Total
 $
3,640,929
  $
17,667
  $
20,228
  $
37,895
  $
3,603,034
   
0.49
%  
0.56
%  
1.04
%
                                 
59
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non- GAAP Allowance for Loan and Lease Loss Detail

As of December 31, 2016

(Dollars in Thousands, Unaudited)

   Horizon                      
   Legacy  Heartland  Summit  Peoples  Kosciusko  LaPorte  CNB  Total 

Pre-discount loan balance

  $1,636,945  $16,046  $55,042  $148,467  $81,946  $202,407  $10,303  $2,151,156 

Allowance for loan losses (ALLL)

   14,833   4   —     —     —     —     —     14,837 

Loan discount

   N/A   1,083   2,475   3,323   997   6,971   321   15,170 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

ALLL+loan discount

   14,833   1,087   2,475   3,323   997   6,971   321   30,007 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans, net

  $1,622,112  $14,959  $52,567  $145,144  $80,949  $195,436  $9,982  $2,121,149 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

ALLL/pre-discount loan balance

   0.91%   0.02%   0.00%   0.00%   0.00%   0.00%   0.00%   0.69% 

Loan discount/pre-discount loan balance

   N/A   6.75%   4.50%   2.24%   1.22%   3.44%   3.12%   0.71% 

ALLL+loan discount/pre-discount loan balance

   0.91%   6.77%   4.50%   2.24%   1.22%   3.44%   3.12%   1.39% 

Liquidity and Rate Sensitivity Management

Management and the Board of Directors meet regularly to review both the liquidity and rate sensitivity position of Horizon. Effective asset and liability management ensures Horizon’s ability to monitor the cash flow requirements of depositors along with the demands of borrowers and to measure and manage interest rate risk. Horizon utilizes an interest rate risk assessment model designed to highlight sources of existing interest rate risk and consider the effect of these risks on strategic planning. Management maintains (within certain parameters) an essentially balanced ratio of interest sensitive assets to liabilities in order to protect against the effects of wide interest rate fluctuations.

Liquidity

The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayments, investment security sales, cashflows and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the FHLB and the Federal Reserve Bank (“FRB”). At December 31, 2016,2019, Horizon had available approximately $453.9$517.1 million in available credit from various money center banks, including the FHLB and the FRB Discount Window. Factors whichThe following factors could impact Horizon’s funding needs in the future include:

future:
Horizon had outstanding borrowings of over $124.0$392.0 million with the FHLB and total borrowing capacity with the FHLB of $419.8$701.6 million. Generally, the loan terms from the FHLB are better than the terms Horizon can receive from other sources, making it less expensive to borrow money from the FHLB. Financial difficulties at the FHLB could reduce or eliminate Horizon’s additional borrowing capacity with the FHLB or the FHLB could change collateral requirements, which could lower the Company’s borrowing availability.

If residential mortgage loan rates remain low, Horizon’s mortgage warehouse loans could create an additional need for funding.

Horizon had a total of $68.2$112.0 million of unused Federal Fund lines from various money center banks. These are uncommitted lines and could be withdrawn at any time by the correspondent banks.

Horizon had a total of $89.9$95.6 million of available collateral at the FRB secured by municipal securities. These securities may mature, call, or be sold, which would reduce the available collateral.

Horizon had approximately $807.4 million of unpledged investment securities at December 31, 2019.
A downgrade in Horizon’s ability to obtain credit due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition.acquisition could impact the availability of funding sources.

An act of terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund, hedge fund or a government agency.agency could affect the cost and availability of funding sources.

Market speculation or rumors about Horizon or the banking industry in general may adversely affect the cost and availability of normal funding sources.

HORIZON BANCORPAND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

If any of these events occur, they could force Horizon to borrow money from other sources including negotiable certificates of deposit. Such other monies may only be available at higher interest rates and on less advantageous terms, which will impact our net income and could impact our ability to grow. Management believes Horizon has adequate funding sources to meet short and long term needs.

Horizon maintains a liquidity contingency plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period.

60
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table dollars in thousands except per share data)
During 2016,2019, cash flows were generated primarily from net cash received in the Salin acquisition of $128.7 million, sales, maturities, and prepayments of investment securities of $300.4 million, a decrease in loans of $32.1 million, cash received from acquisitions totaling $169.5$219.7 million and an increase in deposits of $46.6$50.3 million. Cash flows were used to purchase investments totaling $271.4$390.8 million, to fund an increase in loans of $59.4 million and a decrease in borrowings by $256.0 million and to redeem preferred stock for $12.5of $71.0 million. The net cash and cash equivalent position increased by $22.2$40.3 million during 2016.

2019.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2016.2019. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

           After one   After three   After 
       Within   but within   but within   five 
   Total   one year   three years   five years   years 

Remaining contractual maturities of time deposits

  $475,843   $257,071   $149,172   $47,380   $22,220 

Borrowings

   267,489    203,610    55,285    8,164    430 

Subordinated debentures

   37,456    —      —      —      37,456 

Loan Commitments

   808,299    254,063    554,236    —      —   

Letters of credit

   969    2    967    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,590,056   $714,746   $752,161   $57,543   $65,606 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                     
 
Total
  
Within
One Year
  
After one
but within
three years
  
After three
but within
five years
  
After
five
years
 
Remaining contractual maturities of time deposits
 $
975,612
  $
 747,022
  $
  204,313
  $
 22,995
  $
 1,282
 
Borrowings
  
549,741
   
276,970
   
67,324
   
80,299
   
125,148
 
Subordinated debentures
  
56,311
   
—  
   
—  
   
—  
   
56,311
 
Loan commitments
  
958,690
   
310,025
   
648,665
   
—  
   
—  
 
Letters of credit
  
17,252
   
7,053
   
10,199
   
—  
   
—  
 
                     
Total
 $
2,557,606
  $
1,340,728
  $
930,844
  $
103,189
  $
182,845
 
                     
Interest Rate Sensitivity

The degree by which net interest income may fluctuate due to changes in interest rates is monitored by Horizon using computer simulation models, incorporating not only the current GAP position but the effect of expected repricing of specific financial assets and liabilities. When repricing opportunities are not properly aligned, net interest income may be affected when interest rates change. Forecasting results of the possible outcomes determines the exposure to interest rate risk inherent in Horizon’s balance sheet. The goal is to manage imbalanced positions that arise when the total amount of assets that reprice or mature in a given time period differs significantly from liabilities that reprice or mature in the same time period. The theory behind managing the difference between repricing assets and liabilities is to have more assets repricing in a rising rate environment and more liabilities repricing in a declining rate environment. Based on a model that assumes a lag in repricing, at December 31, 2016,2019, the amount of assets that reprice within one year was 218%161% of liabilities that reprice within one year. At December 31, 2015,2018, this same model reported that the amount of assets that reprice within one year was approximately 209%148% of the amount of liabilities that reprice within the same time period. TheDuring the year 2016 was2019, the increase in the cost of funding outpaced the increase in the yield of interest-earning assets resulting in a stable rate environment and the yields on assets continued to reprice at lower rates due to current asset pricing and a more competitive environment. However, the impact of slightly lower funding costs and a balance sheet restructuring that repaid higher cost long term debt during 2016 positively impacted thedecrease in net interest margin.

HORIZON BANCORPAND SUBSIDIARIES

                     
 
3 Months
or Less
  
> 3 Months
&
</= 6 Months
  
> 6 Months
&
</= 1 Year
  
Greater
Than
1 Year
  
Total
 
Loans
 $
  1,429,780
  $
  213,752
  $
  350,923
  $
  1,646,474
  $
  3,640,929
 
Federal funds sold
  
5,646
   
—  
   
—  
   
—  
   
5,646
 
Interest-earning balances with banks
  
17,343
   
—  
   
—  
   
—  
   
17,343
 
Investment securities and FHLB stock
  
49,549
   
36,893
   
84,662
   
894,018
   
1,065,122
 
Other assets
  
—  
   
—  
   
—  
   
517,789
   
517,789
 
                     
Total assets
 $
1,502,318
  $
250,645
  $
435,585
  $
 3,058,281
  $
 5,246,829
 
                     
Noninterest-bearing deposits
 $
16,786
  $
16,786
  $
33,572
  $
642,616
  $
709,760
 
Interest-bearing deposits
  
376,119
   
292,509
   
399,566
   
2,153,048
   
3,221,242
 
Borrowed funds
  
117,874
   
98,950
   
6,086
   
383,142
   
606,052
 
Other liabilities
  
—  
   
—  
   
—  
   
53,752
   
53,752
 
Stockholders’ equity
  
—  
   
—  
   
—  
   
656,023
   
656,023
 
                     
Total liabilities and stockholders’ equity
 $
510,779
  $
408,245
  $
439,224
  $
 3,888,581
  $
 5,246,829
 
                     
GAP
 $
991,539
  $
(157,600
) $
(3,639
) $
(830,300
)   
Cumulative GAP
 $
991,539
  $
833,939
  $
830,300
       
61
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

   Rate Sensitivity 
       > 3 Months       Greater    
   3 Months   & < 6   > 6 Months   Than 1    
   or Less   Months   & < 1 Year   Year  Total 

Loans

  $825,794   $150,925   $223,235   $944,119  $2,144,073 

Federal Funds Sold

   3,098    —      —      —     3,098 

Interest-Bearing balances with Banks

   19,022    —      —      —     19,022 

Investment securities and FRB and FHLB stock

   52,524    26,609    45,498    532,326   656,957 

Other assets

   —      —      —      318,006   318,006 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total Assets

  $900,438   $177,534   $268,733   $1,794,451  $3,141,156 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Noninterest-bearing deposits

  $13,498   $13,498   $26,996   $442,256  $496,248 

Interest-bearing deposits

   116,459    116,287    176,047    1,566,169   1,974,962 

Borrowed Funds

   124,105    7,978    20,939    151,923   304,945 

Other Liabilities

   —      —      —      24,146   24,146 

Stockholders’ equity

   —      —      —      340,855   340,855 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities and stockholder’s equity

  $254,062   $137,763   $223,982   $2,525,349  $3,141,156 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

GAP

  $646,376   $39,771   $44,751   $(730,898)  

Cumulative GAP

  $646,376   $686,147   $730,898    

Quantitative and Qualitative Disclosures about Market Risk

Horizon’s primary market risk exposure is interest rate risk. Interest rate risk (“IRR”) is the risk that Horizon’s earnings and capital will be adversely affected by changes in interest rates. The primary approach to IRR management is one that focuses on adjustments to the asset/liability mix in order to limit the magnitude of IRR.

Horizon’s exposure to interest rate risk arises from repricing or mismatch risk, embedded options risk, and yield curve risk. Repricing risk is the risk of adverse consequence from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect Horizon’s assets and liabilities. Basis risk is the risk that the spread, or rate difference, between instruments of similar maturities will change. Options risk arises whenever products give the customer the right, but not the obligation, to alter the quantity or timing of cash flows. Yield curve risk is the risk that changes in prevailing interest rates will affect instruments of different maturities by different amounts. Horizon’s objective is to remain reasonably neutral with respect to IRR. Horizon utilizes a variety of strategies to maintain this position, including the sale of mortgage loans on the secondary market, hedging certain balance sheet items using derivatives, varying maturities of FHLB advances, certificates of deposit funding and investment securities.

The table which follows provides information about Horizon’s financial instruments that were sensitive to changes in interest rates as of December 31, 2016.2019. The table incorporates Horizon’s internal system generated data related to the maturity and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the historical experience of Horizon related to the impact of interest rate fluctuations on the prepayment of residential loans and mortgage-backed securities. From a risk management perspective, Horizon believes that repricing dates are more relevant than contractual maturity dates when analyzing the value of financial instruments. For deposits with no contractual maturity dates, the table presents principal cash flows and weighted average rate, as applicable, based upon Horizon’s experience and management’s judgment concerning the most likely withdrawal behaviors.

HORIZON BANCORPAND SUBSIDIARIES

                                 
           
2025
    
Fair Value
December 31
 
 
2020
  
2021
  
2022
  
2023
  
2024
  
& Beyond
  
Total
  
2019
 
Rate-sensitive assets
                        
Fixed interest rate loans
 $
689,022
  $
367,287
  $
215,722
  $
131,021
  $
69,181
  $
109,563
  $
1,581,796
  $
1,420,685
 
Average interest rate
  
4.89
%  
4.83
%  
4.96
%  
5.01
%  
4.97
%  
4.78
%  
4.89
%   
Variable interest rate loans
  
1,319,167
   
148,803
   
133,360
   
107,601
   
99,296
   
250,906
   
2,059,133
   
2,138,354
 
Average interest rate
  
4.70
%  
4.36
%  
4.46
%  
4.52
%  
4.27
%  
3.87
%  
4.53
%   
                                 
Total loans
  
2,008,189
   
516,090
   
349,082
   
238,622
   
168,477
   
360,469
   
3,640,929
   
3,559,039
 
Average interest rate
  
4.76
%  
4.69
%  
4.77
%  
4.79
%  
4.56
%  
4.15
%  
4.68
%   
Securities, including FHLB stock
  
177,407
   
106,642
   
83,685
   
69,485
   
62,792
   
565,111
   
1,065,122
   
1,071,425
 
Average interest rate
  
2.47
%  
3.17
%  
3.18
%  
3.08
%  
3.16
%  
3.54
%  
3.24
%   
Other interest-earning assets
  
22,989
   
—  
   
—  
   
—  
   
—  
   
—  
   
22,989
   
22,989
 
Average interest rate
  
5.61
%  
0.00
%  
0.00
%  
0.00
%  
0.00
%  
0.00
%  
5.61
%   
                                 
Total earning assets
 $
2,208,585
  $
622,732
  $
432,767
  $
308,107
  $
231,269
  $
925,580
  $
4,729,040
  $
4,653,453
 
                                 
Average interest rate
  
4.59
%  
4.43
%  
4.46
%  
4.40
%  
4.18
%  
3.77
%  
4.36
%   
Rate-sensitive liabilities
                        
Noninterest-bearing deposits
 $
67,145
  $
60,792
  $
55,041
  $
49,834
  $
45,120
  $
431,828
  $
709,760
  $
709,760
 
NOW accounts
  
77,857
   
67,689
   
58,849
   
51,163
   
44,481
   
296,109
   
596,148
   
574,709
 
Average interest rate
  
0.15
%  
0.15
%  
0.15
%  
0.15
%  
0.15
%  
0.15
%  
0.15
%   
Savings and money market accounts
  
243,331
   
206,992
   
176,134
   
149,924
   
127,656
   
745,445
   
1,649,482
   
1,627,824
 
Average interest rate
  
0.82
%  
0.81
%  
0.80
%  
0.80
%  
0.79
%  
0.74
%  
0.78
%   
Certificates of deposit
  
747,006
   
122,957
   
48,181
   
33,175
   
22,995
   
1,298
   
975,612
   
978,235
 
Average interest rate
  
2.05
%  
2.15
%  
1.90
%  
2.28
%  
1.93
%  
0.76
%  
2.06
%   
                                 
Total deposits
  
1,135,339
   
458,430
   
338,205
   
284,096
   
240,252
   
1,474,680
   
3,931,002
   
3,890,528
 
Average interest rate
  
1.53
%  
0.96
%  
0.71
%  
0.71
%  
0.63
%  
0.40
%  
0.86
%   
Fixed interest rate borrowings
  
174,015
   
26,692
   
127,933
   
80
   
80,047
   
50,033
   
458,800
   
460,631
 
Average interest rate
  
1.04
%  
2.21
%  
1.80
%  
3.32
%  
1.66
%  
2.69
%  
1.60
%   
Variable interest rate borrowings
  
147,252
   
—  
   
—  
   
—  
   
—  
   
—  
   
147,252
   
138,172
 
Average interest rate
  
2.35
%  
0.00
%  
0.00
%  
0.00
%  
0.00
%  
0.00
%  
2.35
%   
                                 
Total funds
 $
1,456,606
  $
485,122
  $
466,138
  $
284,176
  $
320,299
  $
1,524,713
  $
4,537,054
  $
4,489,331
 
                                 
Average interest rate
  
1.56
%  
1.03
%  
1.01
%  
0.71
%  
0.89
%  
0.48
%  
0.98
%   
62
Horizon Bancorp, Inc. and Subsidiaries
Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

                        Fair Value 
                  2022     December 31 
   2017  2018  2019  2020  2021  & Beyond  Total  2016 

Rate-sensitive assets

         

Fixed interest rate loans

  $442,447  $210,532  $137,396  $83,172  $45,380  $74,691  $993,618  $895,233 

Average interest rate

   4.50%   4.55%   4.54%   4.52%   4.53%   4.57%   4.52%  

Variable interest rate loans

   751,349   80,145   70,570   57,912   52,088   138,391   1,150,455   1,201,126 

Average interest rate

   4.13%   4.26%   4.22%   4.14%   4.08%   3.66%   4.08%  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans

   1,193,796   290,677   207,966   141,084   97,468   213,082   2,144,073   2,096,359 

Average interest rate

   4.26%   4.47%   4.43%   4.36%   4.29%   3.98%   4.29%  

Securities, including FRB and FHLB stock

   124,632   79,663   61,179   53,727   43,832   293,923   656,957   661,093 

Average interest rate

   2.42%   2.55%   2.42%   2.92%   3.27%   3.83%   3.16%  

Other interest-bearing assets

   22,120   —     —     —     —     —     22,120   22,120 

Average interest rate

   2.38%   0.00%   0.00%   0.00%   0.00%   0.00%   2.38%  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total earnings assets

  $1,340,548  $370,340  $269,145  $194,811  $141,300  $507,005  $2,823,149  $2,779,572 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Average interest rate

   4.06%   4.06%   3.98%   3.97%   4.06%   3.89%   4.01%  

Rate-sensitive liabilities

         

Noninterest-bearing deposits

  $53,992  $48,117  $42,882  $38,217  $34,059  $278,981  $496,248  $496,248 

NOW accounts

   45,964   41,794   38,004   34,557   31,422   315,021   506,762   468,264 

Average interest rate

   0.09%   0.09%   0.09%   0.09%   0.09%   0.09%   0.09%  

Savings and money market accounts

   105,526   93,984   83,740   74,646   66,568   567,894   992,358   907,801 

Average interest rate

   0.18%   0.18%   0.18%   0.17%   0.17%   0.16%   0.17%  

Certificates of deposit

   257,304   75,178   73,602   31,629   15,632   22,498   475,843   463,104 

Average interest rate

   0.81%   1.10%   1.36%   1.58%   1.47%   1.57%   1.05%  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total deposits

   462,786   259,073   238,228   179,049   147,681   1,184,394   2,471,211   2,335,415 

Average interest rate

   0.50%   0.40%   0.50%   0.37%   0.25%   0.13%   0.29%  

Fixed interest rate borrowings

   134,065   32,019   10,856   1,333   10,642   1,930   190,845   191,662 

Average interest rate

   0.54%   1.17%   1.69%   1.94%   2.48%   2.82%   0.85%  

Variable interest rate borrowings

   114,100   —     —     —     —     —     114,100   111,905 

Average interest rate

   2.46%   0.00%   0.00%   0.00%   0.00%   0.00%   2.46%  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total funds

  $710,951  $291,092  $249,084  $180,382  $158,323  $1,186,324  $2,776,156  $2,638,982 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Average interest rate

   0.82%   0.48%   0.55%   0.38%   0.40%   0.14%   0.42%  

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required under this item is incorporated by reference to the information appearing in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

63
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HORIZON BANCORPAND SUBSIDIARIES

Horizon Bancorp, Inc. and Subsidiaries
Consolidated Financial Statements

Table of Contents

Consolidated Financial Statements Page 
Page

Balance Sheets

Consolidated Financial Statements
  59 

Statements of IncomeConsolidated Balance Sheets

  60
65
 

Consolidated Statements of Income
66
Consolidated Statements of Comprehensive Income

  61
67
 

Consolidated Statements of Stockholders’ Equity

  62
68
 

Consolidated Statements of Cash Flows

  63
69
 

Notes to Financial Statements

  65 
Notes to Consolidated Financial Statements
70

Reports of Independent Registered Public Accounting Firm

  127
133
 

Other Information

 

Management’s Report on Financial Statements

  129

Summary of Selected Financial Data

130

Horizon’s Common Stock and Related Stockholders’ Matters

131
138
 

HORIZON BANCORPAND SUBSIDIARIES

64
Horizon Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets

(Dollar Amounts in Thousands)

   December 31  December 31 
   2016  2015 

Assets

   

Cash and due from banks

  $70,832  $48,650 

Investment securities, available for sale

   439,831   444,982 

Investment securities, held to maturity (fair value of $194,086 and $193,703)

   193,194   187,629 

Loans held for sale

   8,087   7,917 

Loans, net of allowance for loan losses of $14,837 and $14,534

   2,121,149   1,734,597 

Premises and equipment, net

   66,357   60,798 

Federal Reserve and Federal Home Loan Bank stock

   23,932   13,823 

Goodwill

   76,941   49,600 

Other intangible assets

   9,366   7,371 

Interest receivable

   12,713   10,535 

Cash value of life insurance

   74,134   54,504 

Other assets

   44,620   31,995 
  

 

 

  

 

 

 

Total assets

  $3,141,156  $2,652,401 
  

 

 

  

 

 

 

Liabilities

   

Deposits

   

Non-interest bearing

  $496,248  $335,955 

Interest bearing

   1,974,962   1,544,198 
  

 

 

  

 

 

 

Total deposits

   2,471,210   1,880,153 

Borrowings

   267,489   449,347 

Subordinated debentures

   37,456   32,797 

Interest payable

   472   507 

Other liabilities

   23,674   22,765 
  

 

 

  

 

 

 

Total liabilities

   2,800,301   2,385,569 
  

 

 

  

 

 

 

Commitments and contingent liabilities

   

Stockholders’ Equity

   

Preferred stock, Authorized, 1,000,000 shares

   

Series B shares $.01 par value, $1,000 liquidation value

   

Issued 0 and 12,500 shares

   —     12,500 

Common stock, no par value

   

Authorized, 66,000,000 shares (1)

   

Issued, 22,192,530 and 17,992,986 shares (1)

   

Outstanding, 22,171,596 and 17,909,831 shares (1)

   —     —   

Additionalpaid-in capital

   182,326   106,370 

Retained earnings

   164,173   148,685 

Accumulated other comprehensive loss

   (5,644)   (723) 
  

 

 

  

 

 

 

Total stockholders’ equity

   340,855   266,832 
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $3,141,156  $2,652,401 
  

 

 

  

 

 

 

(1)Adjusted for 3:2 stock split on November 14, 2016.

 
December 31
  
December 31
 
 
2019
  
2018
 
Assets
      
Cash and due from banks
 $
98,831
  $
58,492
 
Interest-earning time deposits
  
8,455
   
15,744
 
Investment securities, available for sale
  
834,776
   
600,348
 
Investment securities, held to maturity (fair value of $215,147 and $208,273)
  
207,899
   
210,112
 
Loans held for sale
  
4,088
   
1,038
 
Loans, net of allowance for loan losses of $17,667 and $17,820
  
3,619,174
   
2,995,512
 
Premises and equipment, net
  
92,209
   
74,331
 
Federal Home Loan Bank stock
  
22,447
   
18,073
 
Goodwill
  
151,238
   
119,880
 
Other intangible assets
  
26,679
   
10,390
 
Interest receivable
  
18,828
   
14,239
 
Cash value of life insurance
  
95,577
   
88,062
 
Other assets
  
66,628
   
40,467
 
         
Total assets
  
5,246,829
  $
4,246,688
 
         
Liabilities
      
Deposits
      
Non-interest
bearing
 $
709,760
  $
642,129
 
Interest bearing
  
3,221,242
   
2,497,247
 
         
Total deposits
  
3,931,002
   
3,139,376
 
Borrowings
  
549,741
   
550,384
 
Subordinated debentures
  
56,311
   
37,837
 
Interest payable
  
3,062
   
2,031
 
Other liabilities
  
50,690
   
25,068
 
         
Total liabilities
  
4,590,806
   
3,754,696
 
         
Commitments and contingent liabilities
      
Stockholders’ Equity
      
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares
  
—  
   
—  
 
Common stock, 0 par value, Authorized 99,000,000 shares 
 
 
 
    
Issued 45,000,840 and 38,400,476 shares, Outstanding 44,975,771 and 38,375,407 shares
  
—  
   
—  
 
Additional
paid-in
capital
  
379,853
   
276,101
 
Retained earnings
  
269,738
   
224,035
 
Accumulated other comprehensive income (loss)
  
6,432
   
(8,144
)
         
Total stockholders’ equity
  
656,023
   
491,992
 
         
Total liabilities and stockholders’ equity
  
5,246,829
  $
4,246,688
 
         
See notes to consolidated financial statements

HORIZON BANCORPAND SUBSIDIARIES

6
5
Horizon Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

   Years Ended December 31 
   2016  2015  2014 

Interest Income

    

Loans receivable

  $91,569  $75,373  $62,435 

Investment securities

    

Taxable

   10,039   8,721   9,344 

Tax exempt

   4,921   4,494   4,426 
  

 

 

  

 

 

  

 

 

 

Total interest income

   106,529   88,588   76,205 
  

 

 

  

 

 

  

 

 

 

Interest Expense

    

Deposits

   6,616   5,559   5,257 

Borrowed funds

   11,807   6,286   5,956 

Subordinated debentures

   2,114   2,009   2,009 
  

 

 

  

 

 

  

 

 

 

Total interest expense

   20,537   13,854   13,222 
  

 

 

  

 

 

  

 

 

 

Net Interest Income

   85,992   74,734   62,983 

Provision for loan losses

   1,842   3,162   3,058 
  

 

 

  

 

 

  

 

 

 

Net Interest Income after Provision for Loan Losses

   84,150   71,572   59,925 
  

 

 

  

 

 

  

 

 

 

Non-interest Income

    

Service charges on deposit accounts

   5,404   4,807   4,085 

Wire transfer fees

   806   633   557 

Interchange fees

   7,042   5,591   4,649 

Fiduciary activities

   6,621   5,637   4,738 

Gain on sale of investment securities (includes $1,836, $189 and $988 for the years ended December 31, 2016, 2015 and

    

2014 related to accumulated other comprehensive earnings reclassifications)

   1,836   189   988 

Gain on sale of mortgage loans

   11,675   10,055   8,395 

Mortgage servicing income net of impairment

   1,908   993   805 

Increase in cash value of bank owned life insurance

   1,643   1,249   1,047 

Death benefit on bank owned life insurance

   —     145   —   

Other income

   1,039   1,103   1,013 
  

 

 

  

 

 

  

 

 

 

Totalnon-interest income

   37,974   30,402   26,277 
  

 

 

  

 

 

  

 

 

 

Non-interest Expense

    

Salaries and employee benefits

   44,013   37,712   32,682 

Net occupancy expenses

   8,322   6,400   5,607 

Data processing

   5,367   4,251   3,663 

Professional fees

   2,752   2,070   1,731 

Outside services and consultants

   7,863   5,735   3,250 

Loan expense

   5,582   5,379   4,770 

FDIC insurance expense

   1,559   1,499   1,175 

Other losses

   684   432   (70) 

Other expense

   13,269   10,715   9,138 
  

 

 

  

 

 

  

 

 

 

Totalnon-interest expense

   89,411   74,193   61,946 
  

 

 

  

 

 

  

 

 

 

Income Before Income Tax

   32,713   27,781   24,256 

Income tax expense (includes $643, $66 and $346 for the years ended December 31, 2016, 2015 and 2014 related to income tax expense from reclassification items)

   8,801   7,232   6,155 
  

 

 

  

 

 

  

 

 

 

Net Income

   23,912   20,549   18,101 

Preferred stock dividend

   (42)   (125)   (133) 
  

 

 

  

 

 

  

 

 

 

Net Income Available to Common Shareholders

  $23,870  $20,424  $17,968 
  

 

 

  

 

 

  

 

 

 

Basic Earnings Per Share (1)

  $1.19  $1.30  $1.32 

Diluted Earnings Per Share (1)

   1.19   1.26   1.27 

(1)Adjusted for 3:2 stock split on November 14, 2016.

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Interest Income
         
Loans receivable
 $
183,631
  $
147,478
  $
112,329
 
Investment securities
         
Taxable
  
12,606
   
10,621
   
9,086
 
Tax exempt
  
12,095
   
8,069
   
7,068
 
             
Total interest income
  
208,332
   
166,168
   
128,483
 
             
Interest Expense
         
Deposits
  
33,690
   
18,225
   
7,901
 
Borrowed funds
  
10,672
   
11,009
   
6,178
 
Subordinated debentures
  
3,179
   
2,365
   
2,304
 
             
Total interest expense
  
47,541
   
31,599
   
16,383
 
             
Net Interest Income
  
160,791
   
134,569
   
112,100
 
Provision for loan losses
  
1,976
   
2,906
   
2,470
 
             
Net Interest Income after Provision for Loan Losses
  
158,815
   
131,663
   
109,630
 
             
Non-interest
Income
         
Service charges on deposit accounts
  
9,959
   
7,762
   
6,383
 
Wire transfer fees
  
653
   
612
   
658
 
Interchange fees
  
7,655
   
5,715
   
5,104
 
Fiduciary activities
  
8,580
   
7,827
   
7,894
 
Gains (losses) on sale of investment securities (includes $(75), $(443) and $38 for the years ended December 31, 2019, 2018 and 2017, respectively, related to accumulated other comprehensive earnings reclassificiations)
  
(75
)  
(443
)  
38
 
Gain on sale of mortgage loans
  
9,208
   
6,613
   
7,906
 
Mortgage servicing income net of impairment
  
1,914
   
2,120
   
1,583
 
Increase in cash value of bank owned life insurance
  
2,190
   
1,912
   
1,797
 
Death benefit on bank owned life insurance
  
580
   
154
   
—  
 
Other income
  
2,394
   
2,141
   
1,773
 
             
Total
non-interest
income
  
43,058
   
34,413
   
33,136
 
             
Non-interest
Expense
         
Salaries and employee benefits
  
65,206
   
56,623
   
51,375
 
Net occupancy expenses
  
12,157
   
10,482
   
9,535
 
Data processing
  
8,480
   
6,816
   
5,914
 
Professional fees
  
1,946
   
1,926
   
2,490
 
Outside services and consultants
  
8,152
   
5,271
   
7,018
 
Loan expense
  
8,633
   
6,341
   
4,970
 
FDIC insurance expense
  
252
   
1,444
   
1,046
 
Other losses
  
740
   
665
   
368
 
Other expense
  
16,466
   
12,948
   
12,097
 
             
Total
non-interest
expense
  
122,032
   
102,516
   
94,813
 
             
Income Before Income Taxes
  
79,841
   
63,560
   
47,953
 
Income tax expense (includes $(16), $(93) and $13 for the years ended December 31, 2019, 2018 and 2017, respectively, related to income tax expense (benefit) from reclassification items)
  
13,303
   
10,443
   
14,836
 
             
Net Income Available to Common Shareholders
 $
66,538
  $
53,117
  $
33,117
 
             
Basic Earnings Per Share
 $
1.53
  $
1.39
  $
0.96
 
Diluted Earnings Per Share
  
1.53
   
1.38
   
0.95
 
See notes to consolidated financial statements

HORIZON BANCORPAND SUBSIDIARIES

6
6
Horizon Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

   Years Ended December 31 
   2016  2015  2014 

Net Income

  $23,912  $20,549  $18,101 
  

 

 

  

 

 

  

 

 

 

Other Comprehensive Income (Loss)

    

Change in fair value of derivative instruments:

    

Change in fair value of derivative instruments for the period

   9   195   (511) 

Income tax effect

   (3)   (68)   179 
  

 

 

  

 

 

  

 

 

 

Changes from derivative instruments

   6   127   (332) 
  

 

 

  

 

 

  

 

 

 

Change in securities:

    

Unrealized appreciation (depreciation) for the period on AFS securities

   (5,091)   (2,910)   4,841 

Amortization from transfer of securities fromavailable-for-sale toheld-to-maturity securities

   (653)   (549)   1,658 

Reclassification adjustment for securities gains realized in income

   (1,836)   (189)   (988) 

Income tax effect

   2,653   1,277   (1,929) 
  

 

 

  

 

 

  

 

 

 

Unrealized gains (losses) on securities

   (4,927)   (2,371)   3,582 
  

 

 

  

 

 

  

 

 

 

Other Comprehensive Income (Loss), Net of Tax

   (4,921)   (2,244)   3,250 
  

 

 

  

 

 

  

 

 

 

Comprehensive Income

  $18,991  $18,305  $21,351 
  

 

 

  

 

 

  

 

 

 

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Net Income
 $
66,538
  $
53,117
  $
33,117
 
             
Other Comprehensive Income (Loss)
         
Change in fair value of derivative instruments:
         
Change in fair value of derivative instruments for the period
  
(2,680
)  
(32
)  
1,404
 
Income tax effect
  
563
   
7
   
(491
)
             
Changes from derivative instruments
  
(2,117
)  
(25
)  
913
 
             
Change in securities:
         
Unrealized appreciation (depreciation) for the period on AFS securities
  
21,173
   
(5,067
)  
2,110
 
Amortization from transfer of securities from available for sale to held to maturity securities
  
(117
)  
(190
)  
(256
)
Reclassification adjustment for securities (gains) losses realized in income
  
75
   
443
   
(38
)
Income tax effect
  
(4,438
)  
1,012
   
(636
)
             
