UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~March 31,~~September 30, 2021


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

For the transition period from________to

Commission file number 0-10792

HORIZON BANCORP, INC.

(Exact name of registrant as specified in its charter)


Indiana			35-1562417
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

515 Franklin Street, Michigan City, Indiana 46360

(Address of principal executive offices)(Zip Code)

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

Former name, former address and former fiscal year, if changed since last report: N/A

____________________________

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, no par value

HBNC

The NASDAQ Stock Market, LLC

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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


Large Accelerated Filer	☐	Accelerated Filer	☒
Non-accelerated Filer	☐	Smaller Reporting Company	☐
Emerging growth 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 in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~43,949,189~~43,520,694 shares of Common Stock, no par value, at ~~April 29,~~November 5, 2021.

Table of Contents

HORIZON BANCORP, INC.

FORM 10–Q

INDEX


PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	56
	Condensed Consolidated Statements of Stockholders’ Equity	67
	Condensed Consolidated Statements of Cash Flows	79
	Notes to Condensed Consolidated Financial Statements	911
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4246
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5871
Item 4.	Controls and Procedures	5872
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	5973
Item 1A.	Risk Factors	5973
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5973
Item 3.	Defaults Upon Senior Securities	5973
Item 4.	Mine Safety Disclosures	5973
Item 5.	Other Information	5973
Item 6.	Exhibits	5973
Index to Exhibits		5973
Signatures		6175

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

March 31,
2021 December 31,
2020
(Unaudited)
Assets
Cash and due from banks $ 529,336 $ 249,711
Interest earning time deposits 7,983 8,965
Investment securities, available for sale 1,262,175 1,134,025
Investment securities, held to maturity (fair value of $170,949 and $179,990) 161,650 168,676
Loans held for sale 7,798 13,538
Loans, net of allowance for credit losses of $57,186 and $57,027 3,607,250 3,810,356
Premises and equipment, net 92,109 92,416
Federal Home Loan Bank stock 23,023 23,023
Goodwill 151,238 151,238
Other intangible assets 22,058 22,955
Interest receivable 20,951 21,396
Cash value of life insurance 97,262 96,751
Other assets 72,695 93,564
Total assets $ 6,055,528 $ 5,886,614
Liabilities
Deposits
Non–interest bearing $ 1,133,412 $ 1,053,242
Interest bearing 3,588,404 3,477,891
Total deposits 4,721,816 4,531,133
Borrowings 481,488 475,000
Subordinated notes 58,640 58,603
Junior subordinated debentures issued to capital trusts 56,604 56,548
Interest payable 1,772 2,712
Other liabilities 45,829 70,402
Total liabilities 5,366,149 5,194,398
Commitments and contingent liabilities 0 0
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares 0 0
Common stock, no par value, Authorized 99,000,000 shares
Issued 43,974,258 and 43,905,631 shares, Outstanding 43,949,189 and 43,880,562 shares 0 0
Additional paid-in capital 362,613 362,945
Retained earnings 316,080 301,419
Accumulated other comprehensive income 10,686 27,852
Total stockholders’ equity 689,379 692,216
Total liabilities and stockholders’ equity $ 6,055,528 $ 5,886,614


	September 30, 2021		December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	971,817	$	249,711
Interest earning time deposits	5,767		8,965
Investment securities, available for sale	1,669,634		1,134,025
Investment securities, held to maturity (fair value of $768,099 and $179,990)	769,240		168,676
Loans held for sale	4,811		13,538
Loans, net of allowance for credit losses of $56,779 and $57,027	3,603,302		3,810,356
Premises and equipment, net	93,866		92,416
Federal Home Loan Bank stock	24,440		23,023
Goodwill	162,788		151,238
Other intangible assets	21,150		22,955
Interest receivable	24,762		21,396
Cash value of life insurance	97,003		96,751
Other assets	85,660		93,564
Total assets	$	7,534,240	$	5,886,614
Liabilities
Deposits
Non–interest bearing	$	1,324,757	$	1,053,242
Interest bearing	4,655,142		3,477,891
Total deposits	5,979,899		4,531,133
Borrowings	670,753		475,000
Subordinated notes	58,713		58,603
Junior subordinated debentures issued to capital trusts	56,722		56,548
Interest payable	1,427		2,712
Other liabilities	58,184		70,402
Total liabilities	6,825,698		5,194,398
Commitments and contingent liabilities	0		0
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares	—		—
Common stock, no par value, Authorized 99,000,000 shares
Issued 43,609,536 and 43,905,631 shares, Outstanding 43,520,694 and 43,880,562 shares	—		—
Additional paid-in capital	351,954		362,945
Retained earnings	348,943		301,419
Accumulated other comprehensive income	7,645		27,852
Total stockholders’ equity	708,542		692,216
Total liabilities and stockholders’ equity	$	7,534,240	$	5,886,614

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, ~~INC~~INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Interest Income
Loans receivable	$	40,392	$	44,051	$	120,446	$	132,927
Investment securities – taxable	4,565		1,704		8,641		6,923
Investment securities – tax exempt	5,911		4,391		16,790		12,294
Total interest income	50,868		50,146		145,877		152,144
Interest Expense
Deposits	1,808		3,616		6,204		15,838
Borrowed funds	1,075		1,662		3,640		5,974
Subordinated notes	880		895		2,641		953
Junior subordinated debentures issued to capital trusts	561		576		1,678		2,061
Total interest expense	4,324		6,749		14,163		24,826
Net Interest Income	46,544		43,397		131,714		127,318
Credit loss expense (recovery)	1,112		2,052		(13)		17,709
Net Interest Income after Credit Loss Expense (Recovery)	45,432		41,345		131,727		109,609
Non–interest Income
Service charges on deposit accounts	2,291		2,154		6,682		6,488
Wire transfer fees	210		298		687		699
Interchange fees	2,587		2,438		7,819		6,661
Fiduciary activities	2,124		2,105		5,828		6,398
Gains on sale of investment securities (includes $0 and $1,088 for the three months ended September 30, 2021 and 2020, respectively, and $914 and $1,675 for the nine months ended September 30, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications)	—		1,088		914		1,675
Gain on sale of mortgage loans	4,088		8,813		14,996		18,906
Mortgage servicing income net of impairment	336		(1,308)		2,052		(4,043)
Increase in cash value of bank owned life insurance	534		566		1,547		1,677
Death benefit on bank owned life insurance	517		31		783		264
Other income	3,357		515		3,816		1,163
Total non–interest income	16,044		16,700		45,124		39,888
Non–interest Expense
Salaries and employee benefits	18,901		18,832		53,502		51,052
Net occupancy expenses	2,935		3,107		9,337		9,549
Data processing	2,526		2,237		7,290		7,074
Professional fees	522		688		1,654		1,742
Outside services and consultants	2,330		1,561		6,252		5,235
Loan expense	2,645		2,876		8,574		7,667
FDIC insurance expense	279		570		1,579		955
Other losses	69		114		358		427
Other expense	4,142		3,422		11,363		11,287
Total non–interest expense	34,349		33,407		99,909		94,988
Income Before Income Taxes	27,127		24,638		76,942		54,509
Income tax expense (includes $0 and $228 for the three months ended September 30, 2021 and 2020, respectively, and $192 and $352 for the nine months ended September 30, 2021 and 2020, respectively, related to income tax expense from reclassification items)	4,056		4,326		11,276		7,903
Net Income	$	23,071	$	20,312	$	65,666	$	46,606

Table of Contents

Three Months Ended
March 31,
2021 2020
Interest Income
Loans receivable $ 40,818 $ 44,958
Investment securities – taxable 1,548 2,898
Investment securities – tax exempt 5,223 3,798
Total interest income 47,589 51,654
Interest Expense
Deposits 2,343 7,716
Borrowed funds 1,269 2,238
Subordinated notes 880 0
Junior subordinated debentures issued to capital trusts 559 775
Total interest expense 5,051 10,729
Net Interest Income 42,538 40,925
Credit loss expense 367 8,600
Net Interest Income after Credit Loss Expense 42,171 32,325
Non–interest Income
Service charges on deposit accounts 2,234 2,446
Wire transfer fees 255 171
Interchange fees 2,340 1,896
Fiduciary activities 1,743 2,528
Gains on sale of investment securities (includes $914 and $339 for the three months ended March 31, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications) 914 339
Gain on sale of mortgage loans 5,296 3,473
Mortgage servicing income net of impairment 213 25
Increase in cash value of bank owned life insurance 511 554
Death benefit on bank owned life insurance 0 233
Other income 367 398
Total non–interest income 13,873 12,063
Non–interest Expense
Salaries and employee benefits 16,871 16,591
Net occupancy expenses 3,318 3,252
Data processing 2,376 2,405
Professional fees 544 536
Outside services and consultants 1,702 1,915
Loan expense 2,822 2,099
FDIC insurance expense 800 150
Other losses 283 120
Other expense 3,456 4,081
Total non–interest expense 32,172 31,149
Income Before Income Taxes 23,872 13,239
Income tax expense (includes $192 and $71 for the three months ended March 31, 2021 and 2020, respectively, related to income tax expense from reclassification items) 3,450 1,584
Net Income $ 20,422 $ 11,655
Basic Earnings Per Share $ 0.46 $ 0.26
Diluted Earnings Per Share 0.46 0.26
HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)


Basic Earnings Per Share	$	0.53	$	0.46	$	1.50	$	1.06
Diluted Earnings Per Share	0.52		0.46		1.49		1.06

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, ~~INC~~INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollar Amounts in Thousands)


		Three Months Ended				Three Months Ended				Nine Months Ended
		March 31				September 30				September 30
		2021		2020				2021		2020		2021		2020
Net Income	Net Income	$	20,422	$	11,655		Net Income	$	23,071	$	20,312	$	65,666	$	46,606
Other Comprehensive Income	Other Comprehensive Income						Other Comprehensive Income
Change in fair value of derivative instruments:	Change in fair value of derivative instruments:						Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period	Change in fair value of derivative instruments for the period	3,053		(3,965)			Change in fair value of derivative instruments for the period	555		(359)		3,590		(4,459)
Income tax effect	Income tax effect	(641)		833			Income tax effect	(117)		75		(754)		936
Changes from derivative instruments	Changes from derivative instruments	2,412		(3,132)			Changes from derivative instruments	438		(284)		2,836		(3,523)
Change in securities:	Change in securities:						Change in securities:
Unrealized appreciation (depreciation) for the period on AFS securities	Unrealized appreciation (depreciation) for the period on AFS securities	(23,885)		7,992			Unrealized appreciation (depreciation) for the period on AFS securities	(14,488)		4,019		(28,304)		27,518
Accretion (amortization) from transfer of securities from available for sale to held to maturity securities	Accretion (amortization) from transfer of securities from available for sale to held to maturity securities	17		(30)			Accretion (amortization) from transfer of securities from available for sale to held to maturity securities	19		(31)		50		(60)
Reclassification adjustment for securities gains realized in income	Reclassification adjustment for securities gains realized in income	(914)		(339)			Reclassification adjustment for securities gains realized in income	—		(1,088)		(914)		(1,675)
Income tax effect	Income tax effect	5,204		(1,601)			Income tax effect	3,038		(608)		6,125		(5,414)
Unrealized gains (losses) on securities	Unrealized gains (losses) on securities	(19,578)		6,022			Unrealized gains (losses) on securities	(11,431)		2,292		(23,043)		20,369
Other Comprehensive Income (Loss), Net of Tax	Other Comprehensive Income (Loss), Net of Tax	(17,166)		2,890			Other Comprehensive Income (Loss), Net of Tax	(10,993)		2,008		(20,207)		16,846
Comprehensive Income	Comprehensive Income	$	3,256	$	14,545		Comprehensive Income	$	12,078	$	22,320	$	45,459	$	63,452

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, ~~INC~~INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)


	Three Months Ended
	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total
Balances, July 1, 2020	$	—	$	—	$	361,087	$	269,849	$	21,270	$	652,206
Net income	—		—		—		20,312		—		20,312
Other comprehensive income, net of tax	—		—		—		—		2,008		2,008
Amortization of unearned compensation	—		—		335		—		—		335
Exercise of stock options	—		—		—		—		—		—
Stock option expense	—		—		28		—		—		28
Stock issued stock plans	—		—		730		—		—		730


Cash dividends on common stock ($0.12 per share)	—		—		—		(5,326)		—		(5,326)
Balances, September 30, 2020	$	—	$	—	$	362,180	$	284,835	$	23,278	$	670,293

Balances, July 1, 2021	$	—	$	—	$	359,227	$	332,509	$	18,638	$	710,374
Net income	—		—		—		23,071		—		23,071
Other comprehensive loss, net of tax	—		—		—		—		(10,993)		(10,993)

Amortization of unearned compensation	—		—		449		—		—		449
Exercise of stock options	—		—		—		—		—		—
Stock option expense	—		—		13		—		—		13

Repurchase of outstanding stock	—		—		(7,607)		—		—		(7,607)
Stock retirement plans	—		—		(128)		—		—		(128)
Cash dividends on common stock ($0.15 per share)	—		—		—		(6,637)		—		(6,637)
Balances, September 30, 2021	$	—	$	—	$	351,954	$	348,943	$	7,645	$	708,542

Three Months Ended
Preferred
Stock Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income Total
Balances, January 1, 2020 $ — $ — $ 379,853 $ 269,738 $ 6,432 $ 656,023
Net income — — — 11,655 — 11,655
Other comprehensive income, net of tax — — — — 2,890 2,890
Amortization of unearned compensation — — 200 — — 200
Exercise of stock options — — 255 — — 255
Stock option expense — — 50 — — 50
Stock issued stock plans — — 297 — — 297
Repurchase of outstanding stock — — (19,636) — — (19,636)
Cash dividends on common stock ($0.12 per share) — — — (5,257) — (5,257)
Balances, March 31, 2020 $ — $ — $ 361,019 $ 260,501 $ 9,322 $ 630,842
Balances, January 1, 2021 $ — $ — $ 362,945 $ 301,419 $ 27,852 $ 692,216
Net income — — — 20,422 — 20,422
Other comprehensive loss, net of tax — — — — (17,166) (17,166)
Amortization of unearned compensation — — 335 — — 335
Exercise of stock options — — 653 — — 653
Stock option expense — — 27 — — 27
Stock awards vested — — (1,347) — — (1,347)
Cash dividends on common stock ($0.12 per share) — — — (5,761) — (5,761)
Balances, March 31, 2021 $ — $ — $ 362,613 $ 316,080 $ 10,686 $ 689,379

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)


	Nine Months Ended
	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total
Balances, January 1, 2020	$	—	$	—	$	379,853	$	269,738	$	6,432	$	656,023
Net income	—		—		—		46,606		—		46,606
Other comprehensive income, net of tax	—		—		—		—		16,846		16,846
Impact of adoption of ASU No. 2016–13	—		—		—		(15,635)		—		(15,635)
Amortization of unearned compensation	—		—		457		—		—		457
Exercise of stock options	—		—		157		—		—		157
Stock option expense	—		—		105		—		—		105

Stock issued stock plans	—		—		1,244		—		—		1,244

Repurchase of outstanding stock	—		—		(19,636)		—		—		(19,636)
Cash dividends on common stock ($0.36 per share)	—		—		—		(15,874)		—		(15,874)
Balances, September 30, 2020	$	—	$	—	$	362,180	$	284,835	$	23,278	$	670,293

Balances, January 1, 2021	$	—	$	—	$	362,945	$	301,419	$	27,852	$	692,216
Net income	—		—		—		65,666		—		65,666
Other comprehensive loss, net of tax	—		—		—		—		(20,207)		(20,207)

Amortization of unearned compensation	—		—		1,233		—		—		1,233
Exercise of stock options	—		—		769		—		—		769
Stock option expense	—		—		55		—		—		55
Stock awards vested	—		—		(1,347)		—		—		(1,347)

Repurchase of outstanding stock	—		—		(7,607)		—		—		(7,607)
Stock retirement plans	—		—		(4,094)		—		—		(4,094)
Cash dividends on common stock ($0.41 per share)	—		—		—		(18,142)		—		(18,142)
Balances, September 30, 2021	$	—	$	—	$	351,954	$	348,943	$	7,645	$	708,542

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, ~~INC~~INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar Amounts in Thousands)


		Three Months Ended					Nine Months Ended
		March 31					September 30
		2021		2020			2021		2020
Operating Activities	Operating Activities					Operating Activities
Net income	Net income	$	20,422	$	11,655	Net income	$	65,666	$	46,606
Items not requiring (providing) cash	Items not requiring (providing) cash					Items not requiring (providing) cash
Provision for credit losses		367		8,600
Provision for (recovery of) credit losses						Provision for (recovery of) credit losses	(13)		17,709
Depreciation and amortization	Depreciation and amortization	2,657		2,610		Depreciation and amortization	8,085		7,539
Share based compensation	Share based compensation	27		50		Share based compensation	55		105
Mortgage servicing rights income	Mortgage servicing rights income	23		(347)		Mortgage servicing rights income	90		(630)
Mortgage servicing rights net impairment	Mortgage servicing rights net impairment	(236)		322		Mortgage servicing rights net impairment	(2,142)		4,673
Premium amortization on securities, net	Premium amortization on securities, net	2,224		1,997		Premium amortization on securities, net	7,279		6,649
Gain on sale of investment securities	Gain on sale of investment securities	(914)		(339)		Gain on sale of investment securities	(914)		(1,675)
Gain on sale of mortgage loans	Gain on sale of mortgage loans	(5,296)		(3,473)		Gain on sale of mortgage loans	(14,996)		(18,906)
Proceeds from sales of loans	Proceeds from sales of loans	137,060		68,892		Proceeds from sales of loans	366,004		436,285
Loans originated for sale	Loans originated for sale	(126,024)		(67,576)		Loans originated for sale	(342,281)		(426,344)
Change in cash value life insurance	Change in cash value life insurance	(511)		(554)		Change in cash value life insurance	(1,547)		(1,677)
Gain on sale of other real estate owned	Gain on sale of other real estate owned	0		(8)		Gain on sale of other real estate owned	(76)		(119)
Net change in:	Net change in:					Net change in:
Interest receivable	Interest receivable	445		1,054		Interest receivable	(2,847)		(1,628)
Interest payable	Interest payable	(940)		(290)		Interest payable	(1,301)		(581)
Other assets	Other assets	9,223		6,068		Other assets	11,200		(7,048)
Other liabilities	Other liabilities	(5,156)		(484)		Other liabilities	(3,443)		1,873
Net cash provided by operating activities	Net cash provided by operating activities	33,371		28,177		Net cash provided by operating activities	88,819		62,831
Investing Activities	Investing Activities					Investing Activities
Purchases of securities available for sale	Purchases of securities available for sale	(230,708)		(129,405)		Purchases of securities available for sale	(820,485)		(396,133)
Proceeds from sales, maturities, calls and principal repayments of securities available for sale	Proceeds from sales, maturities, calls and principal repayments of securities available for sale	76,869		71,395		Proceeds from sales, maturities, calls and principal repayments of securities available for sale	250,808		237,645

Purchases of securities held to maturity						Purchases of securities held to maturity	(625,397)		—
Proceeds from maturities of securities held to maturity	Proceeds from maturities of securities held to maturity	6,623		6,708		Proceeds from maturities of securities held to maturity	23,368		26,359
Net change in interest earning time deposits	Net change in interest earning time deposits	982		(784)		Net change in interest earning time deposits	3,198		(758)

Change in FHLB stock						Change in FHLB stock	(1,417)		(576)
Net change in loans	Net change in loans	202,290		(68,685)		Net change in loans	412,873		(394,167)
Proceeds on the sale of OREO and repossessed assets	Proceeds on the sale of OREO and repossessed assets	507		155		Proceeds on the sale of OREO and repossessed assets	1,119		1,426
Change in premises and equipment, net	Change in premises and equipment, net	(1,118)		(2,030)		Change in premises and equipment, net	(462)		(4,252)

Death benefit on bank owned life insurance	Death benefit on bank owned life insurance	0		233		Death benefit on bank owned life insurance	783		264
Repurchase of outstanding stock	Repurchase of outstanding stock	0		(19,636)		Repurchase of outstanding stock	(7,607)		(19,636)

Net cash provided by (used in) investing activities		55,445		(142,049)
Net cash received in branch acquisition						Net cash received in branch acquisition	616,832		—
Net cash used in investing activities						Net cash used in investing activities	(146,387)		(549,828)
Financing Activities	Financing Activities					Financing Activities
Net change in:	Net change in:					Net change in:
Deposits	Deposits	190,683		(48,731)		Deposits	602,357		405,287
Borrowings	Borrowings	6,581		154,935		Borrowings	196,037		37,654
Net change from issuance of stock	Net change from issuance of stock	(694)		552		Net change from issuance of stock	(578)		1,401
Net proceeds from issuance of subordinated notes	Net proceeds from issuance of subordinated notes	0		0		Net proceeds from issuance of subordinated notes	—		58,824
Dividends paid on common stock	Dividends paid on common stock	(5,761)		(5,257)		Dividends paid on common stock	(18,142)		(15,874)
Net cash provided by financing activities	Net cash provided by financing activities	190,809		101,499		Net cash provided by financing activities	779,674		487,292
Net Change in Cash and Cash Equivalents		279,625		(12,373)
Cash and Cash Equivalents, Beginning of Period		249,711		98,831

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HORIZON BANCORP, ~~INC~~INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar Amounts in Thousands)


Net Change in Cash and Cash Equivalents						Net Change in Cash and Cash Equivalents	722,106		295
Cash and Cash Equivalents, Beginning of Period						Cash and Cash Equivalents, Beginning of Period	249,711		98,831
Cash and Cash Equivalents, End of Period	Cash and Cash Equivalents, End of Period	$	529,336	$	86,458	Cash and Cash Equivalents, End of Period	$	971,817	$	99,126
Additional Supplemental Information	Additional Supplemental Information					Additional Supplemental Information
Interest paid	Interest paid	$	5,991	$	11,019	Interest paid	$	15,448	$	25,407
Income taxes paid	Income taxes paid	0		0		Income taxes paid	1,225		9,825
Transfer of loans to other real estate and repossessed assets	Transfer of loans to other real estate and repossessed assets	449		609		Transfer of loans to other real estate and repossessed assets	964		1,795
Transfer of premises to other real estate						Transfer of premises to other real estate	1,753		—

See notes to condensed consolidated financial statements

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HORIZON BANCORP, ~~INC~~INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 1 - Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp, Inc. (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”)~~. Horizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to~~, which is an Indiana commercial ~~bank effective June 23, 2017.~~bank. All inter–company balances and transactions have been eliminated. The results of operations for the periods ended ~~March 31,~~September 30, 2021 and ~~March 31,~~September 30, 2020 are not necessarily indicative of the operating results for the full year of 2021 or 2020. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.

Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10–K for 2020 filed with the Securities and Exchange Commission on February 26, 2021. The condensed consolidated balance sheet of Horizon as of December 31, 2020 has been derived from the audited balance sheet as of that date.

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 ~~March 31,~~September 30, 2021, Horizon had repurchased a total of ~~373,323~~803,349 shares at an average price per share of ~~$15.86.~~$16.89. In addition to the stock repurchase program, Horizon agreed to repurchase 1,000,000 shares at a price per share of $15.19 from an individual shareholder on March 6, 2020.

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.


