UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the quarterly period ended SeptemberJune 30, 2017

2021

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to
Commission file number0-10792

HORIZON BANCORP,

INC.

(Exact name of registrant as specified in its charter)

Indiana35-1562417

(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

515 Franklin Square, Michigan City, Indiana46360
(Address of principal executive offices)(Zip Code)

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 classTrading
Symbol(s)
Name of each exchange
on which registered
Common stock, no par valueHBNCThe 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a 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 Rule12b-2 of the Exchange Act.

Large Accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
Emerging growth company
Non-accelerated Filer☐  (Do not check if smaller reporting company)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 Rule12b-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: 25,482,43843,950,720 shares of Common Stock, no par value, at November 7, 2017.

August 2, 2021.



Table of Contents
HORIZON BANCORP,

INC.

FORM10-Q

10–Q

INDEX


Condensed Consolidated Statement of Stockholders’ Equity

6

7

9

50

69

69

70

70

70

70

70

70

70

Item 6.

71

72


2

PART 1 —I – FINANCIAL INFORMATION

ITEM 1.1 – FINANCIAL STATEMENTS





HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

   September 30  December 31 
   2017  2016 
   (Unaudited)    

Assets

   

Cash and due from banks

  $72,662  $70,832 

Investment securities, available for sale

   509,844   439,831 

Investment securities, held to maturity (fair value of $202,222 and $194,086)

   198,605   193,194 

Loans held for sale

   3,616   8,087 

Loans, net of allowance for loan losses of $15,586 and $14,837

   2,410,239   2,121,149 

Premises and equipment, net

   73,743   66,357 

Federal Reserve and Federal Home Loan Bank stock

   15,340   23,932 

Goodwill

   93,750   76,941 

Other intangible assets

   9,494   9,366 

Interest receivable

   14,880   12,713 

Cash value of life insurance

   75,480   74,134 

Other assets

   41,848   44,620 
  

 

 

  

 

 

 

Total assets

  $3,519,501  $3,141,156 
  

 

 

  

 

 

 

Liabilities

   

Deposits

   

Non-interest bearing

  $563,536  $496,248 

Interest bearing

   2,044,739   1,974,962 
  

 

 

  

 

 

 

Total deposits

   2,608,275   2,471,210 

Borrowings

   458,152   267,489 

Subordinated debentures

   37,607   37,456 

Interest payable

   700   472 

Other liabilities

   22,712   23,674 
  

 

 

  

 

 

 

Total liabilities

   3,127,446   2,800,301 
  

 

 

  

 

 

 

Commitments and contingent liabilities

   

Stockholders’ Equity

   

Preferred stock, Authorized, 1,000,000 shares

   

Issued 0 and 0 shares

   —     —   

Common stock, no par value

   

Authorized 66,000,000 shares(1)

   

Issued, 23,344,709 and 22,192,530 shares(1)

   

Outstanding, 23,325,459 and 22,171,596 shares(1)

   —     —   

Additionalpaid-in capital

   212,436   182,326 

Retained earnings

   181,396   164,173 

Accumulated other comprehensive loss

   (1,777  (5,644
  

 

 

  

 

 

 

Total stockholders’ equity

   392,055   340,855 
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $3,519,501  $3,141,156 
  

 

 

  

 

 

 

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

June 30,
2021
December 31,
2020
(Unaudited)
Assets
Cash and due from banks$304,171 $249,711 
Interest earning time deposits6,994 8,965 
Investment securities, available for sale1,691,186 1,134,025 
Investment securities, held to maturity (fair value of $162,651 and $179,990)153,284 168,676 
Loans held for sale7,228 13,538 
Loans, net of allowance for credit losses of $55,649 and $57,0273,463,870 3,810,356 
Premises and equipment, net88,604 92,416 
Federal Home Loan Bank stock23,023 23,023 
Goodwill151,238 151,238 
Other intangible assets21,160 22,955 
Interest receivable21,702 21,396 
Cash value of life insurance97,071 96,751 
Other assets79,696 93,564 
Total assets$6,109,227 $5,886,614 
Liabilities
Deposits
Non–interest bearing$1,102,950 $1,053,242 
Interest bearing3,678,676 3,477,891 
Total deposits4,781,626 4,531,133 
Borrowings439,094 475,000 
Subordinated notes58,676 58,603 
Junior subordinated debentures issued to capital trusts56,662 56,548 
Interest payable2,430 2,712 
Other liabilities60,365 70,402 
Total liabilities5,398,853 5,194,398 
Commitments and contingent liabilities00
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares0 
Common stock, no par value, Authorized 99,000,000 shares
Issued 44,039,562 and 43,905,631 shares, Outstanding 43,950,720 and 43,880,562 shares0 
Additional paid-in capital359,227 362,945 
Retained earnings332,509 301,419 
Accumulated other comprehensive income18,638 27,852 
Total stockholders’ equity710,374 692,216 
Total liabilities and stockholders’ equity$6,109,227 $5,886,614 