Unrealized gains (losses) on securities
  
16,693
   
(3,802
)  
1,180
 
             
Other Comprehensive Income (Loss), Net of Tax
  
14,576
   
(3,827
)  
2,093
 
             
Comprehensive Income
 $
81,114
  $
49,290
  $
35,210
 
             
See notes to consolidated financial statements

HORIZON BANCORPAND SUBSIDIARIES

6
7
Horizon Bancorp, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity

(Dollar Amounts in Thousands, Except Per Share Data)

             Accumulated    
      Additional      Other    
   Preferred  Paid-in   Retained  Comprehensive    
   Stock  Capital   Earnings  Income (Loss)  Total 

Balances, January 1, 2014

  $12,500  $32,496   $121,253  $(1,729)  $164,520 

Net income

      18,101    18,101 

Other comprehensive income, net of tax

       3,250   3,250 

Amortization of unearned compensation

    363      363 

Stock issued stock plans

    165      165 

Stock option expense

    203      203 

Stock issued from acquisition

    12,689      12,689 

Cash dividends on preferred stock (1.06%)

      (133)    (133) 

Cash dividends on common stock ($0.34 per share)

      (4,744)    (4,744) 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Balances, December 31, 2014

  $12,500  $45,916   $134,477  $1,521  $194,414 

Net income

      20,549    20,549 

Other comprehensive loss, net of tax

       (2,244)   (2,244) 

Amortization of unearned compensation

    355      355 

Stock issued stock plans

    554      554 

Exercise of stock warrants

    3,751      3,751 

Stock option expense

    288      288 

Stock issued from acquisition

    55,506      55,506 

Cash dividends on preferred stock (1.00%)

      (125)    (125) 

Cash dividends on common stock ($0.39 per share)

      (6,216)    (6,216) 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Balances, December 31, 2015

  $12,500  $106,370   $148,685  $(723)  $266,832 

Net income

      23,912    23,912 

Other comprehensive income, net of tax

       (4,921)   (4,921) 

Redemption of preferred stock

   (12,500)       (12,500) 

Amortization of unearned compensation

    284      284 

Stock option expense

    324      324 

Stock issued stock plans

    572      572 

Stock issued in Kosciusko acquisition

    14,470      14,470 

Stock issued in LaPorte acquisition

    60,306      60,306 

Cash dividends on preferred stock (1.00%)

      (42)    (42) 

Cash dividends on common stock ($0.41 per share)

      (8,382)    (8,382) 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Balances, December 31, 2016

  $—    $182,326   $164,173  $(5,644)  $340,855 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

                         
 
Preferred
Stock
  
Common
Stock
  
Additional
Paid-in

Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
 
Balances, January 1, 2017
 $
—  
  $
—  
  $
182,326
  $
164,173
  $
(5,644
) $
340,855
 
Net income
  
—  
   
—  
   
—  
   
33,117
   
—  
   
33,117
 
Other comprehensive loss, net of tax
  
—  
   
—  
   
—  
   
—  
   
2,093
   
2,093
 
Amortization of unearned compensation
  
—  
   
—  
   
135
   
—  
   
—  
   
135
 
Exercise of stock options
  
—  
   
—  
   
1,604
   
—  
   
—  
   
1,604
 
Stock option expense
  
—  
   
—  
   
325
   
—  
   
—  
   
325
 
Stock issued in Lafayette acquisition
  
—  
   
—  
   
28,558
   
—  
   
—  
   
28,558
 
Stock issued in Wolverine acquisition
  
—  
   
—  
   
62,111
   
—  
   
—  
   
62,111
 
Cash dividends on common stock
($0.33 per share) (Restated - See Note 1)
  
—  
   
—  
   
—  
   
(11,720
)  
—  
   
(11,720
)
                         
Balances, December 31, 2017
 $
—  
  $
—  
  $
275,059
  $
185,570
  $
(3,551
) $
457,078
 
Net income
  
—  
   
—  
   
—  
   
53,117
   
—  
   
53,117
 
Other comprehensive loss, net of tax
  
—  
   
—  
   
—  
   
—  
   
(3,827
)  
(3,827
)
Amortization of unearned compensation
  
—  
   
—  
   
169
   
—  
   
—  
   
169
 
Exercise of stock options
  
—  
   
—  
   
493
   
—  
   
—  
   
493
 
Stock option expense
  
—  
   
—  
   
251
   
—  
   
—  
   
251
 
Stock issued stock plans
  
—  
   
—  
   
129
   
—  
   
—  
   
129
 
Reclassification of tax adjustment on accumulated other comprehensive loss
  
—  
   
—  
   
—  
   
766
   
(766
)  
—  
 
Cash dividends on common stock
($0.40 per share) (Restated - See Note 1)
  
—  
   
—  
   
—  
   
(15,418
)  
—  
   
(15,418
)
                         
Balances, December 31, 2018
 $
—  
  $
—  
  $
276,101
  $
224,035
  $
(8,144
) $
491,992
 
Net income
  
—  
   
—  
   
—  
   
66,538
   
—  
   
66,538
 
Other comprehensive income, net of tax
  
—  
   
—  
   
—  
   
—  
   
14,576
   
14,576
 
Amortization of unearned compensation
  
—  
   
—  
   
705
   
—  
   
—  
   
705
 
Exercise of stock options
  
—  
   
—  
   
236
   
—  
   
—  
   
236
 
Stock option expense
  
—  
   
—  
   
215
   
—  
   
—  
   
215
 
Stock issued stock plans
  
—  
   
—  
   
1,469
   
—  
   
—  
   
1,469
 
Stock issued in Salin acquisition
  
—  
   
—  
   
102,722
   
—  
   
—  
   
102,722
 
Repurchase of outstanding stock
  
—  
   
—  
   (1,595)  
—  
   
—  
   (1,595)
Cash dividends on common stock
($0.46 per share)
  
—  
   
—  
   
—  
   
(20,835
)  
—  
   
(20,835
)
                         
Balances, December 31, 2019
 $
—  
  $
—  
  $
379,853
  $
269,738
  $
6,432
  $
656,023
 
                         
See notes to consolidated financial statements

HORIZON BANCORPAND SUBSIDIARIES

6
8
Horizon Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

   Twelve Months Ended December 31 
   2016  2015  2014 

Operating Activities

    

Net income

  $23,912  $20,549  $18,101 

Items not requiring (providing) cash

    

Provision for loan losses

   1,842   3,162   3,058 

Depreciation and amortization

   5,275   4,152   3,779 

Share based compensation

   324   288   203 

Mortgage servicing rights net (recovery) impairment

   110   59   (51) 

Premium amortization on securities available for sale, net

   6,162   3,420   2,299 

Gain on sale of investment securities

   (1,836)   (189)   (988) 

Gain on sale of mortgage loans

   (11,675)   (10,055)   (8,395) 

Proceeds from sales of loans

   328,377   310,700   234,776 

Loans originated for sale

   (316,875)   (302,419)   (229,243) 

Change in cash value of life insurance

   (1,618)   (1,224)   (1,007) 

Gain (Loss) on sale of other real estate owned

   261   (289)   (186) 

Net change in

    

Interest receivable

   (544)   (1,010)   (398) 

Interest payable

   (275)   (11)   (50) 

Other assets

   489   8,569   (4,945) 

Other liabilities

   (8,381)   (472)   712 
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   25,548   35,230   17,665 
  

 

 

  

 

 

  

 

 

 

Investing Activities

    

Purchases of securities available for sale

   (225,555)   (244,195)   (93,375) 

Proceeds from sales, maturities, calls, and principal repayments of securities available for sale

   269,587   121,724   117,533 

Purchases of securities held to maturity

   (45,832)   (32,605)   (4,839) 

Proceeds from maturities of securities held to maturity

   30,843   7,155   13,851 

Change in FHLB stock

   (5,448)   268   4,972 

Net change in loans

   32,099   (156,340)   (190,838) 

Proceeds on the sale of OREO and repossessed assets

   2,572   3,014   2,726 

Change in premises and equipment, net

   (1,383)   (5,622)   (6,255) 

Acquisition of SCB, net of cash received

   —     —     7,914 

Acquisition of Peoples, net of cash received

   —     182,413   —   

Acquisition of Kosciusko, net of cash received

   30,437   —     —   

Acquisition of LaPorte, net of cash received

   116,521   —     —   

Acquisition of CNB, net of cash received

   22,549   —     —   

Purchase of Mortgage Company

   —     —     (735) 
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) investing activities

   226,390   (124,188)   (149,046) 
  

 

 

  

 

 

  

 

 

 

Financing Activities

    

Net change in

    

Deposits

   46,590   46,747   69,780 

Borrowings

   (255,994)   49,421   78,068 

Redemption of preferred stock

   (12,500)   —     —   

Proceeds from issuance of stock

   572   4,305   165 

Dividends paid on common shares

   (8,382)   (6,216)   (4,744) 

Dividends paid on preferred shares

   (42)   (125)   (133) 
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   (229,756)   94,132   143,136 
  

 

 

  

 

 

  

 

 

 

Net Change in Cash and Cash Equivalents

   22,182   5,174   11,755 

Cash and Cash Equivalents, Beginning of Period

   48,650   43,476   31,721 
  

 

 

  

 

 

  

 

 

 

Cash and Cash Equivalents, End of Period

  $70,832  $48,650  $43,476 
  

 

 

  

 

 

  

 

 

 

Continued

HORIZON BANCORPAND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

   Twelve Months Ended December 31 
   2016   2015   2014 

Additional Supplemental Information

      

Interest paid

  $20,572   $13,844   $13,230 

Income taxes paid

   6,916    4,123    2,800 

Transfer of loans to other real estate owned

   3,679    5,567    3,905 

Transfer ofavailable-for-sale securities toheld-to-maturity

   —      —      167,047 

The Company purchased all of the capital stock of Kosciusko for $22,983 on June 1, 2016. In conjunction with the acquisition, liabilities were assumed as follows:

      

Fair value of assets acquired

   155,873    —      —   

Less: common stock issued

   14,470    —      —   

Cash paid for the capital stock

   8,513    —      —   

Liabilities assumed

   132,890    —      —   

The Company purchased all of the capital stock of LaPorte Bancorp for $98,634 on July 18, 2016. In conjunction with the acquisition, liabilities were assumed as follows:

      

Fair value of assets acquired

   549,412    —      —   

Less: common stock issued

   60,306    —      —   

Cash paid for the capital stock

   38,328    —      —   

Liabilities assumed

   450,778    —      —   

The Company purchased all of the capital stock of CNB Bancorp for $5,311 on November 7, 2016. In conjunction with the acquisition, liabilities were assumed as follows:

     —      —   

Fair value of assets acquired

   56,219    —      —   

Less: cash paid for the capital stock

   5,311    —      —   

Liabilities assumed

   50,908    —      —   

The Company purchased all of the capital stock of Summit for $18,896 on April 3, 2014 and Peoples for $78,147 on July 1, 2015. In conjunction with the acquisition, liabilities were assumed as follows:

      

Fair value of assets acquired

   —      485,077    158,585 

Cash paid to retire debt

   —      —      1,029 

Less: common stock issued

   —      55,506    12,689 

Cash paid for the capital stock

   —      22,641    6,207 

Liabilities assumed

   —      406,930    138,660 

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Operating Activities
         
Net income
 $
66,538
  $
53,117
  $
33,117
 
Items not requiring (providing) cash
         
Provision for loan losses
  
1,976
   
2,906
   
2,470
 
Depreciation and amortization
  
9,688
   
6,813
   
5,936
 
Share based compensation
  
215
   
251
   
325
 
Mortgage servicing rights, net impairment
  
192
   
(60
)  
80
 
Premium amortization on securities, net
  
5,929
   
5,798
   
6,024
 
Loss (gain) on sale of investment securities
  
75
   
443
   
(38
)
Gain on sale of mortgage loans
  
(9,208
)  
(6,613
)  
(7,906
)
Proceeds from sales of loans
  
275,809
   
197,492
   
231,410
 
Loans originated for sale
  
(269,651
)  
(188,823
)  
(218,511
)
Change in cash value life insurance
  
(2,190
)  
(1,912
)  
(1,797
)
Death benefit on bank owned life insurance
  
580
   
154
   
—  
 
Loss (gain) on other real estate owned
  
(126
)  
(209
)  
(4
)
Net change in:
         
Interest receivable
  
(2,101
)  
(1,180
)  
(2,591
)
Interest payable
  
205
   
1,145
   
152
 
Other assets
  
97,629
   
2,460
   
6,173
 
Other liabilities
  
(608
)  
658
   
(5,776
)
             
Net cash provided by operating activities
  
174,952
   
72,440
   
49,064
 
             
Investing Activities
         
Purchases of securities available for sale
  
(425,879
)  
(214,706
)  
(149,376
)
Proceeds from sales, maturities, calls and principal repayments of securities available for sale
  
248,422
   
123,377
   
85,587
 
Purchases of securities held to maturity
  
—  
   
(28,374
)  
(31,794
)
Proceeds from maturities of securities held to maturity
  
8,384
   
8,301
   
13,376
 
Net change in interest-earning time deposits
  
7,289
   
717
   
950
 
Change in Federal Reserve and FHLB stock
  
(803
)  
32
   
8,987
 
Net change in loans
  
(59,420
)  
(182,637
)  
(251,821
)
Proceeds on the sale of OREO and repossessed assets
  
4,744
   
3,258
   
4,238
 
Change in premises and equipment, net
  
(4,612
)  
(3,434
)  
(2,689
)
Purchases of bank owned life insurance
  
—  
   
(10,450
)  
—  
 
Net cash received in acquisition of branch
  
—  
   
—  
   
11,000
 
Net cash received in acquisition, Lafayette
  
—  
   
—  
   
20,425
 
Gain on remeasurement of equity interest in Lafayette
  
—  
   
—  
   
(530
)
Net cash received in acquisition, Wolverine
  
—  
   
—  
   
12,723
 
Net cash received in acquisition, Salin
  
128,745
   
—  
   
—  
 
Repurchase of outstanding stock
  
(1,595
)  
—  
   
—  
 
             
Net cash provided by (used in) investing activities
  
(94,725
)  
(303,916
)  
(278,924
)
             
Financing Activities
         
Net change in:
         
Deposits
  
50,282
   
258,373
   
(13,360
)
Borrowings
  
(71,040
)  
(13,589
)  
259,895
 
Proceeds from issuance of stock
  
1,705
   
622
   
1,604
 
Dividends paid on common stock
  
(20,835
)  
(15,418
)  
(11,720
)
             
Net cash provided by (used in) financing activities
  
(39,888
)  
229,988
   
236,419
 
             
Net Change in Cash and Cash Equivalents
  
40,339
   
(1,488
)  
6,559
 
Cash and Cash Equivalents, Beginning of Period
  
58,492
   
59,980
   
53,421
 
             
Cash and Cash Equivalents, End of Period
 $
98,831
  $
58,492
  $
59,980
 
             
Additional Supplemental Information
         
Interest paid
 $
46,510
  $
30,454
  $
15,969
 
Income taxes paid
  
13,219
   
6,819
   
10,350
 
Transfer of loans to other real estate and repossessed assets
  
2,700
   
3,005
   
2,411
 
Transfer of premises to other real estate
  
1,705
   
—  
   
—  
 
Right-of-use assets exchanged for lease obligations
  
3,411
   
—  
   
—  
 
Sale of securities available for sale not yet settled
 
 
6,303
 
  —     —   
See notes to consolidated financial statements

HORIZON BANCORPAND SUBSIDIARIES

6
9
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

NatureofBusiness
— The consolidated financial statements of Horizon Bancorp, Inc. (“Horizon”) and its wholly owned subsidiaries, Horizon Bank N.A. (“Bank”), and Horizon Risk Management, Inc. and LSB Risk Management, Inc., together referred to as “Horizon” conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly owned subsidiary of Horizon. LSB Risk Management, Inc. is a captive insurance company incorporated in Nevada and acquired by Horizon as part of its LaPorte Bancorp acquisition.

The Bank is a full-service commercial bank offering a broad range of commercial and retail banking and other services incident to banking along with a trust department that offers corporate and individual trust and agency services and investment management services. The Bank maintains 5674 full service offices. The Bank has wholly owned direct and indirect subsidiaries: Horizon Investments, Inc. (“Horizon Investments”), Horizon Properties, Inc. (“Horizon Properties”), Horizon Insurance Services, Inc. (“Horizon Insurance”) and Horizon Grantor Trust. Horizon Investments manages the investment portfolio of the Bank. Horizon Properties manages the real estate investment trust. Horizon Insurance is used by the Company’s Wealth Management to sell certain insurance products. Horizon Grantor Trust holds title to certain company owned life insurance policies. Horizon conducts no business except that incident to its ownership of the subsidiaries.

Horizon formed Horizon Bancorp Capital Trust II in 2004 (“Trust II”) and Horizon Bancorp Capital Trust III in 2006 (“Trust III”) for the purpose of participating in pooled trust preferred securities offerings. The Company assumed additional debentures as the result of the following acquisitions: Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I (“Alliance Trust”); American Trust & Savings Bank in 2010, which formed Am Tru Statutory Trust I (“Am Tru Trust”); Heartland Bancshares, Inc. in 2013, which formed Heartland (IN) Statutory Trust II (“Heartland Trust”); and LaPorte Bancorp, Inc. in 2016, which acquired City Savings Statutory Trust I (“City Savings Trust”) in 2007.2007; and Salin Bancshares, Inc. in 2003, which formed Salin Statutory Trust I (“Salin Trust”). See Note 15 1
6
of the Consolidated Financial Statements for further discussion regarding these previously consolidated entities that are now reported separately. The business of Horizon is not seasonal to any material degree.

BasisofReporting
— The consolidated financial statements include the accounts of Horizon and subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation.

UseofEstimates
— The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of other real estate owned, goodwill and intangible assets, mortgage servicing rights, other-than-temporary impairments and fair values of financial instruments.

Cash and Cash Equivalents
— Cash and cash equivalents includes cash, deposits with other financial institutions with original maturities under 90 days, and federal funds sold.
FairValueMeasurements
— Horizon uses fair value measurements to record fair value adjustments, to certain assets, and liabilities and to determine fair value disclosures. Horizon has adopted Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures for all applicable financial and nonfinancial assets and liabilities. This accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances.

70
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
As defined in codification, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

in determining fair value. Horizon values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).

In measuring the fair value of an asset, Horizon assumes the highest and best use of the asset by a market participant to maximize the value of the asset, and does not consider the intended use of the asset.

When measuring the fair value of a liability, Horizon assumes that the nonperformance risk associated with the liability is the same before and after the transfer. Nonperformance risk is the risk that an obligation will not be satisfied and encompasses not only Horizon’s own credit risk (i.e., the risk that Horizon will fail to meet its obligation), but also other risks such as settlement risk. Horizon considers the effect of its own credit risk on the fair value for any period in which fair value is measured.

There are three acceptable valuation techniques that can be used to measure fair value: the market approach, the income approach and the cost approach. Selection of the appropriate technique for valuing a particular asset or liability takes into consideration the exit market, the nature of the asset or liability being valued, and how a market participant would value the same asset or liability. Ultimately, determination of the appropriate valuation method requires significant judgment, and sufficient knowledge and expertise are required to apply the valuation techniques.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of Horizon. Unobservable inputs are assumptions based on Horizon’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an input to be significant if it drives 10% or more of the total fair value of a particular asset or liability.

Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.

71
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
InvestmentSecuritiesAvailableforSale
— Horizon designates the majority of its investment portfolio as available for sale based on management’s plans to use such securities for asset and liability management, liquidity and not to hold such securities as long-term investments. Management repositions the portfolio to take advantage of future expected interest rate trends when Horizon’s long-term profitability can be enhanced. Investment securities available for sale and marketable equity securities are carried at estimated fair value and any net unrealized gains/losses (after tax) on these securities are included in accumulated other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Gains/losses on the disposition of securities available for sale are recognized at the time of the transaction and are determined by the specific identification method.

HORIZON BANCORPAND SUBSIDIARIES

Notes

Investment Securities Held to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

InvestmentSecuritiesHeldtoMaturity

— Includes any security for which Horizon has the positive intent and ability to hold until maturity. These securities are carried at amortized cost.

LoansHeldforSale
— Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

InterestandFeesonLoans
— Interest on commercial, mortgage and installment loans is recognized over the term of the loans based on the principal amount outstanding. When principal or interest is past due 90 days or more, and the loan is not well secured or in the process of collection, or when serious doubt exists as to the collectability of a loan, the accrual of interest is discontinued. Loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as a yield adjustment. Discounts and premiums on purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments.

ConcentrationsofCreditRisk
— The Bank grants commercial, real estate, and consumer loans to customers located primarily in Northernthe
n
orthern and Central
cent
ral
regions of Indiana and Southwesternthe
s
outhern and Central
c
entral regions of Michigan and provides mortgage warehouse lines to mortgage companies in the United States. Commercial loans make up approximately 46%56% of the loan portfolio and are secured by both real estate and business assets. These loans are expected to be repaid from cash flows from operations of the businesses. The Bank does not have a concentration in speculative commercial real estate loans. Residential real estate loans make up approximately 25%21% of the loan portfolio and are secured by residential real estate. Installment loans make up approximately 20%19% of the loan portfolio and are primarily secured by consumer assets. Mortgage warehouse loans make up approximately 6%4% of the loan portfolio and are secured by residential real estate.

MortgageWarehouseLoans
— Horizon’s mortgage warehousing has specific mortgage companies as customers of the Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement.

The transaction does not qualify as a sale under ASC 860, Transfers and Servicing and therefore is accounted for as a secured borrowing with pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold and no0 costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the sales commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

7
2
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
AllowanceforLoanLosses
— An allowance for loan losses is maintained to absorb probable incurred losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of the probable incurred losses inherent in the

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

loan portfolio. The allowance is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. Horizon’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the general allowance, specific allowances for identified problem loans and the qualitative allowance.

The general allowance is calculated by applying loss factors to pools of outstanding loans. Loss factors are based on historical loss experience and may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.

Specific allowances are established in cases where management has identified conditions or circumstances related to a credit that management believes indicate the probability that a loss will be incurred in excess of the amount determined by the application of the formula allowance.

The qualitative allowance is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the general and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the qualitative allowance may include factors such as local, regional and national economic conditions and forecasts, concentrations of credit and changes in the composition of the portfolio.

LoanImpairment
— When analysis determines a borrower’s operating results and financial condition are not adequate to meet debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally placed on
non-accrual
status when 90 days or more past due. These loans are also often considered impaired. Impaired loans or portions thereof, are
charged-off
when deemed uncollectible. This typically occurs when the loan is 90 or more days past due.

Loans are considered impaired if the borrower does not exhibit the ability to pay or the full principal or interest payments are not expected or made in accordance with the original terms of the loan. Impaired loans are measured and carried at the lower of cost or the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.

Smaller balance homogenous loans are evaluated for impairment in the aggregate. Such loans include residential first mortgage loans secured by one to four family residences, residential construction loans and automobile, home equity and second mortgages. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment.

LoansAcquiredinBusinessCombinations
— Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of purchase dates may include information such as
past-due
and nonaccrual status, borrower credit scores and recent loans to value percentages. Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (FASB ASC
310-30)
and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Accordingly, allowances for credit losses related to these loans are not carried over and recorded at the acquisition dates. As a result, related discounts are recognized subsequently through accretion based on the expected cash flows
,
including loan prepayment considerations, 
of the acquired loans. For purposes of applying FASB ASC
310-30,
loans acquired in business combinations are aggregated into pools of loans with common risk characteristics.

Acquired loans not accounted for under ASC

310-30
are accounted for under ASC
310-20,
which allows the fair value adjustment to be accreted to income over the remaining life of the loans.
7
3
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The expected cash flows of the acquired loan pools in excess of the fair values recorded is referred to as the accretable yield and is recognized in interest income over the remaining estimated lives of the loan pools. The Company continues to evaluate the fair value of the loans including cash flows expected to be collected. Increases in the Company’s cash flow expectation are recognized as increases to the accretable yield while decreases are recognized as impairments through the allowance for loan losses.

Performing loans acquired (FASB ASC
310-20)
with credit impairment subsequent to the acquisition date are evaluated individually and charged down to the fair value of the underlying collateral in the period the uncollectible loss is reasonably determined.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

PremisesandEquipment
— Buildings and major improvements are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 3 to 40 years. Furniture and equipment are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 2 to 20 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations.

FederalReserveandFederalHomeLoanBankofIndianapolis(FHLBI)Stock
— The stock is a required investment for institutions that are members of the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) systems. The required investment in the common stock is based on a predetermined formula.

MortgageServicingRights —Mortgage
—Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance(ASC (ASC
 860-50),
servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. Amortized mortgage servicing rights include commercial mortgage servicing rights. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date.

Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income.

Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with mortgage servicing income net of impairment on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

7
4
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
IntangibleAssets
— Goodwill is tested annually for impairment. At December 31, 2016,2019, Horizon had core deposit intangibles of $9.4$26.7 million subject to amortization and $76.9$151.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Goodwill totaled $76.9 million at December 31, 2016 and $49.6 million at December 31, 2015. A large majority of the goodwill relates to the acquisitions of Heartland, Summit, Peoples, Kosciusko, LaPorte, Lafayette, Wolverine and LaPorte.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Salin.

BankOwnedLifeInsurance(BOLI)
– BOLI has been purchased on certain employees and directors of the Company. The Company records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

IncomeTaxes —The
—The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740,
IncomeTaxes
). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets themore-likely-than-not more-
likely-than-not
recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the
more-likely-than-not
recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company files consolidated income tax returns with its subsidiaries.

TrustAssetsandIncome
— Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by Horizon.

TransferofFinancialAssets
—
The transfer of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

HORIZON BANCORPAND SUBSIDIARIES

7
5
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

EarningsperCommonShare
— Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share.

   Years Ended December 31 
   2016   2015   2014 

Basic earnings per share

      

Net income

  $23,912   $20,549   $18,101 

Less: Preferred stock dividends

   42    125    133 
  

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

  $23,870   $20,424   $17,968 

Weighted average common shares outstanding(1)

   19,987,728    15,765,444    13,591,053 

Basic earnings per share

  $1.19   $1.30   $1.32 
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share

      

Net income available to common shareholders

  $23,870   $20,424   $17,968 

Weighted average common shares outstanding(1)

   19,987,728    15,765,444    13,591,053 

Effect of dilutive securities:

      

Warrants

   —      330,474    473,519 

Restricted stock

   26,553    48,015    59,214 

Stock options

   68,129    53,379    57,402 
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

   20,082,410    16,197,312    14,181,188 

Diluted earnings per share

  $1.19   $1.26   $1.27 
  

 

 

   

 

 

   

 

 

 

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Basic earnings per share
         
Net income
 $
66,538
  $
53,117
  $
33,117
 
Weighted average common shares outstanding
(1)
  
43,493,316
   
38,347,059
   
34,553,736
 
Basic earnings per share
 $
1.53
  $
1.39
  $
0.96
 
             
Diluted earnings per share
         
Net income available to common shareholders
 $
66,538
  $
53,117
  $
33,117
 
Weighted average common shares outstanding
(1)
  
43,493,316
   
38,347,059
   
34,553,736
 
Effect of dilutive securities:
         
Restricted stock
  
23,006
   
36,185
   
46,981
 
Stock options
  
81,273
   
111,987
   
159,721
 
             
Weighted average common shares outstanding
  
43,597,595
   
38,495,231
   
34,760,438
 
 $
1.53
  $
1.38
  $
0.95
 
             
(1)Adjusted for 3:2 stock split on November 14, 2016June 15, 2018

At

There were 120,341, 102,138 and 0 shares for the twelve months ended December 31, 2016 there were zero shares2019, 2018 and at December 31, 2015 and 2014 there were 3,750 and 3,750 shares that2017, respectively, which were not included in the computation of diluted earnings per share because they were
non-dilutive.

DividendRestrictions — Regulations

On May 15, 2018, the Board of Directors of the OCCCompany approved a
three-for-two
stock split of the Company’s authorized common stock, no par value. All share and per share amounts in the consolidated financial statements and notes thereto have been retroactively adjusted, where necessary, to reflect this
three-for-two
stock split. The effect of the
three-for-two
stock split on the outstanding common shares is that shareholders of record as of the close of business on May 31, 2018, the record date, received an additional half share for each share of common stock held, with shareholders receiving cash in lieu of any fractional shares. The additional shares issued in the stock split were payable and issued on June 15, 2018, and the common shares began trading on a split-adjusted basis on June 19, 2018.
On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of December 31, 2019, Horizon had repurchased a total of 99,407 shares at an average price per share of $16.04.
Dividend Restrictions
— Horizon’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by a national bank to its parent holding company without prior approval of regulatory agencies. Under these regulations, the OCC.amount of dividends that may be paid in any calendar year is limited to the current year’s net profits combined with the retained net profits of the preceding two years, subject to the capital requirements described in Note 2
2
. At December 31, 2016, $6.6 million was available for payment of dividends from2019, the Bank could, without prior approval, declare dividends of approximately $43.7 million to Horizon. Additionally, the Federal Reserve Board limits the amount of dividends that may be paid by Horizon to its stockholders under its capital adequacy guidelines.

ConsolidatedStatementsofCashFlows
— For purposes of reporting cash flows, cash and cash equivalents are defined to include cash and due from banks, money market investments and federal funds sold with maturities of one day or less. Horizon reports net cash flows for customer loan transactions, deposit transactions, short-term investments and borrowings.

7
6
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
ComprehensiveIncome
— Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) onavailable-for-sale securities, unrealized and realized gains and losses in derivative financial instruments and amortization ofavailable-for-sale securities transferred toheld-to-maturity.

Share-BasedCompensation
— At December 31, 2016,2019, Horizon hashad share-based compensation plans, which are described more fully in Note 22.2
3
. All share-based payments are to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. Horizon has recorded approximately $608,000, $643,000,$920,000, $626,000, and $566,000 for 2016, 2015 and 2014,$460,000 in compensation expense relating to vesting of stock options less estimated forfeitures for the
12-month period
periods ended December 31, 2016, 20152019, 2018 and 2014.

HORIZON BANCORPAND SUBSIDIARIES

2017, respectively.

Derivative Financial Instruments
— The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Statements of Financial Condition, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss of the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in
non-interest
income or
non-interest
expense. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability.
Reclassifications
— Certain reclassifications have been made to the 2018 and 2017 consolidated financial statements to be comparable to 2019. These reclassifications had 0 effect on net income.
Adoption of New Accounting Standards
FASB ASU No.
 2018-03,
Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The FASB has issued ASU No.
 2018-03,
Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, to clarify certain aspects of the guidance issued in ASU No.
 2016-01,
including aspects of equity securities without a readily determinable fair value. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. As these clarifications did not have a material impact on Horizon’s consolidated financial statements, Horizon elected to early adopt this guidance as of January 1, 2018.
FASB ASU No.
 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The FASB has issued ASU No.
 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The amendments in this ASU allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments
7
7
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Reclassifications — Certain reclassifications

in this ASU is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the 2015 consolidated financial statementseffect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. At December 31, 2017, the Company had approximately $766,000 stranded tax effects included in AOCI and reclassified to be comparable to 2016. These reclassifications had no effect on net income.

Recent Accounting Pronouncements

retained earnings at January 1, 2018.

FASB Accounting Standards UpdatesASU No. 2017-04,Intangibles–GoodwillandOther
 2016-02,
Leases (Topic 350):SimplifyingtheTestforGoodwillImpairment

842)

The FASB has issued Accounting Standards Update (ASU)ASU No. 2017-04,Intangibles–GoodwillandOther(Topic350):SimplifyingtheTestforGoodwillImpairment. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB Accounting Standards UpdatesNo. 2017-01,BusinessCombinations

 2016-02,
Leases (Topic 805):ClarifyingtheDefinitionofaBusiness

The FASB has issued Accounting Standards Update (ASU)No. 2017-01,BusinessCombinations(Topic805):ClarifyingtheDefinitionofaBusiness. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

FASB Accounting Standards UpdatesNo. 2016-15,StatementofCashFlows (Topic 230)

The FASB has issued Accounting Standards Update (ASU)No. 2016-15,StatementofCashFlows(Topic230)842). This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow. In November 2016, the FASB issued ASUNo. 2016-18, which gave clarification on how restricted cash was to be presented in the cash flow statement. The Company elected to adopt these updates as of December 31, 2016, and there was no material impact on the consolidated financial statements.

FASB Accounting Standards UpdatesNo. 2016-13,FinancialInstruments–CreditLosses (Topic 326):MeasurementofCreditLossesonFinancialInstruments

The FASB has issued Accounting Standards Update (ASU)No. 2016-13,FinancialInstruments–CreditLosses(Topic326):MeasurementofCreditLossesonFinancialInstruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption will be permitted beginning after December 15, 2018. We have formed a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize aone-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any suchone-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

FASB Accounting Standards UpdatesNo. 2016-09,Compensation–StockCompensation (Topic 718):ImprovementstoEmployeeShare-BasedPaymentAccounting

The FASB has issued Accounting Standards Update (ASU)No. 2016-09,Compensation–StockCompensation(Topic718):ImprovementstoEmployeeShared-BasePaymentAccounting. The amendments are intended to improve the accounting for employee shared-base payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update became effective on January 1, 2017 and did not have a material impact on the consolidated financial statements.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

FASB Accounting Standards UpdatesNo. 2016-05,DerivativesandHedging (Topic 815):EffectofDerivativeContractNovationsandExistingHedgeAccountingRelationships

The FASB has issued Accounting Standards Update (ASU)No. 2016-05,DerivativesandHedging(Topic815):EffectofDerivativeContractNovationsandExistingHedgeAccountingRelationships. The amendments apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument. The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, requirede-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial statements.