		Three Months Ended				Three Months Ended				Nine Months Ended
		March 31				September 30				September 30
		2021		2020				2021		2020		2021		2020
Basic earnings per share	Basic earnings per share						Basic earnings per share
Net income	Net income	$	20,422	$	11,655		Net income	$	23,071	$	20,312	$	65,666	$	46,606
Weighted average common shares outstanding	Weighted average common shares outstanding	43,919,549		44,658,512			Weighted average common shares outstanding	43,810,729		43,862,435		43,893,194		44,099,862
Basic earnings per share	Basic earnings per share	$	0.46	$	0.26		Basic earnings per share	$	0.53	$	0.46	$	1.50	$	1.06

Diluted earnings per share	Diluted earnings per share						Diluted earnings per share
Net income	Net income	$	20,422	$	11,655		Net income	$	23,071	$	20,312	$	65,666	$	46,606
Weighted average common shares outstanding	Weighted average common shares outstanding	43,919,549		44,658,512			Weighted average common shares outstanding	43,810,729		43,862,435		43,893,194		44,099,862
Effect of dilutive securities:	Effect of dilutive securities:						Effect of dilutive securities:
Restricted stock	Restricted stock	102,048		39,845			Restricted stock	99,666		8,246		102,446		32,574
Stock options	Stock options	50,984		58,359			Stock options	48,475		33,200		51,403		33,214
Weighted average common shares outstanding	Weighted average common shares outstanding	44,072,581		44,756,716			Weighted average common shares outstanding	43,958,870		43,903,881		44,047,043		44,165,650
Diluted earnings per share	Diluted earnings per share	$	0.46	$	0.26		Diluted earnings per share	$	0.52	$	0.46	$	1.49	$	1.06

911

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HORIZON BANCORP, ~~INC~~INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

There were ~~138,010~~142,705 and 153,582 shares for the three and nine months ended ~~March 31,~~September 30, 2021, which were not included in the computation of diluted earnings per share because they were non–dilutive. There were ~~293,665~~492,273 and 273,776 shares for the three and nine months ended ~~March 31,~~September 30, 2020, which were not included in the computation of diluted earnings per share because they were non–dilutive.

Horizon has share–based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2020 Annual Report on Form 10–K. Also, the Company's shareholders approved the 2021 Omnibus Equity Incentive Plan at its Annual Meeting on May 6, 2021, adding 1.4 million additional shares to the plan and with no other significant changes from the Company's previous plan.

Accounting Guidance Issued But Not Yet Adopted

FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rates on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:

•A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria.

•When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.

The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022.

ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform.

The Company has been conducting monthly meetings to address contracts and hedge accounting relationships that reference LIBOR. All contracts referencing LIBOR as an interest rate have been identified and are in the process of being rewritten or refinanced by December 31, 2021, except for commercial loan interest rate swaps. Hedge accounting relationships referencing LIBOR will be modified by the counter parties. The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 2 – Acquisitions

On September 17, 2021, Horizon Bank completed the purchase and assumption of certain assets and liabilities of 14 former TCF National Bank (“TCF”) branches in 11 Michigan counties. Net cash of $618.2 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans of $206.3 million, fixed assets of $6.9 million, cash of $4.0 million and a 1.75% premium on deposits. Customer deposit balances were recorded at $846.4 million and a core deposit intangible of $887,000 was recorded in the transaction, which will be amortized over 10 years on a straight line basis. Goodwill of $11.5 million was generated in the transaction.

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 preliminary purchase price for the TCF branches is detailed in the following table. Final estimates of fair value on the date of acquisition have not been received yet. 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. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.


Assets			Liabilities
Cash and due from banks	$	4,012	Deposits
Loans			Non-interest bearing	$	181,403
Commercial	99,893		NOW accounts	303,050
Residential mortgage	54,218		Savings and money market	262,488
Consumer	52,224		Certificates of deposit	99,468
Total loans	206,335		Total deposits	846,409
Premises and equipment, net	6,901		Interest payable	16
Goodwill	11,550		Other liabilities	2,206
Core deposit intangible	887
Interest receivable	519
Other assets	260
Total assets purchased	$	230,204	Total liabilities assumed	$	848,631

Net cash received	$	(618,167)

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. Management continues to complete its evaluation to determine if any loans were purchased with credit deterioration.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 3 – Securities

The fair value of securities is as follows:


		March 31, 2021									September 30, 2021
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale	Available for sale									Available for sale
U.S. Treasury and federal agencies	U.S. Treasury and federal agencies	$	40,155	$	0	$	(553)	$	39,602	U.S. Treasury and federal agencies	$	119,159	$	136	$	(707)	$	118,588
State and municipal	State and municipal	992,461		22,182		(9,592)		1,005,051		State and municipal	1,108,057		22,276		(11,210)		1,119,123
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	116,072		3,019		(3)		119,088		Federal agency collateralized mortgage obligations	73,922		1,607		(4)		75,525
Federal agency mortgage-backed pools	Federal agency mortgage-backed pools	84,609		2,866		(124)		87,351		Federal agency mortgage-backed pools	236,432		2,341		(1,068)		237,705
Private labeled mortgage-backed pools										Private labeled mortgage-backed pools	32,948		274		(285)		32,937
Corporate notes	Corporate notes	10,015		1,072		(4)		11,083		Corporate notes	84,672		1,201		(117)		85,756
Total available for sale investment securities	Total available for sale investment securities	$	1,243,312	$	29,139	$	(10,276)	$	1,262,175	Total available for sale investment securities	$	1,655,190	$	27,835	$	(13,391)	$	1,669,634
Held to maturity	Held to maturity									Held to maturity
State and municipal	State and municipal	$	151,474	$	9,109	$	0	$	160,583	State and municipal	$	283,858	$	8,170	$	(2,909)	$	289,119
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	1,959		22		(2)		1,979		Federal agency collateralized mortgage obligations	69,537		10		(793)		68,754
Federal agency mortgage-backed pools	Federal agency mortgage-backed pools	8,217		171		(1)		8,387		Federal agency mortgage-backed pools	215,873		167		(3,542)		212,498
Private labeled mortgage-backed pools										Private labeled mortgage-backed pools	66,298		7		(753)		65,552
Corporate notes										Corporate notes	133,674		—		(1,498)		132,176
Total held to maturity investment securities	Total held to maturity investment securities	$	161,650	$	9,302	$	(3)	$	170,949	Total held to maturity investment securities	$	769,240	$	8,354	$	(9,495)	$	768,099

December 31, 2020
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 19,750 $ 0 $ (35) $ 19,715
State and municipal 803,100 35,014 (271) 837,843
Federal agency collateralized mortgage obligations 144,022 3,448 (17) 147,453
Federal agency mortgage-backed pools 114,484 4,315 0 118,799
Corporate notes 9,007 1,208 0 10,215
Total available for sale investment securities $ 1,090,363 $ 43,985 $ (323) $ 1,134,025
Held to maturity
State and municipal $ 157,421 $ 11,035 $ 0 $ 168,456
Federal agency collateralized mortgage obligations 2,661 36 0 2,697
Federal agency mortgage-backed pools 8,594 243 0 8,837
Total held to maturity investment securities $ 168,676 $ 11,314 $ 0 $ 179,990


	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale
U.S. Treasury and federal agencies	$	19,750	$	—	$	(35)	$	19,715
State and municipal	803,100		35,014		(271)		837,843
Federal agency collateralized mortgage obligations	144,022		3,448		(17)		147,453
Federal agency mortgage-backed pools	114,484		4,315		—		118,799
Corporate notes	9,007		1,208		—		10,215
Total available for sale investment securities	$	1,090,363	$	43,985	$	(323)	$	1,134,025
Held to maturity
State and municipal	$	157,421	$	11,035	$	—	$	168,456
Federal agency collateralized mortgage obligations	2,661		36		—		2,697
Federal agency mortgage-backed pools	8,594		243		—		8,837
Total held to maturity investment securities	$	168,676	$	11,314	$	—	$	179,990

The amortized cost and fair value of securities available for sale and held to maturity at ~~March 31,~~September 30, 2021 and December 31, 2020, 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.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


		March 31, 2021				December 31, 2020					September 30, 2021				December 31, 2020
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale	Available for sale									Available for sale
Within one year	Within one year	$	48,715	$	48,714	$	44,206	$	44,192	Within one year	$	28,888	$	28,885	$	44,206	$	44,192
One to five years	One to five years	72,803		74,114		61,594		63,006		One to five years	133,651		134,899		61,594		63,006
Five to ten years	Five to ten years	204,419		207,260		136,857		145,102		Five to ten years	320,561		322,940		136,857		145,102
After ten years	After ten years	716,694		725,648		589,200		615,473		After ten years	828,788		836,743		589,200		615,473
		1,042,631		1,055,736		831,857		867,773			1,311,888		1,323,467		831,857		867,773
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	116,072		119,088		144,022		147,453		Federal agency collateralized mortgage obligations	73,922		75,525		144,022		147,453
Federal agency mortgage–backed pools	Federal agency mortgage–backed pools	84,609		87,351		114,484		118,799		Federal agency mortgage–backed pools	236,432		237,705		114,484		118,799
Private labeled mortgage–backed pools										Private labeled mortgage–backed pools	$	32,948	$	32,937	$	—	$	—
Total available for sale investment securities	Total available for sale investment securities	$	1,243,312	$	1,262,175	$	1,090,363	$	1,134,025	Total available for sale investment securities	$	1,655,190	$	1,669,634	$	1,090,363	$	1,134,025
Held to maturity	Held to maturity									Held to maturity
Within one year	Within one year	$	6,303	$	6,329	$	7,302	$	7,327	Within one year	$	4,612	$	4,666	$	7,302	$	7,327
One to five years	One to five years	43,736		45,317		42,742		44,358		One to five years	45,148		46,573		42,742		44,358
Five to ten years	Five to ten years	77,214		82,247		82,087		88,300		Five to ten years	185,847		188,962		82,087		88,300
After ten years	After ten years	24,221		26,690		25,290		28,471		After ten years	181,925		181,094		25,290		28,471
		151,474		160,583		157,421		168,456			417,532		421,295		157,421		168,456
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	1,959		1,979		2,661		2,697		Federal agency collateralized mortgage obligations	69,537		68,754		2,661		2,697
Federal agency mortgage–backed pools	Federal agency mortgage–backed pools	8,217		8,387		8,594		8,837		Federal agency mortgage–backed pools	215,873		212,498		8,594		8,837
Private labeled mortgage–backed pools										Private labeled mortgage–backed pools	66,298		65,552		—		—
Total held to maturity investment securities	Total held to maturity investment securities	$	161,650	$	170,949	$	168,676	$	179,990	Total held to maturity investment securities	$	769,240	$	768,099	$	168,676	$	179,990

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.

March 31, 2021
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 $ 37,697 $ (553) $ 0 $ 0 $ 37,697 $ (553)
State and municipal 459,377 (9,485) 1,458 (107) 460,835 (9,592)
Federal agency collateralized mortgage obligations 2,380 (5) 0 0 2,380 (5)
Federal agency mortgage-backed pools 12,081 (125) 0 0 12,081 (125)
Corporate notes 996 (4) 0 0 996 (4)
Total temporarily impaired securities $ 512,531 $ (10,172) $ 1,458 $ (107) $ 513,989 $ (10,279)


	September 30, 2021
	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	$	108,551	$	(688)	$	2,731	$	(19)	$	111,282	$	(707)
State and municipal	680,184		(13,892)		5,316		(227)		685,500		(14,119)
Federal agency collateralized mortgage obligations	57,191		(797)		—		—		57,191		(797)
Federal agency mortgage–backed pools	363,453		(4,610)		—		—		363,453		(4,610)
Private labeled mortgage–backed pools	77,208		(1,038)		—		—		77,208		(1,038)
Corporate notes	144,177		(1,615)		—		—		144,177		(1,615)
Total temporarily impaired securities	$	1,430,764	$	(22,640)	$	8,047	$	(246)	$	1,438,811	$	(22,886)

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


		December 31, 2020													December 31, 2020
		Less than 12 Months				12 Months or More				Total					Less than 12 Months				12 Months or More				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment Securities	Investment Securities													Investment Securities
U.S. Treasury and federal agencies	U.S. Treasury and federal agencies	$	17,215	$	(35)	$	0	$	0	$	17,215	$	(35)	U.S. Treasury and federal agencies	$	17,215	$	(35)	$	—	$	—	$	17,215	$	(35)
State and municipal	State and municipal	56,287		(242)		1,245		(29)		57,532		(271)		State and municipal	56,287		(242)		1,245		(29)		57,532		(271)
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	6,358		(17)		0		0		6,358		(17)		Federal agency collateralized mortgage obligations	6,358		(17)		—		—		6,358		(17)
Federal agency mortgage–backed pools		0		0		0		0		0		0

Total temporarily impaired securities	Total temporarily impaired securities	$	79,860	$	(294)	$	1,245	$	(29)	$	81,105	$	(323)	Total temporarily impaired securities	$	79,860	$	(294)	$	1,245	$	(29)	$	81,105	$	(323)

~~NaN~~No allowance for credit losses for available for sale debt securities or held to maturity securities was needed at ~~March 31,~~September 30, 2021 or December 31, 2020. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled ~~$8.7~~$13.1 million at ~~March 31,~~September 30, 2021 and $8.1 million at December 31, 2020 and is excluded from the estimate of credit losses.

The U.S. government sponsored entities and agencies and mortgage–backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses.

Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities were due to changes in interest rates. Due to the contractual terms, the issuers of state and municipal securities are not allowed to settle for less than the amortized cost of the security. In addition, the Company does not intend to sell these securities prior to the recovery of the amortized cost, which may not occur until maturity.

Information regarding security proceeds, gross gains and gross losses are presented below.


		Three Months Ended				Three Months Ended				Nine Months Ended
		March 31				September 30				September 30
		2021		2020				2021		2020		2021		2020
Sales of securities available for sale	Sales of securities available for sale						Sales of securities available for sale
Proceeds	Proceeds	$	27,514	$	32,036		Proceeds	$	—	$	17,012	$	27,514	$	54,194
Gross gains	Gross gains	914		389			Gross gains	—		1,094		914		1,731
Gross losses	Gross losses	0		(50)			Gross losses	—		(6)		—		(56)

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(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 34 – Loans

The table below identifies the Company’s loan portfolio segments and classes.


Portfolio Segment						Class of Financing Receivable
Commercial						Owner occupied real estate
						Non-owner occupied real estate
						Residential spec homes
						Development & spec land
						Commercial and industrial
Real estate						Residential mortgage
						Residential construction
Mortgage warehouse						Mortgage warehouse
Consumer						Direct installment
						Indirect installment
						Home equity

Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Class of financing receivable is defined as a group of financing receivables determined on the basis of both of the following, 1) risk characteristics of the financing receivable, and 2) an entity’s method for monitoring and assessing credit risk. Generally, the Bank does not move loans from a revolving loan to a term loan other than construction loans. Construction loans are reviewed and rewritten prior to being originated as a term loan.

The following table presents total loans outstanding by portfolio class, as of ~~March~~September 30, 2021 and December 31, ~~2021:~~2020:


	September 30, 2021		December 31, 2020
Commercial
Owner occupied real estate	$	521,186	$	496,306
Non–owner occupied real estate	1,016,377		999,636
Residential spec homes	10,142		10,070
Development & spec land	31,957		26,372
Commercial and industrial	593,538		659,887
Total commercial	2,173,200		2,192,271
Real estate
Residential mortgage	580,364		598,700
Residential construction	23,176		25,586
Mortgage warehouse	169,909		395,626
Total real estate	773,449		1,019,912
Consumer
Direct installment	67,176		38,046
Indirect installment	365,756		357,511
Home equity	280,500		259,643
Total consumer	713,432		655,200
Total loans	3,660,081		3,867,383
Allowance for credit losses	(56,779)		(57,027)
Net loans	$	3,603,302	$	3,810,356

March 31,
2021 December 31,
2020
Commercial
Owner occupied real estate $ 482,687 $ 496,306
Non–owner occupied real estate 998,304 999,636
Residential spec homes 10,131 10,070
Development & spec land 26,384 26,372
Commercial and industrial 660,352 659,887
Total commercial 2,177,858 2,192,271
Real estate
Residential mortgage 558,374 598,700
Residential construction 23,555 25,586
Mortgage warehouse 266,246 395,626
Total real estate 848,175 1,019,912
Consumer
Direct installment 35,622 38,046
Indirect installment 352,189 357,511
Home equity 250,592 259,643
Total consumer 638,403 655,200
Total loans 3,664,436 3,867,383
Allowance for credit losses (57,186) (57,027)
Net loans $ 3,607,250 $ 3,810,356

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(Table Dollar Amounts in Thousands, Except Per Share Data)

As of ~~March 31,~~September 30, 2021 and December 31, 2020, ~~loans originated under the~~ Federal Paycheck Protection Program (“PPP”) loans totaled approximately ~~$252.3~~$92.3 million and $208.9 million, respectively, and are included with commercial loans. Total loans include net deferred loan costs of $316,000 at September 30, 2021 and net deferred loan fees of ~~$5.0 million and~~ $1.7 million at ~~March 31, 2021 and~~ December 31, 2020, respectively.

The risk characteristics of each loan portfolio segment are as follows:

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, the general 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 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.

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 mortgage loan 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

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Notes to Condensed Consolidated Financial Statements

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(Table Dollar Amounts in Thousands, Except Per Share Data)

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.

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~~HORIZON BANCORP, INC AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

Based on these 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 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.

Non–performing Loans

The following table presents non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructurings (“TDRs”) by class of loans:

March 31, 2021
Non–accrual Loans Past
Due Over 90
Days Still
Accruing Non–performing
TDRs Performing
TDRs Total
Non–performing
Loans Non–accrual
with no Allowance for Credit Losses
Commercial
Owner occupied real estate $ 9,945 $ 0 $ 603 $ 0 $ 10,548 $ 5,441
Non–owner occupied real estate 225 0 316 0 541 541
Residential spec homes 0 0 0 0 0 0
Development & spec land 70 0 0 0 70 70
Commercial and industrial 1,585 0 58 0 1,643 1,294
Total commercial 11,825 0 977 0 12,802 7,346
Real estate
Residential mortgage 5,427 71 940 1,478 7,916 7,797
Residential construction 0 0 0 0 0 0
Mortgage warehouse 0 0 0 0 0 0
Total real estate 5,427 71 940 1,478 7,916 7,797
Consumer
Direct installment 8 26 0 0 34 34
Indirect installment 853 34 0 0 887 887
Home equity 2,587 136 354 350 3,427 3,427
Total consumer 3,448 196 354 350 4,348 4,348
Total $ 20,700 $ 267 $ 2,271 $ 1,828 $ 25,066 $ 19,491


	September 30, 2021
	Non–accrual		Loans Past Due Over 90 Days Still Accruing		Non–performing TDRs		Performing TDRs		Total Non–performing Loans		Non–accrual with no Allowance for Credit Losses
Commercial
Owner occupied real estate	$	8,651	$	—	$	—	$	603	$	9,254	$	4,074
Non–owner occupied real estate	2,853		—		292		—		3,145		3,145
Residential spec homes	—		—		—		—		—		—
Development & spec land	964		—		—		—		964		964
Commercial and industrial	2,758		—		—		—		2,758		2,021
Total commercial	15,226		—		292		603		16,121		10,204
Real estate
Residential mortgage	6,291		—		911		1,439		8,641		8,641
Residential construction	—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—
Total real estate	6,291		—		911		1,439		8,641		8,641
Consumer
Direct installment	16		3		—		—		19		19
Indirect installment	817		56		—		—		873		873
Home equity	2,787		141		401		391		3,720		3,720
Total consumer	3,620		200		401		391		4,612		4,612
Total	$	25,137	$	200	$	1,604	$	2,433	$	29,374	$	23,457

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


		December 31, 2020													December 31, 2020
		Non–accrual		Loans Past Due Over 90 Days Still Accruing		Non–performing TDRs		Performing TDRs		Total Non–performing Loans		Non–accrual with no Allowance for Credit Losses			Non–accrual		Loans Past Due Over 90 Days Still Accruing		Non–performing TDRs		Performing TDRs		Total Non–performing Loans		Non–accrual with no Allowance for Credit Losses
Commercial	Commercial													Commercial
Owner occupied real estate	Owner occupied real estate	$	10,581	$	0	$	630	$	168	$	11,379	$	6,305	Owner occupied real estate	$	10,581	$	—	$	630	$	168	$	11,379	$	6,305
Non–owner occupied real estate	Non–owner occupied real estate	237		0		330		0		567		567		Non–owner occupied real estate	237		—		330		—		567		567
Residential spec homes	Residential spec homes	0		0		0		0		0		0		Residential spec homes	—		—		—		—		—		—
Development & spec land	Development & spec land	70		0		0		0		70		70		Development & spec land	70		—		—		—		70		70
Commercial and industrial	Commercial and industrial	1,826		0		506		0		2,332		1,847		Commercial and industrial	1,826		—		506		—		2,332		1,847
Total commercial	Total commercial	12,714		0		1,466		168		14,348		8,789		Total commercial	12,714		—		1,466		168		14,348		8,789
Real estate	Real estate													Real estate
Residential mortgage	Residential mortgage	5,674		17		922		1,381		7,994		7,097		Residential mortgage	5,674		17		922		1,381		7,994		7,097
Residential construction	Residential construction	0		0		0		0		0		0		Residential construction	—		—		—		—		—		—
Mortgage warehouse	Mortgage warehouse	0		0		0		0		0		0		Mortgage warehouse	—		—		—		—		—		—
Total real estate	Total real estate	5,674		17		922		1,381		7,994		7,097		Total real estate	5,674		17		922		1,381		7,994		7,097
Consumer	Consumer													Consumer
Direct installment	Direct installment	12		1		0		0		13		13		Direct installment	12		1		—		—		13		13
Indirect installment	Indirect installment	1,174		120		0		0		1,294		1,294		Indirect installment	1,174		120		—		—		1,294		1,294
Home equity	Home equity	2,568		124		222		244		3,158		2,628		Home equity	2,568		124		222		244		3,158		2,628
Total consumer	Total consumer	3,754		245		222		244		4,465		3,935		Total consumer	3,754		245		222		244		4,465		3,935
Total	Total	$	22,142	$	262	$	2,610	$	1,793	$	26,807	$	19,821	Total	$	22,142	$	262	$	2,610	$	1,793	$	26,807	$	19,821

There was 0no interest income recognized on non–accrual loans during the three and nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively, while the loans were in non–accrual status. Included in the ~~$20.7~~$25.1 million of non–accrual loans and the ~~$2.3~~$1.6 million of non–performing TDRs at ~~March 31,~~September 30, 2021 were ~~$2.4~~$2.2 million and ~~$907,000,~~$295,000, respectively, of loans acquired for which there were accretable yields recognized.