See notes to condensed consolidated financial statements

3

Table of Contents
HORIZON BANCORP, 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 
   2017   2016   2017   2016 

Interest Income

        

Loans receivable

  $28,113   $25,313   $79,699   $65,854 

Investment securities

        

Taxable

   2,167    2,498    6,817    7,703 

Tax exempt

   1,790    1,151    5,193    3,583 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   32,070    28,962    91,709    77,140 
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

   1,841    1,875    5,315    4,923 

Borrowed funds

   1,753    2,128    4,028    5,608 

Subordinated debentures

   597    549    1,721    1,556 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

   4,191    4,552    11,064    12,087 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

   27,879    24,410    80,645    65,053 

Provision for loan losses

   710    455    1,370    1,219 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

   27,169    23,955    79,275    63,834 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income

        

Service charges on deposit accounts

   1,672    1,605    4,638    4,310 

Wire transfer fees

   175    292    503    588 

Interchange fees

   1,251    1,156    3,809    3,065 

Fiduciary activities

   1,887    1,653    5,752    4,753 

Gains (losses) on sale of investment securities (includes $6 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $38 and $875 for the nine months ended September 30, 2017 and 2016, respectively, related to accumulated other comprehensive earnings reclassifications)

   6    —      38    875 

Gain on sale of mortgage loans

   1,950    3,528    5,918    9,171 

Mortgage servicing income net of impairment

   369    409    1,175    1,356 

Increase in cash value of bank owned life insurance

   474    449    1,346    1,145 

Other income

   237    226    613    708 
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalnon-interest income

   8,021    9,318    23,792    25,971 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense

        

Salaries and employee benefits

   12,911    12,210    37,086    32,592 

Net occupancy expenses

   2,400    2,174    7,048    6,011 

Data processing

   1,502    1,616    4,311    3,855 

Professional fees

   649    612    1,797    2,190 

Outside services and consultants

   2,504    2,686    4,991    5,983 

Loan expense

   1,215    1,482    3,572    4,086 

FDIC insurance expense

   270    465    776    1,279 

Other losses

   58    107    186    510 

Other expense

   3,004    2,730    8,755    7,798 
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalnon-interest expense

   24,513    24,082    68,522    64,304 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Tax

   10,677    9,191    34,545    25,501 

Income tax expense (includes $2 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $13 and $306 for the nine months ended September 30, 2017 and 2016, respectively, related to income tax expense from reclassification items)

   2,506    2,589    9,078    7,192 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   8,171    6,602    25,467    18,309 

Preferred stock dividend

   —      —      —      (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

  $8,171   $6,602   $25,467   $18,267 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