FASB Accounting Standards UpdatesNo. 2016-02,Leases (Topic 842)

The FASB has issued Accounting Standards Update (ASU)No. 2016-02,Leases.

Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a
right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding as
As of December 31, 2016, we do not expectJanuary 1, 2019, the new standard to haveCompany recorded a material impact on our income statement, but anticipate
right-of-use
asset and an $80 million to $100 million increase in our assetsoperating lease liability of $3.4 million.
FASB ASU No.
 2016-01,
Financial Instruments – Overall (Subtopic 825-10), Recognition and liabilities. Decisions to repurchase, modify or renew leases prior to the implementation date will impact this levelMeasurement of materiality.

FASB Accounting Standards UpdatesNo. 2016-01,FinancialInstruments–Overall (Subtopic825-10):Recognition Assets andMeasurementofFinancialAssetsandFinancialLiabilities

The FASB has issued Accounting Standards Update (ASU)ASU No.
 2016-01,
FinancialInstruments–Overall(Subtopic (Subtopic 825-10):, RecognitionandMeasurementofFinancialAssetsandFinancialLiabilities.
The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies,
not-for-profit
organizations, and employee benefit plans that hold financial assets or owe financial liabilities.

The new guidance makes targeted improvements to existing U.S. GAAP by:

Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;

Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;

Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;

Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;

Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and

Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

HORIZON BANCORPAND SUBSIDIARIES

78
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and
not-for-profit
organizations from having to disclose fair value information about financial instruments measured at amortized cost. Adoption of the ASU isdid not expected to have a significant effect on the Company’s consolidated financial statements.

FASB

Revenue Recognition
— Accounting Standards UpdateNo. 2015-16,BusinessCombinations (Topic 805):SimplifyingtheAccountingforMeasurement-PeriodAdjustments

The FASB has issued Accounting Standards Update (ASU)No. 2015-16,BusinessCombinations(Topic805):SimplifyingtheAccountingforMeasurement-PeriodAdjustments. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments eliminate the requirement to retrospectively account for those adjustments.

U.S. GAAP currently requires that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The acquirer also must revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts.

The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

The amendments require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

The only disclosures required at transition should be the nature of and reason for the change in accounting principle. An entity should disclose that information in the first annual period of adoption and in the interim periods within the first annual period if there is a measurement-period adjustment during the first annual period in which the changes are effective.

FASB Accounting Standards UpdateNo. 2015-15,Interest—ImputationofInterest (Subtopic835-30),PresentationandSubsequentMeasurementofDebtIssuanceCostsAssociatedwithLine-of-CreditArrangements

The FASB has issued Accounting Standards Update (ASU)No. 2015-15,Interest-ImputationofInterest(Subtopic835-30):PresentationandSubsequentMeasurementofDebtIssuanceCostsAssociatedwithLine-of-CreditArrangements-AmendmentstoSECParagraphsPursuanttoStaffAnnouncementatJune18,2015EITFMeeting. This ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated withline-of-credit arrangements.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

In April 2015, the FASB issued ASUNo. 2015-03,Interest-ImputationofInterest(Subtopic835-30):SimplifyingthePresentationofDebtIssuanceCosts, which requires the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. ASU2015-03 does not address presentation or subsequent measurement of debt issuance costs related toline-of-credit arrangements.

Given the absence of authoritative guidance within ASU2015-03 for debt issuance costs related toline-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of theline-of-credit arrangement, regardless of whether there are any outstanding borrowings on theline-of-credit arrangement. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

FASB Accounting Standards UpdateNo. 2015-01,EliminatingtheConceptofExtraordinaryItems

The FASB has issued Accounting Standards Update (ASU)No. 2015-01,IncomeStatement-ExtraordinaryandUnusualItems(Subtopic225-20):SimplifyingIncomeStatementPresentationbyEliminatingtheConceptofExtraordinaryItems. The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards. The objective of the simplification initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements.

This ASU eliminates from U.S. GAAP the concept of extraordinary items. Subtopic225-20,IncomeStatement-ExtraordinaryandUnusualItems, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item.

If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or discloseearnings-per-share data applicable to the extraordinary item. The amendments in this update became effective for interim and annual periods beginning after December 15, 2015 and did not have a material impact on the consolidated financial statements.

FASB Accounting Standards UpdateNo. 2014-12,Compensation–StockCompensation (Topic 718):AccountingforShare-BasedPaymentsWhentheTermsofanAwardProvideThataPerformanceTargetCouldBeAchievedaftertheRequisiteServicePeriod

The FASB has issued Accounting Standards Update (ASU)No. 2014-12,Compensation–StockCompensation(Topic718):AccountingforShare-BasedPaymentsWhentheTermsofanAwardProvideThataPerformanceTargetCouldBeAchievedaftertheRequisiteServicePeriod. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should apply guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the service has already been rendered. The amendments in this update became effective for interim and annual periods beginning after December 15, 2015 and did not have a material impact on the consolidated financial statements.

FASB Accounting Standards Update No. 2014-09,Codification 606,

“Revenuefrom Contracts with Customers – (TopicCustomers”
(ASC 606)

The FASB has issued Accounting Standards Update (ASU) No. 2014-09 creating,RevenuefromContractswithCustomers(Topic606).The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance providesenumerates five steps tothat entities should follow to achieve thein achieving this core principle. An entity should disclose sufficient informationRevenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result in a change to enable usersthe accounting of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We do not expect the new standard, or any of the amendments detailed below, to result in a material change from our current accounting forCompany’s revenue as recognitionstreams that are within the scope of interest income and the larger sourcesamendments. Revenue-gathering activities that are within the scope of non-interest income from Horizon’s current financial instruments would not be impacted by the guidance.

In May 2016, the FASB issued ASU No. 2016-12,RevenuefromContractswithCustomers(Topic606):Narrow-ScopeImprovementsandPracticalExpedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.

In December 2016, the FASB issued ASU No. 2016-20,Revenue fromContractswithCustomers(Topic606):TechnicalCorrectionsandImprovements.The FASB board decided to issue a separate update for technical corrections and improvements to TopicASC 606 and other Topics amended by ASU No. 2014-09 to increase awarenessthat are presented as

non-interest
income in the Company’s consolidated statements of income include:
Service charges and fees on deposit accounts – these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer and overdraft activities. Revenue is recognized when the proposalsperformance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.
Fiduciary activities – this includes periodic fees due from trust and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects ofwealth management customers for managing the guidance issued in ASU No. 2014-09.

��

77

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

customers’ financial assets. Fees are charged based on a standard agreement and are recognized as they are earned.

Note 2 – Acquisitions

Salin Bancshares, Inc.
On November 7, 2016,March 26, 2019, Horizon completed the acquisition of CNB Bancorp,Salin Bancshares, Inc. (“Salin”), an Indiana corporation, headquartered in Attica, Indiana (“CNB”) and theHorizon Bank’s acquisition of The Central NationalSalin Bank and Trust Company (“Central National Bank & Trust”Salin Bank”), an Indiana commercial bank and wholly-owned subsidiary of Salin, through mergers effective November 7, 2016.March 26, 2019. Under the terms of the acquisition,Merger Agreement, shareholders of CNBSalin received merger consideration23,907.5 shares of Horizon common stock and $87,417.17 in cash for each outstanding share of Salin common stock. Salin shares outstanding at the formclosing to be exchanged were 275, and the shares of cash.Horizon common stock issued to Salin shareholders totaled 6,563,697. The total valueSalin shareholders received cash in lieu of fractional shares. Based upon the March 25, 2019 closing price of $15.65 per share of Horizon common stock immediately prior to the effectiveness of the consideration formerger the acquisition was $5.3transaction has an implied valuation of approximately $126.7 million.
The Company hadincurred approximately $779,000$5.6 million in costs related to the acquisition as of December 31, 2016.acquisition. These expenses are classified in the
non-interest
expense section of the income statement and are primarily located in the salariesdata processing, professional fees, outside services and employee benefits, professional servicesconsultants and other expense line items. As a result of the acquisition, the Company will have an opportunitywas able to increase its loan and deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

Under the purchaseacquisition method of accounting, the total estimated purchase price is allocated to CNB’s net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuationvaluations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the CNBSalin acquisition is allocateddetailed in the following table. Prior to the end of the
one-year
measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. The measurement period adjustments will be calculated as follows:

ASSETS

        LIABILITIES  

Cash and due from banks

  $27,860       

Deposits

  

Investment securities, available for sale

   16,393       

Non-interest bearing

  $24,079 
        

NOW accounts

   9,038 

Commercial

   2,267       

Savings and money market

   13,829 

Residential mortgage

   6,624       

Certificates of deposits

   3,342 
          

 

 

 

Consumer

   1,579       

Total deposits

   50,288 
  

 

 

         

Total loans

   10,470         
        

Borrowings

   459 

Premises and equipment, net

   444       

Interest payable

   7 

FHLB stock

   50       

Other liabilities

   154 

Goodwill

   609         

Core deposit intangible

   190         

Interest receivable

   154         

Other assets

   49         
  

 

 

         

 

 

 

Total assets purchased

  $56,219       

Total liabilities assumed

  $50,908 
  

 

 

         

 

 

 

Cash paid

   5,311         
  

 

 

         

Total estimated purchase price

  $5,311         
  

 

 

         

if the accounting had been completed as of the acquisition date.

79
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
           
Assets
 
 
 
 
Liabilities
 
 
 
Cash and due from banks
 $152,745  
Deposits
   
Investment securities, available for sale
  54,319  
Non-interest
bearing
 $188,744 
   
NOW accounts
 207,567 
Loans
    
Savings and money market
  274,504 
Commercial
  352,798  
Certificates of deposit
  70,529 
           
Residential mortgage
  131,008  
Total deposits
  741,344 
Consumer
  85,112     
           
Total loans
  568,918     
   
Borrowings
 70,495 
Premises and equipment, net
  20,425  
Subordinated debentures
  18,376 
FRB and FHLB stock
  3,571  
Interest payable
  826 
Goodwill
  31,358  
Other liabilities
  8,759 
Core deposit intangible
  19,818     
Interest receivable
  2,488     
Other assets
  112,880     
           
    
Total liabilities assumed
 $839,800 
           
Total assets purchased
 $966,522     
           
Common shares issued
 $102,722     
Cash paid
  24,000     
           
Total purchase price
 $126,722     
           
Of the total purchase price of $5.3$126.7 million, $190,000$19.8 million has been allocated to core deposit intangible. Additionally, $609,000$31.2 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will beis being amortized over 10 years on a straight line basis.

The Company acquiredacq
u
ired various loans in the $10.8 million performing loan portfolio with an estimated fair valueacquisition that had evidence of $10.5 million. No loans weredeterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired.

HORIZON BANCORPAND SUBSIDIARIES

Evidence of credit quality deterioration as of the purchase date may include information such as

past-due
and
non-accr
u
al
status, borrower credit scores and recent
loan-to-value
percentages. Purchased credit-impaired loans are accounted for the under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC
310-30)
and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current assumptions, such as a default rates, severity and prepayment speeds.
The following table details an estimate of the acquired loans that are accounted for in accordance with ASC
310-30
as of March 26, 2019. Final valuation estimates have not yet been determined for acquired loans as of December 31, 2019. If information becomes available which would indicate adjustments to the purchase price allocation, such adjustments would be made prospectively.
8
0
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

     
Contractually required principal and interest at acquisition
 $
22,672
 
Contractual cash flows not expected to be collected (nonaccretable differences)
  
6,694
 
     
Expected cash flows at acquisition
  
15,978
 
Interest component of expected cash flows (accretable discount)
  
735
 
     
Fair value of acquired loans accounted for under ASC
310-30
 $
15,243
 
     
Estimates of certain loans, those for which specific credit-related deterioration has occurred since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
Wolverine Bancorp, Inc.
On July 18, 2016,October 17, 2017, Horizon completed the acquisition of LaPorteWolverine Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”Wolverine”) and theHorizon Bank’s acquisition of The LaPorte SavingsWolverine Bank, a state-charteredfederally chartered savings bank and wholly ownedwholly-owned subsidiary of LaPorte Bancorp,Wolverine, through mergers effective July 18, 2016.October 17, 2017. Under the terms of the merger agreement,Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.9435Wolverine received 1.5228 shares of Horizon common stock and $14.00 in cash for each outstanding share of LaPorte Bancorp’sWolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331, and the shares of Horizon common stock subjectissued to allocation provisions to assure that in aggregate, LaPorte BancorpWolverine shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte Bancorp shareholder stock and cash elections and the related proration provisions of the merger agreement, Horizon issued 3,421,488 shares of its common stock in the merger.totaled 3,241,045. Based upon the July 18, 2016October 16, 2017 closing price of $18.36$19.37 per share of Horizon common stock immediately prior to the effectiveness of the merger, less the consideration used to pay off LaPorteWolverine Bancorp’s ESOP loan receivable, the transaction has an implied valuation of approximately $98.6$93.8 million. The Company hadincurred approximately $4.0$1.9 million in costs related to the acquisition as of December 31, 2016.2017. These expenses are classified in the
non-interest expense
section of the income statement and are primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was ablewill have an opportunity to increase
its
loan and deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the Wolverine acquisition is allocated as follows:
81
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
           
Assets
 
 
 
 
Liabilities
 
 
 
Cash and due from banks
 $44,450  
Deposits
   
    
Non-interest
bearing
 $25,221 
Loans
    
NOW accounts
  8,026 
Commercial
  276,167  
Savings and money market
  129,044 
Residential mortgage
  30,603  
Certificates of deposit
  94,688 
           
Consumer
  3,897  
Total deposits
  256,979 
           
Total loans
  310,667     
Premises and equipment, net
  2,941  
Borrowings
  36,970 
FRB and FHLB stock
  2,700  
Interest payable
  214 
Goodwill
  26,827  
Other liabilities
  6,154 
Core deposit intangible
  2,024     
Interest receivable
  584     
Other assets
  3,897     
           
Total assets purchased
 $394,090  
Total liabilities assumed
 $300,317 
           
Common shares issued
 $62,111     
Cash paid
  31,662     
           
Total purchase price
 $93,773     
           
Of the total purchase price of $93.8 million, $2.0 million has b
e
en allocated to core deposit intangible. Additionally, $26.8 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over 10 years on a straight line basis.
The Company acquired various loans in the acquisition that had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as
past-due
and
non-accrual
status, borrower credit scores and recent
loan-to-value
percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC
310-30)
and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current assumptions, such as default rates, severity and prepayment speeds.
Loans with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
The following table details the acquired loans that are accounted for in accordance with ASC
310-30
as of October 17, 2017.
     
Contractually required principal and interest at acquisition
 $
21,912
 
Contractual cash flows not expected to be collected (nonaccretable differences)
  
1,832
 
     
Expected cash flows at acquisition
  
20,080
 
Interest component of expected cash flows (accretable discount)
  
2,267
 
     
Fair value of acquired loans accounted for under ASC
310-30
 $
17,813
 
     
8
2
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
Lafayette Community Bancorp
On September 1, 2017, Horizon completed the acquisition of Lafayette Community Bancorp, an Indiana corporation (“Lafayette”) and Horizon Bank’s acquisition of Lafayette Community Bank, a state-chartered bank and wholly-owned subsidiary of Lafayette, through mergers effective September 1, 2017. Under the terms of the Merger Agreement, shareholders of Lafayette received 0.8817 shares of Horizon common stock and $1.73 in cash for each outstanding share of Lafayette common stock. Lafayette shareholders owning fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,636,888. Based upon the August 31, 2017 closing price of $17.45 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million. The Company incurred approximately $1.7 million in costs related to the acquisition as of December 31, 2017.
These expenses are classified in the
non-interest
expense section of the income statement and are primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its loan and deposit base and expects to reduce cost through economies of scale.
Horizon held 5% ownership in Lafayette immediately preceding the merger date. In accordance with ASC
805-10
– Business Combinations, Horizon was required to remeasure the equity interest in Lafayette’s common stock and recognize the resulting gain or loss, if any, in earnings. Since Lafayette was traded in the OTC market, the remeasurement was based on the closing price of Lafayette’s common stock immediately prior to the acquisition announcement and immediately prior to Horizon taking control of Lafayette. This remeasurement resulted in a gain of $530,000.
8
3
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the LaPorte BancorpLafayette acquisition is detailed in the following table.

ASSETS

        LIABILITIES  

Cash and due from banks

  $154,849       

Deposits

  

Investment securities, available for sale

   23,779       

Non-interest bearing

  $66,733 
        

NOW accounts

   99,346 

Commercial

   153,750       

Savings and money market

   117,688 

Residential mortgage

   42,603       

Certificates of deposits

   87,605 
          

 

 

 

Consumer

   16,801       

Total deposits

   371,372 

Mortgage Warehousing

   99,752         
  

 

 

         

Total loans

   312,906         
        

Borrowings

   64,793 

Premises and equipment, net

   6,022       

Interest payable

   178 

FHLB stock

   4,029       

Subordinated debt

   4,504 

Goodwill

   20,290       

Other liabilities

   9,931 

Core deposit intangible

   2,514         

Interest receivable

   844         

Cash value of life insurance

   15,267         

Other assets

   8,912         
  

 

 

         

 

 

 

Total assets purchased

  $549,412       

Total liabilities assumed

  $450,778 
  

 

 

         

 

 

 

Common shares issued

  $60,306         

Cash paid

   38,328         
  

 

 

         

Total estimated purchase price

  $98,634         
  

 

 

         

             
Assets
 
 
 
   
Liabilities
 
 
 
Cash and due from banks
 $24,846    
Deposits
   
Investment securities, available for sale
  6    
Non-interest
bearing
 $34,990 
      
NOW accounts
  30,174 
Loans
      
Savings and money market
  53,663 
Commercial
  116,258    
Certificates of deposit
  32,520 
             
Residential mortgage
  12,761    
Total deposits
  151,347 
Consumer
  5,280       
             
Total loans
  134,299       
Premises and equipment, net
  7,818    
Interest payable
  42 
FHLB stock
  395    
Other liabilities
  990 
Goodwill
  15,408       
Core deposit intangible
  2,085       
Interest receivable
  338       
Other assets
  1,649       
             
Total assets purchased
 $186,844    
Total liabilities assumed
 $152,379 
             
           
Common shares issued
 $30,044(1)       
Cash paid
  4,421       
             
Total purchase price
 $34,465       
             
(1)This includes $955,000 of common shares previously held by Horizon.
Of the total estimated purchase price of $98.6$34.5 million, $2.5$2.1 million has been allocated to core deposit intangible. Additionally, $20.3$15.4 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over 10 years on a straight linestraight-line basis.

The Company acquired certainvarious loans in the acquisition and the transferred loansthat had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as
past-due
and
non-accrual
status, borrower credit scores and recent
loan-to-value
percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC
310-30)
and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

Loans with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

8
4
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table details an estimate of the acquired loans that are accounted for in accordance with ASC
310-30
as of July 18, 2016.

Contractually required principal and interest at acquisition

 $12,545 

Contractual cash flows not expected to be collected (nonaccretable differences)

  4,492 
 

 

 

 

Expected cash flows at acquisition

  8,053 

Interest component of expected cash flows (accretable discount)

  1,258 
 

 

 

 

Fair value of acquired loans accounted for under ASC310-30

 $6,795 
 

 

 

 

September 1, 2017.

     
Contractually required principal and interest at acquisition
 $
6,128
 
Contractual cash flows not expected to be collected (nonaccretable differences)
  
1,326
 
     
Expected cash flows at acquisition
  
4,802
 
Interest component of expected cash flows (accretable discount)
  
933
 
     
Fair value of acquired loans accounted for under ASC
310-30
 $
3,869
 
     
Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Bargersville Branch Purchase
On June 1, 2016,February 3, 2017, Horizon completed the acquisitionpurchase and assumption of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”)certain assets and the Bank’s acquisitionliabilities of a single branch of First Farmers State Bank a state-chartered bank and wholly owned subsidiary& Trust Company, in Bargersville, Indiana. Net cash of Kosciusko, through mergers effective June 1, 2016. Under the terms of the merger agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders$11.0 million was received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko shareholder stock and cash elections and the related proration provisions of the merger agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upontransaction, representing the June 1, 2016deposit balances assumed at closing, pricenet of $16.57 per share of Horizon common stock,amounts paid for loans acquired in the transaction has an implied valuation of approximately $23.0 million. The Company had approximately $2.0$3.4 million in costs related to the acquisition. These expenses are classified in thenon-interest expense section of the income statement and primarily located in the salariesa 3.0% premium on deposits. Customer deposit balances were recorded at $14.8 million and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Kosciusko acquisition is detailed in the following table.

ASSETS

       LIABILITIES  

Cash and due from banks

  $38,950      

Deposits

  

Investment securities, available for sale

   1,191      

Non-interest bearing

  $27,871 
       

NOW accounts

   35,213 

Commercial

   70,006      

Savings and money market

   26,953 

Residential mortgage

   26,244      

Certificates of deposits

   32,771 
         

 

 

 

Consumer

   6,319      

Total deposits

   122,808 
  

 

 

        

Total loans

   102,569        
       

Borrowings

   9,038 

Premises and equipment, net

   1,466      

Interest payable

   55 

FRB and FHLB stock

   582      

Other liabilities

   989 

Goodwill

   6,443        

Core deposit intangible

   526        

Interest receivable

   636        

Cash value of life insurance

   2,745        

Other assets

   765        
  

 

 

        

 

 

 

Total assets purchased

  $155,873      

Total liabilities assumed

  $132,890 
  

 

 

        

 

 

 

Common shares issued

  $14,470        

Cash paid

   8,513        
  

 

 

        

Total estimated purchase price

  $22,983        
  

 

 

        

Of the total estimated purchase price of $23.0 million, $526,000 has been allocated to core deposit intangible. Additionally, $6.4 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible of $452,000 was recorded in the transaction, which will be amortized over 10 years on a straight line basis.

The Company acquired certain loans There was no goodwill generated in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such aspast-due andnon-accrual status, borrower credit scores and recentloan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

Loans with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table details the acquired loans that are accounted for in accordance with ASC310-30 as of June 1, 2016.

Contractually required principal and interest at acquisition

  $2,682 

Contractual cash flows not expected to be collected (nonaccretable differences)

   25 
  

 

 

 

Expected cash flows at acquisition

   2,657 

Interest component of expected cash flows (accretable discount)

   634 
  

 

 

 

Fair value of acquired loans accounted for under ASC310-30

  $2,023 
  

 

 

 

Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

transaction.

The results of operations of CNB, LaPorte BancorpSalin, Wolverine and KosciuskoLafayette have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes
pro-forma
results for the periods ended December 31, 20162019, 2018 and 20152017 as if the CNB, LaPorte BancorpSalin, Wolverine and KosciuskoLafayette acquisitions had occurred as of the beginning of the comparable prior reporting period.

   December 31   December 31 
   2016   2015 

Summary of Operations:

    

Net Interest Income

  $95,451   $91,986 

Provision for loan losses

   1,842    3,417 

Net Interest Income after Provision for Loan Losses

   93,609    88,569 

Non-interest Income

   43,237    33,301 

Non-interest Expense

   104,226    87,779 

Income before Income Taxes

   32,620    34,091 

Income Tax Expense

   9,679    8,528 

Net Income

   22,941    25,563 

Net Income Available to Common Shareholders

  $22,899   $25,438 
  

 

 

   

 

 

 

Basic Earnings Per Share

  $1.15   $1.61 

Diluted Earnings Per Share

  $1.14   $1.57 

periods.

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Summary of Operations:
         
Net Interest Income
 $
168,693
  $
157,194
  $
153,376
 
Provision for Loan Losses
  
2,276
   
3,706
   
3,438
 
Net Interest Income after Provision for Loan Losses
  
166,417
   
153,488
   
149,938
 
Non-interest
Income
  
43,472
   
39,918
   
42,456
 
Non-interest
Expense
  
134,446
   
124,944
   
138,752
 
Income before Income Taxes
  
75,443
   
68,462
   
53,642
 
Income Tax Expense
  
13,246
   
10,216
   
15,978
 
Net Income
 $
62,197
  $
58,246
  $
37,664
 
Basic Earnings per Share
 $
1.43
  $
1.52
  $
1.09
 
Diluted Earnings per Share
 $
1.43
  $
1.51
  $
1.08
 
The
pro-forma
information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro-forma information
8
5
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for the year ended 2016 includes $4.3 million, net of tax, of operating revenue from CNB, LaPorte Bancorp and Kosciusko since the acquisition and approximately $4.8 million, net of tax, ofnon-recurring expenses directly attributable to the CNB, LaPorte Bancorp and Kosciusko acquisitions.

per share data)

The
pro-forma
financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and the Bank’s acquisition of Peoples Federal Savings Bank of DeKalb County (“Peoples FSB”), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 1.425 shares of Horizon common stock and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 3,288,303. Horizon’s stock price was $16.88 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. The Company had approximately $4.9 million in costs related to the acquisition as of December 31, 2015. These expenses are classified in thenon-interest expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company experienced, and expects to continue to experience, increases in its deposit base, reductions in transaction costs and reduced costs through economies of scale.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Under the purchase method of accounting, the total estimated purchase price is allocated to Peoples net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the Peoples acquisition is allocated as follows:

ASSETS

       LIABILITIES  

Cash and due from banks

  $205,054      

Deposits

  

Investment securities, available for sale

   2,038      

Non-interest bearing

  $28,251 
       

NOW accounts

   65,771 

Commercial

   67,435      

Savings and money market

   125,176 

Residential mortgage

   137,331      

Certificates of deposits

   131,889 
         

 

 

 

Consumer

   19,593      

Total deposits

   351,087 
  

 

 

        

Total loans

   224,359        
       

Borrowings

   48,884 

Premises and equipment, net

   5,524      

Interest payable

   21 

FRB and FHLB stock

   2,743      

Other liabilities

   6,938 

Goodwill

   21,424        

Core deposit intangible

   4,394        

Interest receivable

   1,279        

Cash value of life insurance

   13,898        

Other assets

   4,364        
  

 

 

        

 

 

 

Total assets purchased

  $485,077      

Total liabilities assumed

  $406,930 
  

 

 

        

 

 

 

Common shares issued

  $55,506        

Cash paid

   22,641        
  

 

 

        

Total estimated purchase price

  $78,147        
  

 

 

        

Of the total purchase price of $78.1 million, $4.4 million has been allocated to core deposit intangible. Additionally, $21.4 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over 10 years on a straight line basis.

The Company acquired the $228.6 million loan portfolio at a fair value discount of $4.8 million. The performing portion of the portfolio, $223.4 million, had an estimated fair value of $220.0 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC310-20.

The Company acquired certain loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

The loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such aspast-due andnon-accrual status, borrower credit scores and recentloan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

Loan with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table details the acquired loans that are accounted for in accordance with ASC310-30 as of July 1, 2015.

Contractually required principal and interest at acquisition

  $5,730 

Contractual cash flows not expected to be collected (nonaccretable differences)

   715 
  

 

 

 

Expected cash flows at acquisition

   5,015 

Interest component of expected cash flows (accretable discount)

   647 
  

 

 

 

Fair value of acquired loans accounted for under ASC310-30

  $4,368 
  

 

 

 

The results of operations of Peoples and Peoples FSB have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended December 31, 2015 and December 31, 2014 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.

   December 31
2015		   December 31
2014		 

Summary of Operations:

    

Net Interest Income

  $80,688   $75,442 

Provision for Loan Losses

   3,222    3,443 

Net Interest Income after Provision for Loan Losses

   77,466    71,999 

Non-interest Income

   32,295    29,928 

Non-Interest Expense

   80,489    74,010 

Income before Income Taxes

   29,272    27,917 

Income Tax Expense

   7,359    6,560 

Net Income

   21,913    21,357 

Net Income Available to Common Shareholders

  $21,788   $21,342 
  

 

 

   

 

 

 

Basic Earnings Per Share

  $1.27   $1.25 

Diluted Earnings Per Share

  $1.23   $1.21 

The pro forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro forma information for the year ended 2015 includes $2.3 million, net of tax, of operating revenue from Peoples since the acquisition and approximately $3.3 million, net of tax, ofnon-recurring expenses directly attributable to the Peoples acquisition.

The pro forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

On April 3, 2014 Horizon closed its acquisition of SCB Bancorp, Inc. (“Summit”) and the Bank’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.7356 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 856,230. Horizon’s stock price was $14.82 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt). For the year ended December 31, 2014, the Company had approximately $1.3 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company experienced, and expects to continue to experience, increases in its deposit base and reductions in transaction costs. The Company also expects to reduce costs through economies of scale.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Under the purchase method of accounting, the total estimated purchase price is allocated to Summit’s net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the Summit acquisition is allocated as follows:

ASSETS

       LIABILITIES  

Cash and due from banks

  $15,161      

Deposits

  
       

Non-interest bearing

  $27,274 

Commercial

   70,441      

NOW accounts

   16,332 

Residential mortgage

   43,448      

Savings and money market

   35,045 

Consumer

   10,192      

Certificates of deposits

   42,368 
  

 

 

        

 

 

 

Total loans

   124,081      

Total deposits

   121,019 

Premises and equipment, net

   2,548      

Borrowings

   16,990 

FRB and FHLB stock

   2,136      

Interest payable

   52 

Goodwill

   8,428      

Other liabilities

   599 

Core deposit intangible

   822        

Interest receivable

   347        

Cash value of life insurance

   2,185        

Other assets

   2,877        
  

 

 

        

 

 

 

Total assets purchased

  $158,585      

Total liabilities assumed

  $138,660 
  

 

 

        

 

 

 

Of the total estimated purchase price of $19.9 million, $822,000 has been allocated to core deposit intangible. Additionally, $8.4 million has been allocated to goodwill and $4.4 million of the purchase price is deductible and was assigned to the business assets. The core deposit intangible will be amortized over 10 years on a straight line basis.

The Company acquired loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such aspast-due andnon-accrual status, borrower credit scores and recentloan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The Company acquired the $130.5 million loan portfolio at a fair value discount of $6.4 million. The performing portion of the portfolio, $106.2 million, had an estimated fair value of $104.6 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC310-20.

Final estimates of loans for which specific credit-related deterioration has been identified, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table details the acquired loans that are accounted for in accordance with ASC310-30 as of April 3, 2014.

Contractually required principal and interest at acquisition

  $14,460 

Contractual cash flows not expected to be collected (nonaccretable differences)

   3,146 
  

 

 

 

Expected cash flows at acquisition

   11,314 

Interest component of expected cash flows (accretable discount)

   1,688 
  

 

 

 

Fair value of acquired loans accounted for under ASC310-30

  $9,626 
  

 

 

 

Pro-forma statements were not presented due to the materiality of the transaction.

Note 3 – Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 20162019 and 2015,2018, cash equivalents consisted primarily of money market accounts with brokers and certificates of deposit.

At December 31, 2016,2019, the Company’s cash accounts exceeded federally insured limits by approximately $6.5$22.2 million.

Approximately $6.7 million of this amount was held by either the Federal Reserve Bank or the Federal Home Loan Bank of Indianapolis, which is not federally insured.

Note 4 – Securities

The fair value of securities is as follows:

December 31, 2016  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		 

Available for sale

        

U.S. Treasury and federal agencies

  $8,051   $2   $(64)   $7,989 

State and municipal

   117,327    324    (1,059)    116,592 

Federal agency collateralized mortgage obligations

   139,040    254    (2,099)    137,195 

Federal agency mortgage-backed pools

   180,183    251    (3,707)    176,726 

Corporate notes

   1,238    91    —      1,329 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $445,839   $922   $(6,929)   $439,831 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity

        

State and municipal

  $165,607   $2,700   $(2,485)   $165,822 

Federal agency collateralized mortgage obligations

   6,530    31    (71)    6,490 

Federal agency mortgage-backed pools

   21,057    897    (180)    21,774 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $193,194   $3,628   $(2,736)   $194,086 
  

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2015  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		 

Available for sale

        

U.S. Treasury and federal agencies

  $5,940   $3   $(17)   $5,926 

State and municipal

   73,829    1,299    (33)    75,095 

Federal agency collateralized mortgage obligations

   157,291    567    (1,655)    156,203 

Federal agency mortgage-backed pools

   206,970    2,080    (1,346)    207,704 

Corporate notes

   32    22    —      54 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $444,062   $3,971   $(3,051)   $444,982 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity

        

U.S. Treasury and federal agencies

  $5,859   $93   $—     $5,952 

State and municipal

   146,331    5,375    (253)    151,453 

Federal agency collateralized mortgage obligations

   9,051    27    (124)    8,954 

Federal agency mortgage-backed pools

   26,388    1,141    (185)    27,344 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $187,629   $6,636   $(562)   $193,703 
  

 

 

   

 

 

   

 

 

   

 

 

 

 
December 31, 2019
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
Available for sale
            
U.S. Treasury and federal agencies
 $
1,415
  $
—  
  $
 (2
) $
1,413
 
State and municipal
  
396,931
   
11,288
   
(2,451
)  
405,768
 
Federal agency collateralized mortgage obligations
  
267,272
   
2,543
   
(563
)  
269,252
 
Federal agency mortgage-backed pools
  
145,623
   
1,207
   
(258
)  
146,572
 
Corporate notes
  
10,848
   
923
   
—  
   
11,771
 
                 
Total available for sale investment securities
 $
822,089
  $
 15,961
  $
 (3,274
) $
834,776
 
                 
Held to maturity
            
State and municipal
 $
190,767
  $
7,129
  $
 (54
) $
197,842
 
Federal agency collateralized mortgage obligations
  
4,560
   
13
   
(5
)  
4,568
 
Federal agency mortgage-backed pools
  
12,572
   
194
   
(29
)  
12,737
 
                 
Total held to maturity investment securities
 $
207,899
  $
7,336
  $
 (88
) $
215,147
 
                 
8
6
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
 
December 31, 2018
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
Available for sale
            
U.S. Treasury and federal agencies
 $
16,815
  $
1
  $
 (208
) $
16,608
 
State and municipal
  
210,386
   
1,495
   
(2,578
)  
209,303
 
Federal agency collateralized mortgage obligations
  
187,563
   
625
   
(3,185
)  
185,003
 
Federal agency mortgage-backed pools
  
183,479
   
80
   
(4,823
)  
178,736
 
Corporate notes
  
10,666
   
107
   
(75
)  
10,698
 
                 
Total available for sale investment securities
 $
608,909
  $
 2,308
  $
 (10,869
) $
600,348
 
                 
Held to maturity
            
State and municipal
 $
191,269
  $
 1,773
  $
 (3,366
) $
189,676
 
Federal agency collateralized mortgage obligations
  
5,144
   
6
   
(120
)  
5,030
 
Federal agency mortgage-backed pools
  
13,699
   
74
   
(206
)  
13,567
 
                 
Total held to maturity investment securities
 $
210,112
  $
 1,853
  $
 (3,692
) $
208,273
 
                 
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio and
held-to-maturity,
Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At December 31, 2016, no2019, 0 individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at December 31, 2016.