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(Table Dollar Amounts in Thousands, Except Per Share Data)

The following table presents the payment status by class of loan, excluding non–accrual loans of ~~$20.7~~$25.1 million and non–performing TDRs of ~~$2.3~~$1.6 million at ~~March 31,~~September 30, 2021:


		March 31, 2021																			September 30, 2021
		Current			30–59 Days Past Due			60–89 Days Past Due			90 Days or Greater Past Due			Total Past Due Loans			Total Loans				Current			30–59 Days Past Due			60–89 Days Past Due			90 Days or Greater Past Due			Total Past Due Loans			Total Loans
Commercial	Commercial																			Commercial
Owner occupied real estate	Owner occupied real estate	$	471,589		$	550		$	0		$	0		$	550		$	472,139		Owner occupied real estate	$	512,306		$	188		$	41		$	—		$	229		$	512,535
Non–owner occupied real estate	Non–owner occupied real estate	996,904			859			0			0			859			997,763			Non–owner occupied real estate	1,013,232			—			—			—			—			1,013,232
Residential spec homes	Residential spec homes	10,131			0			0			0			0			10,131			Residential spec homes	10,142			—			—			—			—			10,142
Development & spec land	Development & spec land	25,564			750			0			0			750			26,314			Development & spec land	30,993			—			—			—			—			30,993
Commercial and industrial	Commercial and industrial	658,555			105			49			0			154			658,709			Commercial and industrial	590,559			39			182			—			221			590,780
Total commercial	Total commercial	2,162,743			2,264			49			0			2,313			2,165,056			Total commercial	2,157,232			227			223			—			450			2,157,682
Real estate	Real estate																			Real estate
Residential mortgage	Residential mortgage	550,699			431			806			71			1,308			552,007			Residential mortgage	572,129			728			305			—			1,033			573,162
Residential construction	Residential construction	23,555			0			0			0			0			23,555			Residential construction	23,176			—			—			—			—			23,176
Mortgage warehouse	Mortgage warehouse	266,246			0			0			0			0			266,246			Mortgage warehouse	169,909			—			—			—			—			169,909
Total real estate	Total real estate	840,500			431			806			71			1,308			841,808			Total real estate	765,214			728			305			—			1,033			766,247
Consumer	Consumer																			Consumer
Direct installment	Direct installment	35,481			99			8			26			133			35,614			Direct installment	66,809			323			25			3			351			67,160
Indirect installment	Indirect installment	350,692			547			63			34			644			351,336			Indirect installment	363,828			1,001			54			56			1,111			364,939
Home equity	Home equity	246,683			543			289			136			968			247,651			Home equity	276,060			1,001			110			141			1,252			277,312
Total consumer	Total consumer	632,856			1,189			360			196			1,745			634,601			Total consumer	706,697			2,325			189			200			2,714			709,411
Total	Total	$	3,636,099		$	3,884		$	1,215		$	267		$	5,366		$	3,641,465		Total	$	3,629,143		$	3,280		$	717		$	200		$	4,197		$	3,633,340
Percentage of total loans	Percentage of total loans	99.85		%	0.11		%	0.03		%	0.01		%	0.15		%	100.00		%	Percentage of total loans	99.88		%	0.09		%	0.02		%	0.01		%	0.12		%	100.00		%

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(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The following table presents the payment status by class of loan, excluding non–accrual loans of $22.1 million and non–performing TDRs of $2.6 million at December 31, 2020:


		December 31, 2020																			December 31, 2020
		Current			30–59 Days Past Due			60–89 Days Past Due			90 Days or Greater Past Due			Total Past Due Loans			Total				Current			30–59 Days Past Due			60–89 Days Past Due			90 Days or Greater Past Due			Total Past Due Loans			Total
Commercial	Commercial																			Commercial
Owner occupied real estate	Owner occupied real estate	$	484,282		$	683		$	130		$	0		$	813		$	485,095		Owner occupied real estate	$	484,282		$	683		$	130		$	—		$	813		$	485,095
Non–owner occupied real estate	Non–owner occupied real estate	997,816			599			654			0			1,253			999,069			Non–owner occupied real estate	997,816			599			654			—			1,253			999,069
Residential spec homes	Residential spec homes	10,070			0			0			0			0			10,070			Residential spec homes	10,070			—			—			—			—			10,070
Development & spec land	Development & spec land	25,552			0			750			0			750			26,302			Development & spec land	25,552			—			750			—			750			26,302
Commercial and industrial	Commercial and industrial	657,027			249			279			0			528			657,555			Commercial and industrial	657,027			249			279			—			528			657,555
Total commercial	Total commercial	2,174,747			1,531			1,813			0			3,344			2,178,091			Total commercial	2,174,747			1,531			1,813			—			3,344			2,178,091
Real estate	Real estate																			Real estate
Residential mortgage	Residential mortgage	590,944			905			238			17			1,160			592,104			Residential mortgage	590,944			905			238			17			1,160			592,104
Residential construction	Residential construction	25,586			0			0			0			0			25,586			Residential construction	25,586			—			—			—			—			25,586
Mortgage warehouse	Mortgage warehouse	395,626			0			0			0			0			395,626			Mortgage warehouse	395,626			—			—			—			—			395,626
Total real estate	Total real estate	1,012,156			905			238			17			1,160			1,013,316			Total real estate	1,012,156			905			238			17			1,160			1,013,316
Consumer	Consumer																			Consumer
Direct installment	Direct installment	37,965			69			0			0			69			38,034			Direct installment	37,965			69			—			—			69			38,034
Indirect installment	Indirect installment	354,655			1,356			206			120			1,682			356,337			Indirect installment	354,655			1,356			206			120			1,682			356,337
Home equity	Home equity	255,908			554			266			125			945			256,853			Home equity	255,908			554			266			125			945			256,853
Total consumer	Total consumer	648,528			1,979			472			245			2,696			651,224			Total consumer	648,528			1,979			472			245			2,696			651,224
Total	Total	$	3,835,431		$	4,415		$	2,523		$	262		$	7,200		$	3,842,631		Total	$	3,835,431		$	4,415		$	2,523		$	262		$	7,200		$	3,842,631
Percentage of total loans	Percentage of total loans	99.81		%	0.11		%	0.07		%	0.01		%	0.19		%	100.00		%	Percentage of total loans	99.81		%	0.11		%	0.07		%	0.01		%	0.19		%	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.

Troubled Debt Restructurings

Loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans' contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default.

At ~~March 31,~~September 30, 2021, the ~~type~~types of concessions the Company has made on restructured loans have 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 6 consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of ~~March 31,~~September 30, 2021, the Company had ~~$4.1~~$4.0 million in TDRs and ~~$1.8~~$2.4 million were performing according to the restructured terms and 0$603,000 TDRs were returned to accrual status during 2021. There were 0no specific reserves allocated to TDRs at ~~March 31,~~September 30, 2021 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the ~~Conronavirus~~Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

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(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The following table presents TDRs by class of loan:


		March 31, 2021						December 31, 2020							September 30, 2021						December 31, 2020
		Non–accrual		Accruing		Total		Non–accrual		Accruing		Total			Non–accrual		Accruing		Total		Non–accrual		Accruing		Total
Commercial	Commercial													Commercial
Owner occupied real estate	Owner occupied real estate	$	603	$	0	$	603	$	630	$	168	$	798	Owner occupied real estate	$	—	$	603	$	603	$	630	$	168	$	798
Non–owner occupied real estate	Non–owner occupied real estate	316		0		316		330		0		330		Non–owner occupied real estate	292		—		292		330		—		330
Residential spec homes	Residential spec homes	0		0		0		0		0		0		Residential spec homes	—		—		—		—		—		—
Development & spec land	Development & spec land	0		0		0		0		0		0		Development & spec land	—		—		—		—		—		—
Commercial and industrial	Commercial and industrial	58		0		58		506		0		506		Commercial and industrial	—		—		—		506		—		506
Total commercial	Total commercial	977		0		977		1,466		168		1,634		Total commercial	292		603		895		1,466		168		1,634
Real estate	Real estate													Real estate
Residential mortgage	Residential mortgage	940		1,478		2,418		922		1,381		2,303		Residential mortgage	911		1,439		2,350		922		1,381		2,303
Residential construction	Residential construction	0		0		0		0		0		0		Residential construction	—		—		—		—		—		—
Mortgage warehouse	Mortgage warehouse	0		0		0		0		0		0		Mortgage warehouse	—		—		—		—		—		—
Total real estate	Total real estate	940		1,478		2,418		922		1,381		2,303		Total real estate	911		1,439		2,350		922		1,381		2,303
Consumer	Consumer													Consumer
Direct installment	Direct installment	0		0		0		0		0		0		Direct installment	—		—		—		—		—		—
Indirect installment	Indirect installment	0		0		0		0		0		0		Indirect installment	—		—		—		—		—		—
Home equity	Home equity	354		350		704		222		244		466		Home equity	401		391		792		222		244		466
Total consumer	Total consumer	354		350		704		222		244		466		Total consumer	401		391		792		222		244		466
Total	Total	$	2,271	$	1,828	$	4,099	$	2,610	$	1,793	$	4,403	Total	$	1,604	$	2,433	$	4,037	$	2,610	$	1,793	$	4,403

Loans Modified under the CARES Act

The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At ~~March 31,~~September 30, 2021 and December 31, 2020, the Bank modified loans totaling ~~$91.6~~$29.2 million and $126.7 million, respectively, which qualify for treatment under the CARES Act.

Collateral Dependent Financial Assets

A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent.

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The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses.


		March 31, 2021											September 30, 2021
		Real Estate		Accounts Receivable/Equipment		Other		Total		ACL Allocation			Real Estate		Accounts Receivable/Equipment		Other		Total		ACL Allocation
Commercial	Commercial											Commercial
Owner occupied real estate	Owner occupied real estate	$	10,404	$	145	$	0	$	10,549	$	1,600	Owner occupied real estate	$	12,386	$	103	$	—	$	12,489	$	1,179
Non–owner occupied real estate	Non–owner occupied real estate	541		0		0		541		0		Non–owner occupied real estate	3,172		—		—		3,172		—
Residential spec homes	Residential spec homes	0		0		0		0		0		Residential spec homes	—		—		—		—		—
Development & spec land	Development & spec land	70		0		0		70		0		Development & spec land	964		—		—		964		—
Commercial and industrial	Commercial and industrial	0		1,643		0		1,643		195		Commercial and industrial	1,214		2,406		—		3,620		218
Total commercial	Total commercial	11,015		1,788		0		12,803		1,795		Total commercial	17,736		2,509		—		20,245		1,397

Total collateral dependent loans	Total collateral dependent loans	$	11,015	$	1,788	$	0	$	12,803	$	1,795	Total collateral dependent loans	$	17,736	$	2,509	$	—	$	20,245	$	1,397


		December 31, 2020											December 31, 2020
		Real Estate		Accounts Receivable/Equipment		Other		Total		ACL Allocation			Real Estate		Accounts Receivable/Equipment		Other		Total		ACL Allocation
Commercial	Commercial											Commercial
Owner occupied real estate	Owner occupied real estate	$	11,309	$	114	$	0	$	11,423	$	1,605	Owner occupied real estate	$	11,309	$	114	$	—	$	11,423	$	1,605
Non–owner occupied real estate	Non–owner occupied real estate	1,032		0		0		1,032		0		Non–owner occupied real estate	1,032		—		—		1,032		—
Residential spec homes	Residential spec homes	0		0		0		0		0		Residential spec homes	—		—		—		—		—
Development & spec land	Development & spec land	70		0		0		70		0		Development & spec land	70		—		—		70		—
Commercial and industrial	Commercial and industrial	2,245		210		0		2,455		252		Commercial and industrial	2,245		210		—		2,455		252
Total commercial	Total commercial	14,656		324		0		14,980		1,857		Total commercial	14,656		324		—		14,980		1,857

Total collateral dependent loans	Total collateral dependent loans	$	14,656	$	324	$	0	$	14,980	$	1,857	Total collateral dependent loans	$	14,656	$	324	$	—	$	14,980	$	1,857

Credit Quality Indicators

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 of the loans. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective regions (ranging from ~~$1,000,000~~$3,000,000 to ~~$3,500,000)~~$6,000,000) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (“CCBO”).

•Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO, Senior Commercial Credit Officer (“SCCO”) or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO, SCCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO or SCCO, however, lenders must present their factual information to either the Loan Committee, CCBO or ~~the CCBO~~SCCO when recommending an upgrade.

•The CCBO, or a designee, meets periodically 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.

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•Monthly, senior management meets as 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

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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 Credit 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 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 or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges.

Risk Grade 2: Good (Pass)

Loans to businesses that have strong financial statements containing an unmodified opinion from a CPA firm and at least three years consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five years 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 with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long–term debt ratings of Baa or better and meeting defined key financial metric ranges.

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 and meeting defined key financial metric ranges. 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, did not possess an unwanted 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.

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Risk Grade 4: Satisfactory/Monitored (Pass)

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory rated loans and meet defined key financial metric ranges. 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 (Pass)

Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, 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. Commercial construction loans are graded as 4W Management Watch until the projects are completed and stabilized.

Risk Grade 5: Special Mention

Loans which possess some temporary (normally less than one year) 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 an unwarranted 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 and must meet defined key financial metric ranges.

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 need 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.

•The borrower meets defined key financial metric ranges.

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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.

•The borrower meets defined key financial metric ranges.

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 of a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

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The following tables present loans by credit grades and origination year at ~~March 31,~~September 30, 2021.

March 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total
Commercial
Owner occupied real estate
Pass $ 9,140 $ 58,133 $ 66,526 $ 50,807 $ 44,193 $ 166,293 $ 39,369 $ 434,461
Special Mention 0 0 1,053 1,226 9,358 12,043 0 23,680
Substandard 0 1,016 1,020 3,919 2,484 12,306 3,801 24,546
Doubtful 0 0 0 0 0 0 0 0
Total owner occupied real estate $ 9,140 $ 59,149 $ 68,599 $ 55,952 $ 56,035 $ 190,642 $ 43,170 $ 482,687
Non–owner occupied real estate
Pass $ 30,379 $ 112,865 $ 108,782 $ 72,116 $ 130,971 $ 296,725 $ 163,134 $ 914,972
Special Mention 0 857 1,225 29,458 1,285 15,270 4,022 52,117
Substandard 0 0 16,883 1,158 99 10,769 2,306 31,215
Doubtful 0 0 0 0 0 0 0 0
Total non–owner occupied real estate $ 30,379 $ 113,722 $ 126,890 $ 102,732 $ 132,355 $ 322,764 $ 169,462 $ 998,304
Residential spec homes
Pass $ 500 $ 335 $ 628 $ 0 $ 0 $ 1,360 $ 7,308 $ 10,131
Special Mention 0 0 0 0 0 0 0 0
Substandard 0 0 0 0 0 0 0 0
Doubtful 0 0 0 0 0 0 0 0
Total residential spec homes $ 500 $ 335 $ 628 $ 0 $ 0 $ 1,360 $ 7,308 $ 10,131
Development & spec land
Pass $ 42 $ 569 $ 724 $ 1,480 $ 2,193 $ 12,613 $ 7,051 $ 24,672
Special Mention 0 0 0 0 0 0 0 0
Substandard 0 0 0 478 0 484 750 1,712
Doubtful 0 0 0 0 0 0 0 0
Total development & spec land $ 42 $ 569 $ 724 $ 1,958 $ 2,193 $ 13,097 $ 7,801 $ 26,384
Commercial & industrial
Pass $ 136,320 $ 175,946 $ 58,700 $ 57,056 $ 83,191 $ 80,196 $ 30,175 $ 621,584
Special Mention 2,478 4,317 1,029 987 7,191 4,935 1,096 22,033
Substandard 2,245 1,835 2,564 3,724 1,474 2,390 2,503 16,735
Doubtful 0 0 0 0 0 0 0 0
Total commercial & industrial $ 141,043 $ 182,098 $ 62,293 $ 61,767 $ 91,856 $ 87,521 $ 33,774 $ 660,352
Total commercial $ 181,104 $ 355,873 $ 259,134 $ 222,409 $ 282,439 $ 615,384 $ 261,515 $ 2,177,858


September 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Commercial
Owner occupied real estate
Pass	$	51,502	$	59,563	$	66,358	$	48,852	$	46,074	$	154,262	$	45,993	$	472,604
Special Mention	—		77		735		2,396		8,567		7,539		—		19,314
Substandard	—		1,007		1,201		3,989		3,956		15,220		3,895		29,268
Doubtful	—		—		—		—		—		—		—		—
Total owner occupied real estate	$	51,502	$	60,647	$	68,294	$	55,237	$	58,597	$	177,021	$	49,888	$	521,186

Non–owner occupied real estate
Pass	$	111,223	$	110,627	$	106,765	$	61,794	$	135,791	$	269,509	$	150,423	$	946,132
Special Mention	—		845		1,203		29,409		4,470		5,687		519		42,133
Substandard	—		—		15,240		1,390		429		8,683		2,370		28,112
Doubtful	—		—		—		—		—		—		—		—
Total non–owner occupied real estate	$	111,223	$	111,472	$	123,208	$	92,593	$	140,690	$	283,879	$	153,312	$	1,016,377

Residential spec homes
Pass	$	1,117	$	758	$	338	$	—	$	—	$	913	$	7,016	$	10,142
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total residential spec homes	$	1,117	$	758	$	338	$	—	$	—	$	913	$	7,016	$	10,142

Development & spec land
Pass	$	1,520	$	550	$	512	$	12	$	1,849	$	12,915	$	12,640	$	29,998
Special Mention	—		—		—		—		—		184		358		542
Substandard	—		—		—		—		17		651		749		1,417
Doubtful	—		—		—		—		—		—		—		—
Total development & spec land	$	1,520	$	550	$	512	$	12	$	1,866	$	13,750	$	13,747	$	31,957

Commercial & industrial
Pass	$	214,792	$	56,773	$	50,106	$	51,700	$	68,635	$	71,387	$	37,613	$	551,006
Special Mention	1,586		2,765		1,385		4,119		6,809		4,015		2,586		23,265
Substandard	1,546		146		3,242		5,748		2,400		1,582		4,603		19,267
Doubtful	—		—		—		—		—		—		—		—
Total commercial & industrial	$	217,924	$	59,684	$	54,733	$	61,567	$	77,844	$	76,984	$	44,802	$	593,538
Total commercial	$	383,286	$	233,111	$	247,085	$	209,409	$	278,997	$	552,547	$	268,765	$	2,173,200

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March 31, 2021		2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
September 30, 2021																		September 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Real estate	Real estate																	Real estate
Residential mortgage	Residential mortgage																	Residential mortgage
Performing	Performing	$	19,705	$	109,655	$	56,914	$	71,948	$	80,572	$	211,664	$	0	$	550,458	Performing	$	79,466	$	111,732	$	50,187	$	58,431	$	68,812	$	203,095	$	—	$	571,723
Non–performing	Non–performing	0		0		378		635		38		6,865		0		7,916		Non–performing	—		—		376		875		—		7,390		—		8,641
Total residential mortgage	Total residential mortgage	$	19,705	$	109,655	$	57,292	$	72,583	$	80,610	$	218,529	$	0	$	558,374	Total residential mortgage	$	79,466	$	111,732	$	50,563	$	59,306	$	68,812	$	210,485	$	—	$	580,364

Residential construction	Residential construction																	Residential construction
Performing	Performing	$	0	$	0	$	0	$	0	$	0	$	0	$	23,555	$	23,555	Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	23,176	$	23,176
Non–performing	Non–performing	0		0		0		0		0		0		0		0		Non–performing	—		—		—		—		—		—		—		—
Total residential construction	Total residential construction	$	0	$	0	$	0	$	0	$	0	$	0	$	23,555	$	23,555	Total residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	23,176	$	23,176

Mortgage warehouse	Mortgage warehouse																	Mortgage warehouse
Performing	Performing	$	0	$	0	$	0	$	0	$	0	$	0	$	266,246	$	266,246	Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	169,909	$	169,909
Non–performing	Non–performing	0		0		0		0		0		0		0		0		Non–performing	—		—		—		—		—		—		—		—
Total mortgage warehouse	Total mortgage warehouse	$	0	$	0	$	0	$	0	$	0	$	0	$	266,246	$	266,246	Total mortgage warehouse	$	—	$	—	$	—	$	—	$	—	$	—	$	169,909	$	169,909
Total real estate	Total real estate	$	19,705	$	109,655	$	57,292	$	72,583	$	80,610	$	218,529	$	289,801	$	848,175	Total real estate	$	79,466	$	111,732	$	50,563	$	59,306	$	68,812	$	210,485	$	193,085	$	773,449


March 31, 2021		2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
September 30, 2021																		September 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Consumer	Consumer																	Consumer
Direct installment	Direct installment																	Direct installment
Performing	Performing	$	2,906	$	10,729	$	8,407	$	5,033	$	4,871	$	3,575	$	67	$	35,588	Performing	$	15,487	$	14,385	$	15,628	$	8,051	$	7,093	$	6,358	$	155	$	67,157
Non–performing	Non–performing	0		26		0		0		4		4		0		34		Non–performing	—		—		—		—		12		7		—		19
Total direct installment	Total direct installment	$	2,906	$	10,755	$	8,407	$	5,033	$	4,875	$	3,579	$	67	$	35,622	Total direct installment	$	15,487	$	14,385	$	15,628	$	8,051	$	7,105	$	6,365	$	155	$	67,176

Indirect installment	Indirect installment																	Indirect installment
Performing	Performing	$	33,036	$	125,035	$	87,287	$	64,394	$	30,973	$	10,577	$	0	$	351,302	Performing	$	121,665	$	101,476	$	67,748	$	46,969	$	20,871	$	6,154	$	—	$	364,883
Non–performing	Non–performing	0		70		164		257		227		169		0		887		Non–performing	22		176		184		178		199		114		—		873
Total indirect installment	Total indirect installment	$	33,036	$	125,105	$	87,451	$	64,651	$	31,200	$	10,746	$	0	$	352,189	Total indirect installment	$	121,687	$	101,652	$	67,932	$	47,147	$	21,070	$	6,268	$	—	$	365,756

Home equity	Home equity																	Home equity
Performing	Performing	$	11,184	$	62,319	$	39,276	$	30,598	$	24,791	$	73,747	$	5,250	$	247,165	Performing	$	51,598	$	56,690	$	36,628	$	28,529	$	24,523	$	71,590	$	7,222	$	276,780
Non–performing	Non–performing	0		0		17		159		73		1,389		1,789		3,427		Non–performing	9		148		10		82		131		1,604		1,736		3,720
Total home equity	Total home equity	$	11,184	$	62,319	$	39,293	$	30,757	$	24,864	$	75,136	$	7,039	$	250,592	Total home equity	$	51,607	$	56,838	$	36,638	$	28,611	$	24,654	$	73,194	$	8,958	$	280,500
Total consumer	Total consumer	$	47,126	$	198,179	$	135,151	$	100,441	$	60,939	$	89,461	$	7,106	$	638,403	Total consumer	$	188,781	$	172,875	$	120,198	$	83,809	$	52,829	$	85,827	$	9,113	$	713,432

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The following tables present loans by credit grades and origination year at December 31, 2020.