  $0.36   $0.31   $1.14   $0.95 

Diluted Earnings Per Share

   0.36    0.30    1.13    0.94 

Three Months EndedSix Months Ended
June 30,June 30,
2021202020212020
Interest Income
Loans receivable$39,236 $43,918 $80,054 $88,876 
Investment securities – taxable2,528 2,321 4,076 5,219 
Investment securities – tax exempt5,656 4,105 10,879 7,903 
Total interest income47,420 50,344 95,009 101,998 
Interest Expense
Deposits2,053 4,506 4,396 12,222 
Borrowed funds1,296 2,074 2,565 4,312 
Subordinated notes881 58 1,761 58 
Junior subordinated debentures issued to capital trusts558 710 1,117 1,485 
Total interest expense4,788 7,348 9,839 18,077 
Net Interest Income42,632 42,996 85,170 83,921 
Credit loss expense (recovery)(1,492)7,057 (1,125)15,657 
Net Interest Income after Credit Loss Expense (Recovery)44,124 35,939 86,295 68,264 
Non–interest Income
Service charges on deposit accounts2,157 1,888 4,391 4,334 
Wire transfer fees222 230 477 401 
Interchange fees2,892 2,327 5,232 4,223 
Fiduciary activities1,961 1,765 3,704 4,293 
Gains on sale of investment securities (includes $0 and $248 for the three months ended June 30, 2021 and 2020, respectively, and $914 and $587 for the six months ended June 30, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications)0 248 914 587 
Gain on sale of mortgage loans5,612 6,620 10,908 10,093 
Mortgage servicing income net of impairment1,503 (2,760)1,716 (2,735)
Increase in cash value of bank owned life insurance502 557 1,013 1,111 
Death benefit on bank owned life insurance266 266 233 
Other income92 250 459 648 
Total non–interest income15,207 11,125 29,080 23,188 
Non–interest Expense
Salaries and employee benefits17,730 15,629 34,601 32,220 
Net occupancy expenses3,084 3,190 6,402 6,442 
Data processing2,388 2,432 4,764 4,837 
Professional fees588 518 1,132 1,054 
Outside services and consultants2,220 1,759 3,922 3,674 
Loan expense3,107 2,692 5,929 4,791 
FDIC insurance expense500 235 1,300 385 
Other losses6 193 289 313 
Other expense3,765 3,784 7,221 7,865 
Total non–interest expense33,388 30,432 65,560 61,581 
Income Before Income Taxes25,943 16,632 49,815 29,871 
Income tax expense (includes $0 and $52 for the three months ended June 30, 2021 and 2020, respectively, and $192 and $123 for the six months ended June 30, 2021 and 2020, respectively, related to income tax expense from reclassification items)3,770 1,993 7,220 3,577 
Net Income$22,173 $14,639 $42,595 $26,294 
Basic Earnings Per Share$0.50 $0.33 $0.97 $0.59 
Diluted Earnings Per Share0.50 0.33 0.97 0.59 
See notes to condensed consolidated financial statements

4

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)
(Dollar Amounts in Thousands)

   Three Months Ended September 30  Nine Months Ended September 30 
   2017  2016  2017  2016 
   (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 

Net Income

  $8,171  $6,602  $25,467  $18,309 
  

 

 

  

 

 

  

 

 

  

 

 

 

Other Comprehensive Income (Loss)

     

Change in fair value of derivative instruments:

     

Change in fair value of derivative instruments for the period

   297   803   743   158 

Income tax effect

   (104  (281  (260  (55
  

 

 

  

 

 

  

 

 

  

 

 

 

Changes from derivative instruments

   193   522   483   103 
  

 

 

  

 

 

  

 

 

  

 

 

 

Change in securities:

     

Unrealized appreciation (depreciation) for the period on AFS securities

   (791  (1,927  5,444   6,712 

Amortization from transfer of securities from available for sale to held to maturity securities

   (54  (83  (200  (560

Reclassification adjustment for securities (gains) losses realized in income

   (6  —     (38  (875

Income tax effect

   297   704   (1,822  (1,848
  

 

 

  

 

 

  

 

 

  

 

 

 

Unrealized gains (losses) on securities

   (554  (1,306  3,384   3,429 
  

 

 

  

 

 

  

 

 

  

 

 

 

Other Comprehensive Income (Loss), Net of Tax

   (361  (784  3,867   3,532 
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive Income

  $7,810  $5,818  $29,334  $21,841 
  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months EndedSix Months Ended
June 30June 30
2021202020212020
Net Income$22,173 $14,639 $42,595 $26,294 
Other Comprehensive Income
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period(18)(135)3,035 (4,100)
Income tax effect4 28 (637)861 
Changes from derivative instruments(14)(107)2,398 (3,239)
Change in securities:
Unrealized appreciation (depreciation) for the period on AFS securities10,069 15,507 (13,816)23,499 
Accretion (amortization) from transfer of securities from available for sale to held to maturity securities14 31 (29)
Reclassification adjustment for securities gains realized in income0 (248)(914)(587)
Income tax effect(2,117)(3,205)3,087 (4,806)
Unrealized gains (losses) on securities7,966 12,055 (11,612)18,077 
Other Comprehensive Income (Loss), Net of Tax7,952 11,948 (9,214)14,838 
Comprehensive Income$30,125 $26,587 $33,381 $41,132 
See notes to condensed consolidated financial statements