2019.

The Company elected to transfer 319
available-for-sale
(“AFS”) securities with an aggregate fair value of $167.1 million to a classification of
held-to-maturity
(“HTM”) on April 1, 2014. In accordance with FASB ASC
320-10-55-24,
the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $1.3 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income (loss), with the associated
pre-tax
amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at April 1, 2014, with no0 unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

8
7
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The amortized cost and fair value of securities available for sale and
held-to-maturity
at December 31, 20162019 and December 31, 2015,2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   December 31, 2016   December 31, 2015 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 

Available for sale

        

Within one year

  $7,455   $7,480   $7,192   $7,232 

One to five years

   37,483    37,479    38,197    38,894 

Five to ten years

   21,112    20,984    16,807    17,152 

After ten years

   60,566    59,967    17,605    17,797 
  

 

 

   

 

 

   

 

 

   

 

 

 
   126,616    125,910    79,801    81,075 

Federal agency collateralized mortgage obligations

   139,040    137,195    157,291    156,203 

Federal agency mortgage-backed pools

   180,183    176,726    206,970    207,704 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $445,839   $439,831   $444,062   $444,982 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity

        

Within one year

  $—     $—     $—     $—   

One to five years

   24,594    25,271    17,815    18,403 

Five to ten years

   87,645    88,805    106,167    110,026 

After ten years

   53,368    51,746    28,208    28,976 
  

 

 

   

 

 

   

 

 

   

 

 

 
   165,607    165,822    152,190    157,405 

Federal agency collateralized mortgage obligations

   6,530    6,490    9,051    8,954 

Federal agency mortgage-backed pools

   21,057    21,774    26,388    27,344 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $193,194   $194,086   $187,629   $193,703 
  

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

                 
 
December 31, 2019
  
December 31, 2018
 
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Available for sale
            
Within one year
 $
37,386
  $
37,321
  $
20,532
  $
20,448
 
One to five years
  
41,230
   
41,293
   
42,476
   
41,705
 
Five to ten years
  
117,004
   
122,145
   
107,839
   
107,107
 
After ten years
  
213,574
   
218,193
   
67,020
   
67,349
 
                 
  
409,194
   
418,952
   
237,867
   
236,609
 
Federal agency collateralized mortgage obligations
  
267,272
   
269,252
   
187,563
   
185,003
 
Federal agency mortgage-backed pools
  
145,623
   
146,572
   
183,479
   
178,736
 
                 
Total available for sale investment securities
 $
822,089
  $
834,776
  $
608,909
  $
600,348
 
                 
Held to maturity
            
Within one year
 $
7,811
  $
7,874
  $
70
  $
70
 
One to five years
  
56,037
   
57,048
   
48,732
   
49,324
 
Five to ten years
  
94,756
   
98,480
   
101,809
   
101,533
 
After ten years
  
32,163
   
34,440
   
40,658
   
38,749
 
                 
  
190,767
   
197,842
   
191,269
   
189,676
 
Federal agency collateralized mortgage obligations
  
4,560
   
4,568
   
5,144
   
5,030
 
Federal agency mortgage-backed pools
  
12,572
   
12,737
   
13,699
   
13,567
 
                 
Total held to maturity investment securities
 $
207,899
  $
215,147
  $
210,112
  $
208,273
 
                 
The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

   Less than 12 Months  12 Months or More  Total 
   Fair   Unrealized  Fair   Unrealized  Fair   Unrealized 
December 31, 2016  Value   Losses  Value   Losses  Value   Losses 

U.S. Treasury and federal agencies

  $6,987   $(64)  $—     $—    $6,987   $(64) 

State and municipal

   142,466    (3,544)   —      —     142,466    (3,544) 

Federal agency collateralized mortgage obligations

   112,414    (1,918)   10,199    (252)   122,613    (2,170) 

Federal agency mortgage-backed pools

   163,768    (3,887)   —      —     163,768    (3,887) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total temporarily impaired securities

  $425,635   $(9,413)  $10,199   $(252)  $435,834   $(9,665) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
   Less than 12 Months  12 Months or More  Total 
   Fair   Unrealized  Fair   Unrealized  Fair   Unrealized 
December 31, 2015  Value   Losses  Value   Losses  Value   Losses 

U.S. Treasury and federal agencies

  $5,468   $(17)  $—     $—    $5,468   $(17) 

State and municipal

   17,353    (280)   446    (6)   17,799    (286) 

Federal agency collateralized mortgage obligations

   89,459    (1,124)   25,428    (655)   114,887    (1,779) 

Federal agency mortgage-backed pools

   113,244    (1,212)   16,506    (319)   129,750    (1,531) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total temporarily impaired securities

  $225,524   $(2,633)  $42,380   $(980)  $267,904   $(3,613) 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

                         
 
December 31, 2019
 
 
Less than 12 Months
  
12 Months or More
  
Total
 
 
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
Investment Securities
                  
U.S. Treasury and federal agencies
 $
1,413
  $
(2
) $
—  
  $
—  
  $
1,413
  $
(2
)
State and municipal
  
129,942
   
(2,374
)  
6,279
   
(131
)  
136,221
   
(2,505
)
Federal agency collateralized mortgage obligations
  
68,043
   
(308
)  
23,301
   
(260
)  
91,344
   
(568
)
Federal agency mortgage-backed pools
  
24,740
   
(104
)  
37,822
   
(183
)  
62,562
   
(287
)
                         
Total temporarily impaired securities
 $
224,138
  $
(2,788
) $
67,402
  $
(574
) $
291,540
  $
(3,362
)
                         
                         
 
December 31, 2018
 
 
Less than 12 Months
  
12 Months or More
  
Total
 
 
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
Investment Securities
                  
U.S. Treasury and federal agencies
 $
—  
  $
—  
  $
9,707
  $
(208
) $
9,707
  $
(208
)
State and municipal
  
75,163
   
(1,628
)  
106,335
   
(4,316
)  
181,498
   
(5,944
)
Federal agency collateralized mortgage obligations
  
6,450
   
(25
)  
106,257
   
(3,280
)  
112,707
   
(3,305
)
Federal agency mortgage-backed pools
  
5,739
   
(39
)  
175,865
   
(4,990
)  
181,604
   
(5,029
)
Corporate notes
  
5,263
   
(75
)  
—  
   
—  
   
5,263
   
(75
)
                         
Total temporarily impaired securities
 $
92,615
  $
(1,767
) $
398,164
  $
(12,794
) $
490,779
  $
(14,561
)
                         
8
8
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
U.S. Treasury, federal agency, state and municipal

The unrealized losses on the Company’s investments in U.S. Treasury, federal agency and state and municipals were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016.

2019.

Federal agency mortgage-backed pools and collateralized mortgage obligations

The unrealized losses on the Company’s investment in federal agency mortgage backed pools and collateralized mortgage obligations securities were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016.

2019.

Information regarding security proceeds, gross gains and gross losses are presented below.

   Years ended December 31 
   2016   2015   2014 

Sales of securities available for sale

      

Proceeds

  $182,549   $43,051   $45,228 

Gross gains

   2,646    254    988 

Gross losses

   (810)    (65)    —   

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Sales of securities available for sale
         
Proceeds
 $
98,425
  $
38,519
  $
5,490
 
Gross gains
  
168
   
37
   
151
 
Gross losses
  
(243
)  
(480
)  
(113
)
The tax effect of the proceeds from the sale of securities available for sale was $643, $66$(16,000), $(93,000) and $346$13,000 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.

The Company pledges securities to secure retail and corporate repurchase agreements to the Federal Reserve for borrowing availability and as settlements for the fair value of swap agreements. At December 31, 2016,2019, the Company had pledged $64.4$106.8 million of fair value or $65.1$106.4 million of amortized cost, in securities as collateral for $57.1$90.9 million in repurchase

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

agreements, $92.5$98.7 million of fair value or $92.4$94.7 million of amortized cost, in securities as collateral for borrowing availability at the Federal Reserve with no$0 current outstanding borrowings and $16.2$33.4 million of fair value or $16.0$33.1 million of amortized cost, in securities as collateral for $3.1$14.8 million in settlements on the fair value of swap agreements.

8
9
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 5
–
Loans

   December 31   December 31 
   2016   2015 

Commercial

    

Working capital and equipment

  $539,403   $381,245 

Real estate, including agriculture

   485,620    391,668 

Tax exempt

   15,486    8,674 

Other

   29,447    23,408 
  

 

 

   

 

 

 

Total

   1,069,956    804,995 

Real estate

    

1–4 family

   526,024    433,015 

Other

   5,850    4,129 
  

 

 

   

 

 

 

Total

   531,874    437,144 

Consumer

    

Auto

   174,773    168,397 

Recreation

   5,669    5,365 

Real estate/home improvement

   53,898    47,015 

Home equity

   144,508    127,113 

Unsecured

   3,875    4,120 

Other

   15,706    10,290 
  

 

 

   

 

 

 

Total

   398,429    362,300 

Mortgage warehouse

   135,727    144,692 
  

 

 

   

 

 

 

Total loans

   2,135,986    1,749,131 

Allowance for loan losses

   (14,837)    (14,534) 
  

 

 

   

 

 

 

Loans, net

  $2,121,149   $1,734,597 
  

 

 

   

 

 

 

         
 
December 31
  
December 31
 
 
2019
  
2018
 
Commercial
      
Working capital and equipment
 $
938,317
  $
804,083
 
Real estate, including agriculture
  
978,891
   
834,037
 
Tax exempt
  
63,571
   
48,975
 
Other
  
65,872
   
34,495
 
         
Total
  
2,046,651
   
1,721,590
 
Real estate
      
1-4
family
  
762,571
   
659,754
 
Other
  
8,146
   
8,387
 
         
Total
  
770,717
   
668,141
 
Consumer
      
Auto
  
362,729
   
327,413
 
Recreation
  
16,262
   
13,975
 
Real estate/home improvement
  
43,585
   
39,587
 
Home equity
  
237,979
   
163,209
 
Unsecured
  
7,286
   
4,043
 
Other
  
1,339
   
1,254
 
         
Total
  
669,180
   
549,481
 
Mortgage warehouse
  
150,293
   
74,120
 
         
Total loans
  
3,636,841
   
3,013,332
 
Allowance for loan losses
  
(17,667
)  
(17,820
)
         
Loans, net
 $
3,619,174
  $
2,995,512
 
         
Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, or in the general economy.economy or fluctuations in interest rates. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus

non-owner
occupied loans.

90
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Real Estate and Consumer

With respect to residential loans that are secured by
1-4
family residences and are generally owner occupied, the Company generally establishes a maximum
loan-to-value
ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in
1-4
family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage and the related mortgagee are underwrittenloan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reaquirereacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

HORIZON BANCORPAND SUBSIDIARIES

9
1
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table shows the recorded investment of individual loan categories.

December 31, 2016  Loan
Balance		   Interest Due   Deferred
Fees / (Costs)		   Recorded
Investment		 

Owner occupied real estate

  $337,548   $899   $1,022   $339,469 

Non owner occupied real estate

   461,897    624    2,176    464,697 

Residential spec homes

   5,006    8    (2)    5,012 

Development & spec land loans

   31,228    56    119    31,403 

Commercial and industrial

   230,520    1,906    442    232,868 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   1,066,199    3,493    3,757    1,073,449 

Residential mortgage

   508,233    1,492    3,030    512,755 

Residential construction

   20,611    33    —      20,644 

Mortgage warehouse

   135,727    480    —      136,207 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   664,571    2,005    3,030    669,606 

Direct installment

   71,150    199    (385)    70,964 

Direct installment purchased

   119    —      —      119 

Indirect installment

   153,204    345    —      153,549 

Home equity

   175,126    703    (785)    175,044 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   399,599    1,247    (1,170)    399,676 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   2,130,369    6,745    5,617    2,142,731 

Allowance for loan losses

   (14,837)    —      —      (14,837) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loans

  $2,115,532   $6,745   $5,617   $2,127,894 
  

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2015  Loan
Balance		   Interest Due   Deferred
Fees / (Costs)		   Recorded
Investment		 

Owner occupied real estate

  $268,281   $613   $1,328   $270,222 

Non owner occupied real estate

   326,399    306    497    327,202 

Residential spec homes

   5,018    9    17    5,044 

Development & spec land loans

   18,183    33    26    18,242 

Commercial and industrial

   184,911    1,246    335    186,492 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   802,792    2,207    2,203    807,202 

Residential mortgage

   414,924    1,275    2,470    418,669 

Residential construction

   19,751    34    —      19,785 

Mortgage warehouse

   144,692    480    —      145,172 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   579,367    1,789    2,470    583,626 

Direct installment

   54,341    168    (359)    54,150 

Direct installment purchased

   153    —      —      153 

Indirect installment

   151,523    323    —      151,846 

Home equity

   157,164    628    (522)    157,270 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   363,181    1,119    (881)    363,419 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   1,745,340    5,115    3,792    1,754,247 

Allowance for loan losses

   (14,534)    —      —      (14,534) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loans

  $1,730,806   $5,115   $3,792   $1,739,713 
  

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

 
December 31, 2019
 
 
Loan
Balance
  
Interest
Due
  
Deferred
Costs/
(Fees)
  
Recorded
Investment
 
Owner occupied real estate
 $
519,577
  $
784
  $
(148
) $
520,213
 
Non-owner
occupied real estate
  
973,331
   
1,752
   
(763
)  
974,320
 
Residential spec homes
  
12,925
   
15
   
(2
)  
12,938
 
Development & spec land
  
35,954
   
101
   
(14
)  
36,041
 
Commercial and industrial
  
505,859
   
4,600
   
(68
)  
510,391
 
                 
Total commercial
  
2,047,646
   
7,252
   
(995
)  
2,053,903
 
Residential mortgage
  
751,019
   
2,245
   
12
   
753,276
 
Residential construction
  
19,686
   
40
   
—  
   
19,726
 
Mortgage warehouse
  
150,293
   
242
   
—  
   
150,535
 
                 
Total real estate
  
920,998
   
2,527
   
12
   
923,537
 
Direct installment
  
41,079
   
148
   
678
   
41,905
 
Indirect installment
  
348,658
   
911
   
—  
   
349,569
 
Home equity
  
276,215
   
1,304
   
2,550
   
280,069
 
                 
Total consumer
  
665,952
   
2,363
   
3,228
   
671,543
 
                 
Total loans
  
3,634,596
   
12,142
   
2,245
   
3,648,983
 
Allowance for loan losses
  
(17,667
)  
—  
   
—  
   
(17,667
)
                 
Net loans
 $
3,616,929
  $
12,142
  $
2,245
  $
3,631,316
 
                 
 
December 31, 2018
 
 
Loan
Balance
  
Interest
Due
  
Deferred
Costs/
(Fees)
  
Recorded
Investment
 
Owner occupied real estate
 $
444,834
  $
931
  $
(130
) $
445,635
 
Non-owner
occupied real estate
  
852,855
   
1,436
   
(747
)  
853,544
 
Residential spec homes
  
5,195
   
13
   
—  
   
5,208
 
Development & spec land
  
50,706
   
153
   
(15
)  
50,844
 
Commercial and industrial
  
368,962
   
3,063
   
(70
)  
371,955
 
                 
Total commercial
  
1,722,552
   
5,596
   
(962
)  
1,727,186
 
Residential mortgage
  
644,094
   
1,861
   
17
   
645,972
 
Residential construction
  
24,030
   
42
   
—  
   
24,072
 
Mortgage warehouse
  
74,120
   
132
   
—  
   
74,252
 
                 
Total real estate
  
742,244
   
2,035
   
17
   
744,296
 
Direct installment
  
35,103
   
108
   
593
   
35,804
 
Indirect installment
  
314,177
   
738
   
—  
   
314,915
 
Home equity
  
197,494
   
968
   
2,114
   
200,576
 
                 
Total consumer
  
546,774
   
1,814
   
2,707
   
551,295
 
                 
Total loans
  
3,011,570
   
9,445
   
1,762
   
3,022,777
 
Allowance for loan losses
  
(17,820
)  
—  
   
—  
   
(17,820
)
                 
Net loans
 $
2,993,750
  $
9,445
  $
1,762
  $
3,004,957
 
                 
9
2
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 6 – Accounting for Certain Loans Acquired in a Transfer

The Company acquired loans in acquisitions and the transferred loans hadwith evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as
past-due
and
non-accrual
status, borrower credit scores and recent
loan-to-value
percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC
310-30)
and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

Interest marks are accreted to income over the remaining life of the loan. Credit marks are evaluated using the practical expedient method.

The carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:

   December 31
2016
Heartland		   December 31
2016
Summit		   December 31
2016
Peoples		   December 31
2016
Kosciusko		   December 31
2016
LaPorte		   December 31
2016
CNB		   December 31
2016
Total		 

Commercial

  $774   $5,245   $692   $1,652   $3,200   $—     $11,563 

Real estate

   534    967    165    457    1,114    —      3,237 

Consumer

   2    0    —      —      41    —      43 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding balance

  $1,310   $6,213   $856   $2,109   $4,355   $—     $14,843 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance of $0

              $14,843 
              

 

 

 
   December 31
2015
Heartland		   December 31
2015
Summit		   December 31
2015
Peoples		   December 31
2015
Kosciusko		   December 31
2015
LaPorte		   December 31
2015
CNB		   December 31
2015
Total		 

Commercial

  $1,633   $5,567   $1,061   $—     $—     $—     $8,261 

Real estate

   693    1,216    179    —      —      —      2,088 

Consumer

   6    35    —      —      —      —      41 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding balance

  $2,332   $6,818   $1,240   $—     $—     $—     $10,390 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance of $63

              $10,327 
              

 

 

 

 
December 31, 2019
 
 
Commercial
  
Real
Estate
  
Consumer
  
Outstanding
Balance
  
Allowance
for Loan
Losses
  
Carrying
Amount
 
Heartland
 $
197
  $
99
  $
 —  
  $
296
  $
 —  
  $
296
 
Summit
  
88
   
473
   
—  
   
561
   
—  
   
561
 
Peoples
  
229
   
35
   
—  
   
264
   
—  
   
264
 
Kosciusko
  
244
   
131
   
—  
   
375
   
—  
   
375
 
LaPorte
  
353
   
793
   
20
   
1,166
   
—  
   
1,166
 
Lafayette
  
1,867
   
—  
   
—  
   
1,867
   
—  
   
1,867
 
Wolverine
  
2,289
   
—  
   
—  
   
2,289
   
—  
   
2,289
 
Salin
  
4,938
   
1,912
   
962
   
7,812
   
133
   
7,679
 
                         
Total
 $
 10,205
  $
3,443
  $
 982
  $
 14,630
  $
 133
  $
14,497
 
                         
 
December 31, 2018
 
 
Commercial
  
Real
Estate
  
Consumer
  
Outstanding
Balance
  
Allowance
for Loan
Losses
  
Carrying
Amount
 
Heartland
 $
232
  $
175
  $
 —  
  $
407
  $
 —  
  $
407
 
Summit
  
323
   
555
   
—  
   
878
   
—  
   
878
 
Peoples
  
270
   
58
   
—  
   
328
   
—  
   
328
 
Kosciusko
  
746
   
155
   
—  
   
901
   
—  
   
901
 
LaPorte
  
753
   
947
   
27
   
1,727
   
60
   
1,667
 
Lafayette
  
3,080
   
—  
   
—  
   
3,080
   
—  
   
3,080
 
Wolverine
  
7,841
   
—  
   
—  
   
7,841
   
—  
   
7,841
 
               ��         
Total
 $
 13,245
  $
1,890
  $
27
  $
 15,162
  $
60
  $
15,102
 
                         
9
3
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Accretable yield, or income expected to be collected are as follows:

   Twelve Months Ended December 31, 2016 
   Heartland  Summit  Peoples  Kosciusko  LaPorte  CNB   Total 

Balance at January 1

  $795  $708  $555  $—    $—    $—     $2,058 

Additions

   —     —     —     634   1,636     2,270 

Accretion

   (164)   (171)   (106)   (72)   (147)   —      (660) 

Reclassification from nonaccretable difference

   —     —     —     —     —     —      —   

Disposals

   (74)   (35)   (60)   (32)   (10)   —      (211) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance at December 31

  $557  $502  $389  $530  $1,479  $—     $3,457 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 
   Twelve Months Ended December 31, 2015 
   Heartland  Summit  Peoples  Kosciusko  LaPorte  CNB   Total 

Balance at January 1

  $2,400  $1,268  $—    $—    $—    $—     $3,668 

Additions

   —     —     647   —     —     —      647 

Accretion

   (327)   (315)   (83)   —     —     —      (725) 

Reclassification from nonaccretable difference

   —     —     —     —     —     —      —   

Disposals

   (1,278)   (245)   (9)   —     —     —      (1,532) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance at December 31

  $795  $708  $555  $—    $—    $—     $2,058 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

                         
 
Twelve Months Ended December 31, 2019
 
 
Beginning
balance
  
Additions
  
Accretion
  
Reclassification
from
nonaccretable
difference
  
Disposals
  
Ending
balance
 
Heartland
 $
174
  $
—  
  $
 (32
) $
 —  
  $
—  
  $
142
 
Summit
  
42
   
—  
   
(9
)  
—  
   
(11
)  
22
 
Kosciusko
  
300
   
—  
   
(63
)  
—  
   
(2
)  
235
 
LaPorte
  
829
   
—  
   
(111
)  
—  
   
4
   
722
 
Lafayette
  
609
   
—  
   
(126
)  
—  
   
(193
)  
290
 
Wolverine
  
698
   
—  
   
(272
)  
—  
   
(306
)  
120
 
Salin
  
—
  
   
2,002
   
(590
)  
—
  
   
(37
)  
1,375
 
                         
Total
 $
 2,652
  $
 2,002
  $
 (1,203
) $
 —  
  $
 (545
) $
2,906
 
                         
                         
 
Twelve Months Ended December 31, 2018
 
 
Beginning
balance
  
Additions
  
Accretion
  
Reclassification
from
nonaccretable
difference
  
Disposals
  
Ending
balance
 
Heartland
 $
452
  $
—  
  $
 (85
) $
 —  
  $
 (193
) $
174
 
Summit
  
147
   
—  
   
(54
)  
—  
   
(51
)  
42
 
Kosciusko
  
386
   
—  
   
(78
)  
—  
   
(8
)  
300
 
LaPorte
  
980
   
—  
   
(144
)  
—  
   
(7
)  
829
 
Lafayette
  
933
   
—  
   
(275
)  
—  
   
(49
)  
609
 
Wolverine
  
2,267
   
—  
   
(812
)  
—  
   
(757
)  
698
 
                         
Total
 $
 5,165
  $
—  
  $
 (1,448
) $
 —  
  $
(1,065
) $
2,652
 
                         
During the years ended December 31, 20162019 and 2015,2018, the Company increased (decreased) the allowance for loan losses by a charge to the income statement of $71,000$133,000 and $(190,000),$60,000, respectively. $0 and $63,000 of allowancesNaN allowance for loan losses were reversed for the years ended December 31, 20162019 and 2015, respectively.

HORIZON BANCORPAND SUBSIDIARIES

2018.

9
4
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 7 – Allowance for Loan Losses

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes using the highest of the one, two or five-year historical loss experience is an appropriate methodology in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.

   December 31   December 31   December 31 
   2016   2015   2014 
      
  

 

 

   

 

 

   

 

 

 

Balance at beginning of the period

  $14,534   $16,501   $15,992 

Loanscharged-off:

      

Commercial

      

Owner occupied real estate

   181    2,208    40 

Non owner occupied real estate

   471    556    136 

Residential development

   —      —      —   

Development & Spec Land Loans

   —      —      173 

Commercial and industrial

   106    673    1,453 
  

 

 

   

 

 

   

 

 

 

Total commercial

   758    3,437    1,802 

Real estate

      

Residential mortgage

   213    288    328 

Residential construction

   —      —      —   

Mortgage warehouse

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Total real estate

   213    288    328 

Consumer

      

Direct Installment

   329    367    250 

Direct Installment Purchased

   —      —      —   

Indirect Installment

   1,051    1,081    1,233 

Home Equity

   309    926    516 
  

 

 

   

 

 

   

 

 

 

Total consumer

   1,689    2,374    1,999 
  

 

 

   

 

 

   

 

 

 

Total loanscharged-off

   2,660    6,099    4,129 

Recoveries of loans previouslycharged-off:

      

Commercial

      

Owner occupied real estate

   31    104    13 

Non owner occupied real estate

   55    1    210 

Residential development

   8    —      —   

Development & Spec Land Loans

   —      35    55 

Commercial and industrial

   116    52    495 
  

 

 

   

 

 

   

 

 

 

Total commercial

   210    192    773 

Real estate

      

Residential mortgage

   97    69    21 

Residential construction

   —      —      —   

Mortgage warehouse

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Total real estate

   97    69    21 

Consumer

      

Direct Installment

   81    106    67 

Direct Installment Purchased

   —      —      —   

Indirect Installment

   529    489    560 

Home Equity

   204    114    159 
  

 

 

   

 

 

   

 

 

 

Total consumer

   814    709    786 
  

 

 

   

 

 

   

 

 

 

Total loan recoveries

   1,121    970    1,580 
  

 

 

   

 

 

   

 

 

 

Net loanscharged-off (recovered)

   1,539    5,129    2,549 
  

 

 

   

 

 

   

 

 

 

Provision charged to operating expense

      

Commercial

   (68)    2,531    2,277 

Real estate

   (23)    62    (1,153) 

Consumer

   1,933    569    1,934 
  

 

 

   

 

 

   

 

 

 

Total provision charged to operating expense

   1,842    3,162    3,058 
  

 

 

   

 

 

   

 

 

 

Balance at the end of the period

  $14,837   $14,534   $16,501 
  

 

 

   

 

 

   

 

 

 

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Balance at beginning of the period
 $
 
17,820
  $
16,394
  $
14,837
 
Loans
charged-off:
         
Commercial
         
Owner occupied real estate
  
41
   
109
   
12
 
Non-owner
occupied real estate
  
64
   
—  
   
75
 
Residential spec homes
  
3
   
—  
   
—  
 
Development & spec land
  
—  
   
—  
   
1
 
Commercial and industrial
  
755
   
364
   
541
 
             
Total commercial
  
863
   
473
   
629
 
Real estate
         
Residential mortgage
  
93
   
76
   
89
 
Residential construction
  
—  
   
—  
   
—  
 
Mortgage warehouse
  
—  
   
—  
   
—  
 
             
Total real estate
  
93
   
76
   
89
 
Consumer
         
Direct installment
  
208
   
154
   
137
 
Indirect installment
  
1,785
   
1,673
   
1,193
 
Home equity
  
319
   
176
   
205
 
             
Total consumer
  
2,312
   
2,003
   
1,535
 
             
Total loans
charged-off
  
3,268
   
2,552
   
2,253
 
Recoveries of loans previously
charged-off:
         
Commercial
         
Owner occupied real estate
  
—  
   
55
   
8
 
Non-owner
occupied real estate
  
15
   
33
   
32
 
Residential spec homes
  
5
   
8
   
8
 
Development & spec land
  
—  
   
—  
   
—  
 
Commercial and industrial
  
179
   
80
   
250
 
             
Total commercial
  
199
   
176
   
298
 
Real estate
         
Residential mortgage
  
46
   
27
   
44
 
Residential construction
  
—  
   
—  
   
—  
 
Mortgage warehouse
  
—  
   
—  
   
—  
 
             
Total real estate
  
46
   
27
   
44
 
Consumer
         
Direct installment
  
97
   
53
   
501
 
Indirect installment
  
661
   
505
   
497
 
Home equity
  
136
   
311
   
—  
 
             
Total consumer
  
894
   
869
   
998
 
             
Total loan recoveries
  
1,139
   
1,072
   
1,340
 
             
Net loans
charged-off
  
2,129
   
1,480
   
913
 
             
Provision charged to operating expense
         
Commercial
  
2,165
   
1,699
   
2,164
 
Real estate
  
(635
)  
(487
)  
(81
)
Consumer
  
446
   
1,694
   
387
 
             
Total provision charged to operating expense
  
1,976
   
2,906
   
2,470
 
             
Balance at the end of the period
 $
17,667
  $
17,820
  $
16,394
 
             
9
5
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Certain loans are individually evaluated for impairment, and the Company’s general practice is to proactively charge down impaired loans to the fair value, which is the appraised value less estimated selling costs, of the underlying collateral.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except
1-4
family residential properties and consumer, loans, the Company promptly
charges-off
loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial
charge-off
is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Companycharges-off1-4
charges-off
1-4
family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of
1-4
family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also
charges-off
unsecured
open-end
loans when the loan is contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:

December 31, 2016  Commercial   Real Estate   Mortgage
Warehousing		   Consumer   Total 

Allowance For Loan Losses

          

Ending allowance balance attributable to loans:

          

Individually evaluated for impairment

  $4   $—     $—     $—     $4 

Collectively evaluated for impairment

   6,575    2,090    1,254    4,914    14,833 

Loans acquired with deteriorated credit quality

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $6,579   $2,090   $1,254   $4,914   $14,837 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Individually evaluated for impairment

  $2,250   $—     $—     $—     $2,250 

Collectively evaluated for impairment

   1,071,199    533,399    136,207    399,676    2,140,481 

Loans acquired with deteriorated credit quality

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loans balance

  $1,073,449   $533,399   $136,207   $399,676   $2,142,731 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2015  Commercial   Real Estate   Mortgage
Warehousing		   Consumer   Total 

Allowance For Loan Losses

          

Ending allowance balance attributable to loans:

          

Individually evaluated for impairment

  $202   $—     $—     $—     $202 

Collectively evaluated for impairment

   6,739    2,476    1,007    3,856    14,078 

Loans acquired with deteriorated credit quality

   254    —      —      —      254 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $7,195   $2,476   $1,007   $3,856   $14,534 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Individually evaluated for impairment

  $7,019   $—     $—     $—     $7,019 

Collectively evaluated for impairment

   798,454    438,454    145,172    363,419    1,745,499 

Loans acquired with deteriorated credit quality

   1,729    —      —      —      1,729 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loans balance

  $807,202   $438,454   $145,172   $363,419   $1,754,247 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

                     
 
December 31, 2019
 
 
Commercial
  
Real
Estate
  
Mortgage
Warehousing
  
Consumer
  
Total
 
Allowance For Loan Losses
               
Ending allowance balance attributable to loans:
               
Individually evaluated for impairment
 $
541
  $
—
  $
—
  $
—
  $
541
 
Collectively evaluated for impairment
  
11,455
   
923
   
1,077
   
3,671
   
17,126
 
Loans acquired with deteriorated credit quality
  
—
   
—
   
—
   
—
   
—
 
                     
Total ending allowance balance
 $
11,996
  $
923
  $
1,077
  $
3,671
  $
17,667
 
                     
Loans:
               
Individually evaluated for impairment
 $
7,347
  $
—
  $
—
  $
—
  $
7,347
 
Collectively evaluated for impairment
  
2,040,299
   
770,705
   
150,293
   
665,952
   
3,627,249
 
Loans acquired with deteriorated credit quality
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total ending loans balance
 $
2,047,646
  $
770,705
  $
150,293
  $
665,952
  $
3,634,596
 
                     
                     
 
December 31, 2018
 
 
Commercial
  
Real
Estate
  
Mortgage
Warehousing
  
Consumer
  
Total
 
Allowance For Loan Losses
               
Ending allowance balance attributable to loans:
               
Individually evaluated for impairment
 $
1,035
  $
—
  $
—
  $
—
  $
1,035
 
Collectively evaluated for impairment
  
9,460
   
1,676
   
1,006
   
4,643
   
16,785
 
Loans acquired with deteriorated credit quality
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total ending allowance balance
 $
10,495
  $
1,676
  $
1,006
  $
4,643
  $
17,820
 
                     
Loans:
               
Individually evaluated for impairment
 $
6,696
  $
—
  $
—
  $
—
  $
6,696
 
Collectively evaluated for impairment
  
1,715,856
   
668,124
   
74,120
   
546,774
   
3,004,874
 
Loans acquired with deteriorated credit quality
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total ending loans balance
 $
1,722,552
  $
668,124
  $
74,120
  $
546,774
  $
3,011,570
 