December 31, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total
Commercial
Owner occupied real estate
Pass $ 57,726 $ 65,558 $ 49,455 $ 49,032 $ 47,480 $ 127,373 $ 40,027 $ 436,651
Special Mention 0 1,081 5,928 10,205 4,207 12,787 325 34,533
Substandard 1,021 1,231 4,012 2,504 2,839 9,673 3,842 25,122
Doubtful 0 0 0 0 0 0 0 0
Total owner occupied real estate $ 58,747 $ 67,870 $ 59,395 $ 61,741 $ 54,526 $ 149,833 $ 44,194 $ 496,306
Non–owner occupied real estate
Pass $ 115,667 $ 120,023 $ 73,669 $ 133,396 $ 99,674 $ 208,649 $ 166,986 $ 918,064
Special Mention 862 1,236 28,723 1,298 2,548 13,182 4,072 51,921
Substandard 0 15,552 1,477 107 6,422 4,521 1,572 29,651
Doubtful 0 0 0 0 0 0 0 0
Total non–owner occupied real estate $ 116,529 $ 136,811 $ 103,869 $ 134,801 $ 108,644 $ 226,352 $ 172,630 $ 999,636
Residential spec homes
Pass $ 737 $ 237 $ 0 $ 298 $ 368 $ 1,177 $ 7,253 $ 10,070
Special Mention 0 0 0 0 0 0 0 0
Substandard 0 0 0 0 0 0 0 0
Doubtful 0 0 0 0 0 0 0 0
Total residential spec homes $ 737 $ 237 $ 0 $ 298 $ 368 $ 1,177 $ 7,253 $ 10,070
Development & spec land
Pass $ 573 $ 736 $ 1,522 $ 2,461 $ 672 $ 11,971 $ 6,907 $ 24,842
Special Mention 0 0 0 0 0 274 0 274
Substandard 0 0 0 0 0 506 750 1,256
Doubtful 0 0 0 0 0 0 0 0
Total development & spec land $ 573 $ 736 $ 1,522 $ 2,461 $ 672 $ 12,751 $ 7,657 $ 26,372
Commercial & industrial
Pass $ 253,953 $ 63,772 $ 58,978 $ 88,121 $ 26,044 $ 70,706 $ 30,845 $ 592,419
Special Mention 8,779 1,164 1,088 9,306 1,835 11,870 3,040 37,082
Substandard 4,233 7,079 11,072 1,660 636 3,322 2,384 30,386
Doubtful 0 0 0 0 0 0 0 0
Total commercial & industrial $ 266,965 $ 72,015 $ 71,138 $ 99,087 $ 28,515 $ 85,898 $ 36,269 $ 659,887
Total commercial $ 443,551 $ 277,669 $ 235,924 $ 298,388 $ 192,725 $ 476,011 $ 268,003 $ 2,192,271


December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Commercial
Owner occupied real estate
Pass	$	57,726	$	65,558	$	49,455	$	49,032	$	47,480	$	127,373	$	40,027	$	436,651
Special Mention	—		1,081		5,928		10,205		4,207		12,787		325		34,533
Substandard	1,021		1,231		4,012		2,504		2,839		9,673		3,842		25,122
Doubtful	—		—		—		—		—		—		—		—
Total owner occupied real estate	$	58,747	$	67,870	$	59,395	$	61,741	$	54,526	$	149,833	$	44,194	$	496,306

Non–owner occupied real estate
Pass	$	115,667	$	120,023	$	73,669	$	133,396	$	99,674	$	208,649	$	166,986	$	918,064
Special Mention	862		1,236		28,723		1,298		2,548		13,182		4,072		51,921
Substandard	—		15,552		1,477		107		6,422		4,521		1,572		29,651
Doubtful	—		—		—		—		—		—		—		—
Total non–owner occupied real estate	$	116,529	$	136,811	$	103,869	$	134,801	$	108,644	$	226,352	$	172,630	$	999,636

Residential spec homes
Pass	$	737	$	237	$	—	$	298	$	368	$	1,177	$	7,253	$	10,070
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total residential spec homes	$	737	$	237	$	—	$	298	$	368	$	1,177	$	7,253	$	10,070

Development & spec land
Pass	$	573	$	736	$	1,522	$	2,461	$	672	$	11,971	$	6,907	$	24,842
Special Mention	—		—		—		—		—		274		—		274
Substandard	—		—		—		—		—		506		750		1,256
Doubtful	—		—		—		—		—		—		—		—
Total development & spec land	$	573	$	736	$	1,522	$	2,461	$	672	$	12,751	$	7,657	$	26,372

Commercial & industrial
Pass	$	253,953	$	63,772	$	58,978	$	88,121	$	26,044	$	70,706	$	30,845	$	592,419
Special Mention	8,779		1,164		1,088		9,306		1,835		11,870		3,040		37,082
Substandard	4,233		7,079		11,072		1,660		636		3,322		2,384		30,386
Doubtful	—		—		—		—		—		—		—		—
Total commercial & industrial	$	266,965	$	72,015	$	71,138	$	99,087	$	28,515	$	85,898	$	36,269	$	659,887
Total commercial	$	443,551	$	277,669	$	235,924	$	298,388	$	192,725	$	476,011	$	268,003	$	2,192,271

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(Table Dollar Amounts in Thousands, Except Per Share Data)


December 31, 2020	December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total		December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Real estate	Real estate																	Real estate
Residential mortgage	Residential mortgage																	Residential mortgage
Performing	Performing	$	109,487	$	68,556	$	86,572	$	89,051	$	65,718	$	171,322	$	0	$	590,706	Performing	$	109,487	$	68,556	$	86,572	$	89,051	$	65,718	$	171,322	$	—	$	590,706
Non–performing	Non–performing	0		296		636		39		300		6,723		0		7,994		Non–performing	—		296		636		39		300		6,723		—		7,994
Total residential mortgage	Total residential mortgage	$	109,487	$	68,852	$	87,208	$	89,090	$	66,018	$	178,045	$	0	$	598,700	Total residential mortgage	$	109,487	$	68,852	$	87,208	$	89,090	$	66,018	$	178,045	$	—	$	598,700

Residential construction	Residential construction																	Residential construction
Performing	Performing	$	—	$	0	$	0	$	0	$	0	$	0	$	25,586	$	25,586	Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	25,586	$	25,586
Non–performing	Non–performing	0		0		0		0		0		0		0		0		Non–performing	—		—		—		—		—		—		—		—
Total residential construction	Total residential construction	$	0	$	0	$	0	$	0	$	0	$	0	$	25,586	$	25,586	Total residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	25,586	$	25,586

Mortgage warehouse	Mortgage warehouse																	Mortgage warehouse
Performing	Performing	$	0	$	0	$	0	$	0	$	0	$	0	$	395,626	$	395,626	Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	395,626	$	395,626
Non–performing	Non–performing	0		0		0		0		0		0		0		0		Non–performing	—		—		—		—		—		—		—		—
Total mortgage warehouse	Total mortgage warehouse	$	0	$	0	$	0	$	0	$	0	$	0	$	395,626	$	395,626	Total mortgage warehouse	$	—	$	—	$	—	$	—	$	—	$	—	$	395,626	$	395,626
Total real estate	Total real estate	$	109,487	$	68,852	$	87,208	$	89,090	$	66,018	$	178,045	$	421,212	$	1,019,912	Total real estate	$	109,487	$	68,852	$	87,208	$	89,090	$	66,018	$	178,045	$	421,212	$	1,019,912


December 31, 2020	December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total		December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Consumer	Consumer																	Consumer
Direct installment	Direct installment																	Direct installment
Performing	Performing	$	12,552	$	9,552	$	5,828	$	5,946	$	2,124	$	2,019	$	12	$	38,033	Performing	$	12,552	$	9,552	$	5,828	$	5,946	$	2,124	$	2,019	$	12	$	38,033
Non–performing	Non–performing	0		0		0		5		3		5		0		13		Non–performing	—		—		—		5		3		5		—		13
Total direct installment	Total direct installment	$	12,552	$	9,552	$	5,828	$	5,951	$	2,127	$	2,024	$	12	$	38,046	Total direct installment	$	12,552	$	9,552	$	5,828	$	5,951	$	2,127	$	2,024	$	12	$	38,046

Indirect installment	Indirect installment																	Indirect installment
Performing	Performing	$	134,394	$	97,408	$	74,215	$	36,763	$	8,636	$	4,801	$	0	$	356,217	Performing	$	134,394	$	97,408	$	74,215	$	36,763	$	8,636	$	4,801	$	—	$	356,217
Non–performing	Non–performing	84		223		392		361		80		154		0		1,294		Non–performing	84		223		392		361		80		154		—		1,294
Total indirect installment	Total indirect installment	$	134,478	$	97,631	$	74,607	$	37,124	$	8,716	$	4,955	$	0	$	357,511	Total indirect installment	$	134,478	$	97,631	$	74,607	$	37,124	$	8,716	$	4,955	$	—	$	357,511

Home equity	Home equity																	Home equity
Performing	Performing	$	63,946	$	42,762	$	34,807	$	27,553	$	22,450	$	59,503	$	5,464	$	256,485	Performing	$	63,946	$	42,762	$	34,807	$	27,553	$	22,450	$	59,503	$	5,464	$	256,485
Non–performing	Non–performing	0		9		111		74		121		1,237		1,606		3,158		Non–performing	—		9		111		74		121		1,237		1,606		3,158
Total home equity	Total home equity	$	63,946	$	42,771	$	34,918	$	27,627	$	22,571	$	60,740	$	7,070	$	259,643	Total home equity	$	63,946	$	42,771	$	34,918	$	27,627	$	22,571	$	60,740	$	7,070	$	259,643
Total consumer	Total consumer	$	210,976	$	149,954	$	115,353	$	70,702	$	33,414	$	67,719	$	7,082	$	655,200	Total consumer	$	210,976	$	149,954	$	115,353	$	70,702	$	33,414	$	67,719	$	7,082	$	655,200

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(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 45 – Allowance for Credit and Loan Losses

The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020:


		Three Months Ended March 31, 2021											Three Months Ended September 30, 2021
		Commercial		Real Estate		Mortgage Warehouse		Consumer		Total			Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	Balance, beginning of period	$	42,210	$	4,620	$	1,267	$	8,930	$	57,027	Balance, beginning of period	$	41,766	$	4,108	$	1,155	$	8,620	$	55,649
Provision for credit losses on loans	Provision for credit losses on loans	928		(456)		(104)		(1)		367		Provision for credit losses on loans	1,330		(400)		(101)		283		1,112
PCD loan charge–offs												PCD loan charge–offs	—		—		—		—		—
Charge–offs	Charge–offs	(196)		0		0		(235)		(431)		Charge–offs	(10)		—		—		(189)		(199)
Recoveries	Recoveries	38		65		0		120		223		Recoveries	35		29		—		153		217
Balance, end of period	Balance, end of period	$	42,980	$	4,229	$	1,163	$	8,814	$	57,186	Balance, end of period	$	43,121	$	3,737	$	1,054	$	8,867	$	56,779


	Three Months Ended September 30, 2020
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	39,147	$	5,832	$	1,190	$	8,921	$	55,090

Provision for credit losses on loans	1,136		(232)		60		1,088		2,052
Charge–offs	(502)		(144)		—		(510)		(1,156)
Recoveries	14		8		—		311		333
Balance, end of period	$	39,795	$	5,464	$	1,250	$	9,810	$	56,319


	Nine Months Ended September 30, 2021
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	42,210	$	4,620	$	1,267	$	8,930	$	57,027


Provision for credit losses on loans	1,090		(1,000)		(213)		110		(13)
PCD loan charge–offs	(6)		—		—		—		(6)
Charge–offs	(273)		—		—		(661)		(934)
Recoveries	100		117		—		488		705
Balance, end of period	$	43,121	$	3,737	$	1,054	$	8,867	$	56,779


	Nine Months Ended September 30, 2020
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	11,996	$	923	$	1,077	$	3,671	$	17,667
Impact of adopting ASC 326	10,832		4,048		—		4,911		19,791
Initial PCD allowance	2,786		—		—		—		2,786
Provision for credit losses on loans	14,655		670		173		2,211		17,709
Charge–offs	(586)		(204)		—		(1,654)		(2,444)
Recoveries	112		27		—		671		810
Balance, end of period	$	39,795	$	5,464	$	1,250	$	9,810	$	56,319

Three Months Ended March 31, 2020
Commercial Real Estate Mortgage Warehouse Consumer Total
Balance, beginning of period $ 11,996 $ 923 $ 1,077 $ 3,671 $ 17,667
Impact of adopting ASC 326 13,618 4,048 0 4,911 22,577
Provision for credit losses on loans 6,916 700 (22) 1,006 8,600
Charge–offs (69) (26) 0 (618) (713)
Recoveries 89 9 0 211 309
Balance, end of period $ 32,550 $ 5,654 $ 1,055 $ 9,181 $ 48,440

The Company utilized the Cumulative Loss Rate method in determining expected future credit losses. The loss rate method measures the amount of loan charge–offs, net of recoveries, (“loan losses”) recognized over the life of a pool and compares those loan losses to the outstanding loan balance of that pool as of a specific point in time (“pool date”).

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(Table Dollar Amounts in Thousands, Except Per Share Data)

To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date.

The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look–back period includes January 2012 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.

Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit–related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.

The Company’s CECL estimate applies to a forecast that incorporates macroeconomic trends and other environmental factors. Management utilized National, Regional and Local Leading Economic Indexes, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and qualitative adjustments were utilized to reflect the forecast and other relevant factors.

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~~(Unaudited)~~

~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, loan purpose, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of the borrower and concentrations, and historical or expected credit loss patterns.

Note 56 – Loan Servicing

Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately ~~$1.532~~$1.5 billion and ~~$1.527~~$1.5 billion at ~~March 31,~~September 30, 2021 and December 31, 2020.

The aggregate fair value of capitalized mortgage servicing rights was approximately ~~$12.9~~$14.9 million and $12.5 million at ~~March 31,~~September 30, 2021 and December 31, 2020, compared to the carrying values of ~~$12.9~~$14.9 million and $12.5 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. 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.

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March 31, December 31,
2021 2020
Mortgage servicing rights
Balance, beginning of period $ 17,644 $ 15,046
Servicing rights capitalized 1,130 5,530
Amortization of servicing rights (962) (2,932)
Balance, end of period 17,812 17,644
Impairment allowance
Balance, beginning of period (5,172) (719)
Additions 0 (5,106)
Reductions 235 653
Balance, end of period (4,937) (5,172)
Mortgage servicing rights, net $ 12,875 $ 12,472
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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


	September 30,		December 31,
	2021		2020
Mortgage servicing rights
Balance, beginning of period	$	17,644	$	15,046
Servicing rights capitalized	3,209		5,530
Amortization of servicing rights	(2,960)		(2,932)
Balance, end of period	17,893		17,644
Impairment allowance
Balance, beginning of period	(5,172)		(719)
Additions	—		(5,106)
Reductions	2,142		653
Balance, end of period	(3,030)		(5,172)
Mortgage servicing rights, net	$	14,863	$	12,472

The Bank reduced impairment by approximately ~~$235,000~~$2.1 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021. The Bank recorded additional impairment of approximately $4.5 million for the year ended December 31, 2020.

Note 67 – Goodwill

The following table presents the Company’s carrying amount of goodwill as of ~~March 31,~~September 30, 2021 and December 31, 2020.


		March 31,		December 31,			September 30,		December 31,
		2021		2020			2021		2020
Balance, beginning of period	Balance, beginning of period	$	151,238	$	151,238	Balance, beginning of period	$	151,238	$	151,238
Goodwill acquired during the period	Goodwill acquired during the period	0		0		Goodwill acquired during the period	11,550		—

Balance, end of period	Balance, end of period	$	151,238	$	151,238	Balance, end of period	$	162,788	$	151,238

In accordance with ASC 350–20, the Company conducts a goodwill impairment test at least annually, or more frequently as events occur or circumstances change that would more–likely–than–not reduce the fair value below its carrying amount. In the second quarter of 2020, the onset of the COVID–19 pandemic prompted the Company to assess qualitative and

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~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

quantitative factors to determine whether it was more–likely–than–not the fair value of the Company was less than the carrying amount. The Company assessed relevant events and circumstances, including macroeconomic conditions, industry and market considerations, overall financial performance, changes in the composition or carrying amount of assets and liabilities, the market price of the Company’s common stock and other relevant facts. The Company performed both a market capitalization approach and a discounted cash flow approach to determine the fair value of the Company during the second quarter of 2020 which resulted in 0no goodwill impairment.

The Company updated ~~the~~their analysis above during the ~~first~~third quarter of 2021 which resulted in 0no goodwill impairment charges for the ~~three~~nine months ended ~~March 31,~~September 30, 2021.

The goodwill acquired during the period was calculated 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. 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. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.

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Notes to Condensed Consolidated Financial Statements

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(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 78 – 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 remained under the Company’s control.

The following table shows repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements:


		March 31, 2021															September 30, 2021
		Remaining Contractual Maturity of the Agreements															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			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 and repurchase-to-maturity transactions															Repurchase Agreements and repurchase-to-maturity transactions
Repurchase Agreements	Repurchase Agreements	$	116,011	$	0	$	0	$	0	$	0	$	0	$	116,011	Repurchase Agreements	$	145,164	$	—	$	—	$	—	$	—	$	—	$	145,164
Securities pledged for Repurchase Agreements	Securities pledged for Repurchase Agreements															Securities pledged for Repurchase Agreements
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	$	59,030	$	0	$	0	$	0	$	0	$	0	$	59,030	Federal agency collateralized mortgage obligations	$	38,641	$	—	$	—	$	—	$	—	$	—	$	38,641
Federal agency mortgage–backed pools	Federal agency mortgage–backed pools	59,994		0		0		0		0		0		59,994		Federal agency mortgage–backed pools	111,415		—		—		—		—		—		111,415
Total	Total	$	119,024	$	0	$	0	$	0	$	0	$	0	$	119,024	Total	$	150,056	$	—	$	—	$	—	$	—	$	—	$	150,056

Note 89 – Subordinated Notes

On June 24, 2020, Horizon issued $60.0 million in aggregate principal amount of 5.625% fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625% per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the ~~Benchmark~~benchmark rate, ~~(which~~which is expected to be Three–Month Term ~~SOFR)~~SOFR (the “Benchmark Rate”), plus 549 basis points, payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, commencing on October 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark ~~rate~~Rate is less than zero, the Benchmark ~~rate~~Rate shall be deemed to be zero.

~~Table of Contents~~

~~HORIZON BANCORP, INC AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

Horizon may, at its option, beginning with the interest payment date of July 1, 2025 and on any interest payment date thereafter, redeem the Notes, in whole or in part. The Notes will not otherwise be redeemable by Horizon prior to maturity, unless certain events occur. The redemption price for any redemption is 100% of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations.

The Notes are unsecured subordinated obligations, and rank pari passu, or equally, with all of Horizon's future unsecured subordinated debt and are junior to all existing and future senior debt. The Notes are structurally subordinated to all existing and future liabilities of Horizon's subsidiaries, including the deposit liabilities and claims of other creditors of Horizon Bank, and are effectively subordinated to Horizon’s existing and future secured indebtedness. There is no sinking fund for the Notes. The Notes are obligations of Horizon only and are not obligations of, and are not guaranteed by, any of Horizon’s subsidiaries.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 910 – 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 months LIBOR and to pay interest to the counterparty at a fixed rate of 4.20% on a notional amount of $12.0 million at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. 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 fixed rate of 2.62% on a notional amount of $10.0 million at December 31, 2020. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

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 receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.81% on a notional amount of $50.0 million at ~~March 31,~~September 30, 2021 and December 31, 2020. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. 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 ~~March 31,~~September 30, 2021, 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.

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 ~~March 31,~~September 30, 2021, 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.

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

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 ~~$457.1~~$478.2 million at ~~March 31,~~September 30, 2021 and $442.7 million at December 31, 2020.

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 ~~March 31,~~September 30, 2021, the Company’s fair value 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.

~~The following tables summarize the fair value of derivative financial instruments utilized by Horizon:~~

Asset Derivatives Liability Derivatives
March 31, 2021 March 31, 2021
Balance Sheet
Location Fair
Value Balance Sheet
Location Fair
Value
Derivatives designated as hedging instruments
Interest rate contracts Other assets $ 17,864 Other liabilities $ 23,053
Total derivatives designated as hedging instruments 17,864 23,053
Derivatives not designated as hedging instruments
Mortgage loan contracts Other assets 504 Other liabilities 701
Total derivatives not designated as hedging instruments 504 701
Total derivatives $ 18,368 $ 23,754

Asset Derivatives Liability Derivatives
December 31, 2020 December 31, 2020
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedging instruments
Interest rate contracts Other assets $ 35,388 Other liabilities $ 43,631
Total derivatives designated as hedging instruments 35,388 43,631
Derivatives not designated as hedging instruments
Mortgage loan contracts Other assets 1,045 Other liabilities 0
Total derivatives not designated as hedging instruments 1,045 0
Total derivatives $ 36,433 $ 43,631

~~The effect of the derivative instruments on the condensed consolidated statements of income for the three–month periods ending March 31 is as follows:~~

Amount of Loss Recognized in Other Comprehensive Income on Derivative
(Effective Portion)
Three Months Ended
March 31, 2021 March 31, 2020
Derivatives in cash flow hedging relationship
Interest rate contracts $ 2,412 $ (3,132)

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The following tables summarize the fair value of derivative financial instruments utilized by Horizon:


	Asset Derivatives			Liability Derivatives
	September 30, 2021			September 30, 2021
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	19,391	Other liabilities	$	24,044
Total derivatives designated as hedging instruments		19,391			24,044
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets	666		Other liabilities	333
Total derivatives not designated as hedging instruments		666			333
Total derivatives		$	20,057		$	24,377


	Asset Derivatives			Liability Derivatives
	December 31, 2020			December 31, 2020
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	35,388	Other liabilities	$	43,631
Total derivatives designated as hedging instruments		35,388			43,631
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets	1,045		Other liabilities	—
Total derivatives not designated as hedging instruments		1,045			—
Total derivatives		$	36,433		$	43,631

The effect of the derivative instruments on the condensed consolidated statements of income for the three and nine–month periods ending September 30 is as follows:


	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Derivatives in cash flow hedging relationship
Interest rate contracts	$	438	$	(107)	$	2,836	$	(3,239)

FASB Accounting Standards Codification (“ASC”) Topic 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. Topic 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.

Location of gain
(loss)
recognized on derivative Amount of Gain (Loss) Recognized on Derivative
Three Months Ended
March 31, 2021 March 31, 2020
Derivative in fair value hedging relationship
Interest rate contracts Interest income - loans $ 17,525 $ (26,330)
Interest rate contracts Interest income - loans (17,525) 26,330
Total $ 0 $ 0

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended				Nine Months Ended
		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Derivative in fair value hedging relationship
Interest rate contracts	Interest income - loans	$	3,302	$	(3,162)	$	15,997	$	(29,492)
Interest rate contracts	Interest income - loans	(3,302)		3,162		(15,997)		29,492
Total		$	—	$	—	$	—	$	—

Location of gain
(loss)
recognized on derivative

Amount of Gain (Loss) Recognized on Derivative

Location of gain
(loss)
recognized on derivative

Amount of Gain (Loss) Recognized on Derivative

Three Months Ended

Location of gain
(loss)
recognized on derivative

Three Months Ended

Nine Months Ended

March 31, 2021

March 31, 2020

Location of gain
(loss)
recognized on derivative

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Derivative not designated as hedging relationship

Mortgage contracts

Other income - gain on sale of loans

(1,241)

1,043

Mortgage contracts

(167)

(679)

(712)

364

Note 1011 – 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 –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 –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 condensed 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 ~~March 31,~~September 30, 2021. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

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 collateralized mortgage obligations and 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

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

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

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

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.