HORIZON BANCORP

5

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES

SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

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

Balances, January 1, 2017

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

Net income

       25,467    25,467 

Other comprehensive income, net of tax

        3,867   3,867 

Amortization of unearned compensation

     103      103 

Exercise of stock options

     616      616 

Stock option expense

     238      238 

Stock issued in Lafayette acquisition

     29,153      29,153 

Cash dividends on common stock ($0.37 per share)

       (8,244   (8,244
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Balances, September 30, 2017

  $—     $212,436   $181,396  $(1,777 $392,055 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 


Three Months Ended
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Balances, April 1, 2020$ $ $361,019 $260,501 $9,322 $630,842 
Net income— — — 14,639 — 14,639 
Other comprehensive income, net of tax— — — — 11,948 11,948 
Amortization of unearned compensation— — (79)— — (79)
Exercise of stock options— — (98)— — (98)
Stock option expense— — 27 — — 27 
Stock issued stock plans— — 218 — — 218 
Cash dividends on common stock ($0.12 per share)— — — (5,291)— (5,291)
Balances, June 30, 2020$ $ $361,087 $269,849 $21,270 $652,206 
Balances, April 1, 2021$ $ $362,613 $316,080 $10,686 $689,379 
Net income— — — 22,173 — 22,173 
Other comprehensive loss, net of tax— — — — 7,952 7,952 
Amortization of unearned compensation— — 449 — — 449 
Exercise of stock options— — 116 — — 116 
Stock option expense— — 15 — — 15 
Stock retirement plans— — (3,966)— — (3,966)
Cash dividends on common stock ($0.13 per share)— — — (5,744)— (5,744)
Balances, June 30, 2021$ $ $359,227 $332,509 $18,638 $710,374 

6

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)
Six 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— — — 26,294 — 26,294 
Other comprehensive income, net of tax— — — — 14,838 14,838 
Impact of adoption of ASU No. 2016–13— — — (15,635)— (15,635)
Amortization of unearned compensation— — 122 — — 122 
Exercise of stock options— — 157 — — 157 
Stock option expense— — 77 — — 77 
Stock issued stock plans— — 514 — — 514 
Repurchase of outstanding stock— — (19,636)— — (19,636)
Cash dividends on common stock ($0.24 per share)— — — (10,548)— (10,548)
Balances, June 30, 2020$ $ $361,087 $269,849 $21,270 $652,206 
Balances, January 1, 2021$ $ $362,945 $301,419 $27,852 $692,216 
Net income— — — 42,595 — 42,595 
Other comprehensive loss, net of tax— — — — (9,214)(9,214)
Amortization of unearned compensation— — 784 — — 784 
Exercise of stock options— — 769 — — 769 
Stock option expense— — 42 — — 42 
Stock awards vested— — (1,347)— — (1,347)
Stock retirement plans— — (3,966)— — (3,966)
Cash dividends on common stock($0.25 per share)— — — (11,505)— (11,505)
Balances, June 30, 2021$ $ $359,227 $332,509 $18,638 $710,374 
See notes to condensed consolidated financial statements

7

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)
(Dollar Amounts in Thousands)

   Nine Months Ended September 30 
   2017  2016 
   (Unaudited)  (Unaudited) 

Operating Activities

   

Net income

  $25,467  $18,309 

Items not requiring (providing) cash

   

Provision for loan losses

   1,370   1,219 

Depreciation and amortization

   4,303   3,790 

Share based compensation

   238   247 

Mortgage servicing rights net impairment

   75   840 

Premium amortization on securities available for sale, net

   4,476   4,389 

Gain on sale of investment securities

   (38  (875

Gain on sale of mortgage loans

   (5,918  (9,171

Proceeds from sales of loans

   174,271   246,435 

Loans originated for sale

   (163,882  (236,719

Change in cash value of life insurance

   (1,346  (1,145

Gain on sale of other real estate owned

   12   118 

Net change in

   

Interest receivable

   (1,811  (687

Interest payable

   180   275 

Other assets

   2,215   (16,641

Other liabilities

   (2,335  1,015 
  

 

 

  

 

 

 

Net cash provided by operating activities

   37,277   11,399 
  

 

 

  

 

 

 

Investing Activities

   