                     
9
6
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 8 –
Non-performing
Assets and Impaired Loans

The following table presents the nonaccrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDRs”) by class of loans:

December 31, 2016  Non-accrual   Loans Past
Due Over 90
Days Still
Accruing		   Non-
Performing
TDRs		   Performing
TDRs		   Total Non-
Performing
Loans		 

Commercial

          

Owner occupied real estate

  $1,532  $183   $—     $—     $1,715 

Non owner occupied real estate

   440    —      —      —      440 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   118    —      —      —      118 

Commercial and industrial

   159    —      —      —      159 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   2,249    183    —      —      2,432 

Real estate

          

Residential mortgage

   2,959    —      576    1,254    4,789 

Residential construction

   —      —      233    —      233 

Mortgage warehouse

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   2,959    —      809    1,254    5,022 

Consumer

          

Direct Installment

   512    —      —      —      512 

Direct Installment Purchased

   —      —      —      —      —   

Indirect Installment

   659    49    —      —      708 

Home Equity

   1,557    9    205    238    2,009 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

   2,728    58    205    238    3,229 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $7,936   $241   $1,014   $1,492   $10,683 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2015  Non-accrual   Loans Past
Due Over 90
Days Still
Accruing		   Non-
Performing
TDRs		   Performing
TDRs		   Total Non-
Performing
Loans		 

Commercial

          

Owner occupied real estate

  $1,749   $—     $—     $—     $1,749 

Non owner occupied real estate

   3,034    —      1,915    60    5,009 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   71    —      —      —      71 

Commercial and industrial

   176    —      —      —      176 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   5,030    —      1,915    60    7,005 

Real estate

          

Residential mortgage

   4,354    1    824    808    5,987 

Residential construction

   —      —      250    —      250 

Mortgage warehouse

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   4,354    1    1,074    808    6,237 

Consumer

          

Direct Installment

   541    —      —      —      541 

Direct Installment Purchased

   —      —      —      —      —   

Indirect Installment

   601    27    —      —      628 

Home Equity

   1,736    —      183    350    2,269 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

   2,878    27    183    350    3,438 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $12,262   $28   $3,172   $1,218   $16,680 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

                     
 
December 31, 2019
 
 
Non-accrual
  
Loans Past
Due Over 90
Days Still
Accruing
  
Non-peforming

TDRs
  
Performing
TDRs
  
Total
Non-performing

Loans
 
Commercial
               
Owner occupied real estate
 $
2,424
  $
 —  
  $
629
  $
139
  $
3,192
 
Non-owner
occupied real estate
  
682
   
—  
   
374
   
—  
   
1,056
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
73
   
—  
   
—  
   
—  
   
73
 
Commercial and industrial
  
1,603
   
—  
   
78
   
1,345
   
3,026
 
                     
Total commercial
  
4,782
   
—  
   
1,081
   
1,484
   
7,347
 
Real estate
               
Residential mortgage
  
7,614
   
1
   
708
   
1,561
   
9,884
 
Residential construction
  
—  
   
—  
   
—  
   
—  
   
—  
 
Mortgage warehouse
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total real estate
  
7,614
   
1
   
708
   
1,561
   
9,884
 
Consumer
               
Direct installment
  
30
   
5
   
—  
   
—  
   
35
 
Indirect installment
  
1,234
   
135
   
—  
   
—  
   
1,369
 
Home equity
  
2,019
   
5
   
217
   
309
   
2,550
 
                     
Total consumer
  
3,283
   
145
   
217
   
309
   
3,954
 
                     
Total
 $
 15,679
  $
 146
  $
 2,006
  $
 3,354
  $
 21,185
 
                     
                     
 
December 31, 2018
 
 
Non-accrual
  
Loans Past
Due Over 90
Days Still
Accruing
  
Non-peforming

TDRs
  
Performing
TDRs
  
Total
Non-performing

Loans
 
Commercial
               
Owner occupied real estate
 $
3,531
  $
208
  $
—  
  $
109
  $
3,848
 
Non-owner
occupied real estate
  
554
   
—  
   
492
   
—  
   
1,046
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
68
   
—  
   
—  
   
—  
   
68
 
Commercial and industrial
  
1,941
   
—  
   
—  
   
—  
   
1,941
 
                     
Total commercial
  
6,094
   
208
   
492
   
109
   
6,903
 
Real estate
               
Residential mortgage
  
2,846
   
180
   
423
   
1,558
   
5,007
 
Residential construction
  
—  
   
—  
   
—  
   
—  
   
—  
 
Mortgage warehouse
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total real estate
  
2,846
   
180
   
423
   
1,558
   
5,007
 
Consumer
               
Direct installment
  
35
   
—  
   
—  
   
—  
   
35
 
Indirect installment
  
916
   
173
   
—  
   
—  
   
1,089
 
Home equity
  
1,657
   
7
   
142
   
335
   
2,141
 
                     
Total consumer
  
2,608
   
180
   
142
   
335
   
3,265
 
                     
Total
 $
 11,548
  $
 568
  $
 1,057
  $
 2,002
  $
 15,175
 
                     
Included in the $7.9$15.7 million of
non-accrual
loans and the $1.0$2.0 million of
non-performing
TDRs at December 31, 20162019 were $2.8$2.3 million and $17,000,$182,000, respectively, of loans acquired for which there were accretable yields recognized.

9
7
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a
non-accruing
loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to generally place a loan on a
non-accrual
status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the
Executive Vice President and Chief OperatingCommercial Banking Officer and/or the senior collection officerExecutive Vice President and Chief Operations Officer must review all loans placed onnon-accrual status. Subsequent payments on
non-accrual
loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual
Non-accrual
loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not
less than six months before returning a nonaccrual
non-accrual
loan to accrual status.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 – 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to
non-accrual
status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

three methods described above.

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At December 31, 2016,2019, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six6 consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of December 31, 2016,2019, the Company had $2.5$5.4 million in TDRs and $1.5$3.4 million were performing according to the restructured terms and four0 TDRs were returned to accrual status during 2016.2019. There was $109,000$133,000 of specific reserves allocated to TDRs at December 31, 20162019 based on the collateral deficiencies.

HORIZON BANCORPAND SUBSIDIARIES

9
8
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table presents commercial loans individually evaluated for impairment by class of loans:

               Twelve Months Ending 
December 31, 2016  Unpaid
Principal
Balance		   Recorded
Investment		   Allowance For
Loan Loss
Allocated		   Average
Balance in
Impaired
Loans		   Cash/Accrual
Interest
Income
Recognized		 

With no recorded allowance

          

Commercial

          

Owner occupied real estate

  $1,533   $1,533   $—     $1,619   $58 

Non owner occupied real estate

   440    440    —      871    18 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   118    118    —      61    16 

Commercial and industrial

   128    127    —      349    1 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   2,219    2,218    —      2,900    93 

With an allowance recorded

          

Commercial

          

Owner occupied real estate

   —      —      —      —      —   

Non owner occupied real estate

   —      —      —      —      —   

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   —      —      —      —      —   

Commercial and industrial

   31    32    4    5    2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   31    32    4    5    2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $2,250   $2,250   $4   $2,905   $95 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
               Twelve Months Ending 
December 31, 2015  Unpaid
Principal
Balance		   Recorded
Investment		   Allowance For
Loan Loss
Allocated		   Average
Balance in
Impaired
Loans		   Cash/Accrual
Interest
Income
Recognized		 

With no recorded allowance

          

Commercial

          

Owner occupied real estate

  $1,340   $1,339   $—     $1,001   $22 

Non owner occupied real estate

   4,938    4,953    —      5,417    8 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   71    71    —      6    3 

Commercial and industrial

   79    79    —      275    4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   6,428    6,442    —      6,699    37 

With an allowance recorded

          

Commercial

          

Owner occupied real estate

   410    410    105    243    8 

Non owner occupied real estate

   70    70    32    6    13 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   —      —      —      —      —   

Commercial and industrial

   97    97    65    162    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   577    577    202    411    21 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $7,005   $7,019   $202   $7,110   $58 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

                     
 
December 31, 2019
 
       
Twelve Months Ended
 
 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance for
Loan Loss
 Allocated
  
Average
Balance in
Impaired
Loans
  
Cash/Accrual
Interest
Income
Recognized
 
With no recorded allowance
               
Commercial
               
Owner occupied real estate
 $
3,192
  $
3,193
  $
 —  
  $
3,608
  $
246
 
Non-owner
occupied real estate
  
937
   
937
   
—  
   
2,810
   
98
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
73
   
73
   
—  
   
158
   
—  
 
Commercial and industrial
  
1,859
   
1,861
   
—  
   
2,464
   
100
 
                     
Total commercial
  
6,061
   
6,064
   
—  
   
9,040
   
444
 
With an allowance recorded
               
Commercial
               
Owner occupied real estate
  
—  
   
—  
   
—  
   
—  
   
—  
 
Non-owner
occupied real estate
  
119
   
119
   
25
   
130
   
—  
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial and industrial
  
1,167
   
1,168
   
516
   
1,225
   
46
 
                     
Total commercial
  
1,286
   
1,287
   
541
   
1,355
   
46
 
                     
Total
 $
7,347
  $
7,351
  $
541
  $
10,395
  $
490
 
                     
                     
 
December 31, 2018
 
       
Twelve Months Ended
 
 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance for
Loan Loss
Allocated
  
Average
Balance in
Impaired
Loans
  
Cash/Accrual
Interest
Income
Recognized
 
With no recorded allowance
               
Commercial
               
Owner occupied real estate
 $
2,814
  $
2,815
  $
—  
  $
3,168
  $
77
 
Non-owner
occupied real estate
  
860
   
860
   
—  
   
1,096
   
12
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
68
   
68
   
—  
   
71
   
—  
 
Commercial and industrial
  
1,226
   
1,226
   
—  
   
1,119
   
21
 
                     
Total commercial
  
4,968
   
4,969
   
—  
   
5,454
   
110
 
With an allowance recorded
               
Commercial
               
Owner occupied real estate
  
827
   
827
   
145
   
864
   
—  
 
Non-owner
occupied real estate
  
186
   
186
   
30
   
180
   
4
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial and industrial
  
715
   
715
   
860
   
870
   
14
 
                     
Total commercial
  
1,728
   
1,728
   
1,035
   
1,914
   
18
 
                     
Total
 $
6,696
  $
6,697
  $
1,035
  $
7,368
  $
128
 
                     
9
9
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

               Twelve Months Ending 
December 31, 2014  Unpaid
Principal
Balance		   Recorded
Investment		   Allowance For
Loan Loss
Allocated		   Average
Balance in
Impaired
Loans		   Cash/Accrual
Interest
Income
Recognized		 

With no recorded allowance

          

Commercial

          

Owner occupied real estate

  $1,169   $1,170   $—     $645   $65 

Non owner occupied real estate

   1,193    1,194    —      1,341    51 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   —      —      —      —      —   

Commercial and industrial

   854    854    —      357    27 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   3,216    3,218    —      2,343    143 

With an allowance recorded

          

Commercial

          

Owner occupied real estate

   422    422    165    141    16 

Non owner occupied real estate

   6,453    6,453    744    1,995    208 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   —      —      —      —      —   

Commercial and industrial

   962    962    680    798    12 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   7,837    7,837    1,589    2,934    236 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $11,053   $11,055   $1,589   $5,277   $379 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 
December 31, 2017
 
       
Twelve Months Ended
 
 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance for
Loan Loss
Allocated
  
Average
Balance in
Impaired
Loans
  
Cash/Accrual
Interest
Income
Recognized
 
With no recorded allowance
               
Commercial
               
Owner occupied real estate
 $
1,255
  $
1,270
  $
 —  
  $
1,168
  $
4
 
Non-owner
occupied real estate
  
3,123
   
3,139
   
—  
   
850
   
7
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
176
   
176
   
—  
   
233
   
4
 
Commercial and industrial
  
1,656
   
1,656
   
—  
   
1,445
   
25
 
                     
Total commercial
  
6,210
   
6,241
   
—  
   
3,696
   
40
 
With an allowance recorded
               
Commercial
               
Owner occupied real estate
  
704
   
704
   
78
   
59
   
33
 
Non-owner
occupied real estate
  
227
   
227
   
106
   
19
   
13
 
Residential spec homes
  
—  
   
—  
   
—  
   
—  
   
—  
 
Development & spec land
  
—  
   
—  
   
—  
   
—  
   
—  
 
Commercial and industrial
  
—  
   
—  
   
—  
   
—  
   
—  
 
                     
Total commercial
  
931
   
931
   
184
   
78
   
46
 
                     
Total
 $
7,141
  $
7,172
  $
184
  $
3,774
  $
86
 
                     
The following table presents the payment status by class of loans:

December 31, 2016  30 - 59 Days
Past Due		  60 - 89 Days
Past Due		  90 Days or
Greater Past Due		  Total Past Due  Loans Not Past
Due		  Total 

Commercial

       

Owner occupied real estate

  $1,068  $—    $183  $1,251  $336,297  $337,548 

Non owner occupied real estate

   357   —     —     357   461,540   461,897 

Residential development

   —     —     —     —     5,006   5,006 

Development & Spec Land Loans

   1   —     —     1   31,227   31,228 

Commercial and industrial

   982   —     —     982   229,538   230,520 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   2,408   —     183   2,591   1,063,608   1,066,199 

Real estate

       

Residential mortgage

   886   123   —     1,009   507,224   508,233 

Residential construction

   —     —     —     —     20,611   20,611 

Mortgage warehouse

   —     —     —     —     135,727   135,727 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   886   123   —     1,009   663,562   664,571 

Consumer

       

Direct Installment

   139   4   —     143   71,007   71,150 

Direct Installment Purchased

   —     —     —     —     119   119 

Indirect Installment

   1,339   237   49   1,625   151,579   153,204 

Home Equity

   912   267   9   1,188   173,938   175,126 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

   2,390   508   58   2,956   396,643   399,599 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $5,684  $631  $241  $6,556  $2,123,813  $2,130,369 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   0.27%   0.03%   0.01%   0.31%   99.69%  

HORIZON BANCORPAND SUBSIDIARIES

 
December 31, 2019
 
 
Current
  
30-59
 Days
Past Due
  
60-89
 Days
Past Due
  
90 Days or
Greater
Past Due
  
Non-accrual

&
Non-peforming

TDRs
  
Total Past Due
&
Non-accrual

Loans
  
Total
 
Commercial
                     
Owner occupied real estate
 $
515,604
  $
920
  $
—
  $
—
  $
3,053
  $
3,973
  $
519,577
 
Non-owner
occupied real
estate
  
972,195
   
80
   
—
   
—
   
1,056
   
1,136
   
973,331
 
Residential spec homes
  
12,925
   
—
   
—
   
—
   
—
   
—
   
12,925
 
Development & spec land
  
35,881
   
—
   
—
   
—
   
73
   
73
   
35,954
 
Commercial and industrial
  
503,348
   
819
   
11
   
—
   
1,681
   
2,511
   
505,859
 
                             
Total commercial
  
2,039,953
   
1,819
   
11
   
—
   
5,863
   
7,693
   
2,047,646
 
Real estate
                     
Residential mortgage
  
740,712
   
1,984
   
—
   
1
   
8,322
   
10,307
   
751,019
 
Residential construction
  
19,686
   
—
   
—
   
—
   
—
   
—
   
19,686
 
Mortgage warehouse
  
150,293
   
—
   
—
   
—
   
—
   
—
   
150,293
 
                             
Total real estate
  
910,691
   
1,984
   
—
   
1
   
8,322
   
10,307
   
920,998
 
Consumer
                     
Direct installment
  
40,864
   
175
   
5
   
5
   
30
   
215
   
41,079
 
Indirect installment
  
344,478
   
2,407
   
404
   
135
   
1,234
   
4,180
   
348,658
 
Home equity
  
273,050
   
904
   
20
   
5
   
2,236
   
3,165
   
276,215
 
                             
Total consumer
  
658,392
   
3,486
   
429
   
145
   
3,500
   
7,560
   
665,952
 
                             
Total
 $
3,609,036
  $
7,289
  $
440
  $
146
  $
17,685
  $
25,560
  $
3,634,596
 
                             
Percentage of total loans
  
99.30
%  
0.20
%  
0.01
%  
0.00
%  
0.49
%  
0.70
%  
100.00
%
100
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

December 31, 2015  30 - 59 Days
Past Due		  60 - 89 Days
Past Due		  90 Days or
Greater Past Due		  Total Past Due  Loans Not Past
Due		  Total 

Commercial

       

Owner occupied real estate

  $481  $18  $—    $499  $267,782  $268,281 

Non owner occupied real estate

   49   —     —     49   326,350   326,399 

Residential development

   —     —     —     —     5,018   5,018 

Development & Spec Land Loans

   —     —     —     —     18,183   18,183 

Commercial and industrial

   32   —     —     32   184,879   184,911 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   562   18   —     580   802,212   802,792 

Real estate

       

Residential mortgage

   1,121   344   1   1,466   413,458   414,924 

Residential construction

   —     —     —     —     19,751   19,751 

Mortgage warehouse

   —     —     —     —     144,692   144,692 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   1,121   344   1   1,466   577,901   579,367 

Consumer

       

Direct Installment

   106   10   —     116   54,225   54,341 

Direct Installment Purchased

   —     —     —     —     153   153 

Indirect Installment

   1,186   268   27   1,481   150,042   151,523 

Home Equity

   1,193   203   —     1,396   155,768   157,164 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

   2,485   481   27   2,993   360,188   363,181 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $4,168  $843  $28  $5,039  $1,740,301  $1,745,340 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   0.24%   0.05%   0.00%   0.29%   99.71%  

 
December 31, 2018
 
 
Current
  
30-59
 Days
Past Due
  
60-89
 Days
Past Due
  
90 Days or
Greater
Past Due
  
Non-accrual

&
Non-peforming

TDRs
  
Total Past Due
&
Non-accrual

Loans
  
Total
 
Commercial
                     
Owner occupied real estate
 $
439,542
  $
537
  $
1,016
  $
208
  $
3,531
  $
5,292
  $
444,834
 
Non-owner
occupied real estate
  
851,587
   
203
   
19
   
—  
   
1,046
   
1,268
   
852,855
 
Residential spec homes
  
4,703
   
492
   
—  
   
—  
   
—  
   
492
   
5,195
 
Development & spec land
  
50,638
   
—  
   
—  
   
—  
   
68
   
68
   
50,706
 
Commercial and industrial
  
365,817
   
487
   
717
   
—  
   
1,941
   
3,145
   
368,962
 
                             
Total commercial
  
1,712,287
   
1,719
   
1,752
   
208
   
6,586
   
10,265
   
1,722,552
 
Real estate
                     
Residential mortgage
  
639,458
   
1,131
   
56
   
180
   
3,269
   
4,636
   
644,094
 
Residential construction
  
24,030
   
—  
   
—  
   
—  
   
—  
   
—  
   
24,030
 
Mortgage warehouse
  
74,120
   
—  
   
—  
   
—  
   
—  
   
—  
   
74,120
 
                             
Total real estate
  
737,608
   
1,131
   
56
   
180
   
3,269
   
4,636
   
742,244
 
Consumer
                     
Direct installment
  
34,957
   
93
   
18
   
—  
   
35
   
146
   
35,103
 
Indirect installment
  
311,494
   
1,396
   
198
   
173
   
916
   
2,683
   
314,177
 
Home equity
  
194,890
   
761
   
37
   
7
   
1,799
   
2,604
   
197,494
 
                             
Total consumer
  
541,341
   
2,250
   
253
   
180
   
2,750
   
5,433
   
546,774
 
                             
Total
 $
2,991,236
  $
5,100
  $
2,061
  $
568
  $
12,605
  $
20,334
  $
3,011,570
 
                             
Percentage of total loans
  
99.32
%  
0.17
%  
0.07
%  
0.02
%  
0.42
%  
0.68
%  
100.00
%
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being
re-evaluated
for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.

For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective marketsregions (ranging from $1,000,000$1,500,000 to $2,500,000)$3,500,000) are validated by the Loan Committee, which is chaired by the Executive Vice President and Chief CreditCommercial Banking Officer (CCO)(EVP/CCBO).

Commercial loan officers are responsible for reviewing their loan portfolios and reportreporting any adverse material change to the CCOEVP/CCBO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCOEVP/CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCO,EVP/CCBO, however, lenders must present their factual information to either the Loan Committee or the CCOEVP/CCBO when recommending an upgrade.

The CCO,EVP/CCBO, or hisa designee, meets weeklyperiodically with loan officers to discuss the status of
past-due
loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.

Monthly, senior management meets withas members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management’s analysis of the adequacy of the Allowance for Loan and Lease Losses.

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on
non-accrual,
or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on
non-accrual.
Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.

HORIZON BANCORPAND SUBSIDIARIES

10
1
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Horizon Bank employs a nine-grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.

Risk Grade 1: Excellent (Pass)

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2: Good (Pass)

Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.

Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

•At inception, the loan was properly underwritten, didnot possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

At inception, the loan was properly underwritten, did
not
possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;
At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.

Risk Grade 4W Management Watch:

Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.

HORIZON BANCORPAND SUBSIDIARIES

10
2
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Risk Grade 5: Special Mention

Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of anunwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.

Risk Grade 6: Substandard

One or more of the following characteristics may be exhibited in loans classified Substandard:

Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

Loans are inadequately protected by the current net worth and paying capacity of the obligor.

The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

Unusual courses of action are needed to maintain a high probability of repayment.

The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

The lender is forced into a subordinated or unsecured position due to flaws in documentation.

Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7: Doubtful

One or more of the following characteristics may be present in loans classified Doubtful:

Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8: Loss

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

HORIZON BANCORPAND SUBSIDIARIES

10
3
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table presents loans by credit grades.

December 31, 2016  Pass  Special
Mention		  Substandard  Doubtful  Total 

Commercial

      

Owner occupied real estate

  $322,924  $4,960  $9,664  $—    $337,548 

Non owner occupied real estate

   455,648   341   5,908   —     461,897 

Residential development

   5,006   —     —     —     5,006 

Development & Spec Land Loans

   31,057   —     171   —     31,228 

Commercial and industrial

   220,424   3,728   6,368   —     230,520 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   1,035,059   9,029   22,111   —     1,066,199 

Real estate

      

Residential mortgage

   503,444   —     4,789   —     508,233 

Residential construction

   20,378   —     233   —     20,611 

Mortgage warehouse

   135,727   —     —     —     135,727 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   659,549   —     5,022   —     664,571 

Consumer

      

Direct Installment

   70,638   —     512   —     71,150 

Direct Installment Purchased

   119   —     —     —     119 

Indirect Installment

   152,496   —     708   —     153,204 

Home Equity

   173,117   —     2,009   —     175,126 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Consumer

   396,370   —     3,229   —     399,599 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $2,090,978  $9,029  $30,362  $—    $2,130,369 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   98.15%   0.42%   1.43%   0.00%  

December 31, 2015  Pass  Special
Mention		  Substandard  Doubtful  Total 

Commercial

      

Owner occupied real estate

  $257,181  $4,954  $6,146  $—    $268,281 

Non owner occupied real estate

   320,216   585   5,598   —     326,399 

Residential development

   5,018   —     —     —     5,018 

Development & Spec Land Loans

   18,112   —     71   —     18,183 

Commercial and industrial

   180,581   693   3,637   —     184,911 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   781,108   6,232   15,452   —     802,792 

Real estate

      

Residential mortgage

   408,937   —     5,987   —     414,924 

Residential construction

   19,501   —     250   —     19,751 

Mortgage warehouse

   144,692   —     —     —     144,692 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   573,130   —     6,237   —     579,367 

Consumer

      

Direct Installment

   53,800   —     541   —     54,341 

Direct Installment Purchased

   153   —     —     —     153 

Indirect Installment

   150,895   —     628   —     151,523 

Home Equity

   154,895   —     2,269   —     157,164 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Consumer

   359,743   —     3,438   —     363,181 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $1,713,981  $6,232  $25,127  $—    $1,745,340 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   98.20%   0.36%   1.44%   0.00%  

HORIZON BANCORPAND SUBSIDIARIES

 
December 31, 2019
 
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
Commercial
               
Owner occupied real estate
 $
492,386
  $
8,328
  $
 18,863
  $
—  
  $
519,577
 
Non-owner
occupied real estate
  
957,990
   
7,824
   
7,517
   
—  
   
973,331
 
Residential spec homes
  
12,925
   
—  
   
—  
   
—  
   
12,925
 
Development & spec land
  
35,815
   
—  
   
139
   
—  
   
35,954
 
Commercial and industrial
  
468,893
   
18,652
   
18,314
   
—  
   
505,859
 
                     
Total commercial
  
1,968,009
   
34,804
   
44,833
   
—  
   
2,047,646
 
Real estate
               
Residential mortgage
  
741,136
   
—  
   
9,883
   
—  
   
751,019
 
Residential construction
  
19,686
   
—  
   
—  
   
—  
   
19,686
 
Mortgage warehouse
  
150,293
   
—  
   
—  
   
—  
   
150,293
 
                     
Total real estate
  
911,115
   
—  
   
9,883
   
—  
   
920,998
 
Consumer
               
Direct installment
  
41,044
   
—  
   
35
   
—  
   
41,079
 
Indirect installment
  
347,289
   
—  
   
1,369
   
—  
   
348,658
 
Home equity
  
273,665
   
—  
   
2,550
   
—  
   
276,215
 
                     
Total consumer
  
661,998
   
—  
   
3,954
   
—  
   
665,952
 
                     
Total
 $
3,541,122
  $
34,804
  $
 58,670
  $
—  
  $
3,634,596
 
                     
Percentage of total loans
  
97.43
%  
0.96
%  
1.61
%  
0.00
%  
100.00
%
 
December 31, 2018
 
 
Pass
  
Special
Mention
  
Substandard
  
Doubtful
  
Total
 
Commercial
               
Owner occupied real estate
 $
426,887
  $
3,664
  $
 14,283
  $
—  
  $
444,834
 
Non-owner
occupied real estate
  
834,582
   
9,682
   
8,591
   
—  
   
852,855
 
Residential spec homes
  
5,195
   
—  
   
—  
   
—  
   
5,195
 
Development & spec land
  
47,523
   
3,115
   
68
   
—  
   
50,706
 
Commercial and industrial
  
354,630
   
6,591
   
7,741
   
—  
   
368,962
 
                     
Total commercial
  
1,668,817
   
23,052
   
30,683
   
—  
   
1,722,552
 
Real estate
               
Residential mortgage
  
639,267
   
—  
   
4,827
   
—  
   
644,094
 
Residential construction
  
24,030
   
—  
   
—  
   
—  
   
24,030
 
Mortgage warehouse
  
74,120
   
—  
   
—  
   
—  
   
74,120
 
                     
Total real estate
  
737,417
   
—  
   
4,827
   
—  
   
742,244
 
Consumer
               
Direct installment
  
35,068
   
—  
   
35
   
—  
   
35,103
 
Indirect installment
  
313,088
   
—  
   
1,089
   
—  
   
314,177
 
Home equity
  
195,353
   
—  
   
2,141
   
—  
   
197,494
 
                     
Total consumer
  
543,509
   
—  
   
3,265
   
—  
   
546,774
 
                     
Total
 $
2,949,743
  $
23,052
  $
 38,775
  $
—  
  $
3,011,570
 
                     
Percentage of total loans
  
97.95
%  
0.76
%  
1.29
%  
0.00
%  
100.00
%
10
4
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 9 – Premises and Equipment

   December 31
2016		   December 31
2015		 

Land

  $20,032   $19,475 

Buildings and improvements

   59,607    55,341 

Furniture and equipment

   19,965    15,702 
  

 

 

   

 

 

 

Total cost

   99,604    90,518 

Accumulated depreciation

   (33,247)    (29,720) 
  

 

 

   

 

 

 

Net premise and equipment

  $66,357   $60,798 
  

 

 

   

 

 

 

 
December 31
  
December 31
 
 
2019
  
2018
 
Land
 $
27,292
  $
21,604
 
Buildings and improvements
  
83,669
   
69,590
 
Furniture and equipment
  
27,482
   
24,596
 
         
Total cost
  
138,443
   
115,790
 
Accumulated depreciation
  
(46,234
)  
(41,459
)
         
Net premises and equipment
 $
92,209
  $
74,331
 
         
Note 10 – Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1.3$1.4 billion and $1.2$1.3 billion at December 31, 20162019 and 2015.

2018.

The aggregate fair value of capitalized mortgage servicing rights was approximately $12.1$14.4 million, $10.8$13.9 million and $10.5$12.8 million at December 31, 2016, 20152019, 2018 and 2014,2017, compared to the carrying values of $11.1$14.3 million, $8.9$12.3 million and $7.6$11.6 million, respectively. The fair value of capitalized mortgage servicing rights was approximately $7.0$11.7 million on January 1, 2014.2017. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.

   December 31
2016		   December 31
2015		   December 31
2014		 

Mortgage servicing rights

      

Balances, January 1

  $9,271   $7,980   $7,428 

Servicing rights capitalized

   3,426    2,974    2,280 

Amortization of servicing rights

   (1,016)    (1,683)    (1,728) 
  

 

 

   

 

 

   

 

 

 

Balances, December 31

   11,681    9,271    7,980 
  

 

 

   

 

 

   

 

 

 

Impairment allowance

      

Balances, January 1

   (397)    (338)    (389) 

Additions

   (236)    (130)    (95) 

Reductions

   126    71    146 
  

 

 

   

 

 

   

 

 

 

Balances, December 31

   (507)    (397)    (338) 
  

 

 

   

 

 

   

 

 

 

Mortgage servicing rights, net

  $11,174   $8,874   $7,642 
  

 

 

   

 

 

   

 

 

 

 
December 31
  
December 31
  
December 31
 
 
2019
  
2018
  
2017
 
Mortgage servicing rights
         
Balances, January 1
 $
 12,876
  $
 12,189
  $
 11,681
 
Servicing rights capitalized
  
3,547
   
1,883
   
2,109
 
Amortization of servicing rights
  
(1,377
)  
(1,196
)  
(1,601
)
             
Balances, December 31
  
15,046
   
12,876
   
12,189
 
             
Impairment allowance
         
Balances, January 1
  
(527
)  
(587
)  
(507
)
Additions
  
(234
)  
(78
)  
(85
)
Reductions
  
42
   
138
   
5
 
             
Balances, December 31
  
(719
)  
(527
)  
(587
)
             
Mortgage servicing rights, net
 $
 14,327
  $
 12,349
  $
 11,602
 
             
During 2016, 20152019, 2018 and 2014,2017 the Bank recorded recovery and additional (impairment)impairment of approximately $(110,000), $(59,000)$192,000, $60,000 and $51,000,$80,000, respectively.

Note 11 – Goodwill and Intangible Assets

On November 7, 2016,March 26, 2019, the CNBSalin acquisition resulted in goodwill of $609,000. $31.2 million.
On July 18, 2016,October 
17
,
2017
, the LaPorteWolverine acquisition resulted in goodwill of $20.3$
26.8
 million. On June September 
1 2016,
,
2017
, the KosciuskoLafayette acquisition resulted in goodwill of $6.4$
15.4
 million. On July 1, 2015, the Peoples acquisition resulted
10
5
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in goodwill of $21.4 million. Additionally, on April 3, 2014, the Summit acquisition resulted in goodwill of $8.4 million.