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.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated 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:

March 31, 2021
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 $ 39,602 $ 0 $ 39,602 $ 0
State and municipal 1,005,051 0 1,005,051 0
Federal agency collateralized mortgage obligations 119,088 0 119,088 0
Federal agency mortgage–backed pools 87,351 0 87,351 0
Corporate notes 11,083 0 11,083 0
Total available for sale securities 1,262,175 0 1,262,175 0
Interest rate swap agreements asset 17,864 0 17,864 0
Forward sale commitments 504 0 504 0
Interest rate swap agreements liability (23,053) 0 (23,053) 0
Commitments to originate loans (701) 0 (701) 0


	September 30, 2021
	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	$	118,588	$	—	$	118,588	$	—
State and municipal	1,119,123		—		1,119,123		—
Federal agency collateralized mortgage obligations	75,525		—		75,525		—
Federal agency mortgage–backed pools	237,705		—		237,705		—
Private labeled mortgage–backed pools	32,937		—		32,937		0
Corporate notes	85,756		—		85,756		—
Total available for sale securities	1,669,634		—		1,669,634		—
Interest rate swap agreements asset	19,391		—		19,391		—
Forward sale commitments	666		—		666		—
Interest rate swap agreements liability	(24,044)		—		(24,044)		—
Commitments to originate loans	(333)		—		(333)		—

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


		December 31, 2020									December 31, 2020
		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			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	Available for sale securities									Available for sale securities
U.S. Treasury and federal agencies	U.S. Treasury and federal agencies	$	19,715	$	0	$	19,715	$	0	U.S. Treasury and federal agencies	$	19,715	$	—	$	19,715	$	—
State and municipal	State and municipal	837,843		0		837,843		0		State and municipal	837,843		—		837,843		—
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	147,453		0		147,453		0		Federal agency collateralized mortgage obligations	147,453		—		147,453		—
Federal agency mortgage–backed pools	Federal agency mortgage–backed pools	118,799		0		118,799		0		Federal agency mortgage–backed pools	118,799		—		118,799		—
Corporate notes	Corporate notes	10,215		0		10,215		0		Corporate notes	10,215		—		10,215		—
Total available for sale securities	Total available for sale securities	1,134,025		0		1,134,025		0		Total available for sale securities	1,134,025		—		1,134,025		—
Interest rate swap agreements asset	Interest rate swap agreements asset	35,388		0		35,388		0		Interest rate swap agreements asset	35,388		—		35,388		—
Forward sale commitments	Forward sale commitments	1,045		0		1,045		0		Forward sale commitments	1,045		—		1,045		—
Interest rate swap agreements liability	Interest rate swap agreements liability	(46,631)		0		(46,631)		0		Interest rate swap agreements liability	(43,631)		—		(43,631)		—

Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:


		Three Months Ended				Three Months Ended				Nine Months Ended
		March 31, 2021		March 31, 2020				September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Non-interest Income	Non-interest Income						Non-interest Income
Total gains and losses from:	Total gains and losses from:						Total gains and losses from:
Hedged loans	Hedged loans	$	17,525	$	(26,330)		Hedged loans	$	3,302	$	(3,162)	$	15,997	$	(29,492)
Fair value interest rate swap agreements	Fair value interest rate swap agreements	(17,525)		26,330			Fair value interest rate swap agreements	(3,302)		3,162		(15,997)		29,492
Derivative loan commitments	Derivative loan commitments	(1,241)		1,043			Derivative loan commitments	(167)		(679)		(712)		364
		$	(1,241)	$	1,043			$	(167)	$	(679)	$	(712)	$	364

Certain other assets are measured at fair value on a non-recurring 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)			Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2021
September 30, 2021										September 30, 2021
Collateral dependent loans	Collateral dependent loans	$	11,008	$	0	$	0	$	11,008	Collateral dependent loans	$	18,848	$	—	$	—	$	18,848
Mortgage servicing rights	Mortgage servicing rights	12,875		0		0		12,875		Mortgage servicing rights	14,863		—		—		14,863
December 31, 2020	December 31, 2020									December 31, 2020
Collateral dependent loans	Collateral dependent loans	$	13,123	$	0	$	0	$	13,123	Collateral dependent loans	$	13,123	$	—	$	—	$	13,123
Mortgage servicing rights	Mortgage servicing rights	12,472		0		0		12,472		Mortgage servicing rights	12,472		—		—		12,472

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Collateral Dependent Loans: For loans 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.

Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

Mortgage Servicing Rights (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’ fair value due to impairment ~~decreased~~increased by ~~$236,000~~$2.1 million during the first ~~three~~nine months of 2021 and ~~increased~~decreased by ~~$322,000~~$3.2 million during the first ~~three~~nine months of 2020.

The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill.

~~March 31,~~September 30, 2021

Fair
Value

Valuation
Technique

Unobservable
Inputs

Range
(Weighted Average)

Collateral dependent loans

~~11,008~~18,848

Collateral based measurement

Discount to reflect current market conditions and ultimate collectibility

0.0%~~-98.6% (14.0%~~-65.0% (6.9%)

Mortgage servicing rights

~~12,875~~14,863

Discounted cash flows

Discount rate,

Constant prepayment rate,

Probability of default

~~7.8%-7.8% (7.8%~~8.0%-8.0% (8.0%),

~~11.9%-30.6% (16.6%~~9.5%-16.7% (12.7%),

0.0%~~-1.2%(0.7%~~-18.5%(0.4%)

December 31, 2020

Fair
Value

Valuation
Technique

Unobservable
Inputs

Range
(Weighted Average)

Collateral dependent loans

13,123

Collateral based measurement

Discount to reflect current market conditions and ultimate collectibility

0.0%-72.0%(12.4%)

Mortgage servicing rights

12,472

Discounted cash flows

Discount rate,
Constant prepayment rate,
Probability of default

7.8%-7.8% (7.8%),

11.5%-20.9%(17.5%),

0.0%-1.0%(0.8%)

Note 1112 – 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.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

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 ~~March 31,~~September 30, 2021 and December 31, 2020. These include financial instruments recognized as assets and liabilities on the condensed 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:

Cash and Due from Banks – The carrying amounts approximate fair value.

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(Table Dollar Amounts in Thousands, Except Per Share Data)~~

Interest-earning time deposits – The fair values of the Company’s interest–earning time deposits are estimated using discounted cash flow analyses based on current rates for similar types of interest–earning time deposits.

Held–to–Maturity Securities – 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.

Loans Held for Sale – The carrying amounts approximate fair value.

Net Loans – The fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.

FHLB Stock – Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.

Interest Receivable/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.

Subordinated Notes – The fair value of subordinated notes is based on discounted cash flows based on current borrowing rates for similar types of instruments.

Junior Subordinated Debentures Issued to Capital Trusts – Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.

Commitments to Extend Credit and Standby Letters of Credit – 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.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

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.


		March 31, 2021									September 30, 2021
		Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	Assets									Assets
Cash and due from banks	Cash and due from banks	$	529,336	$	529,336	$	0	$	0	Cash and due from banks	$	971,817	$	971,817	$	—	$	—
Interest–earning time deposits	Interest–earning time deposits	7,983		0		8,123		0		Interest–earning time deposits	5,767		—		5,881		—
Investment securities, held to maturity	Investment securities, held to maturity	161,650		0		170,949		0		Investment securities, held to maturity	769,240		—		768,099		—
Loans held for sale	Loans held for sale	7,798		0		0		7,798		Loans held for sale	4,811		—		—		4,811
Loans (excluding loan level hedges), net	Loans (excluding loan level hedges), net	3,607,250		0		0		3,535,694		Loans (excluding loan level hedges), net	3,603,302		—		—		3,518,194
Stock in FHLB	Stock in FHLB	23,023		0		23,023		0		Stock in FHLB	24,440		—		24,440		—
Interest receivable	Interest receivable	20,951		0		20,951		0		Interest receivable	24,762		—		24,762		—
Liabilities	Liabilities									Liabilities
Non–interest bearing deposits	Non–interest bearing deposits	$	1,133,412	$	1,133,412	$	0	$	0	Non–interest bearing deposits	$	1,324,757	$	1,324,757	$	—	$	—
Interest bearing deposits	Interest bearing deposits	3,588,404		0		3,541,714		0		Interest bearing deposits	4,655,142		—		4,603,849		—
Borrowings	Borrowings	481,488		0		481,549		0		Borrowings	670,753		—		669,517		—
Subordinated notes	Subordinated notes	58,640		0		57,756		0		Subordinated notes	58,713		—		58,176		—
Junior subordinated debentures issued to capital trusts	Junior subordinated debentures issued to capital trusts	56,604��		0		52,924		0		Junior subordinated debentures issued to capital trusts	56,722		—		53,384		—
Interest payable	Interest payable	1,772		0		1,772		0		Interest payable	1,427		—		1,427		—


	December 31, 2020
	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	$	249,711	$	249,711	$	—	$	—
Interest–earning time deposits	8,965		—		9,136		—
Investment securities, held to maturity	168,676		—		179,990		—
Loans held for sale	13,538		—		—		13,538
Loans (excluding loan level hedges), net	3,810,356		—		—		3,767,348
Stock in FHLB	23,023		—		23,023		—
Interest receivable	21,396		—		21,396		—
Liabilities
Non–interest bearing deposits	$	1,053,242	$	1,053,242	$	—	$	—
Interest bearing deposits	3,477,891		—		3,466,522		—
Borrowings	475,000		—		483,245		—
Subordinated notes	58,603		—		57,626		—
Junior subordinated debentures issued to capital trusts	56,548		—		52,676		—
Interest payable	2,712		—		2,712		—

December 31, 2020
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 $ 249,711 $ 249,711 $ 0 $ 0
Interest–earning time deposits 8,965 0 9,136 0
Investment securities, held to maturity 168,676 0 179,990 0
Loans held for sale 13,538 0 0 13,538
Loans (excluding loan level hedges), net 3,810,356 0 0 3,767,348
Stock in FHLB 23,023 0 23,023 0
Interest receivable 21,396 0 21,396 0
Liabilities
Non–interest bearing deposits $ 1,053,242 $ 1,053,242 $ 0 $ 0
Interest bearing deposits 3,477,891 0 3,466,522 0
Borrowings 475,000 0 483,245 0
Subordinated notes 58,603 0 57,626 0
Junior subordinated debentures issued to capital trusts 56,548 0 52,676 0
Interest payable 2,712 0 2,712 0

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 1213 – Accumulated Other Comprehensive Income

March 31,
2021 December 31,
2020
Unrealized gain on securities available for sale $ 18,863 $ 43,662
Unamortized loss on securities held to maturity, previously transferred from AFS (148) (165)
Unrealized loss on derivative instruments (5,190) (8,243)
Tax effect (2,839) (7,402)
Total accumulated other comprehensive income $ 10,686 $ 27,852


	September 30, 2021		December 31, 2020
Unrealized gain on securities available for sale	$	14,444	$	43,662
Unamortized loss on securities held to maturity, previously transferred from AFS	(115)		(165)
Unrealized loss on derivative instruments	(4,653)		(8,243)
Tax effect	(2,031)		(7,402)
Total accumulated other comprehensive income	$	7,645	$	27,852

Note 1314 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital framework (known as “Basel III”). 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 certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Company and Bank are subject to minimum regulatory capital requirements as defined and calculated in accordance with the Basel III–based regulations. As allowed under Basel III rules, the Company made the decision to opt–out of including accumulated other comprehensive income in regulatory capital. The minimum regulatory capital requirements are set forth in the table below.

In addition, to be categorized as well capitalized, the Company and Bank must maintain 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 ~~March 31,~~September 30, 2021 and December 31, 2020, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the ~~first~~third quarter of 2021 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well capitalized status for bank holding companies.

In October 2019, the federal banking agencies finalized a new rule that will simplify capital requirements for qualified community banks that opt into the new community bank leverage ratio framework. The new framework was available to use in March 31, 2020 Call Reports or Forms FRY-9C (as applicable) for depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, among other qualifying criteria. Horizon did not elect the new community bank leverage ratio framework.

As of March 31, 2020, the Company and Bank elected the transition option of the 2019 CECL Rule which allows banking organizations to phase in over a three–year period the day–one adverse effects of CECL on their regulatory capital ratios.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Horizon and the Bank’s actual and required capital ratios as of ~~March 31,~~September 30, 2021 and December 31, 2020 were as follows:

Actual
Required for Capital
Adequacy Purposes(1)
Required For Capital
Adequacy Purposes
with Capital Buffer(1)
Well Capitalized
Under Prompt Corrective Action
Provisions(1)
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
March 31, 2021
Total capital (to risk–weighted assets)(1)
Consolidated $ 669,098 16.94 % $ 315,985 8.00 % $ 414,730 10.50 % N/A N/A
Bank 548,682 13.86 % 316,700 8.00 % 415,668 10.50 % $ 395,874 10.00 %
Tier 1 capital (to risk–weighted assets)(1)
Consolidated 622,085 15.75 % 236,985 6.00 % 335,728 8.50 % N/A N/A
Bank 503,222 12.71 % 237,556 6.00 % 336,537 8.50 % 316,741 8.00 %
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated 506,877 12.84 % 177,644 4.50 % 276,335 7.00 % N/A N/A
Bank 503,222 12.71 % 178,167 4.50 % 277,148 7.00 % 257,352 6.50 %
Tier 1 capital (to average assets)(1)
Consolidated 622,085 10.82 % 229,976 4.00 % 229,976 4.00 % N/A N/A
Bank 503,222 8.81 % 228,478 4.00 % 228,478 4.00 % 285,597 5.00 %
December 31, 2020
Total capital (to risk–weighted assets)(1)
Consolidated $ 648,804 14.91 % $ 348,024 8.00 % $ 456,782 10.50 % N/A N/A
Bank 532,315 12.21 % 348,810 8.00 % 457,813 10.50 % $ 436,013 10.00 %
Tier 1 capital (to risk–weighted assets)(1)
Consolidated 607,340 13.96 % 261,018 6.00 % 369,775 8.50 % N/A N/A
Bank 492,221 11.29 % 261,606 6.00 % 370,609 8.50 % 348,808 8.00 %
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated 491,281 11.29 % 195,764 4.50 % 304,522 7.00 % N/A N/A
Bank 492,221 11.29 % 196,205 4.50 % 305,207 7.00 % 283,407 6.50 %
Tier 1 capital (to average assets)(1)
Consolidated 607,340 10.68 % 227,507 4.00 % 227,507 4.00 % N/A N/A
Bank 492,221 8.71 % 226,158 4.00 % 226,158 4.00 % 282,697 5.00 %
(1) As defined by regulatory agencies


	Actual				Required for Capital Adequacy Purposes(1)				Required For Capital Adequacy Purposes with Capital Buffer(1)				Well Capitalized Under Prompt Corrective Action Provisions(1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2021
Total capital (to risk–weighted assets)(1)
Consolidated	$	678,665	15.27	%	$	355,555	8.00	%	$	466,666	10.50	%	N/A		N/A
Bank	575,693		12.97	%	355,092		8.00	%	466,058		10.50	%	$	443,865	10.00	%
Tier 1 capital (to risk–weighted assets)(1)
Consolidated	634,105		14.27	%	266,617		6.00	%	377,708		8.50	%	N/A		N/A
Bank	526,731		11.86	%	266,474		6.00	%	377,505		8.50	%	355,299		8.00	%
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated	518,670		11.67	%	200,001		4.50	%	311,113		7.00	%	N/A		N/A
Bank	526,731		11.86	%	199,856		4.50	%	310,887		7.00	%	288,681		6.50	%
Tier 1 capital (to average assets)(1)
Consolidated	634,105		10.03	%	252,883		4.00	%	252,883		4.00	%	N/A		N/A
Bank	526,731		8.38	%	251,423		4.00	%	251,423		4.00	%	314,279		5.00	%
December 31, 2020
Total capital (to risk–weighted assets)(1)
Consolidated	$	648,804	14.91	%	$	348,024	8.00	%	$	456,782	10.50	%	N/A		N/A
Bank	532,315		12.21	%	348,810		8.00	%	457,813		10.50	%	$	436,013	10.00	%
Tier 1 capital (to risk–weighted assets)(1)
Consolidated	607,340		13.96	%	261,018		6.00	%	369,775		8.50	%	N/A		N/A
Bank	492,221		11.29	%	261,606		6.00	%	370,609		8.50	%	348,808		8.00	%
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated	491,281		11.29	%	195,764		4.50	%	304,522		7.00	%	N/A		N/A
Bank	492,221		11.29	%	196,205		4.50	%	305,207		7.00	%	283,407		6.50	%
Tier 1 capital (to average assets)(1)
Consolidated	607,340		10.68	%	227,507		4.00	%	227,507		4.00	%	N/A		N/A
Bank	492,221		8.71	%	226,158		4.00	%	226,158		4.00	%	282,697		5.00	%
(1) As defined by regulatory agencies

Note 1415 – 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 of operation and cash flows of the Company.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward–Looking Statements

This report contains certain forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp, Inc. (“Horizon” or the “Company”) and Horizon Bank (the “Bank”). Horizon intends such forward–looking statements to be covered by the safe harbor provisions for forward–looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward–looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward–looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward–looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward–looking statement include but are not limited to:

•COVID–19 related impact on Horizon and its customers, employees and vendors, which may depend on several factors, including the scope and continued duration of the pandemic, its influence on the financial markets, long–term and post–pandemic changes in the banking preferences and behaviors of customers, supply chain risks to the bank and its customers and actions taken by governmental authorities and other third parties in response to the pandemic;

•economic conditions and their impact on Horizon and its customers, including local and global economic recovery from the pandemic;

•changes to government regulations, including the CARES Act, on the accounting for modified loans;

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

•the effect of low or negative interest rates on net interest rate margin and their impact on mortgage loan volumes and the outflow of deposits;

•loss of key Horizon personnel;

•changes in federal or state government mandates regarding vaccination requirements which may impact our ability to retain or attract labor;

•our former 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 plaintiff’s bar;

•increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks, which may have been accelerated by the pandemic;

•potential loss of fee income, including interchange fees, as new and 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 activities;

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

•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;

•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;

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

~~For the Three Months ended March 31, 2021 and 2020~~

•litigation, regulatory enforcement, tax, and legal compliance risk and costs, as applicable generally and specifically to the financial and fiduciary (generally and as an ESOP fiduciary) environment, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same;

•the effects and costs of governmental investigations or related actions by third parties;

•rapid technological developments and changes;

•the risks presented by cyber terrorism and data security breaches;

•the rising costs of effective cybersecurity;

•containing costs and expenses;

•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 climate change and social justice initiatives;

•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 the U.S. trade relations related to imposition of tariffs, Brexit and the phase out of the London Interbank Offered Rate (“LIBOR”), and the geopolitical risk related to the increasing tension with China, Taiwan, Russia, Iran and other countries which could lead to disruption in supply chains, logistics and overall markets; and

•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.

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward–looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward–looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward–looking statements, see “Risk Factors” in Item 1A of Part I of our 2020 Annual Report on Form 10–K and in the subsequent reports we file with the SEC.

Overview

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 northern and central Indiana and southern and central Michigan through its bank subsidiary, Horizon Bank (“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. Horizon Bank (formerly known as “Horizon Bank, N.A.”) was founded in 1873 as a national association, and it remained a national association until its conversion to an Indiana commercial bank effective June 23, 2017. 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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

Over the last 20 years, Horizon has expanded its geographic reach and experienced financial growth through a combination of both organic expansion and mergers and acquisitions. Horizon's initial operations focused on northwest Indiana, but since then, the Company has developed a presence in new markets in southern and central Michigan and northeastern and central Indiana.

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

~~For the Three Months ended March 31, 2021 and 2020~~

~~First~~Third Quarter 2021 Highlights

•~~Generated return on average assets (“ROAA”)~~On September 17, 2021, completed previously announced acquisition of ~~1.40%~~14 branches in 11 Michigan counties, approximately $206.8 million in loans and ~~return on average common equity (“ROACE”) of 11.88%~~$846.4 million in ~~the quarter, as well as adjusted ROAA of 1.35%~~deposits, in a transaction designed to further extend Horizon’s retail franchise and ~~adjusted ROACE of 11.46%, excluding the impact of gains on sale of investment securities, net of tax. (See the “Non–GAAP Reconciliation of Return on Average Assets”~~further enhance its low–cost core deposit and ~~the “Non–GAAP Reconciliation of Return on Average Common Equity” tables below.)~~funding capability to support lending in its Midwestern growth markets.

•~~Earned net~~Net income ~~of $20.4~~grew to a record $23.1 million, ~~or $0.46 diluted~~up 4.0% from the linked quarter and 13.6% from the year–ago period. Diluted earnings per share ~~compared to $21.9 million, or~~(“EPS”) of $0.52 was up from $0.50 ~~diluted earnings per share,~~ for the ~~fourth~~second quarter of ~~2020~~2021 and ~~$11.7 million, or $0.26 diluted earnings per share,~~$0.46 for the ~~first~~third quarter of 2020.

•Pre–tax, pre–provision net income ~~totaled~~grew to a ~~first–~~record $28.2 million, up 15.5% from the linked quarter ~~record $24.2 million, compared to $26.9 million for~~and 5.8% from the ~~fourth quarter of 2020 and $21.8 million for the first three months of 2020.~~year–ago period. This non–GAAP financial measure is utilized by banks to provide a greater understanding of pre–tax profitability before giving effect to credit loss expense. (See the “Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income” table ~~below.)~~below).

•Non–interest expense was ~~$32.2~~$34.3 million in the quarter, or ~~2.20%~~2.09% of average assets on an annualized basis, compared to ~~$36.5~~$33.4 million, or ~~2.47%~~2.18%, in the ~~fourth~~second quarter of ~~2020~~2021 and ~~$31.1~~$33.4 million, or ~~2.38%~~2.30%, in the ~~first~~third quarter of 2020. Acquisition–related expenses totaled approximately $799,000 in the third quarter of 2021 and $242,000 in the linked quarter.

•The efficiency ratio for the period was ~~57.03%~~54.88% compared to ~~57.54%~~57.73% for the ~~fourth~~second quarter of ~~2020~~2021 and ~~58.79%~~55.59% for the ~~first~~third quarter of 2020. The adjusted efficiency ratio was ~~57.97%~~56.16% compared to ~~56.48%~~57.45% for the ~~fourth~~second quarter of ~~2020~~2021 and ~~59.43%~~56.64% for the ~~first~~third quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table ~~below.)~~below).

•~~Following record residential lending last year~~A previously disclosed consolidation of 10 retail locations was completed on August 27 as part of Horizon’s rigorous annual branch performance review process, with employees reassigned to support other staffing needs and during what has historically been its seasonally lightest volume quarter, mortgage–related non–interest income remained strong in the first three months of 2021, with gain on mortgage loan sales of $5.3 milliongrowth initiatives. Operating cost saves are largely expected to be redeployed into continued digital banking and net mortgage servicing income of $213,000. The bank originated $155.6 million in mortgage loans during the quarter, with 65% of volume from refinances, as Horizon continued to focus residential lending on prime borrowers in Indiana and Michigan markets.technology investments.

•Net interest income ~~was $42.5~~grew to a record $46.5 million for the quarter, ~~compared to $43.6 million for~~up 9.2% from the ~~fourth~~second quarter of ~~2020~~2021 and ~~$40.9 million for~~7.3% from the ~~first~~third quarter of 2020. First quarter 2021 net interest income remained relatively stable in the current environment, given previously disclosed initiatives to optimize returns on earning assets, including increasing investment securities to 23.5% of assets from 22.1% in the fourth quarter of 2020 and 20.6% in the first quarter of 2020.

•Reported net interest margin (“NIM”) ~~of 3.29%~~was 3.17% and adjusted NIM ~~of 3.17%~~was 3.12%, with reported NIM ~~declining~~increasing by 5three basis points and adjusted NIM decreasing by 27one basis ~~points~~point from the ~~fourth~~second quarter of ~~2020.~~2021. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP ~~calculation.~~calculation of adjusted NIM.) ~~An estimated 10~~Approximately 16 basis points of the NIM and adjusted NIM is attributed to Federal Paycheck Protection Program (“PPP”) lending, ~~improved the margin,~~ offset by an estimated 16 basis point compression attributed to excess liquidity ~~held~~ during the quarter. During the third quarter, ~~for both NIM~~Horizon increased the average balance of its investment portfolio by $471.8 million to leverage capital and ~~adjusted NIM.~~focus on increasing net interest income.

•Total non–interest income was $16.0 million, including the recovery of $876,000 from an acquired charged–off loan, as well as a $2.4 million gain from the sale of the Company’s ESOP trustee accounts at the end of the quarter. The sale of these accounts is not expected to have any significant impact to the bottom line due to the related costs saves the Company will incur as it exited these account relationships. Non–interest income was $15.2 million in the second quarter of 2021 and $16.7 million, including a $1.1 million securities sale gain, in the third quarter of 2020.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

•Horizon’s in–market consumer and commercial deposit relationships, including those on–boarded as part of its branch acquisition during the quarter, combined with strategic pricing moves to manage deposit growth and runoff of higher–priced time deposits, contributed to continued improvement in the cost of interest bearing liabilities, which declined to ~~0.50%~~0.38% in the quarter, compared to ~~0.94%~~0.45% in the ~~fourth~~second quarter of ~~2020~~2021 and ~~1.13%~~0.67% in the ~~first~~third quarter of 2020.