Nothousands except for per share data)

NaN impairment loss was recorded in 20162019 or 2015.2018. The Company tested goodwill for impairment during 20162019 and 2015.2018. In both valuations, the fair value exceeded the Company’s carrying value, therefore, it was concluded goodwill is not impaired. For additional details related to impairment testing, see the “Goodwill and Intangible Assets” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Item 7 of this Annual Report on Form 10K.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

   2016   2015 

Balance, January 1

  $49,600   $28,176 

Goodwill acquired

   27,341    21,424 
  

 

 

   

 

 

 

Balance, December 31

  $76,941   $49,600 
  

 

 

   

 

 

 

         
 
December 31
  
December 31
 
 
2019
  
2018
 
Balance, January 1
 $
 119,880
  $
 119,880
 
Goodwill acquired
  31,358   
—  
 
         
Balance, December 31
 $
 151,238
  $
 119,880
 
         
As a result of the acquisition of Alliance Bank Corporation in 2005, American Trust & Savings Bank in 2010,2010; Heartland in 2012,2012; Summit in 2014,2014; Peoples in 2015,2015; Kosciusko, LaPorte and CNB in 2016,2016; Lafayette and Wolverine in 2017; and Salin in 2019; the Company has recorded certain amortizable intangible assets related to core deposit intangibles. TheThese core deposit intangible isintangibles are being amortized over seven to ten years using an accelerated method. Amortizable intangible assets are summarized as follows:

   December 31, 2016   December 31, 2015 
   Gross Carrying
Amount		   Accumulated
Amortization		   Gross Carrying
Amount		   Accumulated
Amortization		 

Amortizable intangible assets

        

Core deposit intangible

  $16,151   $(6,785)   $12,920   $(5,549) 

                 
 
December 31, 2019
  
December 31, 2018
 
 
Gross Carrying
Amount
  
Accumulated
Amortization
  
Gross Carrying
Amount
  
Accumulated
Amortization
 
Amortizable intangible assets                
Core deposit intangible
 $
 40,590
  $
 (13,911
) $
 20,711
  $
 (10,321
)
Amortization expense for intangibleinta
n
gible assets totaled $1.2$3.5 million, $988,000,$2.0 million, and $880,000$1.5 million for the years ended December 31, 2016, 20152019, 2018 and 2014.2017. Estimated amortization for the years ending December 31 is as follows:

2017

  $1,425 

2018

   1,422 

2019

   1,280 

2020

   984 

2021

   910 

Thereafter

   3,345 
  

 

 

 
  $9,366 
  

 

 

 

follows
:
     
2020
 $
3,723
 
2021
  
3,591
 
2022
  
3,516
 
2023
  
3,430
 
2024
  
3,225
 
Thereafter
  
9,194
 
     
 $
26,679
 
     
Note 12 – Deposits

   December 31   December 31 
   2016   2015 

Noninterest-bearing demand deposits

  $496,248   $335,955 

Interest-bearing demand deposits

   850,641    706,739 

Money market (variable rate)

   290,896    231,956 

Savings deposits

   357,582    238,956 

Certificates of deposit of $250,000 or more

   105,361    67,697 

Other certificates and time deposits

   370,482    298,850 
  

 

 

   

 

 

 

Total deposits

  $2,471,210   $1,880,153 
  

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

Leases

As of January 1, 2019, when the Company adopted ASU
2016-02
prospectively, the Company began recording operating leases as a
right-of-use
(“ROU”) asset in other assets and operating lease liability in other liabilities on the consolidated balance sheet. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating liability, is recognized on a straight-line basis over the lease term, and is recorded primarily in net occupancy expense in the consolidated statements of income.
10
6
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

When the Company adopted the guidance on January 1, 2019, it elected the optional alternative transition method permitted by ASU
2018-11
allowing for recognition of applicable leases as of January 1, 2019. Additionally, the Company elected the following accounting policies:
The practical expedient package that forgoes:
Reassessment of any expired or existing contracts for a lease
Reassessment of lease classification for expired or existing leases
Reassessment of initial direct costs for existing leases
The hindsight practical expedient to determine lease term and impairment of ROU assets
Other practical expedients regarding combination of lease and
non-lease
components and the exclusion of short-term leases
The Company did not elect to follow the practical expedients for land easements and the portfolio approach
Operating leases relate primarily to bank branches and office space with remaining average lease terms of seven years. The weighted average discount rate utilized to calculate the ROU asset and operating lease liability was approximately 2.57%, which represents the incremental borrowing rate. At inception, the Company recorded a ROU asset and operating lease liability of $3.5 million. At December 31, 2019, a ROU asset of $2.7 million is included in other assets and an operating lease liability of $2.7 million is included in other liabilities. Options to extend a lease were considered in the remaining lease term determination. The lease expense for operating leases was $591,000 for the year ended December 31, 2019.
The weighted average remaining life of leases was 6.4 years at December 31, 2019.
Future minimum operating lease payments under
non-cancellable
leases with initial or remaining lease terms at December 31, 2019 were as follows:
     
Year
 
Amount
 
2020
 $
476
 
2021
  
476
 
2022
  
504
 
2023
  
504
 
2024 and thereafter
  
1,105
 
     
Total lease payments
 $
3,065
 
     
Less: Interest
  
(51
)
     
Present value of lease liabilities
 $
3,014
 
     
Note 13 – Deposits
         
 
December 31
  
December 31
 
 
2019
  
2018
 
Noninterest-bearing demand deposits
 $
709,760
  $
642,129
 
Interest-bearing demand deposits
  
1,159,296
   
864,026
 
Money market (variable rate)
  
522,382
   
420,123
 
Savings deposits
  
563,952
   
400,187
 
Certificates of deposit of $250,000 or more
  
461,435
   
371,824
 
Other certificates and time deposits
  
514,177
   
441,087
 
         
Total deposits
 $
3,931,002
  $
3,139,376
 
         
10
7
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Certificates and other time deposits for both retailre
t
ail and brokered maturing in years ending December 31 are as follows:

   Retail   Brokered   Total 

2017

  $215,751   $41,320   $257,071 

2018

   74,148    1,250    75,398 

2019

   73,774    —      73,774 

2020

   31,702    —      31,702 

2021

   12,528    3,150    15,678 

Thereafter

   19,741    2,479    22,220 
  

 

 

   

 

 

   

 

 

 
  $427,644   $48,199   $475,843 
  

 

 

   

 

 

   

 

 

 

             
 
Retail
  
Brokered
  
Total
 
2020
 $
722,672
  $
24,350
  $
747,022
 
2021
  
102,449
   
20,508
   
122,957
 
2022
  
32,925
   
15,256
   
48,181
 
2023
  
16,527
   
16,648
   
33,175
 
2024
  
22,995
   
—  
   
22,995
 
Thereafter
  
1,282
   
—  
   
1,282
 
             
 $
898,850
  $
76,762
  $
975,612
 
             
Note 1314 – Borrowings

   December 31   December 31 
   2016   2015 

Federal Home Loan Bank advances, variable and fixed rates ranging from 0.74% to 7.53%, due at various dates through November 15, 2024

  $124,034   $158,948 

Securities sold under agreements to repurchase

   57,144    154,399 

Federal funds purchased

   66,811    136,000 

Notes payable, variable rate of 2.75%, due at various dates through July 13, 2019

   19,500    —   
  

 

 

   

 

 

 

Total borrowings

  $267,489   $449,347 
  

 

 

   

 

 

 

         
 
December 31
  
December 31
 
 
2019
  
2018
 
Federal Home Loan Bank advances, variable and fixed rates ranging from 0.68% to 7.53%, due at various dates through August 20, 2029
 $
 390,800
  $
 356,579
 
Securities sold under agreements to repurchase
  
90,941
   
52,116
 
Federal funds purchased
  
68,000
   
141,689
 
         
Total borrowings
 $
 549,741
  $
 550,384
 
         
The Federal Home Loan Bank advances are secured by first and second mortgage loans and mortgage warehouse loans totaling approximately $537.8$905.9 million. Advances are subject to restrictions or penalties in the event of prepayment.

At December 31, 2016,2019, the Bank had a total of $125.0 million in putable advances. The call dates for these advances range from February 20, 2020 to October 24, 2022 even though maturity dates extend beyond those dates.
At December 31, 2019, the Bank had available approximately $453.9$517.1 million in credit lines with various money center banks, including the FHLB.

Contractual maturities in years ending December 31 are as follows:

2017

  $203,610 

2018

   33,328 

2019

   21,957 

2020

   2,847 

2021

   5,317 

Thereafter

   430 
  

 

 

 
  $267,489 
  

 

 

 
     
2020
 $
276,970
 
2021
  
15,102
 
2022
  
52,222
 
2023
  
183
 
2024
  
80,116
 
Thereafter
  
125,148
 
     
 $
549,741
 
     
108
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)

Note 1415 – Repurchase Agreements

The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remain under the Bank’s control. Securities sold under agreements to repurchase are secured by federal agency collateralized mortgage obligations and mortgage-backed pools.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table shows repurchase agreements accounted for as secured borrowings (in thousands):

   Remaining Contractual Maturity of the Agreements 
December 31, 2016  Overnight
and
Continuous		   Up to one
year		   One to
three years		   Three to
five years		   Five to ten
years		   Beyond ten
years		   Total 

Repurchase Agreements andrepurchase-to-maturity transactions

              

Repurchase Agreements

  $57,144   $—     $—     $—     $—     $—     $57,144 

Securities pledged for Repurchase Agreements

              

U.S. Treasury and federal agencies

  $—     $—     $—     $—     $—     $—     $—   

Federal agency collateralized mortgage obligations

   44,408    —      —      —      —      —      44,408 

Federal agency mortgage-backed pools

   19,980    —      —      —      —      —      19,980 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $64,388   $—     $—     $—     $—     $—     $64,388 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities sold under agreements to repurchase consist of obligations of the Bank to other parties. The obligations are secured by U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations and federal agency mortgage-backed pools and such collateral is held in safekeeping by third parties. The maximum amount of outstanding agreements at any month end during 20162019 and 20152018 totaled $157.7$97.3 million and $156.2$61.4 million and the daily average of such agreements totaled $134.2$81.3 million and $149.9$51.4 million. The agreements at December 31, 2016,2019 are overnight agreements.

The following table shows repurchase agreements accounted for as secured borrowings:
                             
 
December 31, 2019
 
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight
and
Continuous
  
Up to one
year
  
One to three
years
  
Three to five
years
  
Five to ten
years
  
Beyond ten
years
  
Total
 
Repurchase Agreements and
repurchase-to-maturity
transactions
                     
Repurchase Agreements
 $
90,941
  $
—  
  $
 —  
  $
 —  
  $
 —  
  $
 —  
  $
90,941
 
Securities pledged for
Repurchase Agreements
                     
Federal agency collateralized
mortgage obligations
 $
35,537
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
35,537
 
Federal agency
mortgage-backed pools
  
71,234
   
—  
   
—  
   
—  
   
—  
   
—  
   
71,234
 
                             
Total
 $
106,771
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
106,771
 
                             

Note 1516 – Subordinated Debentures

In October of 2004, Horizon formed Horizon Statutory Trust II (“Trust II”), a wholly owned statutory business trust. Trust II sold $10.3 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90-day
LIBOR plus 1.95% (2.95%(3.86% at December 31, 2016)2019) and mature on October 21,November 23, 2034, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $17,500 were capitalized and were amortized to October 31, 2009, the first call date of the securities.

In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (“Trust III”), a wholly owned statutory business trust. Trust III sold $12.4 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90-day
LIBOR plus 1.65% (2.65%
(
3.56% at December 31, 2016)2019) and mature on January 30, 2037, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $12,647 were capitalized and are being amortized to the first call date of the securities.

109
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The Company assumed additional debentures as the result of the acquisition of Alliance Bank Corporation in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I a wholly owned business trust (“Alliance Trust”), to sell $5.2 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Alliance. The junior subordinated debentures are the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90-day
LIBOR plus 2.65% (3.65%(4.56% at December 31, 2016)2019) and mature in June 2034, and securities may be called at any quarterly interest payment date at par.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The Company assumed additional debentures as the result of the American Trust & Savings Bank purchase and assumption in 2010. In March 2004, Am Tru Inc., the holding company for American Trust & Savings Bank, formed Am Tru Statutory Trust I a wholly owned business trust (“Am Tru Trust”), to sell $3.5 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Am Tru Inc. The junior subordinated debentures are the sole assets of Am Tru Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90-day
LIBOR plus 2.85% (3.85%(4.76% at December 31, 2016)2019) and mature in March 2034,December 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $3.2$3.5 million, net of the remaining purchase discount, at December 31, 2016.

2019.

The Company assumed additional debentures as the result of the Heartland merger in July 2012. In December 2006, Heartland formed Heartland (IN) Statutory Trust II a wholly owned business trust (“Heartland Trust”), to sell $3.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Heartland. The junior subordinated debentures are the sole assets of Heartland Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90-day
LIBOR plus 1.67% (2.67%(3.58% at December 31, 2016)2019) and mature in December 2036, and securities may be called at any quarterly interest payment date at par. The carrying value was $1.7$1.9 million, net of the remaining purchase discount, at December 31, 2016.

2019.

The Company assumed additional debentures as the result of the LaPorte merger in July 2016. In October 2007, LaPorte assumed debentures as the result of its acquisition of City Savings Financial Corporation (“City Savings”). In June 2003, City Savings formed City Savings Statutory Trust I a wholly owned business trust (“City Savings Trust”), to sell $5.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from City Savings. The junior subordinated debentures are the sole assets of City Savings Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90-day
LIBOR plus 3.10% (4.10%(5.01% at December 31, 2016)2019) and mature in June 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $4.3$4.4 million, net of the remaining purchase discount, at December 31, 2016.

2019.

The Company assumed additional debentures as the result of the Salin merger in March 2019. In October 2003, Salin Bancshares, Inc. (“Salin”) formed Salin Statutory Trust I (“Salin Trust”), to sell $20.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Salin. The junior subordinated debentures are the sole assets of Salin Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the securities bear interest at a rate of
90-day
LIBOR plus 2.95% (4.86% at December 31, 2019) and mature in October 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $17.7 million, net of the remaining purchase discount, at December 31, 2019.
1
10
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1 Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded as interest expense.

Note 1617 – Employee Stock Ownership Plan

Effective January 1, 2007, Horizon converted its stock bonus plan to an employee stock ownership plan (“ESOP”). Prior to that date, Horizon maintained an employee stock bonus plan that covered substantially all employees. The stock bonus plan was noncontributory, and Horizon made matching contributions of amounts contributed by the employees to the Employee Thrift Plan and discretionary contributions. Prior to the establishment of the employee stock bonus plan, Horizon maintained an ESOP that was terminated in 1999. The prior ESOP accounts of active employees and the discretionary accounts of active employees remain in the new ESOP. The Matching contribution accounts under the stock bonus plan were transferred to the EmployeesEmployee Thrift Plan.

The ESOP exists for the benefit of substantially all employees. Contributions to the ESOP are by Horizon and are determined by the Board of Directors at its discretion. The contributions may be made in the form of cash or common stock. Shares are allocated among participants each December 31 on the basis of each participant’s eligible compensation to total eligible compensation. Eligible compensation is limited to $265,000 for each participant. Dividends on shares held by the plan, at the discretion of each participant, may be distributed to an individual participant or left in the plan to purchase additional shares.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Total cash contributions and expense recorded for the ESOP was $550,000$719,000 in 2016, $450,0002019, $750,000 in 20152018 and $400,000$600,000 in 2014.

2017.

The ESOP, which is not leveraged, owns a total of 1,131,6291,344,625 shares of Horizon’s stock or 5.1%3.0% of the outstanding shares.

shares as of December 31, 2019.

Note 1718 – Employee Thrift and Defined Benefit Plan

The Employee Thrift Plan (“Plan”) provides that all employees of Horizon with the requisite hours of service are eligible for the Plan. The Plan permits voluntary employee contributions and Horizon may make discretionary matching and profit sharing contributions. Each eligible employee is vested according to a schedule based upon years of service. Employee voluntary contributions are vested at all times. The Bank’s expense related to the Plan totaled approximately $785,000$1.2 million in 2016, $848,0002019, $1.2 million in 20152018 and $633,000$942,000 in 2014.

2017.

The Plan owns a total of 501,923741,650 shares of Horizon’s stock or 2.3%1.6% of the outstanding shares.

shares as of December 31, 2019.

1
11
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The Company acquired a pension fund known as the Pentegra Defined Benefit Plan (“Pentegra Plan”) in the Peoples acquisition. Prior to August 1, 2007, Peoples provided pension benefits for substantially all of its employees through its participation in the Pentegra Plan. Peoples chose to freeze the Pentegra Plan effective August 1, 2007. The trustees of the Financial Institutions Retirement Fund administer the Pentegra Plan, employer identification number13-5645888 and plan number 333. This plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra Plan. The Pentegra Plan is a single plan under Internal Revenue Code 413(c) and, as a result, all of the assets stand behind all of the liabilities.

The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:

Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.

If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

If the Company chooses to stop participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

There was no0 expense to the Company in 20162019 and 20152018 for this Pentegra Plan. The Company intends on terminating this Pentegra Plan during the first quarter of 2017 20
20
and has recorded a $3.4$3.1 million withdrawal liability for the termination of the Pentegra Plan.

HORIZON BANCORPAND SUBSIDIARIES

11
2
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 1819 – Income Tax

   December 31   December 31   December 31 
   2016   2015   2014 

Income tax expense

      

Currently payable

      

Federal

  $7,467   $5,511   $4,561 

Deferred

   1,334    1,721    1,594 
  

 

 

   

 

 

   

 

 

 

Total income tax expense

  $8,801   $7,232   $6,155 
  

 

 

   

 

 

   

 

 

 

Reconciliation of federal statutory to actual tax expense

      

Federal statutory income tax at 35%

  $11,450   $9,724   $8,488 

Tax exempt interest

   (1,882)    (1,708)    (1,628) 

Tax exempt income

   (575)    (488)    (366) 

Other tax exempt income

   (608)    (199)    (309) 

Nondeductible and other

   416    (97)    (30) 
  

 

 

   

 

 

   

 

 

 

Actual tax expense

  $8,801   $7,232   $6,155 
  

 

 

   

 

 

   

 

 

 

   December 31   December 31 
   2016   2015 

Assets

    

Allowance for loan losses

  $5,581   $5,329 

Net operating loss (from acquisitions)

   2,368    1,679 

Director and employee benefits

   3,124    2,223 

Unrealized loss on AFS securities and fair value hedge

   937    711 

Accrued Pension

   1,323    1,725 

Fair value adjustment on acquisitions

   2,340    756 

Other

   1,593    273 
  

 

 

   

 

 

 

Total assets

   17,266    12,696 
  

 

 

   

 

 

 

Liabilities

    

Depreciation

   (1,916)    (2,180) 

State tax

   (341)    (192) 

Federal Home Loan Bank stock dividends

   (474)    (343) 

Difference in basis of intangible assets

   (4,654)    (2,938) 

FHLB Penalty

   —      (123) 

Other

   (431)    (589) 
  

 

 

   

 

 

 

Total liabilities

   (7,816)    (6,040) 

Valuation allowance

   (2,018)    (1,082) 
  

 

 

   

 

 

 

Net deferred tax asset

  $7,432   $5,249 
  

 

 

   

 

 

 

             
 
December 31
  
December 31
  
December 31
 
 
2019
  
2018
  
2017
 
Income tax expense
         
Currently payable
         
Federal
 $
11,143
  $
9,166
  $
12,079
 
State
  
140
   
—
   
—
 
Deferred
         
Federal
  
1,787
   
1,277
   
331
 
State
  
233
   
—
   
—
 
Revaluation of deferred tax assets
  
—
   
—
   
2,426
 
             
Total income tax expense
 $
13,303
  $
10,443
  $
14,836
 
             
Reconciliation of federal statutory to actual tax expense
         
Federal statutory income tax at 21% in 201
9
and
2
018
35% in 2017
 $
16,767
  $
13,348
  $
16,783
 
Tax exempt interest
  
(2,977
)  
(1,982
)  
(2,699
)
Tax exempt income
  
(587
)  
(448
)  
(638
)
Stock compensation
  
(324
)  
(384
)  
(546
)
Revaluation of deferred tax assets
  
—
   
—
   
2,426
 
Other tax exempt income
  
(313
)   
(260
)  
(456
)
State tax
  295   
 
—
   
 
—
 
Nondeductible and other
  
442
   
169
   
(34
)
             
Actual tax expense
 $
13,303
  $
10,443
  $
14,836
 
             
         
 
December 31
  
December 31
 
 
2019
  
2018
 
Assets
      
Allowance for loan losses
 $
4,120
  $
3,831
 
Net operating loss and tax credits (from acquisitions)
  
54
   
1,038
 
Director and employee benefits
  
1,890
   
2,392
 
Unrealized loss on AFS securities and fair value hedge
  
—
   
2,165
 
Accrued pension
  
775
   
801
 
Fair value adjustment on acquisitions
  
—
   
—
 
Other
  
2,145
   
670
 
         
Total assets
  
8,984
   
10,897
 
         
Liabilities
      
Depreciation
  
(4,456
)  
(1,850
)
State tax
  
(10
)  
(137
)
Federal Home Loan Bank stock dividends
  
(368
)  
(330
)
Difference in basis of intangible assets
  
(3,427
)  
(2,919
)
Fair value adjustment on acquisitions
  
(2,488
)  
(62
)
Unrealized gain on AFS securities and fair value hedge
  (1,710
)
  — 
Other
  
(63
)  
(119
)
         
Total liabilities
  
(12,522
)  
(5,417
)
Valuation allowance
  
—
   
(1,038
)
         
Net deferred tax asset/(liability)
 $
(3,538
) $
4,442
 
         
11
3
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
As of December 31, 2016,2019, the Company had approximately $31.2 million$900,000 of state tax loss carryforward available to offset future franchise taxable income. Also, at December 31, 2016, the Company had approximately $970,000 of Federal loss carryforward available to offset future federal income tax. The state loss carryforward begins to expire in 2024. The Federal loss carryforward begins to expire in 2032. 2031. 
Due to thesethe
s
e losses being incurred by acquired institutions, prior to the acquisitions by Horizon, the annual losses which can be used are subject to an annual limitation. Management believes that the Company will be able to fully utilize the benefits recorded for both state and federal loss carryforwards within the allotted time periods, except for the amount represented byand has reversed the valuation allowance. The valuation allowance has beenpreviously recorded for the possible inability to use a portion of the state net operating loss carryover.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

carryforwards.

Retained earnings of the Bank include approximately $10.8$12.8 million for which no deferred income tax liability has been recognized. This amount represents an allocation of previously acquired institutions income to bad debt deductions as of December 31, 1987 for tax purposes only. Reductions of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of “bank” status would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for the Company was approximately $3.8$2.7 million at December 31, 2016.

2019.

The Company files income tax returns in the U.S. federal jurisdiction. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or
non-U.S.
income tax examinations by tax authorities for years before 2013.

2016.

Note 1920 – Accumulated Other Comprehensive Income (Loss)

Loss

The components of accumulated other comprehensive income (loss)loss included in capital are as follows:

   December 31   December 31 
   2016   2015 

Unrealized gain (loss) on securities available for sale

  $(6,007)   $920 

Unamortized gain on securities held to maturity, previously transferred from AFS

   456    1,109 

Unrealized loss on derivative instruments

   (3,132)    (3,141) 

Tax effect

   3,039    389 
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

  $(5,644)   $(723) 
  

 

 

   

 

 

 

         
 
December 31
  
December 31
 
 
2019
  
2018
 
Unrealized gain (loss) on securities available for sale
 $
12,687
  $
(8,561
)
Unamortized gain (loss) on securities held to maturity, previously transferred from AFS
  
(107
)  
10
 
Unrealized loss on derivative instruments
  
(4,440
)  
(1,760
)
Tax effect
  
(1,708
)  
2,167
 
         
Total accumulated other comprehensive income (loss)
 $
6,432
  $
(8,144
)
         
Note 2021 – Commitments,
Off-Balance
Sheet Risk and Contingencies

Because of the nature of its activities, Horizon is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

The Bank was not required to have approximately $1.8 million ofany cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 2016.2019. These balances arewould be included in cash and cash equivalents and dowould not earn interest.

The Bank is a party to financial instruments with
off-balance
sheet risk in the ordinary course of business to meet financing needs of its customers. These financial instruments include commitments to make loans and standby letters of credit. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements.

At December 31, 20162019 and 2015,2018, commitments to make loans amounted to approximately $808.3$958.7 million and $468.8$873.8 million and commitments under outstanding standby letters of credit amounted to approximately $1.0$17.3 million and $3.6$4.8 million. Since many commitments to make loans and standby letters of credit expire without being used, the amount does not necessarily represent future cash advances. NoNaN losses are anticipated as a result of these transactions. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation.

HORIZON BANCORPAND SUBSIDIARIES

11
4
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 2122 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certainoff-balance-sheet
off-balance-
sheet items as calculated under regulatory accounting practices. The CompanyCompany’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets, (as defined), and of Tier I capital (as defined) to average assets, (as defined), or leverage ratio. For December 31, 20162019 and 2015,2018, Basel III rules require the Company and Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined).assets. Additionally, under Basel III rules, the decision was made to
opt-out
of including accumulated other comprehensive income in regulatory capital.

To be categorized as well capitalized, the Company and Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based and Tier I leverage ratios as set forth in the table below. As of December 31, 20162019 and December 31, 2015,2018, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the year ending December 31, 20162019 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

Horizon and the Bank’s actual and required capital ratios as of December 31, 20162019 and 20152018 were as follows:

   Actual  Required For Capital1
Adequacy Purposes		  Required For Capital1
Adequacy Purposes
with Capital Buffer		  Well Capitalized Under Prompt1
Corrective Action Provisions		 
   Amount   Ratio  Amount   Ratio  Amount   Ratio  Amount   Ratio 

As of December 31, 2016

             

Total capital1 (to risk-weighted assets)

             

Consolidated

  $316,576    13.87%  $182,596    8.00%  $196,976    8.63%   N/A    N/A 

Bank

   319,013    13.98%  $182,541    8.00%   196,916    8.63%  $228,176    10.00% 

Tier 1 capital1 (to risk-weighted assets)

             

Consolidated

   301,739    13.22%  $136,947    6.00%   151,326    6.63%   N/A    N/A 

Bank

   304,176    13.33%  $136,905    6.00%   151,280    6.63%   182,540    8.00% 

Common equity tier 1 capital1 (to risk-weighted assets)

             

Consolidated

   263,313    11.50%  $103,036    4.50%   117,460    5.13%   N/A    N/A 

Bank

   304,176    13.33%  $102,679    4.50%   117,054    5.13%   148,314    6.50% 

Tier 1 capital1 (to average assets)

             

Consolidated

   301,739    10.44%  $115,609    4.00%   115,609    4.00%   N/A    N/A 

Bank

   304,176    9.93%  $122,521    4.00%   122,521    4.00%   153,151    5.00% 

As of December 31, 2015

             

Total capital1 (to risk-weighted assets)

             

Consolidated

  $264,452    13.99%  $151,223    8.00%   N/A    N/A   N/A    N/A 

Bank

   237,348    12.57%   151,057    8.00%   N/A    N/A  $188,821    10.00% 

Tier 1 capital1 (to risk-weighted assets)

             

Consolidated

   249,918    13.22%   113,427    6.00%   N/A    N/A   N/A    N/A 

Bank

   222,814    11.80%   113,295    6.00%   N/A    N/A   151,060    8.00% 

Common equity tier 1 capital1 (to risk-weighted assets)

             

Consolidated

   204,350    10.81%   85,067    4.50%   N/A    N/A   N/A    N/A 

Bank

   222,814    11.80%   84,971    4.50%   N/A    N/A   122,737    6.50% 

Tier 1 capital1 (to average assets)

             

Consolidated

   249,918    9.82%   101,800    4.00%   N/A    N/A   N/A    N/A 

Bank

   222,814    8.77%   101,626    4.00%   N/A    N/A   127,032    5.00% 

1As defined by regulatory agencies

11
5
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
 
Actual
  
Required for Capital
1

Adequacy Purposes
  
Required For Capital
1

Adequacy Purposes
with Capital Buffer
  
Well Capitalized Under
Prompt
1

Corrective Action
Provisions
 
 
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
 
December 31, 2019
                        
Total capital
1
(to risk-weighted assets)
                        
Consolidated
 $
548,364
   
13.95
% $
314,395
   
8.00
% $
412,644
   
10.50
%  
N/A
   
N/A
 
Bank
  
497,227
   
12.65
%  
314,452
   
8.00
%  
412,718
   
10.50
% $
393,065
   
10.00
%
Tier 1 capital
1
(to risk-weighted assets)
                        
Consolidated
  
530,643
   
13.50
%  
235,796
   
6.00
%  
334,044
   
8.50
%  
N/A
   
N/A
 
Bank
  
479,506
   
12.20
%  
235,823
   
6.00
%  
334,082
   
8.50
%  
314,430
   
8.00
%
Common equity tier 1 capital
1
(to risk-weighted assets)
                        
Consolidated
  
473,150
   
12.04
%  
176,846
   
4.50
%  
275,094
   
7.00
%  
N/A
   
N/A
 
Bank
  
479,506
   
12.20
%  
176,867
   
4.50
%  
275,126
   
7.00
%  
255,475
   
6.50
%
Tier 1 capital
1
(to average assets)
                        
Consolidated
  
530,643
   
10.50
%  
202,111
   
4.00
%  202,111   
4.00
%  
N/A
   
N/A
 
Bank
  
479,506
   
9.49
%  
202,110
   
4.00
%  
202,110
   
4.00
%  
252,638
   
5.00
%
December 31, 2018
                        
Total capital
1
(to risk-weighted assets)
                        
Consolidated
 $
427,616
   
13.39
% $
255,419
   
8.00
% $
315,283
   
9.875
%  
N/A
   
N/A
 
Bank
  
396,755
   
12.43
%  
255,419
   
8.00
%  
315,283
   
9.875
% $
319,274
   
10.00
%
Tier 1 capital
1
(to risk-weighted assets)
                        
Consolidated
  
409,760
   
12.83
%  
191,565
   
6.00
%  
251,429
   
7.875
%  
N/A
   
N/A
 
Bank
  
378,899
   
11.87
%  
191,565
   
6.00
%  
251,429
   
7.875
%  
255,420
   
8.00
%
Common equity tier 1 capital
1
(to risk-weighted assets)
                        
Consolidated
  
371,297
   
11.63
%  
143,673
   
4.50
%  
203,537
   
6.375
%  
N/A
   
N/A
 
Bank
  
378,899
   
11.87
%  
143,674
   
4.50
%  
203,537
   
6.375
%  
207,528
   
6.50
%
Tier 1 capital
1
(to average assets)
                        
Consolidated
  
409,760
   
10.12
%  
162,033
   
4.00
%  
162,033
   
4.000
%  
N/A
   
N/A
 
Bank
  
378,899
   
9.34
%  
162,327
   
4.00
%  
162,327
   
4.000
%  
202,908
   
5.00
%
The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is being
was
phased
in from 0.0% for 2015 to 2.50%
b
y
increments starting with the 2016 calculations and was fully implemented
 by
2019. The capital conservation buffer was 0.625%2.50% at December 31, 2016.2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 2223 – Share-Based Compensation

On January 21, 2003, the Board of Directors adopted the Horizon Bancorp 2003 Omnibus Equity Incentive Plan (“2003 Plan”), which was approved by stockholders on May 8, 2003. Under the 2003 Plan, Horizon could issue up to 506,250759,375 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2003 Plan limited the number of shares available to 506,250759,375 for incentive stock options and to 253,125379,687 for the grant of
non-option
awards. The shares available for issuance under the 2003 Plan could be divided among the various types of awards and among the participants as the Compensation Committee (“Committee”) determines.determined. The Committee was authorized to grant any type of award to a participant that was consistent with the provisions of the 2003 Plan. Awards could consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determined the provisions, terms and conditions of each award. The restricted shares vest over a period of time established by the Committee at the time of each grant. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these
11
6
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
shares is being amortized against earnings using the straight-line method over the vesting period. The options shares granted under the 2003 planPlan vest at a rate designated per the individual agreements. The restricted shares granted under the 2003 Plan vest at the end of each grant’s vesting period. On March 8, 2010, the Board of Directors adopted, and on May 6, 2010, the stockholders approved, an amendment to the 2003 Omnibus Equity Incentive Plan making an additional 590,625 885,937
common shares available for issuance. All share data has been adjusted for the 3:2 stock split on November 14, 2016.

June 15, 2018 (and for four additional stock splits in 2003, 2011, 2012 and 2016 after the 2003 Plan was adopted).

A summary of option activity under the 2003 Plan as of December 31, 2016,2019, and changes during the year then ended, is presented below:

   Shares   Weighted-
Average
Exercise Price		   Weighted-
Average
Remaining
Contractual
Term		   Aggregate
Intrinsic
Value		 

Outstanding, beginning of year

   66,000   $7.38     

Granted

   —      —       

Exercised

   (25,990)    7.47     

Forfeited

   (3,375)    8.22     
  

 

 

       

Outstanding, end of year

   36,635    7.25    3.69   $760,345 
  

 

 

       

Exercisable, end of year

   35,285    7.11    3.63    736,963 

 
Shares
  
Weighted-
Average
Exercise Price
  
Weighted-
Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
 
Outstanding, beginning of year
  
21,300
  $
 5.03
       
Granted
  
—  
   
—  
       
Exercised
  
(8,625
)  
4.45
       
Forfeited
  
—  
   
—  
       
                 
Outstanding, end of year
  
12,675
   
5.42
   
1.04
  $
172,096
 
                 
Exercisable, end of year
  
12,675
   
5.42
   
1.04
   
172,096
 
On June 18, 2013, the Board of Directors adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (“2013 Plan”), which was approved by the Company’s shareholders on May 8, 2014. Under the 2013 Plan, Horizon may issue up to 1,037,5501,556,325 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2013 Plan limits the number of shares available to 150,000225,000 for incentive stock options and to 600,000900,000 for the grant of
non-option
awards. The shares available for issuance under the 2013 Plan may be divided among the various types of awards and among the participants as the Committee determines. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2013 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award.

The 2013 Plan was amended on May 3, 2018, upon shareholder approval, primarily to allow grants of other types of stock-based awards, such as awards valued in whole or in part by reference to the value of shares of Horizon common stock.
All share data has been adjusted for the
3:2
stock split on June 15, 2018 and November 14, 2016.
The restricted shares can vest over a period of time established by the Committee at the time of each grant, but the restricted shares already granted under the 2013 Plan generally vest at the end of each grant’s vesting period.
three, four or five years of continuous employment
. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over the vesting period.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The performance shares that are awarded become earned and vested based on the achievement of certain performance goals during a performance period as established by the Committee at the time of each grant. The performance goals under the presently-awarded grant agreements are based on a comparison of the Company’s average performance over the performance period for the return on common equity, compounded annual growth rate of total assets, and return on average assets, all as relative to the average performance for publicly traded banks with total assets between $1 billion and $5 billion on the SNL Bank Index. Holders of performance share awards receive pass-through dividends but do not have any voting rights before the performance shares are earned and vested.

The options shares granted under the 2013 Plan vest at a rate designated per the individual agreements

agreements.

11
7
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The fair value of options granted is estimated on the date of the grant using an option-pricing model with the following weighted-average assumptions:

December 31  2016  2015  2014 

Dividend yields

   2.34%   2.35%   2.01% 

Volatility factors of expected market price of common stock

   28.60%   28.97%   29.54% 

Risk-free interest rates

   1.83%   2.10%   2.66% 

Expected life of options

   8 years   8 years   8 years 

 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Dividend yields
  
2.39
%  
1.99
%  
1.75
%
Volatility factors of expected market price of common stock
  
28.67
%  
28.60
%  
28.52
%
Risk-free interest rates
  
2.61
%  
2.85
%  
2.42
%
Expected life of options
  
8 years
   
8 years
   
8 years
 
A summary of option activity under the 2013 Plan as of December 31, 2016,2019, and changes during the year then ended, is presented below:

   Shares   Weighted-
Average
Exercise Price		   Weighted-
Average
Remaining
Contractual
Term		   Aggregate
Intrinsic
Value		 

Outstanding, beginning of year

   181,627   $14.72     

Granted

   103,959    15.57     

Exercised

   (1,500)    13.49     

Forfeited

   —      —       

Outstanding, end of year

   284,086    15.04    7.99   $3,682,975 
  

 

 

       

Exercisable, end of year

   120,957    14.33    7.00    1,653,164 
  

 

 

       

 
Shares
  
Weighted-
Average
Exercise Price
  
Weighted-
Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
 
Outstanding, beginning of year
  
307,317
  $
 12.28
       
Granted
  
35,966
   
16.74
       
Exercised
  
(24,256
)  
9.75
       
Forfeited
  
(2,250
)  
10.38
       
                 
Outstanding, end of year
  
316,777
   
12.99
   
6.37
  $
1,822,924
 
                 
Exercisable, end of year
  
242,814
   
11.58
   
5.74
   
1,802,010
 
The weighted average grant-date fair value of options granted during the years 2016, 20152019, 2018 and 20142017 was $3.89, $4.09$4.44, $5.54 and $4.33.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

$4.83.

A summary of the status of Horizon’s
non-vested
restricted and performance shares as of December 31, 2016 is2019 are presented below:

   Shares   Weighted
Average
Grant Date
Fair Value		 

Non-vested beginning of year

   123,571   $12.13 

Vested

   (72,563)    9.69 

Granted

   19,951    15.57 

Forfeited

   —      —   
  

 

 

   

Non-vested, end of year

   70,959    15.59 
  

 

 

   

Grants vest at the end of three, four or five years of continuous employment.

 
Shares
  
Weighted
Average
Grant Date
Fair Value
 
Non-vested,
beginning of year
  
176,538
  $
 16.90
 
Vested
  
(43,358
)  
11.17
 
Granted
  
84,526
   
16.74
 
Forfeited
  
(4,137
)  
18.23
 
         
Non-vested,
end of year
  
213,569
   
17.97
 
         
Total compensation cost recognized in the income statement for option-based payment arrangements during 20162019 was $324,000$215,000 and the related tax benefit recognized was approximately $113,000.$45,000. Total compensation cost recognized in the income statement for option-based payment arrangements during 20152018 and 20142017 was $288,000$251,000 and $203,000$325,000 and the related tax benefit recognized was $101,000$53,000 and $71,000,$114,000, respectively.

Total compensation cost recognized in the income statement for restricted share and performance share based payment arrangements during 2016, 20152019, 2018 and 20142017 was $284,000, $355,000,$705,000, $376,000, and $363,000.$135,000. The recognized tax benefit related thereto was approximately $99,000, $124,000,$148,000, $79,000, and $127,000$47,000 for the years ended December 31, 2016, 20152019, 2018 and 2014.

2017.

11
8
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2016, 20152019, 2018 and 20142017 was $214,000, $403,000,$236,000, $493,000, and $122,000.$1.6 million. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $158,000, $151,000,$104,000, $213,000, and $43,000,$522,000, for the years ended December 31, 2016, 20152019, 2018 and 2014.

2017.

As of December 31, 2016,2019, there was $888,000$1.5 million of total unrecognized compensation cost related to all
non-vested
share-based compensation arrangements granted under all of the plans. That cost is expected to be recognized over a weighted-average period of 1.81.1 years.

Under all plans, forfeitures of share-based compensation grants are recognized as they occur.

Note 2324 – Derivative Financial Instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14%
4.03% on a notional amount of $15.5 million at December 31, 2019 and at a weighted average fixed rate of
3.76% on a notional amount of $30.5 million at December 31, 2016 and $30.5 million at December 31, 2015.2018. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 2.31% on a notional amount of $30.0 million at December 31, 2016.2019 and 2018. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

HORIZON BANCORPAND SUBSIDIARIES

Notes

On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to Consolidated Financial Statements

(Table dollarsreceive interest from the counterparty at one month LIBOR and to pay interest to the counter party at a rate of 2.81% on a notional amount of $50.0 million at December 31, 2019 and 2018. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in thousands except for per share data)

interest expense.

Management has designated the interest rate swap agreements as cash flow hedging instruments. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At December 31, 2016,201
9
, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

11
9
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At December 31, 2016,2019, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan
 and security
agreements being hedged were $122.4$361.0 million at December 31, 20162019 and $117.3$209.2 million at December 31, 2015.

2018.

Other Derivative Instruments

The Company enters into
non-hedging
derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At December 31, 2016,2019, the Company’s fair values of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following tables summarize the fair value of derivative financial instruments utilized by Horizon:

   Asset Derivatives
December 31, 2016		   Liability Derivatives
December 31, 2016		 
Derivatives designated as hedging instruments (Unaudited)  Balance Sheet
Location		   Fair Value   Balance Sheet
Location		   Fair Value 

Interest rate contracts

   Loans   $—      Other liabilities   $6 

Interest rate contracts

   Other Assets    6    Other liabilities    3,132 
    

 

 

     

 

 

 

Total derivatives designated as hedging instruments

     6      3,138 
    

 

 

     

 

 

 

Derivatives not designated as hedging instruments

        

Mortgage loan contracts

   Other assets    602    Other liabilities    22 
    

 

 

     

 

 

 

Total derivatives not designated as hedging instruments

     602      22 
    

 

 

     

 

 

 

Total derivatives

    $608     $3,160 
    

 

 

     

 

 

 
   Asset Derivatives
December 31, 2015		   Liability Derivatives
December 31, 2015		 
Derivatives designated as hedging instruments (Unaudited)  Balance Sheet
Location		   Fair Value   Balance Sheet
Location		   Fair Value 

Interest rate contracts

   Loans   $—      Other liabilities   $1,782 

Interest rate contracts

   Other Assets    1,782    Other liabilities    3,141 
    

 

 

     

 

 

 

Total derivatives designated as hedging instruments

     1,782      4,923 
    

 

 

     

 

 

 

Derivatives not designated as hedging instruments

        

Mortgage loan contracts

   Other assets    642    Other liabilities    —   
    

 

 

     

 

 

 

Total derivatives not designated as hedging instruments

     642      —   
    

 

 

     

 

 

 

Total derivatives

    $2,424     $4,923 
    

 

 

     

 

 

 

 
Asset Derivatives
  
Liability Derivatives
 
 
December 31, 2019
  
December 31, 2019
 
 
Balance Sheet
Location
  
Fair
Value
  
Balance Sheet
Location
  
Fair
Value
 
Derivatives designated as hedging instruments
            
Interest rate contracts
  
Other 
a
ssets
  $
11,422
   
Other liabilities
  
$
 
15,861
 
                 
Total derivatives desginated as hedging instruments
     
11,422
      
15,861
 
                 
Derivatives not designated as hedging instruments
            
Mortgage loan contracts
  
Other assets
   
264
   
Other liabilities
   
38
 
                 
Total derivatives not designated as hedging instruments
     
264
      
38
 
                 
Total derivatives
    $
11,686
     $
3,745
 
                 
1
20
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
 
Asset Derivatives
 
 
Liability Derivatives
 
 
December 31, 2018
 
 
December 31, 2018
 
 
Balance Sheet
Location
 
 
Fair
Value
 
 
Balance Sheet
Location
 
 
Fair
Value
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
Other
a
ssets
 
 
$
42
 
 
 
Other liabilities
 
 
$
1,802
 
Total derivatives desginated as hedging instruments
 
 
 
 
 
42
 
 
 
 
 
 
1,802
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loan contracts
 
 
Other assets
 
 
 
135
 
 
 
Other liabilities
 
 
 
—  
 
Total derivatives not designated as hedging instruments
 
 
 
 
 
135
 
 
 
 
 
 
—  
 
Total derivatives
 
 
 
 
$
177
 
 
 
 
 
$
1,802
 
The effect of the derivative instruments on the consolidated statement of income for the
12-month
periods ended December 31 is as follows:

   Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective
Portion)		 
   Years Ended December 31 

Derivative in cash flow hedging relationship

  2016   2015   2014 

Interest rate contracts

  $6   $127   $(332) 

 
Amount of (Gain) Loss Recognized in Other Comprehensive
Income on Derivative (Effective Portion) 
 
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Derivatives in cash flow hedging relationship
         
Interest rate contracts
 $
(2,117
) $
(25
) $
913
 
FASB Accounting Standards Codification (“ASC”) TopicASC
820-10-20
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. TopicASC
820-10-55
establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

HORIZON BANCORPAND SUBSIDIARIES

 
Location of gain
(loss)
 recognized on
 
Amount of Gain (Loss) Recognized on Derivative
Years Ended December 31
 
 
derivative
 
2019
  
2018
  
2017
 
Derivative in fair value hedging relationship
          
Interest rate contracts
 
Interest income
-
loans
 $
(11,380
) $
(852
) $
(817
)
Interest rate contracts
 
Interest
income
 
-
loans
  
11,380
   
852
   
817
 
               
Total
  $
—  
  $
—  
  $
—  
 
               
 
Location of gain
(loss)
 recognized on
 
Amount of Gain (Loss) Recognized on Derivative
Years Ended December 31
 
 
derivative
 
2019
  
2018
  
2017
 
Derivative not designated as hedging relationship
          
Mortgage contracts
 
Other income - gain on sale of loans
 $
91
  $
(5
) $
(439
)
1
21
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Derivative in fair value hedging relationship

  

Location of gain (loss)

recognized on derivative

  Amount of Gain (Loss) Recognized on Derivative 
    Years Ended December 31 
    2016   2015   2014 

Interest rate contracts

  

Interest income - loans

  $(1,776)   $574   $1,261 

Interest rate contracts

  

Interest income - loans

   1,776    (574)    (1,261) 
    

 

 

   

 

 

   

 

 

 

Total

    $—     $—     $—   
    

 

 

   

 

 

   

 

 

 

Derivative not designated as hedging relationship

  

Location of gain (loss)

recognized on derivative

  Amount of Gain (Loss) Recognized on Derivative
Years Ended December 31		 
    2016   2015   2014 

Mortgage contracts

  

Other income - gain on sale of loans

  $(62)   $195   $256 

Note 2425 – Disclosures about fair value of assets and liabilities

The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:

Level 1
 
Quoted prices in active markets for identical assets or liabilities
Level 2 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended December 31, 2016. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

2019.

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, private-label mortgage-backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features.

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Hedged loans

Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

1
22
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:

   Fair Value   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 

December 31, 2016

        

Available-for-sale securities

        

U.S. Treasury and federal agencies

  $7,989   $—     $7,989   $—   

State and municipal

   116,592    —      116,592    —   

Federal agency collateralized mortgage obligations

   137,195    —      137,195    —   

Federal agency mortgage-backed pools

   176,726    —      176,726    —   

Corporate notes

   1,329    —      1,329    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalavailable-for-sale securities

   439,831    —      439,831    —   

Hedged loans

   122,345    —      122,345    —   

Forward sale commitments

   602    —      602    —   

Interest rate swap agreements

   (3,138)    —      (3,138)    —   

Commitments to originate loans

   (22)    —      (22)    —   

December 31, 2015

        

Available-for-sale securities

        

U.S. Treasury and federal agencies

  $5,926   $—     $5,926   $—   

State and municipal

   75,095    —      75,095    —   

Federal agency collateralized mortgage obligations

   156,203    —      156,203    —   

Federal agency mortgage-backed pools

   207,704    —      207,704    —   

Corporate notes

   54    —      54    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalavailable-for-sale securities

   444,982    —      444,982    —   

Hedged loans

   115,472    —      115,472    —   

Forward sale commitments

   642    —      642    —   

Interest rate swap agreements

   (4,923)    —      (4,923)    —   

HORIZON BANCORPAND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

                 
 
December 31, 2019
 
 
Fair Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Available for sale securities
            
U.S. Treasury and federal agencies
 $
1,413
  $
—  
  $
1,413
  $
—  
 
State and municipal
  
405,768
   
—  
   
405,768
   
—  
 
Federal agency collateralized mortgage obligations
  
269,252
   
—  
   
269,252
   
—  
 
Federal agency mortgage-backed pools
  
146,572
   
—  
   
146,572
   
—  
 
Corporate notes
  
11,771
   
—  
   
11,771
   
—  
 
                 
Total available for sale securities
  
834,776
   
—  
   
834,776
   
—  
 
Interest rate swap agreements asset
  
11,422
   
—  
   11,422   
—  
 
Forward sale commitments
  
264
   
—  
   
264
   
—  
 
Interest rate swap agreements liability
  
(15,861
)  
—  
   
(15,861
)  
—  
 
Commitments to originate loans
  
(38
)  
—  
   
(38
)  
—  
 
                 
 
December 31, 2018
 
 
Fair Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Available for sale securities
            
U.S. Treasury and federal agencies
 $
16,608
  $
—  
  $
16,608
  $
—  
 
State and municipal
  
209,303
   
—  
   
209,303
   
—  
 
Federal agency collateralized mortgage obligations
  
185,003
   
—  
   
185,003
   
—  
 
Federal agency mortgage-backed pools
  
178,736
   
—  
   
178,736
   
—  
 
Corporate notes
  
10,698
   
—  
   
10,698
   
—  
 
                 
Total available for sale securities
  
600,348
   
—  
   
600,348
   
—  
 
Interest rate swap agreements asset
  
42
   
—  
   
42
   
—  
 
Forward sale commitments
  
135
   
—  
   
135
   
—  
 
Interest rate swap agreements liability
  
(1,801
)  
—  
   
(1,801
)  
—  
 
Commitments to originate loans
  
—  
   
—  
   
—  
   
—  
 
Realized gains and losses included in net incomeinc
o
me for the periods are reported in the consolidated statements of income as follows:

Non Interest Income Total gains and losses from:  Years Ended December 31 
  2016   2015   2014 

Hedged loans

  $(1,776)   $574   $1,261 

Fair value interest rate swap agreements

   1,776    (574)    (1,261) 

Derivative loan commitments

   (62)    195    256 
  

 

 

   

 

 

   

 

 

 
  $(62)   $195   $256 
  

 

 

   

 

 

   

 

 

 

             
 
Years Ended December 31
 
Non-interest
Income
 
2019
  
2018
  
2017
 
Total gains and losses from:
         
Hedged loans
 $
(11,380
) $
(852
) $
(817
)
Fair value interest rate swap agreements
  
11,380
   
852
   
817
 
Derivative loan commitments
  
91
   
(5
)  
(439
)
             
 $
91
  $
(5
) $
(439
)
             
12
3
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

   Fair Value   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 

December 31, 2016

        

Impaired loans

  $2,246   $—     $—     $2,246 

Mortgage servicing rights

   11,174    —      —      11,174 

December 31, 2015

        

Impaired loans

  $6,803   $—     $—     $6,803 

Mortgage servicing rights

   8,874    —      —      8,874 

                 
 
Fair
Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
December 31, 2019
            
Impaired loans
 $
6,806
  $
—  
  $
—  
  $
6,806
 
Mortgage servicing rights
  
14,327
   
—  
   
—  
   
14,327
 
December 31, 2018
            
Impaired loans
 $
5,661
  $
—  
  $
—  
  $
5,661
 
Mortgage servicing rights
  
12,349
   
—  
   
—  
   
12,349
 
Impaired(collateral (collateral dependent):
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

MortgageServicingRights(MSRs):
MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s
month-end
interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs were reduced by $507,000$719,000 in 20162019 and $397,000$527,000 in 20152018 for the fair value.

HORIZON BANCORPAND SUBSIDIARIES

12
4
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 20162019 and 2015.

   Fair Value at
December 31, 2016		   

Valuation

Technique

  

Unobservable Inputs

  Range (Weighted
Average)

Impaired loans

  $2,246   Collateral based measurement  Discount to reflect current market conditions and ultimate collectability  10% - 16% (13%)

Mortgage servicing rights

  $11,174   Discounted cashflows  Discount rate, Constant prepayment rate, Probability of default  10% - 16% (13%),
4% - 7% (4.6%),
1% - 10%  (4.5%)
   Fair Value at
December 31, 2015		   

Valuation

Technique

  

Unobservable Inputs

  Range (Weighted
Average)

Impaired loans

  $6,803   Collateral based measurement  Discount to reflect current market conditions and ultimate collectability  10% - 15% (12%)

Mortgage servicing rights

  $8,874   Discounted cashflows  Discount rate, Constant prepayment rate, Probability of default  10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)
2018.
 
December 31, 2019
 
 
Fair
  
Valuation
 
Unobservable
 
Range
 
 
Value
  
Technique
 
Inputs
 
(Weighted Average)
 
Impaired loans
 $
6,806
  
Collateral based measurement
 Discount to reflect current market
conditions and ultimate
collectability		  
0%-100%
 (7.4%)
 
Mortgage servicing rights
  
14,327
  
Discounted cash flows
 Discount rate,
Constant prepayment rate, Probability of default		  
8.7%-9.0%
 (8.7%),
 
10.2%-19.8%
 
(
12.2
%),
 
0.1%-2.9%
(0.7%)
 
 
December 31, 2018
 
 
Fair
  
Valuation
 
Unobservable
 
Range
 
 
Value
  
Technique
 
Inputs
 
(Weighted Average)
 
Impaired loans
 $
5,661
  
Collateral based measurement
 Discount to reflect current market
conditions and ultimate
collectability		  
0%-100%
 (15.5%)
 
Mortgage servicing rights
  
12,349
  
Discounted cash flows
 Discount rate,
Constant prepayment rate, Probability of default		  
10.2%-11.0%
 
(
10.3%),
9.1%-21.9%
 (9.3%),
0.1%-2.8%
(0.6%)
 

Note 2526 – Fair Value of Financial Instruments

The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts.

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at December 31, 20162019 and December 31, 2015.2018. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain
off-balance
sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities which are not financial instruments as defined by the FASB ASC fair value hierarchy.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

CashandDuefromBanks
— The carrying amounts approximate fair value.

Held-to-MaturitySecurities
— For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.

LoansHeldforSale
— The carrying amounts approximate fair value.

HORIZON BANCORPAND SUBSIDIARIES

12
5
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

NetLoans
— The fair value of portfolionet loans isare estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similaron an exit price basis incorporating discounts for credit, ratingsliquidity and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.

marketability factors.

FHLBandFRBStock
— Fair value of FHLB and FRB stock is based on the price at which it may be resold to the FHLB and FRB.

InterestReceivable/Payable
— The carrying amounts approximate fair value.

Deposits
— The fair value of demand deposits, savings accounts, interest-bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity.

Borrowings
— Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings.

SubordinatedDebentures
— Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.

CommitmentstoExtendCreditandStandbyLettersofCredit
— The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value.

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall.

   December 31, 2016 
       Quoted Prices         
       in Active   Significant     
       Markets for   Other   Significant 
       Identical   Observable   Unobservable 
   Carrying   Assets   Inputs   Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 

Assets

        

Cash and due from banks

  $70,832   $70,832   $—     $—   

Investment securities, held to maturity

   193,194    —      194,086    —   

Loans held for sale

   8,087    —      —      8,087 

Loans excluding loan level hedges, net

   1,998,804    —      —      1,965,928 

Stock in FHLB and FRB

   23,932    —      23,932    —   

Interest receivable

   12,713    —      12,713    —   

Liabilities

        

Non-interest bearing deposits

  $496,248   $496,248   $—     $—   

Interest-bearing deposits

   1,974,962    —      1,839,167    —   

Borrowings

   267,489    —      261,141    —   

Subordinated debentures

   37,456    —      36,371    —   

Interest payable

   472    —      472    —   

HORIZON BANCORPAND SUBSIDIARIES

 
December 31, 2019
 
 
Carrying
Amount
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets
            
Cash and due from banks
 $
98,831
  $
98,831
  $
 —  
  $
 —  
 
Interest-earning time deposits
  
8,455
   
—  
   
8,537
   
—  
 
Investment securities, held to maturity
  
207,899
   
—  
   
215,147
   
—  
 
Loans held for sale
  
4,088
   
—  
   
—  
   
4,088
 
Loans (excluding loan level hedges), net
  
3,619,174
   
—  
   
—  
   
3,554,951
 
Stock in FHLB
  
22,447
   
—  
   
22,447
   
—  
 
Interest receivable
  
18,828
   
—  
   
18,828
   
—  
 
Liabilities
            
Non-interest
bearing deposits
 $
709,760
  $
 709,760
  $
 —  
  $
 —  
 
Interest bearing deposits
  
3,221,242
   
—  
   
3,180,768
   
—  
 
Borrowings
  
549,741
   
—  
   
546,995
   
—  
 
Subordinated debentures
  
56,311
   
—  
   
51,809
   
—  
 
Interest payable
  
3,062
   
—  
   
3,062
   
—  
 
12
6
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

   December 31, 2015 
       Quoted Prices         
       in Active   Significant     
       Markets for   Other   Significant 
       Identical   Observable   Unobservable 
   Carrying   Assets   Inputs   Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 

Assets

        

Cash and due from banks

  $48,650   $48,650   $—     $—   

Investment securities, held to maturity

   187,629    —      193,703    —   

Loans held for sale

   7,917    —      —      7,917 

Loans excluding loan level hedges, net

   1,619,125    —      —      1,703,506 

Stock in FHLB and FRB

   13,823    —      13,823    —   

Interest receivable

   10,535    —      10,535    —   

Liabilities

        

Non-interest bearing deposits

  $335,955   $335,955   $—     $—   

Interest-bearing deposits

   1,544,198    —      1,461,314    —   

Borrowings

   449,347    —      441,547    —   

Subordinated debentures

   32,797    —      32,996    —   

Interest payable

   507    —      507    —   
                 
 
December 31, 2018
 
 
Carrying
Amount
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets
            
Cash and due from banks
 $
58,492
  $
58,492
  $
 —  
  $
 —  
 
Interest-earning time deposits
  
15,744
   
—  
   
15,542
   
—  
 
Investment securities, held to maturity
  
210,112
   
—  
   
208,273
   
—  
 
Loans held for sale
  
1,038
   
—  
   
—  
   
1,038
 
Loans (excluding loan level hedges), net
  
2,786,351
   
—  
   
—  
   
2,681,741
 
Stock in FHLB
  
18,073
   
—  
   
18,073
   
—  
 
Interest receivable
  
14,239
   
—  
   
14,239
   
—  
 
Liabilities
            
Non-interest
bearing deposits
 $
642,129
  $
 642,129
  $
 —  
  $
 —  
 
Interest bearing deposits
  
2,497,247
   
—  
   
2,377,274
   
—  
 
Borrowings
  
550,384
   
—  
   
542,311
   
—  
 
Subordinated debentures
  
37,837
   
—  
   
35,711
   
—  
 
Interest payable
  2,031   —     2,031   —   

Note 2627 – General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results or operationof operations and cash flows of the Company.

C

o
mpany.
Note 2728 – Condensed Financial Information (Parent Company Only)

Presented below is condensed financial information as to financial position, results of operations and cash flows of Horizon Bancorp:

Bancorp, Inc.:

Condensed Balance Sheets

   December 31   December 31 
   2016   2015 

Assets

    

Total cash and cash equivalents

  $15,736   $26,507 

Investment in Bank

   386,389    276,718 

Other assets

   2,504    3,392 
  

 

 

   

 

 

 

Total assets

  $404,629   $306,617 
  

 

 

   

 

 

 

Liabilities

    

Borrowings

  $19,500   $—   

Subordinated debentures

   37,456    32,797 

Other liabilities

   6,818    6,988 

Stockholders’ Equity

   340,855    266,832 
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $404,629   $306,617 
  

 

 

   

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

         
 
December 31
  
December 31
 
 
2019
  
2018
 
Assets
      
Total cash and cash equivalents
 $
50,961
  $
30,653
 
Investment in subsidiaries
  
666,639
   
502,844
 
Other assets
  
3,882
   
1,186
 
         
Total assets
 $
 721,482
  $
 534,683
 
         
Liabilities
      
Subordinated debentures
 $
56,311
  $
37,837
 
Other liabilities
  
9,148
   
4,854
 
Stockholders’ Equity
  
656,023
   
491,992
 
         
Total liabilities and stockholders’ equity
 $
 721,482
  $
 534,683
 
         
12
7
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Condensed Statements of Income

   Years Ended December 31 
   2016  2015  2014 

Operating Income (Expense)

    

Dividend income from Bank

  $20,000  $30,470  $12,500 

Investment income

   33   15   12 

Other income

   42   24   17 

Interest expense

   (2,376)   (2,009)   (2,009) 

Employee benefit expense

   (1,158)   (1,093)   (965) 

Other expense

   1,279   910   883 
  

 

 

  

 

 

  

 

 

 

Income Before Undistributed Income of Subsidiaries

   17,820   28,317   10,438 

Undistributed Income of Subsidiaries

   5,938   (8,168)   6,814 
  

 

 

  

 

 

  

 

 

 

Income Before Tax

   23,758   20,149   17,252 

Income Tax Benefit

   154   400   849 
  

 

 

  

 

 

  

 

 

 

Net Income

   23,912   20,549   18,101 

Preferred stock dividend

   (42)   (125)   (133) 
  

 

 

  

 

 

  

 

 

 

Net Income Available to Common Shareholders

  $23,870  $20,424  $17,968 
  

 

 

  

 

 

  

 

 

 

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Operating Income (Expense)
         
Dividend income from subsidiaries
 $
46,150
  $
46,950
  $
27,000
 
Other income
  
—  
   
—  
   
540
 
Interest expense
  
(3,209
)  
(2,475
)  
(2,791
)
Employee benefit expense
  
(1,687
)  
(1,423
)  
(1,094
)
Other expense
  
(416
)  
(357
)  
(326
)
             
Income Before Undistributed Income of Subsidiaries
  
40,838
   
42,695
   
23,329
 
Undistributed Income of Subsidiaries
  
25,053
   
9,643
   
8,804
 
             
Income Before Tax
  
65,891
   
52,338
   
32,133
 
Income Tax Benefit
  
647
   
779
   
984
 
             
Net Income Available to Common Shareholders
 $
66,538
  $
53,117
  $
33,117
 
             
Condensed Statements of Comprehensive Income

   Years Ended December 31 
   2016  2015  2014 

Net Income

  $23,912  $20,549  $18,101 
  

 

 

  

 

 

  

 

 

 

Other Comprehensive Income (Loss)

    

Change in fair value of derivative instruments, net of taxes

   6   127   (332) 

Unrealized appreciation for the period onheld-to-maturity securities, net of taxes

   (424)   (357)   1,078 

Unrealized appreciation (depreciation) onavailable-for-sale securities, net of taxes

   (3,310)   (1,891)   3,146 

Less: reclassification adjustment for realized gains included in net income, net of taxes

   (1,193)   (123)   (642) 
  

 

 

  

 

 

  

 

 

 
   (4,921)   (2,244)   3,250 
  

 

 

  

 

 

  

 

 

 

Comprehensive Income

  $18,991  $18,305  $21,351 
  

 

 

  

 

 

  

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Net Income
 $
66,538
  $
53,117
  $
33,117
 
Other Comprehensive Income (Loss)
         
Change in fair value of derivative instruments, net of taxes
  
(2,117
)  
(25
)  
913
 
Unrealized appreciation for the period on held to maturity securities, net of taxes
  
(92
)  
(150
)  
(166
)
Unrealized appreciation (depreciation) on available for sale securities, net of taxes
  
16,727
   
(4,003
)  
1,371
 
Less: reclassification adjustment for realized (gains) losses included in net income, net of
taxes
  
59
   
351
   
(25
)
             
  
14,576
   
(3,827
)  
2,093
 
             
Comprehensive Income
 $
81,114
  $
49,290
  $
35,210
 
             
12
8
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Condensed Statements of Cash Flows

   Years Ended December 31 
   2016  2015  2014 

Operating Activities

    

Net income

  $23,912  $20,549  $18,101 

Items not requiring (providing) cash

    

Equity in undistributed net income of subsidiaries

   (5,938)   8,168   (6,814) 

Change in

    

Share based compensation

   284   288   203 

Amortization of unearned compensation

   324   355   363 

Other assets

   888   (634)   906 

Other liabilities

   (244)   (13)   1,377 
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   19,226   28,713   14,136 
  

 

 

  

 

 

  

 

 

 

Investing Activities

    

Acquisition of Summit

   —     —     (7,036) 

Acquisition of Peoples

   —     (19,365)   —   

Acquisition of Kosciusko

   (6,741)   —     —   

Acquisition of LaPorte

   (17,108)   —     —   

Acquisition of CNB

   (5,296)   —     —   
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (29,145)   (19,365)   (7,036) 
  

 

 

  

 

 

  

 

 

 

Financing Activities

    

Redemption of preferred stock

   (12,500)   —     —   

Net change in borrowings

   19,500   —     —   

Dividends paid on preferred shares

   (42)   (125)   (133) 

Dividends paid on common shares

   (8,382)   (6,216)   (4,744) 

Exercise of stock options

   572   4,305   165 
  

 

 

  

 

 

  

 

 

 

Net cash used in financing activities

   (852)   (2,036)   (4,712) 
  

 

 

  

 

 

  

 

 

 

Net Change in Cash and Cash Equivalents

   (10,771)   7,312   2,388 

Cash and Cash Equivalents at Beginning of Year

   26,507   19,195   16,807 
  

 

 

  

 

 

  

 

 

 

Cash and Cash Equivalents at End of Year

  $15,736  $26,507  $19,195 
  

 

 

  

 

 

  

 

 

 

HORIZON BANCORPAND SUBSIDIARIES

             
 
Years Ended December 31
 
 
2019
  
2018
  
2017
 
Operating Activities
         
Net income
 $
66,538
  $
53,117
  $
33,117
 
Items not requiring (providing) cash
         
Equity in undistributed net income of subsidiaries
  
(25,053
)  
(9,643
)  
(8,804
)
Change in:
         
Share based compensation
  
215
   
251
   
325
 
Amortization of unearned compensation
  
705
   
169
   
135
 
Other assets
  
(5,449
)  
132
   
388
 
Other liabilities
  
1,629
   
378
   
(1,675
)
             
Net cash provided by operating activities
  
38,585
   
44,404
   
23,486
 
             
Investing Activities
         
Repurchase of outstanding stock
  
(1,595
)  
—  
   
—  
 
Acquisition of Lafayette
  
—  
   
—  
   
(1,254
)
Acquisition of Wolverine
  
—  
   
—  
   
(7,688
)
Acquisition of Salin
  
2,350
   
—  
   
—  
 
             
Net cash used in investing activities
  
755
   
—  
   
(8,942
)
             
Financing Activities
         
Net change in borrowings
  
98
   
(12,316
)  
(6,803
)
Dividends paid on common shares
  
(20,835
)  
(15,418
)  
(11,720
)
Proceeds from issuance of stock
  
1,705
   
622
   
1,604
 
             
Net cash used in financing activities
  
(19,032
)  
(27,112
)  
(16,919
)
             
Net Change in Cash and Cash Equivalents
  
20,308
   
17,292
   
(2,375
)
Cash and Cash Equivalents at Beginning of Year
  
30,653
   
13,361
   
15,736
 
             
Cash and Cash Equivalents at End of Year
 $
50,961
  $
30,653
  $
13,361
 
             
12
9
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

(Table dollars in thousands except for per share data)

Note 2829 – Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly consolidated results of operations:

Three Months Ended 2016

  March 31   June 30   September 30   December 31 

Interest income

  $23,528   $24,650   $28,962   $29,390 

Interest expense

   3,754    3,781    4,552    8,450 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   19,774    20,869    24,410    20,940 

Provision for loan losses

   532    232    455    623 

Gain on sale of securities

   108    767    —      961 

Net income

   5,381    6,326    6,602    5,603 

Net income available to common shareholders

  $5,339   $6,326   $6,602   $5,603 

Earnings per share:

        

Basic

  $0.30   $0.35   $0.31   $0.25 

Diluted

   0.30    0.34    0.30    0.25 

Average shares outstanding:

        

Basic

   17,924,124    18,268,880    21,538,752    22,155,549 

Diluted

   18,012,726    18,364,167    21,651,953    22,283,722 

Three Months Ended 2015

  March 31   June 30   September 30   December 31 

Interest income

  $20,093   $21,127   $23,578   $23,790 

Interest expense

   3,207    3,277    3,802    3,568 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   16,886    17,850    19,776    20,222 

Provision for loan losses

   614    1,906    300    342 

Gain on sale of securities

   124    —      —      65 

Net income

   5,358    4,728    4,288    6,175 

Net income available to common shareholders

  $5,327   $4,697   $4,257   $6,144 

Earnings per share:

        

Basic

  $0.39   $0.34   $0.25   $0.34 

Diluted

   0.37    0.33    0.24    0.34 

Average shares outstanding:

        

Basic

   13,824,017    13,860,008    17,408,964    17,905,871 

Diluted

   14,414,259    14,456,379    17,839,881    18,020,615 

                 
 