•~~Increased~~Horizon recorded a quarterly provision expense of $1.1 million, reflecting a $2.0 million allocation for loans acquired in the ~~allowance for credit losses (“ACL”) 0.3% year–to–date to $57.2 million~~Michigan branch acquisition, as well as, solid asset quality metrics at period ~~end, representing 1.56% of total loans, reflecting implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the Company’s general reserves.~~end.

•~~COVID–19 deferral levels improved~~Commercial loans, excluding PPP lending, grew by 2.3% organically and by 7.5% overall during the quarter to ~~2.5% of total loans~~$2.1 billion at period ~~end, compared~~end. Total loans, excluding PPP lending, grew organically 0.3% and 6.4% overall to ~~3.3%~~$3.57 billion.

•Horizon’s book value per share increased to an all–time high of $16.28 while tangible book value per share decreased to $12.05. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.) The decrease in tangible book value was a result of the repurchase of shares for approximately $7.6 million and $12.4 million of goodwill and intangible assets recorded during the third quarter.

•Horizon announced an increase to cash dividends to be paid on ~~December 31, 2020,~~October 22, 2021 of 15.4% to $0.15 per share. As of September 30, 2021, in excess of $120.9 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value. This is Horizon’s second dividend increase in 2021.

•During the quarter, the Company repurchased 430,026 shares at an average cost of $17.74 per share for a total cost of $7.6 million. This resulted in a reduction in tangible book value of approximately $0.18 per share and an increase in EPS of $0.01 per share for the third quarter.

Impact of the COVID–19 Pandemic

We continue to monitor the impact of COVID–19 is having on the markets in which we operate in and the ~~bank experienced no material specific~~uncertainty of the long–term ramifications to our customers and operations. Within our markets, vaccinations have become readily available, infection positivity rates are at moderate levels, and the restrictions on businesses have generally been fully lifted. However, the lasting effects of government aid programs are uncertain as stimulus packages taper, and the ultimate long–term impact of the business shutdowns that occurred as a result of COVID–19 remains uncertain in many sectors of the economy. In the third quarter of 2021, COVID–19 positivity rates and hospitalizations in our markets rose due to the impact of the Delta variant, but have now been falling for the last several weeks.

The Federal Reserve, in response to the economic risks resulting from the COVID–19 pandemic, returned to a zero–interest rate policy in March 2020. This was after most broader market rates decreased significantly in response to evolving news about the COVID–19 pandemic. Many areas of consumer and business spending have rebounded in recent months, but there remains uncertainty about the longer lasting impact on local businesses as well as the travel, hospitality and entertainment industries results from the COVID–19 pandemic. This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain those recoveries in the long run. Inflation and supply shortages also pose risks to the economic recovery.

While positive economic indicators exist, we recognize that some of our commercial and individual customers are continuing to experience varying degrees of financial distress, which we expect to continue, through a lesser degree, through the end of 2021 and into early 2022. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID–19 pandemic, which may result in some customers’ inability to meet their loan ~~losses attributable~~obligations to us or seek deferrals on their obligations. In addition, the economic pressures and uncertainties related to the COVID–19 ~~closures.~~pandemic have seemingly resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hotel/lodging, restaurants, retail and commercial real estate, which have been significantly impacted by the COVID–19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID–19 pandemic. We continue to monitor these customers closely.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

Financial Summary


	For the Three Months Ended
	September 30,			June 30,			September 30,
Net Interest Income and Net Interest Margin	2021			2021			2020
Net interest income	$	46,544		$	42,632		$	43,397
Net interest margin	3.17		%	3.14		%	3.39		%
Adjusted net interest margin	3.12		%	3.13		%	3.27		%


	For the Three Months Ended
	September 30,		June 30,		September 30,
Asset Yields and Funding Costs	2021		2021		2020
Interest earning assets	3.46	%	3.48	%	3.90	%
Interest bearing liabilities	0.38	%	0.45	%	0.67	%


	For the Three Months Ended
Non–interest Income and Mortgage Banking Income	September 30,		June 30,		September 30,
	2021		2021		2020
Total non–interest income	$	16,044	$	15,207	$	16,700
Gain on sale of mortgage loans	4,088		5,612		8,813
Mortgage servicing income net of impairment	336		1,503		(1,308)


	For the Three Months Ended
	September 30,			June 30,			September 30,
Non–interest Expense	2021			2021			2020
Total non–interest expense	$	34,349		$	33,388		$	33,407
Annualized non–interest expense to average assets	2.09		%	2.18		%	2.30		%

•


	At or for the Three Months Ended
Credit Quality	September 30,		June 30,		September 30,
	2021		2021		2020
Allowance for credit losses to total loans	1.55	%	1.58	%	1.39	%
Non–performing loans to total loans	0.80	%	0.63	%	0.72	%
Percent of net charge–offs to average loans outstanding for the period	0.00	%	0.00	%	0.02	%

Maintained solid asset quality metrics at period end, including non–performing loans declining 6.5% during the quarter to $25.1 million, or 0.68% of total loans, and substandard loans declining 12.5% to $86.5 million, or 2.4% of total loans, while net charge–offs remained unchanged at 0.01% of average loans for the period.


Allowance for	December 31,			Net Reserve						September 30,
Credit Losses	2020			1Q21		2Q21		3Q21		2021
Commercial	$	42,210		$	770	$	(1,214)	$	1,355	$	43,121
Retail Mortgage	4,620			(391)		(121)		(371)		3,737
Warehouse	1,267			(104)		(8)		(101)		1,054
Consumer	8,930			(116)		(194)		247		8,867
Allowance for Credit Losses (“ACL”)	$	57,027		$	159	$	(1,537)	1,130		$	56,779
ACL/Total Loans	1.47		%							1.55		%

•Loans excluding PPP lending totaled $3.42 billion on March 31, 2021, reflecting Horizon’s successful efforts to secure payoffs of loans previously classified as substandard, as well as cash reserves maintained by many current and prospective commercial borrowers and retail households through the quarter. Loans excluding PPP lending totaled $3.67 billion on December 31, 2020 and $3.71 billion on March 31, 2020.

•Horizon announced an 8.3% increase in its quarterly cash dividend in March to $0.13 per share, paying uninterrupted dividends for over 30 years. As of March 31, 2021, in excess of $127 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value.

•~~Horizon opened a new full–service branch on March 31, 2021 in Gary to improve access to financial services in this Northwest Indiana community.~~

~~Coronavirus Update/Status~~

The coronavirus (“COVID–19”) pandemic has placed significant health, economic and other major pressure throughout the communities we serve, in the states of Indiana and Michigan, the United States and the entire world. We have implemented a number of procedures in response to the pandemic to support the safety and well–being of our employees, customers and shareholders that continue through the date of this report:

•~~Employees~~

◦~~Safety and well–being of employees and families is our first priority.~~

◦~~Installed sneeze guards, customer directional signage, implemented mask requirements, and continuing with sanitizing and social distancing protocols.~~

◦~~Substantial reduction in percentage of employees working remotely.~~

•~~Consumers~~

◦~~100% of our branch locations are now open to lobby traffic.~~

◦~~Payment relief~~

▪~~Approximately $2 million consumer and mortgage loans have been modified as of March 31, 2021, down from $6 million as of December 31, 2020 and $63 million as of June 30, 2020.~~

▪~~Continued to provide new loans to qualified applicants.~~

▪~~Provided mortgage loan education programs.~~

▪~~Provided additional financial assistance in the form of fee waivers and a freeze on all debt collection activities.~~

•~~Businesses~~

◦~~Preferred SBA Lender~~

▪~~Active participant in all SBA loan programs (PPP, 7a, Express and 504).~~

◦~~Payment Relief Programs~~

▪~~Approximately $89 million in commercial loans with payment extensions as of March 31, 2021, down from $121 million as of December 31, 2020 and $470 million as of June 30, 2020.~~

▪~~Processed and received approval for 3,807 PPP loans, funding approximately $441.8 million.~~

▪~~As of March 31, 2021, $185.7 million of PPP loans had been forgiven.~~

•~~Communities~~

◦~~Increased volunteerism in support of local not–for–profit entities.~~

◦~~Contributed over $300,000 during 2020 to COVID–19 related not–for–profit efforts (local food banks, United Way, housing).~~

◦~~Participated in community conference calls related to COVID–19.~~

◦~~Partnered with local neighborhood housing partnerships to provide funding for low to moderate income families.~~

◦~~Partnered with local Certified Development Corporations to provide capital to small businesses.~~

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31, 2021 and 2020~~

~~Financial Summary~~

For the Three Months Ended
March 31, December 31, March 31,
Net Interest Income and Net Interest Margin 2021 2020 2020
Net interest income $ 42,538 $ 43,622 $ 40,925
Net interest margin 3.29 % 3.34 % 3.56 %
Adjusted net interest margin 3.17 % 3.44 % 3.44 %

For the Three Months Ended
March 31, December 31, March 31,
Asset Yields and Funding Costs 2021 2020 2020
Interest earning assets 3.66 % 4.05 % 4.47 %
Interest bearing liabilities 0.50 % 0.94 % 1.13 %

For the Three Months Ended
Non–interest Income and
Mortgage Banking Income March 31, December 31, March 31,
2021 2020 2020
Total non–interest income $ 13,873 $ 19,733 $ 12,063
Gain on sale of mortgage loans 5,296 7,815 3,473
Mortgage servicing income net of impairment 213 327 25

For the Three Months Ended
March 31, December 31, March 31,
Non–interest Expense 2021 2020 2020
Total non–interest expense $ 32,172 $ 36,453 $ 31,149
Annualized non–interest expense to average assets 2.20 % 2.47 % 2.38 %

At or for the Three Months Ended
Credit Quality March 31, December 31, March 31,
2021 2020 2020
Allowance for credit losses to total loans 1.56 % 1.47 % 1.30 %
Non–performing loans to total loans 0.68 % 0.69 % 0.65 %
Percent of net charge–offs to average loans outstanding for the period 0.01 % 0.01 % 0.01 %

Allowance for December 31, Net Reserve Build March 31,
Credit Losses 2020 1Q20 2021
Commercial $ 42,210 $ 770 $ 42,980
Retail Mortgage 4,620 (391) 4,229
Warehouse 1,267 (104) 1,163
Consumer 8,930 (116) 8,814
Allowance for Credit Losses (“ACL”) $ 57,027 $ 159 $ 57,186
ACL/Total Loans 1.47 % 1.56 %

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

~~For the Three Months ended March 31,~~September 30, 2021 and 2020

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2020 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 as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for Credit Losses

The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.

The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast. Loan losses are estimated using the fair value of collateral for collateral–dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged–off against the ACL. Recoveries of amounts previously charged–off are credited to the ACL. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID–19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.

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 ~~March 31,~~September 30, 2021, Horizon had core deposit intangibles of ~~$22.1~~$21.2 million subject to amortization and ~~$151.2~~$162.8 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.

At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID–19, Horizon assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock and other relevant events. Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and stress testing performed. At the conclusion of the most recent qualitative assessment, the Company determined that as of ~~March 31,~~September 30, 2021, it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the COVID–19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

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. 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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

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.

Financial Condition

On ~~March 31,~~September 30, 2021, Horizon’s total assets were ~~$6.1~~$7.5 billion, an increase of approximately ~~$168.9 million~~$1.6 billion compared to December 31, 2020. The increase in total assets was primarily in cash and due from banks of ~~$279.6~~$722.1 million, investments held to maturity of $600.6 million and ~~investment securities~~investments available for sale of ~~$128.2~~$535.6 million. These increases were offset by a decrease in net loans of ~~$203.1 million and other assets of $20.9~~$207.1 million.

Investment securities were comprised of the following as of (dollars in thousands):


		March 31, 2021				December 31, 2020					September 30, 2021				December 31, 2020
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale	Available for sale									Available for sale
U.S. Treasury and federal agencies	U.S. Treasury and federal agencies	$	40,155	$	39,602	$	19,750	$	19,715	U.S. Treasury and federal agencies	$	119,159	$	118,588	$	19,750	$	19,715
State and municipal	State and municipal	992,461		1,005,051		803,100		837,843		State and municipal	1,108,057		1,119,123		803,100		837,843
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	116,072		119,088		144,022		147,453		Federal agency collateralized mortgage obligations	73,922		75,525		144,022		147,453
Federal agency mortgage–backed pools	Federal agency mortgage–backed pools	84,609		87,351		114,484		118,799		Federal agency mortgage–backed pools	236,432		237,705		114,484		118,799
Private labeled mortgage–backed pools										Private labeled mortgage–backed pools	32,948		32,937		—		—
Corporate notes	Corporate notes	10,015		11,083		9,007		10,215		Corporate notes	84,672		85,756		9,007		10,215
Total available for sale investment securities	Total available for sale investment securities	$	1,243,312	$	1,262,175	$	1,090,363	$	1,134,025	Total available for sale investment securities	$	1,655,190	$	1,669,634	$	1,090,363	$	1,134,025
Held to maturity	Held to maturity									Held to maturity
State and municipal	State and municipal	$	151,474	$	160,583	$	157,421	$	168,456	State and municipal	$	283,858	$	289,119	$	157,421	$	168,456
Federal agency collateralized mortgage obligations	Federal agency collateralized mortgage obligations	1,959		1,979		2,661		2,697		Federal agency collateralized mortgage obligations	69,537		68,754		2,661		2,697
Federal agency mortgage–backed pools	Federal agency mortgage–backed pools	8,217		8,387		8,594		8,837		Federal agency mortgage–backed pools	215,873		212,498		8,594		8,837
Private labeled mortgage–backed pools										Private labeled mortgage–backed pools	66,298		65,552		—		—
Corporate notes										Corporate notes	133,674		132,176		—		—
Total held to maturity investment securities	Total held to maturity investment securities	$	161,650	$	170,949	$	168,676	$	179,990	Total held to maturity investment securities	$	769,240	$	768,099	$	168,676	$	179,990

Investment securities available for sale increased ~~$128.2~~$535.6 million since December 31, 2020 to ~~$1.3~~$1.7 billion as of ~~March~~September 30, 2021 and investment securities held to maturity increased $600.6 million since December 31, 2020 to $769.2 million as of September 30, 2021. This increase was due to additional purchases to increase earning ~~assets.~~

~~Gross loans decreased $208.7~~assets as the result of organic deposit growth and Horizon’s previously announced acquisition of 14 branches in 11 Michigan counties which increased deposits approximately $846.4 million ~~since December 31, 2020 to $3.7 billion as of March 31,~~on September 17, 2021. Mortgage warehouse, residential mortgage, consumer, commercial and loans held for sale decreased $129.4 million, $42.4 million, $16.8 million, $14.4 million and $5.7 million. PPP loans increased $43.4 million since December 31, 2020 to $252.3 million as of March 31, 2021.

Total deposits increased $190.7 million since December 31, 2020 to $4.7 billion as of March 31, 2021. This increase was primarily due to Federal stimulus payments to consumers and funds from the origination of PPP loans.

Total borrowings increased from $475.0 million as of December 31, 2020 to $481.5 million as of March 31, 2021. At March 31, 2021, the Company had $166.0 million in short-term funds borrowed compared to $315.5 million at December 31, 2020.

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

Net loans decreased $207.1 million since December 31, 2020 to $3.7 billion as of September 30, 2021. Mortgage warehouse, commercial, residential mortgage and loans held for sale decreased $225.7 million, $19.1 million, $20.7 million and $8.7 million, respectively. These decreases were offset by an increase in consumer loans of $58.2 million. PPP loans decreased $116.6 million since December 31, 2020 to $92.3 million as of September 30, 2021. These decreases were offset by an increase in consumer loans of $58.2 million. The net loans acquired in the acquisition of 14 branches in 11 Michigan counties of approximately $206.8 million helped to partially offset the decrease in loans.

Total deposits increased $1.4 billion since December 31, 2020 to $6.0 billion as of September 30, 2021. This increase was primarily due to Federal stimulus payments to consumers, funds from the origination of PPP loans and approximately $846.4 million in deposits from the acquisition of 14 branches in 11 Michigan counties.

Total borrowings increased from $475.0 million as of December 31, 2020 to $670.8 million as of September 30, 2021. At September 30, 2021, the Company had $195.2 million in short-term funds borrowed compared to $315.5 million at December 31, 2020. During the second quarter of 2021, the Bank paid–off $50.0 million in long–term Federal Home Loan Bank of Indianapolis advances which resulted in a prepayment penalty of $125,000.

Stockholders’ equity totaled ~~$689.4~~$708.5 million at ~~March 31,~~September 30, 2021 compared to $692.2 million at December 31, 2020. The ~~decrease~~increase in stockholders’ equity during the period was due to the generation of net income, offset by dividends paid, stock repurchases and a decrease in accumulated other comprehensive income during the ~~period, offset by the generation of net income.~~period. Book value per common share at ~~March 31,~~September 30, 2021 ~~decreased~~increased to ~~$15.69~~$16.28 compared to $15.78 at December 31, ~~2020 as a result of the decrease in accumulated other comprehensive income during the period.~~2020.

Results of Operations

Overview

Consolidated net income for the three–month period ended ~~March 31,~~September 30, 2021 was ~~$20.4~~$23.1 million, or ~~$0.46~~$0.52 diluted earnings per share, compared to ~~$11.7~~$20.3 million, or ~~$0.26~~$0.46 diluted earnings per share for the same period in 2020. The increase in net income for the three–month period ended ~~March 31,~~September 30, 2021 when compared to the same prior year period reflects an increase in net interest income of ~~$1.6~~$3.1 million, ~~an increase in non–interest income of $1.8 million and~~ a decrease in credit loss expense of ~~$8.2 million,~~$940,000 and a decrease in income tax expense of $270,000, offset by ~~increases~~an increase in non–interest expense of ~~$1.0 million~~$942,000 and a decrease in non–interest income ~~tax~~of $656,000. Excluding acquisition expenses, credit loss expense acquired loans, gain on sale of ~~$1.9 million. Excluding~~ESOP trustee accounts, gain on sale of investment securities and death benefit on bank owned life insurance (“adjusted net income”), adjusted net income for the ~~first~~third quarter of 2021 was ~~$19.7~~$23.0 million, or ~~$0.44~~$0.52 diluted earnings per share, compared to ~~$11.2~~$19.4 million, or ~~$0.24~~$0.45 diluted earnings per share for the ~~first~~third quarter of 2020.

Consolidated net income for the nine–month period ended September 30, 2021 was $65.7 million, or $1.49 diluted earnings per share, compared to $46.6 million, or $1.06 diluted earnings per share for the same period in 2020. The increase in net income for the nine–month period ended September 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $5.2 million, an increase in net interest income of $4.4 million and a decrease in credit loss expense of $17.7 million, offset by increases in non–interest expense of $4.9 million and income tax expense of $3.4 million. Excluding acquisition expenses, credit loss expense acquired loans, gain on sale of ESOP trustee account, gain on sale of investment securities, death benefits on bank owned life insurance and prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the nine–month period ended September 30, 2021 was $64.9 million, or $1.46 diluted earnings per share, compared to $45.0 million, or $1.02 diluted earnings per share for the nine–month period ended September 30, 2020.

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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

Net interest income during the three months ended ~~March 31,~~September 30, 2021 was ~~$42.5~~$46.5 million, an increase of ~~$1.6~~$3.1 million from the ~~$40.9~~$43.4 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 8144 basis points to ~~3.66%~~3.46% for the three months ended ~~March 31,~~September 30, 2021 from ~~4.47%~~3.90% for the three months ended ~~March 31,~~September 30, 2020. Interest income ~~decreased $4.1 million~~increased $722,000 from ~~$51.7~~$50.1 million for the three months ended ~~March 31,~~September 30, 2020 to ~~$47.6~~$50.9 million for the same period in 2021. The ~~decrease~~increase in interest income was due to ~~a decrease~~an increase in ~~yield as~~average balances of interest earning assets ~~reprice~~of $781,000 during the ~~current low rate environment.~~three months ended September 30, 2021. Interest income from acquisition–related purchase accounting adjustments was ~~$1.6 million~~$875,000 for the three months ending ~~March 31,~~September 30, 2021 compared to ~~$1.4~~$1.5 million for the same period of 2020.

Rates paid on interest bearing liabilities decreased by 6329 basis points for the three–month period ended ~~March 31,~~September 30, 2021 compared to the same period in 2020. Interest expense decreased ~~$5.7~~$2.4 million when compared to the three–month period ended ~~March 31,~~September 30, 2020 to ~~$5.1~~$4.3 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost onof average interest bearing deposits decreased 6924 basis points while the cost of average borrowings decreased 6144 basis points. Average balances of interest bearing deposits increased ~~$298.8~~$497.2 million and average balances of borrowings ~~decreased $55.9~~increased $20.9 million for the three-month period ended ~~March 31,~~September 30, 2021 when compared to the same period in 2020.

The net interest margin decreased 2722 basis points from ~~3.56%~~3.39% for the three–month period ended ~~March 31,~~September 30, 2020 to ~~3.29%~~3.17% for the same period in 2021. The decrease in the margin for the three–month period ended ~~March 31,~~September 30, 2021 compared to the same period in 2020 was due to a decrease in the yield on interest earning assets, offset by a decrease in the cost of interest bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been ~~3.17%~~3.12% for the three-month period ending ~~March 31,~~September 30, 2021 compared to ~~3.44%~~3.27% for the same period in 2020.