Three Months Ended
 
 
March 31
  
June 30
  
September 30
  
December 31
 
 
2019
  
2019
  
2019
  
2019
 
Interest income
 $
45,373
  $
53,850
  $
55,711
  $
53,398
 
Interest expense
  
11,093
   
12,321
   
12,248
   
11,879
 
                 
Net interest income
  
34,280
   
41,529
   
43,463
   
41,519
 
Provision for loan losses
  
364
   
896
   
376
   
340
 
Gain (loss) on sale of securities
  
15
   
(100
)  
—  
   
10
 
Net income
 $
10,816
  $
16,642
  $
20,537
  $
18,543
 
Earnings per share:
            
Basic
 $
0.28
  $
0.37
  $
0.46
  $
0.41
 
Diluted
  
0.28
   
0.37
   
0.46
   
0.41
 
Average shares outstanding:
            
Basic
  
38,822,543
   
45,055,117
   
45,038,021
   
44,971,676
 
Diluted
  
38,906,172
   
45,130,408
   
45,113,730
   
45,103,065
 
                 
 
Three Months Ended
 
 
March 31
  
June 30
  
September 30
  
December 31
 
 
2018
  
2018
  
2018
  
2018
 
Interest income
 $
39,426
  $
40,741
  $
42,271
  $
43,730
 
Interest expense
  
6,015
   
7,191
   
8,499
   
9,894
 
                 
Net interest income
  
33,411
   
33,550
   
33,772
   
33,836
 
Provision for loan losses
  
567
   
635
   
1,176
   
528
 
Gain (loss) on sale of securities
  
11
   
—  
   
(122
)  
(332
)
Net income
 $
12,804
  $
14,115
  $
13,065
  $
13,133
 
Earnings per share:
            
Basic
 $
0.33
  $
0.37
  $
0.34
  $
0.35
 
Diluted
  
0.33
   
0.37
   
0.34
   
0.34
 
Average shares outstanding:
            
Basic
  
38,306,395
   
38,347,612
   
38,365,379
   
38,367,972
 
Diluted
  
38,468,810
   
38,519,401
   
38,534,970
   
38,488,861
 
1
30
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
Note 30 – Future Accounting Matters
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No.
 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
The FASB has issued ASU No.
 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
. These amendments modify the disclosure requirements in Topic 820 as follows:
Removals
: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.
Modifications
: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
Additions
: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No.
 2018-13
and delay adoption of the additional disclosures until their effective date. We are currently evaluating the impact of ASU
2018-13
and the impact on our accounting and disclosures.
FASB ASU No.
 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
The FASB has issued ASU No.
 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of a reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
1
31
Horizon Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table dollars in thousands except for per share data)
FASB ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The FASB has issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.
Our Current Expected Credit Loss (“CECL”) task force has been meeting on a monthly basis, at a minimum, to review implementation matters related to the completeness and accuracy of historical data, model development and corporate governance documentation. Specifically regarding model development, the task force has analyzed results from parallel model runs for each portfolio segment and evaluated assumptions related to unfunded commitments, acquired performing loans, and economic and forecast factors. Our task force has also reviewed new corporate governance documentation, such as our new CECL Allowance for Credit Losses (“ACL”) policy, procedure manuals and internal control documentation.
Horizon has completed data and model validation testing, determined qualitative adjustments, established additional supporting analytics, and developed related internal controls over model inputs (data and assumptions) and model operations. While the model is operational, approval of certain governance related matters, procedures and policies are being finalized.
The final year-end estimate for CECL has not been determined and the required financial reporting disclosures are being completed for review. Internal controls over financial reporting specifically related to CECL have been designed and are being evaluated, however, all internal controls related to CECL implementation are not operational. The final step of completing the formal governance and approval process is in its final stages.
We expect the one-time cumulative effect adjustment to the ACL will be between $16.2 million and $20.8 million upon adoption as of January 1, 2020. The majority of the increase is related to including our acquired loan portfolios in the model and the addition of using economic forecasts in estimating future losses. As we continue to evaluate and refine our CECL model during the first quarter of 2020, the estimated range of impact to the ACL as of January 1, 2020 could change.
1
32
Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Horizon Bancorp

Michigan City, Indiana

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Horizon Bancorp (Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is2019, and the related notes (collectively referred to express anas the “financial statements”). In our opinion, on thesethe consolidated financial statements based on our audits.

referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
the Internal Control – Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 28, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB and the standards applicable to financial audits contained in
Government Auditing Standards
issued by the Comptroller General of the United States.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

133
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
As described in Note 7 to the consolidated financial statements, the Company’s consolidated allowance for loan and lease losses (ALLL) was $17.7 million at December 31, 2019. The ALLL is an estimate of probable credit losses related to specifically identified loans and for losses inherent in the portfolio that have been incurred as of the balance sheet date. The determination of the ALLL requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates, risk grading loans, identifying loan impairments, among others. As disclosed by management, different assumptions and conditions could result in a materially different amount for the ALLL.
We identified the valuation of the ALLL as a critical audit matter. Auditing the allowance for loan losses involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
Testing the effectiveness of controls over the Company’s inputs and processes utilized in calculating the ALLL including classifications of loans by loan segment, historical loss data, the calculation of a loss rate, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans including purchased loans that have experienced further credit deterioration and management’s review controls over the ALLL balance as a whole including attending internal Company credit quality discussions and analysis;
Testing the design and operating effectiveness of controls, including those related to technology, over the allowance for credit losses including data completeness and accuracy, classifications of loans by loan segment, verification of historical net loss data and calculated net loss rates, the establishment of qualitative adjustments, credit ratings and risk classification of loans and establishment of specific reserves on impaired loans and management’s review and disclosure controls over the allowance for credit losses;
Testing of completeness and accuracy of the information utilized in the allowance for credit losses;
Evaluating the qualitative adjustment to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions;
Computing an independent calculation of acceptable range and comparing it to the Company’s estimate;
Testing the internal loan review functions and evaluating the accuracy of loan grades by utilizing internal specialists to assist us;
Evaluating the appropriateness of loan grades and assessing the reasonableness of specific reserves on impaired loans;
Evaluating the overall reasonableness of qualitative factors and appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years.
134
Acquisition Accounting and Related Valuation of Assets Acquired and Liabilities Assumed in a Business Combination
As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of Salin Bancshares, Inc. and its wholly-owned subsidiary of Salin Bank and Trust Company during the year ended December 31, 2019 with an acquisition price of $126.7 million, including the recognition of $31.3 million of goodwill. As part of the acquisition, management determined that the acquisition qualified as a business and accordingly all identifiable assets and liabilities acquired were valuated at fair value as part of the purchase price allocation as of the acquisition date. The identification and valuation of such acquired assets and assumed liabilities required management to exercise significant judgment and consider the use of outside vendors to estimate the fair value allocations.
We identified the acquisition and the valuation of acquired assets and assumed liabilities a critical audit matter. Auditing the acquisition transaction involved a high degree of subjectivity in evaluating management’s operational assumptions, fair value estimates, purchase price allocations and assessing the appropriateness of outside vendor valuation models.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
Obtaining and reviewing executed Plan and Agreement of Merger documents to gain an understanding of the underlying terms of the consummated acquisition;
Obtaining and reviewing management’s reconciliation procedures of significant accounts and testing of completion procedures performed and asset/liability identification considerations made;
Testing management’s computation of purchase price and determination of goodwill recognized focusing on the completeness and accuracy of the balance sheet acquired and related fair value purchase price allocations made to identified assets acquired and liabilities assumed;
Obtaining and reviewing significant outside vendor valuation estimates and challenging management’s review of the appropriateness of the valuations assessed/allocated to assets acquired and liabilities assumed; including but not limited to, testing all critical inputs, including assumptions applied and valuation models utilized by the outside vendors;
Utilization of our Forensics & Valuation Services group to assist with testing and challenging the related fair value purchase price allocations made to identified assets acquired and liabilities assumed;
Reviewing and evaluating the adequacy of the disclosures made in the footnotes of the Company’s SEC filings.
Other Reporting Required by
Government Auditing Standards
In accordance with
Government Auditing Standards
, we have also issued our reports dated February 28, 2020, on our consideration of the Company’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of those reports is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over compliance. Those reports are an integral part of an audit performed in accordance with
Government Auditing Standards
and should be considered in assessing the results of our audit.
BKD,
llp
We have served as the Company’s auditor since 1998.
Indianapolis, Indiana
February 28, 2020
Name of Engagement Executive: Michael A. Ososki
Federal Employer Identification Number:
44-0160260
135
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Horizon Bancorp
Michigan City, Indiana
Opinion on the Internal Control over Financial Reporting
We have audited Horizon Bancorp’s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly,Company maintained, in all material respects, theeffective internal control over financial position of Horizon Bancorpreporting as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years2019, based on criteria established in the three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

Internal Control – Integrated Framework: (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Horizon Bancorp’s internal control overthe consolidated financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsstatements of the Treadway Commission (COSO)Company and our report dated February 28, 20172020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Indianapolis, Indiana

February 28, 2017

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Horizon Bancorp

Michigan City, Indiana

We have audited Horizon Bancorp’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). thereon.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Financial Statement.Statements. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
136
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion,

BKD,
llp
Indianapolis, Indiana
February 28, 2020
137
Horizon Bancorp, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Horizon Bancorp and our report dated February 28, 2017, expressed an unqualified opinion thereon.

Indianapolis, Indiana

February 28, 2017

Horizon Bancorp

Inc.

MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS

Management is responsible for the preparation and presentation of the consolidated financial statements and related notes on the preceding pages. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and include amounts that are based on management’s best estimates and judgments. Financial information elsewhere in the Annual Report is consistent with that in the consolidated financial statements.

In meeting its responsibility for the accuracy of the consolidated financial statements, management relies on Horizon’s system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded to permit the preparation of appropriate financial information. The system of internal controls is supplemented by a program of internal audits to independently evaluate the adequacy and application of financial and operating controls and compliance with Company policies and procedures.

The Audit Committee of the Board of Directors meets periodically with management, the independent accountants and the internal auditors to ensure that each is properly discharging its responsibilities with regard to the consolidated financial statements and internal accounting controls. The independent accountants have full and free access to the Audit Committee and meet with it to discuss auditing and financial reporting matters.

The consolidated financial statements in the Annual Report have been audited by BKD, LLP, independent registered public accounting firm, for 2016, 20152019, 2018 and 2014.2017. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and included consideration of internal accounting controls, tests of accounting records and other audit procedures to the extent necessary to allow them to express their opinion on the fairness of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.

138
Horizon Bancorp

Summary of Selected Financial Data

(Dollars in thousands except for per share data)

   2016  2015  2014  2013  2012 

Earnings

      

Net interest income

  $85,992  $74,734  $62,983  $61,383  $58,206 

Provision for loan losses

   1,842   3,162   3,058   1,920   3,524 

Non-interest income

   37,974   30,402   26,277   25,906   27,331 

Non-interest expenses

   89,411   74,193   61,946   58,445   54,024 

Income tax expense

   8,801   7,232   6,155   7,048   8,446 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

   23,912   20,549   18,101   19,876   19,543 

Preferred stock dividend

   (42)   (125)   (133)   (370)   (481) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income available to common shareholders

  $23,870  $20,424  $17,968  $19,506  $19,062 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash dividend declared

  $8,382  $6,216  $4,744  $3,655  $3,047 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Per Share Data

      

Basic earnings per share(1)

  $1.19  $1.30  $1.32  $1.51  $1.59 

Diluted earnings per share(1)

   1.19   1.26   1.27   1.45   1.54 

Cash dividends declared per common share(1)

   0.41   0.39   0.34   0.28   0.25 

Book value per common share(1)

   15.37   14.20   13.16   11.76   11.33 

Weighted-average shares outstanding

      

Basic(1)

   19,987,728   15,765,444   13,591,053   12,928,995   11,961,362 

Diluted(1)

   20,082,410   16,197,312   14,181,188   13,501,445   12,406,765 

Period End Totals

      

Loans, net of deferred loan fees and unearned income

  $2,135,986  $1,749,131  $1,378,554  $1,068,828  $1,190,717 

Allowance for loan losses

   14,837   14,534   16,501   15,992   18,270 

Total assets

   3,141,156   2,652,401   2,076,922   1,758,276   1,848,227 

Total deposits

   2,471,210   1,880,153   1,482,319   1,291,520   1,294,153 

Total borrowings

   304,945   482,144   383,840   288,782   378,095 

Ratios

      

Loan to deposit

   86.43%   93.03%   93.00%   82.76%   92.01% 

Loan to total funding

   76.94%   74.04%   73.87%   67.63%   71.20% 

Return on average assets

   0.81%   0.87%   0.93%   1.13%   1.19% 

Average stockholders’ equity to average total assets

   10.22%   9.30%   9.33%   9.34%   8.63% 

Return on average stockholders’ equity

   7.92%   9.87%   10.60%   12.86%   14.72% 

Dividend payout ratio (dividends divided by net income)

   34.33%   29.85%   25.72%   18.56%   15.90% 

Price to book value ratio

   182.13%   131.26%   132.39%   143.59%   115.61% 

Price to earnings ratio

   23.56   14.78   13.75   11.69   8.53 

(1)Adjusted for 3:2 stock split on November 14, 2016.

Horizon Bancorp

Horizon’s Common Stock and Related Stockholders Matters

Horizon common stock is traded on the NASDAQ Global Select Market under the symbol “HBNC.” The following table sets forth, for the periods indicated, the high and low prices per share. Also summarized below are the cash dividends declared by quarter for 2016 and 2015.

   2016 
   

 

Common Stock Prices

   Dividends
Declared
Per Share		 
   High   Low   

First Quarter

  $18.59   $15.41   $0.10 

Second Quarter

   16.76    15.87    0.10 

Third Quarter

   20.01    16.61    0.10 

Fourth Quarter

   28.41    17.84    0.11 
   2015 
   

 

Common Stock Prices

   Dividends
Declared
Per Share		 
   High   Low   

First Quarter

  $17.24   $14.92   $0.09 

Second Quarter

   17.35    15.23    0.09 

Third Quarter

   17.43    15.07    0.10 

Fourth Quarter

   18.77    15.72    0.10 

The approximate number of holders of record of Horizon’s outstanding common stock as of December 31, 2016, was 1,364.

Horizon Bancorp

, Inc.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision of and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, Horizon has evaluated the effectiveness of the design and operation of its disclosure controls (as defined in Rule
13a-15(e)
of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management of Horizon Bancorp is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule
13a-15(f)
under the Securities Exchange Act of 1934. Horizon’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Management assessed the effectiveness of Horizon’s internal control over financial reporting as of December 31, 2016.2019. In making this assessment, management used the criteria set forth in Internal Control –IntegratedFramework(2013) issuedbytheCommitteeofSponsoringOrganizations(COSO) of the Treadway Commission. Based on this assessment, management has determined that Horizon’s internal control over financial reporting as of December 31, 20162019 is effective based on the specified criteria.

Attestation Report of Registered Public Accounting Firm

BKD, LLP, independent registered public accounting firm, has issued an attestation report on management’s assessment of Horizon’s internal control over financial reporting. This report appears in Item 8, following BKD, LLP’s audit report.

Changes in Internal Control Over Financial Reporting

Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended December 31, 2016,2019, there were no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

139
Horizon Bancorp

, Inc.
PART III

Certain information is omitted from this report pursuant to General Instruction G. (3) of Form
10-K
as Horizon intends to file with the Commission its definitive Proxy Statement for its 20172020 Annual Meeting of Shareholders (the “Proxy Statement”) pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 2016.

2019.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information relating to Horizon’s directors required by this item is found in the Proxy Statement under “Proposal I — Election of Directors” and is incorporated into this report and item by reference.
The information relating to the Audit Committee of the Board of Directors required by this item is found in the Proxy Statement under “Corporate Governance — Audit Committee” and is incorporated into this report and item by reference.

The information relating to Horizon’s executive officers required by this item is included in Part I of this Form
10-K
under “Special Item: Information about our Executive Officers of Registrant”Officers” and is incorporated into this Itemitem by reference.

The information relating to certain filing obligations of directors and executive officers required by this item is found in the Proxy Statement under “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” and is incorporated into this report and item by reference.

Horizon’s “Code of Ethics for Executive Officers and Directors” applies to its directors, chief executive officer and chief financial officer. The code is available on Horizon’s website athttp://www.horizonbank.com/ in the section headed “About Us – Investor Relations” under the caption “Corporate Information – Corporate Governance.”

ITEM
 11. EXECUTIVE COMPENSATION

The information on executive and director compensation and compensation committee matters required by this item can be found in the Proxy Statement under “Corporate Governance,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Executive Compensation” and “Compensation of Directors” and is incorporated into this report and item by reference.

140
Horizon Bancorp

, Inc.
ITEM
 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following table presents information regarding grants under all equity compensation plans of Horizon through December 31, 2016.

Plan Category

 Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and  Rights		  Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights		  Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
the First Column)		 

Equity compensation plans approved by security holders

  320,721  $14.15   691,482 

Equity compensation plans not approved by security holders

  —    $—     —   
 

 

 

   

 

 

 

Total

  320,721  $14.15   691,482 
 

 

 

   

 

 

 

2019.

             
Plan Category
 
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
  
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
  
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans
(Excluding Securities
Reflected in the First
Column)
 
Equity compensation plans approved by security holders
  
329,452
  $
  12.70
   
657,612
 
Equity compensation plans not approved by security holders
  
—  
  $
—  
   
—  
 
             
  
329,452
  $
12.70
   
657,612
 
             
The other information required by this item can be found in the Proxy Statement under “Common Share Ownership of Management and Certain Beneficial Owners” and is incorporated by reference into this report.

report and item.

ITEM
 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is found in the Proxy Statement under “Corporate Governance” and “Certain Business Relationships and Transactions” and is incorporated by reference into this report.

report and item.

ITEM
 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference into this report and item from the Proxy Statement section captioned “Auditor Fees and Services.”

PART IV

ITEM
 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents Filed As Part of This Annual Report on Form
10-K:

 1.Financial Statements

See the Financial Statements included in Item 8.

The following financial statements are filed as part of this document under Item 8:
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Income, years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income, years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity, years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows, years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
141
Horizon Bancorp
, Inc.
 2.Financial Statement Schedules

Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements.

 3.Exhibits

The exhibits filed as part of this Annual Report on Form10-K are identified in the Exhibit Index, which Exhibit Index specifically identifies thosereport and exhibits that describe or evidence all management contracts and compensation plans or arrangements required to be filed as exhibits to this Report. Such Exhibit Index is incorporated herein by reference.

SIGNATURES

Pursuantreference to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

other documents are as follows:

Horizon Bancorp

Registrant

Date: February 28, 2017By:

/s/ Craig M. Dwight

Craig M. Dwight

Chairman, President and Chief Executive Officer (Principal Executive Officer)

Date: February 28, 2017By:

/s/ Mark E. Secor

Mark E. Secor

Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Date

   

Signature and Title

February 28, 2017 
Exhibit
Number
 

/s/ Craig M. Dwight

Craig M. Dwight, Chairman of the Board, President and Chief Executive Officer and Director

February 28, 2017
Description
 

/s/ Susan D. Aaron

Susan D. Aaron, Director

Incorporated by Reference/Attached
February 28, 2017

/s/ Lawrence E. Burnell

Lawrence E. Burnell, Director

February 28, 2017

/s/ James B. Dworkin

James B. Dworkin, Director

February 28, 2017

/s/ Daniel F. Hopp

Daniel F. Hopp, Director

February 28, 2017

/s/ Michele M. Magnuson

Michele M. Magnuson, Director

Date

   

Signature and Title

February 28, 2017 
  3.1
 

/s/ Larry N. Middleton

Larry N. Middleton, Director

February 28, 2017

/s/ Peter L. Pairitz

Peter L. Pairitz, Director

February 28, 2017

/s/ Steven W. Reed

Steven W. Reed, Director

February 28, 2017

/s/ Robert E. Swinehart

Robert E. Swinehart, Director

February 28, 2017

/s/ Spero W. Valavanis

Spero W. Valavanis, Director

February 28, 2017

/s/ Maurice F. Winkler, III

Maurice F. Winkler, III, Director

EXHIBIT INDEX

The following exhibits are included in this Form10-K or are incorporated by reference as noted in the following table:

Exhibit

Number

Description

Incorporated by Reference/Attached

    2.1Agreement
Amended and Plan of Merger, dated as of March 10, 2016, between Horizon Bancorp and LaPorte Bancorp, Inc.
Incorporated by reference to Exhibit 2.1 to Registrant’s Form8-K filed March 11, 2016
    3.1Restated Articles of Incorporation of Horizon Bancorp, as amended and restatedInc. effective May 16, 2018 
Incorporated by reference to Exhibit 3.1 to Registrant’s Form
8-K
filed October 19,2016
on May 16, 2018
 3.2 
  3.2
Amended and Restated Bylaws of Horizon Bancorp, Inc.
 
Incorporated by reference to Exhibit 3.13.2 to Registrant’s Form
8-K
filed April 18, 2013
on January 22, 2020
 4.1 
  4.1
Description of Common Stock
Attached
  4.2
Indenture, dated as of October 21, 2004, between Horizon Bancorp and Wilmington Trust Company related to the issuance of Trust Preferred Securities
 
Incorporated by reference to Exhibit 4.1 to Registrant’s Form
10-K
for the year ended December 31, 2009 (SEC FileNo. 000-10792, Film No. 10677545)
 4.2 
  4.3
Amended and Restated Declaration of Trust of Horizon Bancorp Capital Trust II, dated as of October 21, 2004, related to the issuance of Trust Preferred Securities
 
Incorporated by reference to Exhibit 4.2 to Registrant’s Form
10-K
for the year ended December 31, 2009 (SEC FileNo. 000-10792, Film No. 10677545)
 4.3 
  4.4
Junior Subordinated Indenture, dated as of December 15, 2006, between Horizon Bancorp and Wilmington Trust Company.Company
 
Incorporated by reference to Exhibit 4.1 to Registrant’s Form
8-K
filed on December 21, 2006 (SEC FileNo. 000-10792, Film No. 061291739)
 4.4 
  4.5
Amended and Restated Trust Agreement of Horizon Bancorp Capital Trust III, dated as of December 15, 2006
 
Incorporated by reference to Exhibit 4.2 to Registrant’s Form
8-K
filed on December 21, 2006 (SEC FileNo. 000-10792, Film No. 061291739)
 10.1* Supplemental Executive Retirement Plan, as amended and restated as of January 1, 1997 Incorporated by reference to Exhibit 10.1 to Registrant’s Form10-K for the year ended December 31, 2007 (SEC FileNo. 000-10792, Film No. 08689720)
 10.2*
10.1*
 
Horizon Bancorp Amended 2003 Omnibus Equity Incentive Plan
 
Incorporated by reference to Appendix A to Registrant’s definitive Proxy Statement for its 2010 Annual Meeting of Shareholders (SEC FileNo. 000-10792, Film No. 10693679)
 10.3* Directors Deferred Compensation Plan Incorporated by reference to Exhibit 10.5 to Registrant’s Form10-K for the year ended December 31, 2009 (SEC FileNo. 000-10792, Film No. 10677545)
 10.4*
10.2*
 Form of Change of Control Agreement for certain executive officersIncorporated by reference to Exhibit 10.6 to Registrant’s Form10-K for the year ended December 31, 2009 (SEC FileNo. 000-10792, Film No. 10677545)
  10.5*
Form of Restricted Stock Award Agreement under 2003 Omnibus Equity Incentive Plan
 
Incorporated by reference to Exhibit 10.7 to Registrant’s Form
10-K
for the year ended December 31, 2009 (SEC FileNo. 000-10792, Film No. 10677545)

Exhibit

Number

 

Description

 

Incorporated by Reference/Attached

 10.6*
10.3*
 
Form of Option Grant Agreement under 2003 Omnibus Equity Incentive Plan
 
Incorporated by reference to Exhibit 10.8 to Registrant’s Form
10-K
for the year ended December 31, 2009 (SEC FileNo. 000-10792, Film No. 10677545)
 10.7 Guarantee Agreement of Horizon Bancorp, dated as of October 21, 2004, related to the issuance of Trust Preferred Securities Incorporated by reference to Exhibit 10.10 to Registrant’s Form10-K for the year ended December 31, 2009 (SEC FileNo. 000-10792, Film No. 10677545)
 10.8*
10.4*
 Description of Executive Officer Bonus PlanAttached
  10.9*Horizon Bancorp 2005 Supplemental Executive Retirement Plan as amendedIncorporated by reference to Exhibit 10.14 to Registrant’s Form10-K for the year ended December 31, 2006 (SEC FileNo. 000-10792, Film No. 07714381)
  10.10*Employment Agreement, dated December 1, 2006, among Horizon Bancorp, Horizon Bank, N.A. and Craig M. DwightIncorporated by reference to Exhibit 10.1 to Registrant’s Form8-K filed December 6, 2006 (SEC FileNo. 000-10792, Film No. 061259453)
  10.11*Letter Agreement, dated December 1, 2006, between Horizon Bank, N.A. and Craig M. DwightIncorporated by reference to Exhibit 10.2 to Registrant’s Form8-K filed December 6, 2006 (SEC FileNo. 000-10792, Film No. 061259453)
  10.12*Guarantee Agreement of Horizon Bancorp, dated as of December 15, 2006, related to the issuance of Trust Preferred SecuritiesIncorporated by reference to Exhibit 10.1 to Registrant’s Form8-K filed December 21, 2006 (SEC FileNo. 000-10792, Film No. 061291739)
  10.13*Employment Agreement, dated July 16, 2007, among Horizon Bancorp, Horizon Bank, N.A. and Thomas H. EdwardsIncorporated by reference to Exhibit 10.1 to Registrant’s Form8-K filed July 19, 2007 (SEC FileNo. 000-10792, Film No. 07988114)
  10.14*Agreement, dated August 28, 2007, between Horizon Bank, N.A., and Mark E. SecorIncorporated by reference to Exhibit 10.18 to Registrant’s Form10-K for the year ended December 31, 2008 (SEC FileNo. 000-10792, Film No. 09694757)
  10.15*First Amendment of the Agreement between Horizon Bank, N.A., and Mark E. Secor, dated January 1, 2009Incorporated by reference to Exhibit 10.19 to Registrant’s Form10-K for the year ended December 31, 2008 (SEC FileNo. 000-10792, Film No. 09694757)
  10.16*Employment Agreement, dated December 14, 2011, by and among Horizon Bank, N.A., Horizon Bancorp and James D. NeffIncorporated by reference to Exhibit 10.1 to Registrant’s Form8-K filed on December 14, 2011 (SEC FileNo. 000-10792, Film No. 111259976)
  10.17*First Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement PlanIncorporated by reference to Exhibit 10.1 to Registrant’s Form10-Q for the quarter ended March 31, 2012
  10.18*Second Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement PlanIncorporated by reference to Exhibit 10.2 to Registrant’s Form10-Q for the quarter ended March 31, 2012

Exhibit

Number

Description

Incorporated by Reference/Attached

  10.19*Fifth Amendment to the Horizon Bancorp 1997 Supplemental Executive Retirement PlanIncorporated by reference to Exhibit 10.3 to Registrant’s Form10-Q for the quarter ended March 31, 2012
  10.20*
Horizon Bancorp 2013 Omnibus Equity Incentive Plan
 
Incorporated by reference to Appendix A to Registrant’s definitive Proxy Statement for its 2014 Annual Meeting of Shareholders
 10.21* 
10.5*
Form of Nonqualified Stock Option Agreement
 
Incorporated by reference to Exhibit 10.1 to Registrant’s Form
8-K
filed on June 18, 2013

142
Horizon Bancorp
, Inc.
Exhibit
Number
Description
Incorporated by Reference/Attached
 10.22* 
10.6*
Form of Nonqualified Stock Option Agreement (Restrictive Covenant)
 
Incorporated by reference to Exhibit 10.2 to Registrant’s Form
8-K
filed on June 18, 2013
 10.23* 
10.7*
Form of Performance Share Award Agreement
 
Incorporated by reference to Exhibit 10.1 to Registrant’s Form
8-K
filed on March 27, 2017
10.8*
Form of Performance Share Award Agreement (Restrictive Covenant)
Incorporated by reference to Exhibit 10.2 to Registrant’s Form
8-K
filed on March 27, 2017
10.9*
Form of Restricted Stock Award Agreement
Incorporated by reference to Exhibit 10.9 to Registrant’s Form
10-K
filed on February 28, 2018
10.10*
Form of Restricted Stock Award Agreement (Restrictive Covenant)
Incorporated by reference to Exhibit 10.10 to Registrant’s Form
10-K
filed on February 28, 2018
10.11*
1997 Supplemental Executive Retirement Plan, as amended and restated as of January 1, 1997, with amendments through December 19, 2017
Incorporated by reference to Exhibit 4.2 to Registrant’s Registration Statement on Form
S-8
filed on December 28, 2017 (Registration No.
 333-222329)
10.12*
2005 Supplemental Executive Retirement Plan, effective as of January 1, 2005, with amendments through December 19, 2017
Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form
S-8
filed on December 28, 2017 (Registration No.
 333-222329)
10.13*
1998 Directors Deferred Compensation Plan, with amendments through December 19, 2017
Incorporated by reference to Exhibit 4.2 to Registrant’s Registration Statement on Form
S-8
filed on December 28, 2017 (Registration No.
 333-222330)
10.14*
Amended and Restated 2005 Directors Deferred Compensation Plan, dated December 19, 2017
Incorporated by reference to Exhibit 4.2 to Registrant’s Registration Statement on Form
S-8
filed on December 28, 2017 (Registration No.
 333-222330)
10.15*
Description of Executive Officer Bonus Plan
Attached
10.16*
Amended and Restated Employment Agreement (Craig M. Dwight), dated January 1, 2020
Incorporated by reference to Exhibit 10.7 to Registrant’s Form
8-K
filed on January 7, 2020
10.17*
Amended and Restated Employment Agreement (James D. Neff), dated January 1, 2020
Incorporated by reference to Exhibit 10.8 to Registrant’s Form
8-K
filed on January 7, 2020
10.18*
Change in Control Agreement (Craig M. Dwight), dated January 1, 2020
Incorporated by reference to Exhibit 10.1 to Registrant’s Form
8-K
filed on January 7, 2020
10.19*
Change in Control Agreement (James D. Neff), dated January 1, 2020
Incorporated by reference to Exhibit 10.2 to Registrant’s Form
8-K
filed on January 7, 2020
10.20*
Change in Control Agreement (Mark E. Secor), dated January 1, 2020
Incorporated by reference to Exhibit 10.3 to Registrant’s Form
8-K
filed on June 18, 2013
January 7, 2020
 10.24* Form of Performance Share Award Agreement (Restrictive Covenant) 
10.21*
Change in Control Agreement (Kathie A. DeRuiter), dated January 1, 2020
Incorporated by reference to Exhibit 10.4 to Registrant’s Form
8-K
filed on June 18, 2013January 7, 2020
143
Horizon Bancorp
, Inc.
Exhibit
Number
Description
Incorporated by Reference/Attached
 10.25* Agreement dated September 21, 2016, between Horizon Bank, N.A. and Kathie A. DeRuiter 
10.22*
Change in Control Agreement (Dennis J. Kuhn), dated January 1, 2020
Incorporated by reference to Exhibit 10.110.5 to Registrant’s Form
8-K
filed on September 21, 2016
January 7, 2020
 12 Ratios of Earnings to Fixed Charges and Preferred Stock Dividends Attached
 21
10.23*
 
Change in Control Agreement (Todd A. Etzler), dated January 1, 2020
Incorporated by reference to Exhibit 10.6 to Registrant’s Form
8-K
filed on January 7, 2020
14
Code of Ethics for Executive Officers and Directors
Incorporated by reference to Exhibit 14 to Registrant’s Form
8-K
filed on December 21, 2017
21
Subsidiaries of Horizon
 
Attached
 23 
23
Consent of BKD, LLP
 
Attached
 31.1 
31.1
Certification of Craig M. Dwight pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Attached
 31.2 
31.2
Certification of Mark E. Secor pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Attached
 32.1 
32.1
Certification of Craig M. Dwight Pursuantpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Attached
 32.2 
32.2
Certification of Mark E. Secor Pursuantpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Attached
101 
101
Inline Interactive Data Files
Attached
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 Attached
Embedded Within the Inline XBRL Document

*Indicates exhibits that describe or evidence management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form
10-K.

139

ITEM
16. FORM 10-K SUMMARY
Not included.
144
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized
Horizon Bancorp, Inc.
Registrant
Date: February 28, 2020
By:
/s/ Craig M. Dwight
Craig M. Dwight
Chairman and Chief Executive Officer (Principal
Executive Officer)
Date: February 28, 2020
By :
/s/ Mark E. Secor
Mark E. Secor
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date
Signature and Title
February 28, 2020
/s/ Craig M. Dwight
Craig M. Dwight, Chairman of the Board Chief Executive Officer and Director
February 28, 2020
/s/ Susan D. Aaron
Susan D. Aaron, Director
February 28, 2020
/s/ Eric P. Blackhurst
Eric P. Blackhurst, Director
February 28, 2020
/s/ Lawrence E. Burnell
Lawrence E. Burnell, Director
February 28, 2020
/s/ James B. Dworkin
James B. Dworkin, Director
February 28, 2020
/s/ Julie Scheck Freigang
Julie Scheck Freigang, Director
February 28, 2020
/s/ Daniel F. Hopp
Daniel F. Hopp, Director
February 28, 2020
/s/ Michele M. Magnuson
Michele M. Magnuson, Director
145
Date
Signature and Title
February 28, 2020
/s/ Peter L. Pairitz
Peter L. Pairitz, Director
February 28, 2020
/s/ Steven W. Reed
Steven W. Reed, Director
February 28, 2020
/s/ Spero W. Valavanis
Spero W. Valavanis, Director
146