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

~~For the Three Months ended March 31, 2021 and 2020~~

~~The following are the average balance sheets for the three months ending (dollars in thousands):~~

Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Three Months Ended Three Months Ended
March 31, 2021 March 31, 2020
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 267,241 $ 66 0.10 % $ 24,974 $ 96 1.55 %
Interest earning deposits 25,527 31 0.49 % 26,491 101 1.53 %
Investment securities – taxable 410,063 1,451 1.44 % 501,144 2,701 2.27 %
Investment securities – non–taxable (1)
956,464 5,223 2.80 % 588,784 3,798 3.18 %
Loans receivable (2) (3)
3,780,339 40,818 4.39 % 3,604,809 44,958 5.03 %
Total interest earning assets 5,439,634 47,589 3.66 % 4,746,202 51,654 4.47 %
Non–interest earning assets
Cash and due from banks 85,269 78,108
Allowance for credit losses (57,779) (24,468)
Other assets 469,025 457,490
Total average assets $ 5,936,149 $ 5,257,332
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 3,524,103 $ 2,343 0.27 % $ 3,225,323 $ 7,716 0.96 %
Borrowings 477,278 1,269 1.08 % 533,129 2,238 1.69 %
Subordinated notes 58,616 880 6.09 % — — — %
Junior subordinated debentures issued to capital trusts 56,571 559 4.01 % 56,333 775 5.53 %
Total interest bearing liabilities 4,116,568 5,051 0.50 % 3,814,785 10,729 1.13 %
Non–interest bearing liabilities
Demand deposits 1,063,268 717,257
Accrued interest payable and other liabilities 58,912 57,702
Stockholders’ equity 697,401 667,588
Total average liabilities and stockholders’ equity $ 5,936,149 $ 5,257,332
Net interest income/spread $ 42,538 3.16 % $ 40,925 3.34 %
Net interest income as a percent of average interest earning assets (1)
3.29 % 3.56 %
(1) Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2) Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3) Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

~~For the Three Months ended March 31, 2021 and 2020~~

The net interest margin was impacted due to PPP lending and ~~excess liquidity~~high level of cash held during the ~~first~~third quarter of 2021. Horizon estimates that the PPP loans increased the net interest margin by 1016 basis points for the ~~first~~third quarter of 2021. This assumes these PPP loans were not included in average interest earning assets or interest income and were primarily funded by the growth in non–interest bearing deposits. In addition, Horizon estimates that the high level of cash held on the balance sheet compressed the net interest margin by 16 basis points for the ~~first~~third quarter of 2021. This assumes that the high level of cash was not included in average interest earning assets or interest income and was excluded from non–interest bearing deposits.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

The following are the average balance sheets for the three months ending (dollars in thousands):


	Average Balance Sheets
	(Dollar Amount in Thousands, Unaudited)
		Three Months Ended						Three Months Ended
		September 30, 2021						September 30, 2020
		Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	Assets
	Interest earning assets
	Federal funds sold	$	310,180	$	119	0.15	%	$	45,307	$	12	0.11	%
	Interest earning deposits	26,352		39		0.59	%	28,428		53		0.74	%
	Investment securities – taxable	1,063,177		4,407		1.64	%	447,762		1,639		1.46	%
	Investment securities – non–taxable (1)	1,108,503		5,911		2.68	%	720,111		4,391		3.07	%
	Loans receivable (2) (3)	3,524,876		40,392		4.56	%	4,010,003		44,051		4.39	%
	Total interest earning assets	6,033,088		50,868		3.46	%	5,251,611		50,146		3.90	%
	Non–interest earning assets
	Cash and due from banks	87,799						94,039
	Allowance for credit losses	(55,703)						(55,271)
	Other assets	442,489						478,312
	Total average assets	$	6,507,673					$	5,768,691
	Liabilities and Stockholders’ Equity
	Interest bearing liabilities
	Interest bearing deposits	$	3,831,632	$	1,808	0.19	%	$	3,334,436	$	3,616	0.43	%
	Borrowings	598,327		1,075		0.71	%	577,447		1,662		1.15	%
	Subordinated notes	58,689		880		5.95	%	58,716		895		6.06	%
	Junior subordinated debentures issued to capital trusts	56,684		561		3.93	%	56,458		576		4.06	%
	Total interest bearing liabilities	4,545,332		4,324		0.38	%	4,027,057		6,749		0.67	%
	Non–interest bearing liabilities
	Demand deposits	1,180,890						996,427
	Accrued interest payable and other liabilities	57,039						76,410
	Stockholders’ equity	724,412						668,797
	Total average liabilities and stockholders’ equity	$	6,507,673					$	5,768,691

	Net interest income/spread			$	46,544	3.08	%			$	43,397	3.23	%
	Net interest income as a percent of average interest earning assets (1)					3.17	%					3.39	%

(1)	Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)	Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)	Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

Net interest income during the nine months ended September 30, 2021 was $131.7 million, an increase of $4.4 million from the $127.3 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 60 basis points to 3.53% for the nine months ended September 30, 2021 from 4.13% for the nine months ended September 30, 2020. Interest income decreased $6.3 million from $152.1 million for the nine months ended September 30, 2020 to $145.9 million for the same period in 2021. Average interest earning assets during the nine months ended September 30, 2021 increased $675.3 million to $5.7 billion compared to $5.0 billion during the nine months ended September 30, 2020. Interest income from acquisition–related purchase accounting adjustments was $2.7 million for the nine months ended September 30, 2021 compared to $4.5 million for the same period of 2020.

Rates paid on interest bearing liabilities decreased 40 basis points for the nine–month period ended September 30, 2021 compared to the same period in 2020. Interest expense decreased $10.7 million when compared to the nine–month period ended September 30, 2020 to $14.2 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 41 basis points while the cost of average borrowings decreased 43 basis points. Average balances of interest bearing deposits increased $393.3 million and average balances of borrowings decreased $66.0 million for the nine–month period ended September 30, 2021 when compared to the same period in 2020.

The net interest margin decreased 28 basis points from 3.48% for the nine–month period ended September 30, 2020 to 3.20% for the same period in 2021. The decrease in the margin for the nine–month period ended September 30, 2021 compared to the same period in 2020 was due to a decrease in the yield of interest earning assets, offset by a decrease in the cost of interest bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.14% for the nine–month period ended September 30, 2021 compared to 3.36% for the same period in 2020.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020


	Average Balance Sheets
	(Dollar Amount in Thousands, Unaudited)
		Nine Months Ended						Nine Months Ended
		September 30, 2021						September 30, 2020
		Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	Assets
	Interest earning assets
	Federal funds sold	$	312,359	$	284	0.12	%	$	44,375	$	125	0.38	%
	Interest earning deposits	27,157		128		0.63	%	25,083		216		1.15	%
	Investment securities – taxable	708,519		8,229		1.55	%	476,735		6,582		1.84	%
	Investment securities – non–taxable (1)	1,040,447		16,790		2.73	%	652,339		12,294		3.19	%
	Loans receivable (2) (3)	3,624,393		120,446		4.46	%	3,839,008		132,927		4.64	%
	Total interest earning assets	5,712,875		145,877		3.53	%	5,037,540		152,144		4.13	%
	Non–interest earning assets
	Cash and due from banks	85,855						85,511
	Allowance for credit losses	(56,885)						(42,864)
	Other assets	455,181						469,509
	Total average assets	$	6,197,026					$	5,549,696
	Liabilities and Stockholders’ Equity
	Interest bearing liabilities
	Interest bearing deposits	$	3,679,970	$	6,204	0.23	%	$	3,286,648	$	15,838	0.64	%
	Borrowings	510,264		3,640		0.95	%	576,288		5,974		1.38	%
	Subordinated debentures	58,653		2,641		6.02	%	21,218		953		6.00	%
	Junior subordinated debentures issued to capital trusts	56,628		1,678		3.96	%	56,398		2,061		4.88	%
	Total interest bearing liabilities	4,305,515		14,163		0.44	%	3,940,552		24,826		0.84	%
	Non–interest bearing liabilities
	Demand deposits	1,128,173						879,840
	Accrued interest payable and other liabilities	53,751						69,026
	Stockholders’ equity	709,587						660,278
	Total average liabilities and stockholders’ equity	$	6,197,026					$	5,549,696
	Net interest income/spread			$	131,714	3.09	%			$	127,318	3.29	%
	Net interest income as a percent of average interest earning assets (1)					3.20	%					3.48	%

(1)	Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)	Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)	Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

Credit Loss Expense

Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio. During the three–month period ended ~~March 31,~~September 30, 2021, a provision expense of ~~$367,000~~$1.1 million was required to reflect a $2.0 million allocation for loans acquired in the Michigan branch acquisition and the nature of our loan portfolios and general characteristics of certain loan pools compared to ~~$8.6~~a provision expense of $2.1 million for the same period of 2020. During the three–month period ended ~~March 31,~~September 30, 2021, commercial loan net recoveries were $25,000, residential mortgage loan net recoveries were $29,000 and consumer loan net charge–offs were $36,000.

During the nine–month period ended September 30, 2021, a provision reversal of $13,000 was required which includes a $2.0 million allocation for loans acquired in the Michigan branch acquisition and the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $17.7 million for the same period of 2020. During the nine–month period ended September 30, 2021, commercial loan net charge–offs were ~~$158,000,~~$179,000, residential mortgage loan net recoveries were ~~$65,000~~$117,000 and consumer ~~loan~~ net charge–offs were ~~$115,000.~~$173,000.

The ACL balance at ~~March 31,~~September 30, 2021 was ~~$57.2~~$56.8 million, or ~~1.56%~~1.55% of total loans compared to an ACL balance of $57.0 million at December 31, 2020 or 1.47% of total loans. The increase in the ACL to total loans ratio was primarily due to a decrease in loans from December 31, 2020, ~~and was primarily driven by allocations for sectors~~including a decrease in PPP loans of ~~loans with potentially higher risk of loss due to the nature and characteristics of these portfolios.~~$116.6 million which do not require a related ACL balance.

As of ~~March 31,~~September 30, 2021, non–performing loans totaled ~~$25.1~~$29.4 million, including approximately $7.3 million acquired in the Michigan branch acquisition, which reflects a ~~1 basis point decrease in non–performing loans to total loans, or a $1.7~~$2.6 million ~~decrease~~increase from $26.8 million in non–performing loans as of December 31, 2020. Non–performing commercial loans ~~decreased~~increased by ~~$1.5~~$1.8 million, non–performing real estate loans ~~decreased~~increased by ~~$78,000~~$647,000 and non–performing consumer loans ~~decreased~~increased by ~~$117,000~~$147,000 at ~~March 31,~~September 30, 2021 compared to December 31, 2020.

The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At ~~March 31,~~September 30, 2021, the Bank modified loans totaling ~~$91.6~~$29.2 million which qualify for treatment under the CARES Act. The following is a summary of loan modifications related to the COVID–19 pandemic by type of loan.


Type of Loan	Type of Loan	#	Net Balance	% of Total Modifications		% of Portfolio		Type of Loan	#	Net Balance	% of Total Modifications		% of Portfolio
Commercial	Commercial	36	$89.4	97.6	%	4.1	%	Commercial	7	$28.3	96.9	%	1.3	%
Mortgage (Retained Only)	Mortgage (Retained Only)	13	$1.4	1.5	%	0.2	%	Mortgage (Retained Only)	4	$0.8	2.8	%	0.1	%
Indirect Auto	Indirect Auto	2	$0.0	—	%	—	%	Indirect Auto	2	$0.0	0.0	%	0.0	%
Consumer Direct	Consumer Direct	5	$0.7	0.8	%	1.1	%	Consumer Direct	2	$0.1	0.3	%	0.1	%
Consumer Revolving	Consumer Revolving	2	$0.1	0.1	%	—	%	Consumer Revolving	0	$0.0	0.0	%	0.0	%
Total	Total	58	$91.6	100.0	%	2.5	%	Total	15	$29.2	100.0	%	0.8	%

Mortgage (Serviced Only)	Mortgage (Serviced Only)	56						Mortgage (Serviced Only)	14

Other Real Estate Owned (“OREO”) and repossessed assets totaled ~~$1.7~~$3.0 million at ~~March 31,~~September 30, 2021 compared to $1.9 million at December 31, 2020. The increase was primarily due to several former branch locations totaling $1.8 million being moved to OREO during the third quarter after being closed.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

Non–interest Income

The following is a summary of changes in non–interest income for the three months ending ~~March 31,~~September 30, 2021 and 2020 (table dollar amounts in thousands):


		Three Months Ended									Three Months Ended
		March 31,				Amount		Percent			September 30,				Amount		Percent
		2021		2020		Change		Change			2021		2020		Change		Change
Non–interest Income	Non–interest Income									Non–interest Income
Service charges on deposit accounts	Service charges on deposit accounts	$	2,234	$	2,446	$	(212)	(8.7)	%	Service charges on deposit accounts	$	2,291	$	2,154	$	137	6.4	%
Wire transfer fees	Wire transfer fees	255		171		84		49.1	%	Wire transfer fees	210		298		(88)		(29.5)	%
Interchange fees	Interchange fees	2,340		1,896		444		23.4	%	Interchange fees	2,587		2,438		149		6.1	%
Fiduciary activities	Fiduciary activities	1,743		2,528		(785)		(31.1)	%	Fiduciary activities	2,124		2,105		19		0.9	%
Gain on sale of investment securities	Gain on sale of investment securities	914		339		575		169.6	%	Gain on sale of investment securities	—		1,088		(1,088)		(100.0)	%
Gain on sale of mortgage loans	Gain on sale of mortgage loans	5,296		3,473		1,823		52.5	%	Gain on sale of mortgage loans	4,088		8,813		(4,725)		(53.6)	%
Mortgage servicing net of impairment	Mortgage servicing net of impairment	213		25		188		752.0	%	Mortgage servicing net of impairment	336		(1,308)		1,644		(125.7)	%
Increase in cash surrender value of bank owned life insurance	Increase in cash surrender value of bank owned life insurance	511		554		(43)		(7.8)	%	Increase in cash surrender value of bank owned life insurance	534		566		(32)		(5.7)	%
Death benefit on bank owned life insurance	Death benefit on bank owned life insurance	—		233		(233)		0.0	%	Death benefit on bank owned life insurance	517		31		486		0.0	%
Other income	Other income	367		398		(31)		(7.8)	%	Other income	3,357		515		2,842		551.8	%
Total non–interest income	Total non–interest income	$	13,873	$	12,063	$	1,810	15.0	%	Total non–interest income	$	16,044	$	16,700	$	(656)	(3.9)	%

Total non–interest income was ~~$1.8 million higher~~$656,000 lower during the ~~first~~third quarter of 2021 compared to the same period of 2020. Residential mortgage loan activity during the ~~first~~third quarter of 2021 generated ~~$5.3~~$4.1 million of income from the gain on sale of mortgage loans, updown from ~~$3.5~~$8.8 million for the same period in 2020 due to a ~~higher~~lower volume of loans sold and ~~an increase~~a decrease in the percentage gain on loans sold. Mortgage servicing ~~rights,~~income, net of impairment, increased ~~$188,000~~$1.6 million during the ~~first quarter of 2021 compared to the same period of 2020. Fiduciary income decreased $785,000 during the first~~third quarter of 2021 compared to the same period of 2020 due to an impairment charge of $1.5 million recorded during the ~~timing~~third quarter of 2020 offset by a reversal of $299,000 in impairment charges during the ~~recognition~~third quarter of 2021. Other income increased $2.8 million during the third quarter of 2021 primarily due to the gain on sale of ESOP ~~related fee income. Service~~trustee accounts totaling $2.3 million and the recovery of $876,000 from an acquired charged–off loan. Interchange fees, service charges on deposit accounts and death benefit on bank owned life insurance ~~and other income decreased $212,000, $233,000, and $31,000,~~increased $149,000, $137,000, $486,000, respectively, when comparing the ~~first~~third quarter of 2021 to the same period of 2020.

~~Non–interest Expense~~

~~The following is a summary of changes in non–interest expense for the three months ending March 31, 2021 and 2020 (table dollar amounts in thousands):~~

Three Months Ended
March 31, March 31, Amount Percent
Non–interest Expense 2021 2020 Change Change
Salaries and employee benefits $ 16,871 $ 16,591 $ 280 1.7 %
Net occupancy expenses 3,318 3,252 66 2.0 %
Data processing 2,376 2,405 (29) (1.2) %
Professional fees 544 536 8 1.5 %
Outside services and consultants 1,702 1,915 (213) (11.1) %
Loan expense 2,822 2,099 723 34.4 %
FDIC deposit insurance 800 150 650 433.3 %
Other losses 283 120 163 135.8 %
Other expenses 3,456 4,081 (625) (15.3) %
Total non–interest expense $ 32,172 $ 31,149 $ 1,023 3.3 %
Annualized Non–interest Exp. to Avg. Assets 2.20 % 2.38 %

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

The following is a summary of changes in non–interest income for the nine months ending September 30, 2021 and 2020 (table dollar amounts in thousands):


	Nine Months Ended
	September 30,				Amount		Percent
	2021		2020		Change		Change
Non–interest Income
Service charges on deposit accounts	$	6,682	$	6,488	$	194	3.0	%
Wire transfer fees	687		699		(12)		(1.7)	%
Interchange fees	7,819		6,661		1,158		17.4	%
Fiduciary activities	5,828		6,398		(570)		(8.9)	%
Gain on sale of investment securities	914		1,675		(761)		(45.4)	%
Gain on sale of mortgage loans	14,996		18,906		(3,910)		(20.7)	%
Mortgage servicing net of impairment	2,052		(4,043)		6,095		(150.8)	%
Increase in cash surrender value of bank owned life insurance	1,547		1,677		(130)		(7.8)	%
Death benefit on bank owned life insurance	783		264		519		196.6	%
Other income	3,816		1,163		2,653		228.1	%
Total non–interest income	$	45,124	$	39,888	$	5,236	13.1	%

Total non–interest income was $5.2 million higher for the nine–month period ended September 30, 2021 compared to the same period of 2020. Residential mortgage loan activity during the nine–month period ended September 30, 2021 generated $15.0 million of income from the gain on sale of mortgage loans, down from $18.9 million for the same period in 2020 due to a decrease in the volume of loans sold. Mortgage servicing income, net of impairment, increased $6.1 million during the nine–month period ended September 30, 2021 compared to the same period of 2020 due to the reversal of $2.1 million in impairment charges during the nine–month period ended September 30, 2021 compared to impairment charges of $4.7 million during the same period in 2020. Other income increased $2.7 million during the nine–month period ended September 30, 2021 compared to the same period in 2020 primarily due to the gain on sale of ESOP trustee accounts totaling $2.3 million. Interchange fees increased $1.2 million during the nine–month period ended September 30, 2021 compared to the same period of 2020.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

Non–interest Expense

The following is a summary of changes in non–interest expense for the three months ending September 30, 2021 and 2020 (table dollar amounts in thousands):


	Three Months Ended
	September 30,								September 30,
	2021								2020								Adjusted
	Actual			Acquisition Expenses		Adjusted			Actual			Acquisition Expenses		Adjusted			Amount Change		Percent Change
Non–interest Expense
Salaries and employee benefits	$	18,901		$	(25)	$	18,876		$	18,832		$	—	$	18,832		$	44	0.2	%
Net occupancy expenses	2,935			(13)		2,922			3,107			—		3,107			(185)		(6.0)	%
Data processing	2,526			(17)		2,509			2,237			—		2,237			272		12.2	%
Professional fees	522			(53)		469			688			—		688			(219)		(31.8)	%
Outside services and consultants	2,330			(401)		1,929			1,561			—		1,561			368		23.6	%
Loan expense	2,645			—		2,645			2,876			—		2,876			(231)		(8.0)	%
FDIC deposit insurance	279			—		279			570			—		570			(291)		(51.1)	%
Other losses	69			(1)		68			114			—		114			(46)		(40.4)	%
Other expenses	4,142			(289)		3,853			3,422			—		3,422			431		12.6	%
Total non–interest expense	$	34,349		$	(799)	$	33,550		$	33,407		$	—	$	33,407		$	143	0.4	%
Annualized Non–interest Exp. to Avg. Assets	2.09		%			2.05		%	2.30		%			2.30		%

Total non–interest expense was ~~$1.0 million~~$942,000 higher for the ~~first~~third quarter of 2021 when compared to the ~~first~~third quarter of 2020. Increases in ~~loan~~outside services and consultants, other expense ~~FDIC deposit insurance~~ and ~~salaries and employee benefits~~data processing were offset in part by ~~a decrease~~decreases in ~~other~~FDIC deposit insurance and loan expense. Excluding acquisition expenses, total non–interest expense ~~and outside services and consultants expense.~~increased by $143,000 in the third quarter of 2021 when compared to the same period in 2020.

Annualized non–interest expense as a percent of average assets ~~were 2.20%~~was 2.09% and ~~2.38%~~2.30% for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.05% and 2.30% for the three months ended September 30, 2021 and 2020, respectively.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

The following is a summary of changes in non–interest expense for the nine months ending September 30, 2021 and 2020 (table dollar amounts in thousands):


	Nine Months Ended
	September 30,								September 30,
	2021								2020								Adjusted
	Actual			Acquisition Expenses		Adjusted			Actual			Acquisition Expenses		Adjusted			Amount Change		Percent Change
Non–interest Expense
Salaries and employee benefits	$	53,502		$	(25)	$	53,477		$	51,052		$	—	$	51,052		$	2,425	4.8	%
Net occupancy expenses	9,337			(13)		9,324			9,549			—		9,549			(225)		(2.4)	%
Data processing	7,290			(17)		7,273			7,074			—		7,074			199		2.8	%
Professional fees	1,654			(104)		1,550			1,742			—		1,742			(192)		(11.0)	%
Outside services and consultants	6,252			(588)		5,664			5,235			—		5,235			429		8.2	%
Loan expense	8,574			—		8,574			7,667			—		7,667			907		11.8	%
FDIC deposit insurance	1,579			—		1,579			955			—		955			624		65.3	%
Other losses	358			(1)		357			427			—		427			(70)		(16.4)	%
Other expenses	11,363			(293)		11,070			11,287			—		11,287			(217)		(1.9)	%
Total non–interest expense	$	99,909		$	(1,041)	$	98,868		$	94,988		$	—	$	94,988		$	3,880	4.1	%
Annualized Non–interest Exp. to Avg. Assets	2.16		%			2.13		%	2.29		%			2.29		%

Total non–interest expense was $4.9 million higher for the nine–month period ended September 30, 2021 compared to the same period of 2020. Increases in salaries and employee benefits, outside services and consultants, loan expense, FDIC insurance expense and data processing were offset in part by a decrease in net occupancy expense. Excluding acquisition expenses, total non–interest expense increased $3.9 million for the nine–month period ended September 30, 2021 compared to the same period of 2020.

Annualized non–interest expense as a percent of average assets was 2.16% and 2.29% for the nine–month period ended September 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.13% and 2.29% for the nine–month period ended September 30, 2021 and 2020, respectively.

Income Taxes

Income tax expense totaled ~~$3.5~~$4.1 million for the ~~first~~third quarter of 2021, a decrease of $270,000 when compared to the third quarter of 2020.

Income tax expense totaled $11.3 million for the nine–month period ended September 30, 2021, an increase of ~~$1.9~~$3.4 million when compared to the ~~first quarter~~same period of 2020. The increase in income tax expense ~~in the first quarter of 2021 compared to the first quarter of 2020~~ was primarily due to aan increase in income before taxes of ~~$10.6~~$22.4 million.

Liquidity

The Bank maintains a stable base of core deposits provided by long–standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At ~~March 31,~~September 30, 2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon,

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020

the Bank had approximately ~~$946.1~~$651.7 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $1.04 billion at December 31, 2020. The Bank had approximately ~~$772.8 million~~$1.7 billion of unpledged investment securities at ~~March 31,~~September 30, 2021 compared to $632.4 million at December 31, 2020.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at ~~March 31,~~September 30, 2021. Stockholders’ equity totaled ~~$689.4~~$708.5 million as of ~~March 31,~~September 30, 2021, compared to $692.2 million as of December 31, 2020. For the ~~three~~nine months ended ~~March 31,~~September 30, 2021, the ratio of average stockholders’ equity to average assets was ~~11.75%~~11.45% compared to 11.82% for the twelve months ended December 31, 2020. The ~~decrease~~increase in stockholders’ equity during the period was the result of net income recorded during the period offset in part by a decrease in accumulated other comprehensive income, stock repurchases and dividends ~~declared, offset by net income recorded during the period.~~declared.

Horizon ~~paid~~declared common stock dividends in the amount of ~~$0.12~~$0.41 per share during the first ~~three~~nine months of 2021 and ~~$0.12~~$0.36 per share for the same period of 2020. The dividend payout ratio (dividends as a percent of basic earnings per share) was ~~26.1%~~27.3% and ~~46.2%~~34.0% for the first ~~three~~nine months of 2021 and 2020, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2020.

~~Table of Contents~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

~~For the Three Months ended March 31, 2021 and 2020~~

Use of Non–GAAP Financial Measures

Certain information set forth in this quarterly report on Form 10–Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non–GAAP financial measures relating to net income, diluted earnings per share, net interest margin, the allowance for credit losses, tangible stockholders’ equity, tangible book value per share, the return on average assets, the return on average common equity, and pre–tax pre–provision net income. In each case, we have identified special circumstances that we consider to be adjustments and have excluded them, to show the impact of such events as acquisition–related purchase accounting adjustments, among others we have identified in our reconciliations. Horizon believes that these non–GAAP financial measures are helpful to investors and provide a greater understanding of our business and financial results without giving effect to the purchase accounting impacts and other adjustments. 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. See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.

Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Net income as reported $ 20,422 $ 21,893 $ 20,312 $ 14,639 $ 11,655
(Gain)/loss on sale of investment
securities (914) (2,622) (1,088) (248) (339)
Tax effect 192 551 228 52 71
Net income excluding (gain)/loss on sale of investment securities 19,700 19,822 19,452 14,443 11,387
Death benefit on bank owned life insurance (“BOLI”) — — (31) — (233)
Net income excluding death benefit on BOLI 19,700 19,822 19,421 14,443 11,154
Adjusted net income $ 19,700 $ 19,822 $ 19,421 $ 14,443 $ 11,154

Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Diluted earnings per share (“EPS”) as reported $ 0.46 $ 0.50 $ 0.46 $ 0.33 $ 0.26
(Gain)/loss on sale of investment securities (0.02) (0.06) (0.02) (0.01) (0.01)
Tax effect — 0.01 0.01 — —
Diluted EPS excluding (gain)/loss on investment securities 0.44 0.45 0.45 0.32 0.25
Death benefit on BOLI — — — — (0.01)
Diluted EPS excluding death benefit on BOLI 0.44 0.45 0.45 0.32 0.24
Adjusted Diluted EPS $ 0.44 $ 0.45 $ 0.45 $ 0.32 $ 0.24

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Pre–tax income $ 23,872 $ 23,860 $ 24,638 $ 16,632 $ 13,239
Credit loss expense 367 3,042 2,052 7,057 8,600
Pre–tax, pre–provision net income $ 24,239 $ 26,902 $ 26,690 $ 23,689 $ 21,839
Pre–tax, pre–provision net income $ 24,239 $ 26,902 $ 26,690 $ 23,689 $ 21,839
(Gain)/loss on sale of investment securities (914) (2,622) (1,088) (248) (339)
Death benefit on bank owned life insurance — — (31) — (233)
Adjusted pre–tax, pre–provision net income $ 23,325 $ 24,280 $ 25,571 $ 23,441 $ 21,267

Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Net interest income as reported $ 42,538 $ 43,622 $ 43,397 $ 42,996 $ 40,925
Average interest earning assets 5,439,634 5,365,888 5,251,611 5,112,636 4,746,202
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 3.29 % 3.34 % 3.39 % 3.47 % 3.56 %
Net interest income as reported $ 42,538 $ 43,622 $ 43,397 $ 42,996 $ 40,925
Acquisition–related purchase accounting adjustments
(“PAUs”) (1,579) (2,461) (1,488) (1,553) (1,434)
Prepayment penalties on borrowings — 3,804 — — —
Adjusted net interest income $ 40,959 $ 44,965 $ 41,909 $ 41,443 $ 39,491
Adjusted net interest margin 3.17 % 3.44 % 3.27 % 3.35 % 3.44 %

Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Total stockholders’ equity $ 689,379 $ 692,216 $ 670,293 $ 652,206 $ 630,842
Less: Intangible assets 173,296 174,193 175,107 176,020 176,961
Total tangible stockholders’ equity $ 516,083 $ 518,023 $ 495,186 $ 476,186 $ 453,881
Common shares outstanding 43,949,189 43,880,562 43,874,353 43,821,878 43,763,623
Book value per common share $ 15.69 $ 15.78 $ 15.28 $ 14.88 $ 14.41
Tangible book value per common
share $ 11.74 $ 11.81 $ 11.29 $ 10.87 $ 10.37


Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
	Three Months Ended										Nine Months Ended
	September 30,		June 30,		March 31,		December 31,		September 30,		September 30,		September 30,
	2021		2021		2021		2020		2020		2021		2020
Net income as reported	$	23,071	$	22,173	$	20,422	$	21,893	$	20,312	$	65,666	$	46,606
Acquisition expenses	799		242		—		—		—		1,041		—
Tax effect	(166)		(51)		—		—		—		(217)		—
Net income excluding acquisition expenses	23,704		22,364		20,422		21,893		20,312		66,490		46,606
Credit loss expense acquired loans	2,034		—		—		—		—		2,034		—
Tax effect	(427)		—		—		—		—		(427)		—
Net income excluding credit loss expense acquired loans	25,311		22,364		20,422		21,893		20,312		68,097		46,606
Gain on sale of ESOP trustee accounts	(2,329)		—		—		—		—		(2,329)		—
Tax effect	489		—		—		—		—		489		—
Net income excluding gain on sale of ESOP trustee accounts	23,471		22,364		20,422		21,893		20,312		66,257		46,606
(Gain)/loss on sale of investment securities	—		—		(914)		(2,622)		(1,088)		(914)		(1,675)
Tax effect	—		—		192		551		228		192		352
Net income excluding (gain)/loss on sale of investment securities	23,471		22,364		19,700		19,822		19,452		65,535		45,283
Death benefit on bank owned life insurance (“BOLI”)	(517)		(266)		—		—		(31)		(783)		(264)
Net income excluding death benefit on BOLI	22,954		22,098		19,700		19,822		19,421		64,752		45,019
Prepayment penalties on borrowings	—		125		—		3,804		—		125		—
Tax effect	—		(26)		—		(799)		—		(26)		—
Net income excluding prepayment penalties on borrowings	22,954		22,197		19,700		22,827		19,421		64,851		45,019
Adjusted net income	$	22,954	$	22,197	$	19,700	$	22,827	$	19,421	$	64,851	$	45,019

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Non–interest expense as reported $ 32,172 $ 36,453 $ 33,407 $ 30,432 $ 31,149
Net interest income as reported 42,538 43,622 43,397 42,996 40,925
Non–interest income as reported $ 13,873 $ 19,733 $ 16,700 $ 11,125 $ 12,063
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 57.03 % 57.54 % 55.59 % 56.23 % 58.79 %
Non–interest expense as reported $ 32,172 $ 36,453 $ 33,407 $ 30,432 $ 31,149
Net interest income as reported 42,538 43,622 43,397 42,996 40,925
Prepayment penalties on borrowings — 3,804 — — —
Net interest income excluding prepayment penalties on borrowings 42,538 47,426 43,397 42,996 40,925
Non–interest income as reported 13,873 19,733 16,700 11,125 12,063
(Gain)/loss on sale of investment securities (914) (2,622) (1,088) (248) (339)
Death benefit on bank owned life insurance ("BOLI") — — (31) — (233)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI $ 12,959 $ 17,111 $ 15,581 $ 10,877 $ 11,491
Adjusted efficiency ratio 57.97 % 56.48 % 56.64 % 56.49 % 59.43 %

Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Average assets $ 5,936,149 $ 5,864,086 $ 5,768,691 $ 5,620,695 $ 5,257,332
Return on average assets ("ROAA") as reported 1.40 % 1.49 % 1.40 % 1.05 % 0.89 %
(Gain)/loss on sale of investment securities (0.06) (0.18) (0.08) (0.02) (0.03)
Tax effect 0.01 0.04 0.02 — 0.01
ROAA excluding (gain)/loss on sale of investment securities 1.35 1.35 1.34 1.03 0.87
Death benefit on bank owned life insurance ("BOLI") — — — — (0.02)
ROAA excluding death benefit on BOLI 1.35 1.35 1.34 1.03 0.85
Adjusted ROAA 1.35 % 1.35 % 1.34 % 1.03 % 0.85 %


Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
	Three Months Ended										Nine Months Ended
	September 30,		June 30,		March 31,		December 31,		September 30,		September 30,		September 30,
	2021		2021		2021		2020		2020		2021		2020
Diluted earnings per share (“EPS”) as reported	$	0.52	$	0.50	$	0.46	$	0.50	$	0.46	$	1.49	$	1.06
Acquisition expenses	0.02		0.01		—		—		—		0.02		—
Tax effect	—		—		—		—		—		—		—
Diluted EPS excluding acquisition expenses	0.54		0.51		0.46		0.50		0.46		1.51		1.06
Credit loss expense acquired loans	0.05		—		—		—		—		0.05		—
Tax effect	(0.01)		—		—		—		—		(0.01)		—
Diluted EPS excluding credit loss expense acquired loans	0.58		0.51		0.46		0.50		0.46		1.55		1.06
Gain on sale of ESOP trustee accounts	(0.05)		—		—		—		—		(0.05)		—
Tax effect	0.01		—		—		—		—		0.01		—
Diluted EPS excluding gain on sale of ESOP trustee accounts	0.54		0.51		0.46		0.50		0.46		1.51		1.06
(Gain)/loss on sale of investment securities	—		—		(0.02)		(0.06)		(0.02)		(0.02)		(0.04)
Tax effect	—		—		—		0.01		0.01		—		0.01
Diluted EPS excluding (gain)/loss on investment securities	0.54		0.51		0.44		0.45		0.45		1.49		1.03
Death benefit on BOLI	(0.02)		(0.01)		—		—		—		(0.03)		(0.01)
Diluted EPS excluding death benefit on BOLI	0.52		0.50		0.44		0.45		0.45		1.46		1.02
Prepayment penalties on borrowings	—		—		—		0.09		—		—		—
Tax effect	—		—		—		(0.02)		—		—		—
Diluted EPS excluding prepayment penalties on borrowings	0.52		0.50		0.44		0.52		0.45		1.46		1.02
Adjusted Diluted EPS	$	0.52	$	0.50	$	0.44	$	0.52	$	0.45	$	1.46	$	1.02

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended ~~March 31,~~September 30, 2021 and 2020

Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
Average common equity $ 697,401 $ 680,857 $ 668,797 $ 649,490 $ 667,588
Return on average common equity ("ROACE") as reported 11.88 % 12.79 % 12.08 % 9.07 % 7.02 %
(Gain)/loss on sale of investment securities (0.53) (1.53) (0.65) (0.15) (0.20)
Tax effect 0.11 0.32 0.14 0.03 0.04
ROACE excluding (gain)/loss on sale of investment securities 11.46 11.58 11.57 8.95 6.86
Death benefit on bank owned life insurance ("BOLI") — — (0.02) — (0.14)
ROACE excluding death benefit on BOLI 11.46 11.58 11.55 8.95 6.72
Adjusted ROACE 11.46 % 11.58 % 11.55 % 8.95 % 6.72 %


Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
	Three Months Ended										Nine Months Ended
	September 30,		June 30,		March 31,		December 31,		September 30,		September 30,		September 30,
	2021		2021		2021		2020		2020		2021		2020
Pre–tax income	$	27,127	$	25,943	$	23,872	$	23,860	$	24,638	$	76,942	$	54,509
Credit loss expense (reversal)	1,112		(1,492)		367		3,042		2,052		(13)		17,709
Pre–tax, pre–provision net income	$	28,239	$	24,451	$	24,239	$	26,902	$	26,690	$	76,929	$	72,218
Pre–tax, pre–provision net income	$	28,239	$	24,451	$	24,239	$	26,902	$	26,690	$	76,929	$	72,218
Acquisition expenses	799		242		—		—		—		1,041		—
Gain on sale of ESOP trustee accounts	(2,329)		—		—		—		—		(2,329)		—
(Gain)/loss on sale of investment securities	—		—		(914)		(2,622)		(1,088)		(914)		(1,675)
Death benefit on bank owned life insurance	(517)		(266)		—		—		(31)		(783)		(264)
Prepayment penalties on borrowings	—		125		—		3,804		—		125		—
Adjusted pre–tax, pre–provision net income	$	26,192	$	24,552	$	23,325	$	28,084	$	25,571	$	74,069	$	70,279


Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
	Three Months Ended															Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2021			2021			2021			2020			2020			2021			2020
Net interest income as reported	$	46,544		$	42,632		$	42,538		$	43,622		$	43,397		$	131,714		$	127,318
Average interest earning assets	6,033,088			5,659,384			5,439,634			5,365,888			5,251,611			5,712,875			5,037,540
Net interest income as a percentage of average interest earning assets (“Net Interest Margin”)	3.17		%	3.14		%	3.29		%	3.34		%	3.39		%	3.20		%	3.48		%
Net interest income as reported	$	46,544		$	42,632		$	42,538		$	43,622		$	43,397		$	131,714		$	127,318
Acquisition–related purchase accounting adjustments (“PAUs”)	(875)			(230)			(1,579)			(2,461)			(1,488)			(2,684)			(4,475)
Prepayment penalties on borrowings	—			125			—			3,804			—			125			—
Adjusted net interest income	$	45,669		$	42,527		$	40,959		$	44,965		$	41,909		$	129,155		$	122,843
Adjusted net interest margin	3.12		%	3.13		%	3.17		%	3.44		%	3.27		%	3.14		%	3.36		%

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020


Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
	September 30,		June 30,		March 31,		December 31,		September 30,
	2021		2021		2021		2020		2020
Total stockholders’ equity	$	708,542	$	710,374	$	689,379	$	692,216	$	670,293
Less: Intangible assets	183,938		172,398		173,296		174,193		175,107
Total tangible stockholders’ equity	$	524,604	$	537,976	$	516,083	$	518,023	$	495,186
Common shares outstanding	43,520,694		43,950,720		43,949,189		43,880,562		43,874,353
Book value per common share	$	16.28	$	16.16	$	15.69	$	15.78	$	15.28
Tangible book value per common share	$	12.05	$	12.24	$	11.74	$	11.81	$	11.29

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020


Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
	Three Months Ended															Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2021			2021			2021			2020			2020			2021			2020
Non–interest expense as reported	$	34,349		$	33,388		$	32,172		$	36,453		$	33,407		$	99,909		$	94,988
Net interest income as reported	46,544			42,632			42,538			43,622			43,397			131,714			127,318
Non–interest income as reported	$	16,044		$	15,207		$	13,873		$	19,733		$	16,700		$	45,124		$	39,888
Non–interest expense/(Net interest income + Non–interest income) ("Efficiency Ratio")	54.88		%	57.73		%	57.03		%	57.54		%	55.59		%	56.50		%	56.81		%

Non–interest expense as reported	$	34,349		$	33,388		$	32,172		$	36,453		$	33,407		$	99,909		$	94,988
Acquisition expenses	(799)			(242)			—			—			—			(1,041)			—
Non–interest expense excluding acquisition expenses	33,550			33,146			32,172			36,453			33,407			98,868			94,988
Net interest income as reported	46,544			42,632			42,538			43,622			43,397			131,714			127,318
Prepayment penalties on borrowings	—			125			—			3,804			—			125			—
Net interest income excluding prepayment penalties on borrowings	46,544			42,757			42,538			47,426			43,397			131,839			127,318
Non–interest income as reported	16,044			15,207			13,873			19,733			16,700			45,124			39,888
Gain on sale of ESOP trustee accounts	(2,329)			—			—			—			—			(2,329)			—
(Gain)/loss on sale of investment securities	—			—			(914)			(2,622)			(1,088)			(914)			(1,675)
Death benefit on bank owned life insurance ("BOLI")	(517)			(266)			—			—			(31)			(783)			(264)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI	$	13,198		$	14,941		$	12,959		$	17,111		$	15,581		$	41,098		$	37,949
Adjusted efficiency ratio	56.16		%	57.45		%	57.97		%	56.48		%	56.64		%	57.17		%	57.48		%

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020


Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
	Three Months Ended															Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2021			2021			2021			2020			2020			2021			2020
Average assets	$	6,507,673		$	6,142,507		$	5,936,149		$	5,864,086		$	5,768,691		$	6,197,026		$	5,549,696
Return on average assets ("ROAA") as reported	1.41		%	1.45		%	1.40		%	1.49		%	1.40		%	1.42		%	1.12		%
Acquisition expenses	0.05			0.02			—			—			—			0.02			—
Tax effect	(0.01)			—			—			—			—			—			—
ROAA excluding acquisition expenses	1.45			1.47			1.40			1.49			1.40			1.44			1.12
Credit loss expense acquired loans	0.12			—			—			—			—			0.04			—
Tax effect	(0.03)			—			—			—			—			(0.01)			—
ROAA excluding credit loss expense acquired loans	1.54			1.47			1.40			1.49			1.40			1.47			1.12
Gain on sale of ESOP trustee accounts	(0.14)			—			—			—			—			(0.05)			—
Tax effect	0.03			—			—			—			—			0.01			—
ROAA excluding gain on sale of ESOP trustee accounts	1.43			1.47			1.40			1.49			1.40			1.43			1.12
(Gain)/loss on sale of investment securities	—			—			(0.06)			(0.18)			(0.08)			(0.02)			(0.04)
Tax effect	—			—			0.01			0.04			0.02			—			0.01
ROAA excluding (gain)/loss on sale of investment securities	1.43			1.47			1.35			1.35			1.34			1.41			1.09
Death benefit on bank owned life insurance ("BOLI")	(0.03)			(0.02)			—			—			—			(0.02)			(0.01)
ROAA excluding death benefit on BOLI	1.40			1.45			1.35			1.35			1.34			1.39			1.08
Prepayment penalties on borrowings	—			0.01			—			0.26			—			—			—
Tax effect	—			—			—			(0.05)			—			—			—
ROAA excluding prepayment penalties on borrowings	1.40			1.46			1.35			1.56			1.34			1.39			1.08
Adjusted ROAA	1.40		%	1.46		%	1.35		%	1.56		%	1.34		%	1.39		%	1.08		%

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2021 and 2020


Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
	Three Months Ended															Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2021			2021			2021			2020			2020			2021			2020
Average common equity	$	724,412		$	706,652		$	697,401		$	680,857		$	668,797		$	709,587		$	660,278
Return on average common equity ("ROACE") as reported	12.64		%	12.59		%	11.88		%	12.79		%	12.08		%	12.37		%	9.43		%
Acquisition expenses	0.44			0.14			—			—			—			0.20			—
Tax effect	(0.09)			(0.03)			—			—			—			(0.04)			—
ROACE excluding acquisition expenses	12.99			12.70			11.88			12.79			12.08			12.53			9.43
Credit loss expense acquired loans	1.11			—			—			—			—			0.38			—
Tax effect	(0.23)			—			—			—			—			(0.08)			—
ROACE excluding credit loss expense acquired loans	13.87			12.70			11.88			12.79			12.08			12.83			9.43
Gain on sale of ESOP trustee accounts	(1.28)			—			—			—			—			(0.44)			—
Tax effect	0.27			—			—			—			—			0.09			—
ROACE excluding gain on sale of ESOP trustee accounts	12.86			12.70			11.88			12.79			12.08			12.48			9.43
(Gain)/loss on sale of investment securities	—			—			(0.53)			(1.53)			(0.65)			(0.17)			(0.34)
Tax effect	—			—			0.11			0.32			0.14			0.04			0.07
ROACE excluding (gain)/loss on sale of investment securities	12.86			12.70			11.46			11.58			11.57			12.35			9.16
Death benefit on bank owned life insurance ("BOLI")	(0.29)			(0.15)			—			—			(0.02)			(0.15)			(0.05)
ROACE excluding death benefit on BOLI	12.57			12.55			11.46			11.58			11.55			12.20			9.11
Prepayment penalties on borrowings	—			0.07			—			2.22			—			0.02			—
Tax effect	—			(0.01)			—			(0.47)			—			—			—
ROACE excluding prepayment penalties on borrowings	12.57			12.61			11.46			13.33			11.55			12.22			9.11
Adjusted ROACE	12.57		%	12.61		%	11.46		%	13.33		%	11.55		%	12.22		%	9.11		%

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HORIZON BANCORP, INC. AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2020 Annual Report on Form 10–K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2020 Annual Report on Form 10–K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of disclosure controls and procedures as of ~~March 31,~~September 30, 2021, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a–15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). 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 under the Exchange Act is recorded, processed, summarized and reported within the time 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.

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 ~~March 31,~~September 30, 2021, there have been 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.

5872

HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

ITEM 1. 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 1A. RISK FACTORS

There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form 10–K for the fiscal year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Unregistered Sales of Equity Securities: Not Applicable

(b)Use of Proceeds: Not Applicable

(c)Repurchase of Our Equity ~~Securities: Not Applicable~~Securities

The following table presents information relating to our purchases of equity securities during the three months ended September 30, 2021.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as part of Publicly announced Plans or Programs (1)	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
July 1–31, 2021	—	$	—	373,323	1,876,677
August 1–31, 2021	275,894	17.71		649,217	1,600,783
September 1–30, 2021	154,132	17.65		803,349	1,446,651
Total	430,026	$	17.69	803,349	1,446,651

(1) On July 16, 2019, the Board of Directors authorized a stock repurchase program for up to 2,250,000 shares of Horizon common stock, without par value. Horizon announced the program publicly on July 17, 2019. The program will continue until otherwise modified, suspended or terminated by the Board of Directors in its sole discretion and without notice.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

5973

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

ITEM 6. EXHIBITS

(a) Exhibits


Exhibit No.	Description	Location
31.1	Certification of Craig M. Dwight	Attached
31.2	Certification of Mark E. Secor	Attached
32	Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached
101	Inline Interactive Data Files	Attached
104	The cover page from the Company’s Quarterly Report on Form 10–Q for the quarter ended ~~March 31,~~September 30, 2021, has been formatted in Inline XBRL	Within the Inline XBRL document

6074

Table of Contents

SIGNATURES

Pursuant to the requirements 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.

~~April 30,~~November 8, 2021						/s/ Craig M. Dwight
Date						Craig M. Dwight
						Chief Executive Officer

~~April 30,~~November 8, 2021						/s/ Mark E. Secor
Date						Mark E. Secor
						Chief Financial Officer

6175


	March 31, 2021		December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	529,336	$	249,711
Interest earning time deposits	7,983		8,965
Investment securities, available for sale	1,262,175		1,134,025
Investment securities, held to maturity (fair value of $170,949 and $179,990)	161,650		168,676
Loans held for sale	7,798		13,538
Loans, net of allowance for credit losses of $57,186 and $57,027	3,607,250		3,810,356
Premises and equipment, net	92,109		92,416
Federal Home Loan Bank stock	23,023		23,023
Goodwill	151,238		151,238
Other intangible assets	22,058		22,955
Interest receivable	20,951		21,396
Cash value of life insurance	97,262		96,751
Other assets	72,695		93,564
Total assets	$	6,055,528	$	5,886,614
Liabilities
Deposits
Non–interest bearing	$	1,133,412	$	1,053,242
Interest bearing	3,588,404		3,477,891
Total deposits	4,721,816		4,531,133
Borrowings	481,488		475,000
Subordinated notes	58,640		58,603
Junior subordinated debentures issued to capital trusts	56,604		56,548
Interest payable	1,772		2,712
Other liabilities	45,829		70,402
Total liabilities	5,366,149		5,194,398
Commitments and contingent liabilities	0		0
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares	0		0
Common stock, no par value, Authorized 99,000,000 shares
Issued 43,974,258 and 43,905,631 shares, Outstanding 43,949,189 and 43,880,562 shares	0		0
Additional paid-in capital	362,613		362,945
Retained earnings	316,080		301,419
Accumulated other comprehensive income	10,686		27,852
Total stockholders’ equity	689,379		692,216
Total liabilities and stockholders’ equity	$	6,055,528	$	5,886,614


	Three Months Ended March 31, 2020
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	11,996	$	923	$	1,077	$	3,671	$	17,667
Impact of adopting ASC 326	13,618		4,048		0		4,911		22,577
Provision for credit losses on loans	6,916		700		(22)		1,006		8,600
Charge–offs	(69)		(26)		0		(618)		(713)
Recoveries	89		9		0		211		309
Balance, end of period	$	32,550	$	5,654	$	1,055	$	9,181	$	48,440


Allowance for	December 31,			Net Reserve Build		March 31,
Credit Losses	2020			1Q20			2021
Commercial	$	42,210		$	770		$	42,980
Retail Mortgage	4,620			(391)			4,229
Warehouse	1,267			(104)			1,163
Consumer	8,930			(116)			8,814
Allowance for Credit Losses (“ACL”)	$	57,027		$	159		$	57,186
ACL/Total Loans	1.47		%				1.56		%