Purchases of securities available for sale

   (127,752  (152,283

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

   67,416   88,330 

Purchases of securities held to maturity

   (20,152  (35,598

Proceeds from maturities of securities held to maturity

   4,883   14,654 

Change in Federal Reserve and FHLB stock

   8,987   (2,443

Net change in loans

   (154,038  (26,920

Proceeds on the sale of OREO and repossessed assets

   2,125   1,524 

Change in premises and equipment, net

   (2,667  (1,719

Acquisition of Kosciusko, net of cash received

   —     30,437 

Acquisition of LaPorte, net of cash received

   —     116,521 

Acquisition of branch, net of cash received

   11,000   —   

Acquisition of Lafayette, net of cash received

   20,425   —   
  

 

 

  

 

 

 

Net cash provided by (used in) investing activities

   (189,773  32,503 
  

 

 

  

 

 

 

Financing Activities

   

Net change in

   

Deposits

   (28,860  (37,495

Borrowings

   190,814   46,846 

Redemption of preferred stock

   —     (12,500

Proceeds from issuance of stock

   616   286 

Dividends paid on common shares

   (8,244  (5,926

Dividends paid on preferred shares

   —     (42
  

 

 

  

 

 

 

Net cash provided by financing activities

   154,326   (8,831
  

 

 

  

 

 

 

Net Change in Cash and Cash Equivalents

   1,830   35,071 

Cash and Cash Equivalents, Beginning of Period

   70,832   48,650 
  

 

 

  

 

 

 

Cash and Cash Equivalents, End of Period

  $72,662  $83,721 
  

 

 

  

 

 

 

(continued)

Six Months Ended
June 30
20212020
Operating Activities
Net income$42,595 $26,294 
Items not requiring (providing) cash
Provision for (recovery of) credit losses(1,125)15,657 
Depreciation and amortization5,394 4,909 
Share based compensation42 77 
Mortgage servicing rights income340 (466)
Mortgage servicing rights net impairment(1,843)3,201 
Premium amortization on securities, net4,573 4,266 
Gain on sale of investment securities(914)(587)
Gain on sale of mortgage loans(10,908)(10,093)
Proceeds from sales of loans256,395 258,207 
Loans originated for sale(239,177)(259,939)
Change in cash value life insurance(1,013)(1,111)
Gain on sale of other real estate owned19 
Net change in:
Interest receivable(306)(1,357)
Interest payable(282)(709)
Other assets11,569 1,811 
Other liabilities(4,581)661 
Net cash provided by operating activities60,778 40,828 
Investing Activities
Purchases of securities available for sale(700,359)(207,160)
Proceeds from sales, maturities, calls and principal repayments of securities available for sale125,616 126,826 
Proceeds from maturities of securities held to maturity14,617 16,138 
Net change in interest earning time deposits1,971 (792)
Change in FHLB stock0 (1,161)
Net change in loans347,010 (340,505)
Proceeds on the sale of OREO and repossessed assets873 444 
Change in premises and equipment, net997 (2,913)
Death benefit on bank owned life insurance266 233 
Repurchase of outstanding stock0 (19,636)
Net cash used in investing activities(209,009)(428,526)
Financing Activities
Net change in:
Deposits250,493 376,597 
Borrowings(35,719)33,458 
Net change from issuance of stock(578)671 
Net proceeds from issuance of subordinated notes0 58,824 
Dividends paid on common stock(11,505)(10,548)
Net cash provided by financing activities202,691 459,002 
Net Change in Cash and Cash Equivalents54,460 71,304 
Cash and Cash Equivalents, Beginning of Period249,711 98,831 
8

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HORIZON BANCORP, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar Amounts in Thousands)
Cash and Cash Equivalents, End of Period$304,171 $170,135 
Additional Supplemental Information
Interest paid$10,121 $18,786 
Income taxes paid725 
Transfer of loans to other real estate and repossessed assets601 939 
See notes to condensed consolidated financial statements

7


9

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(Dollar Amounts in Thousands)

Additional Supplemental Information

    

Interest paid

  $10,836   $11,579 

Income taxes paid

   10,350    7,310 

Transfer of loans to other real estate owned

   1,717    3,035 

The Company purchased all of the capital stock of Lafayette for $34,529 on September 1, 2017. In conjunction with the acquisition, liabilities were assumed as follows:

    

Fair value of assets acquired

   186,659    —   

Less: common stock issued

   30,108    —   

Cash paid for the capital stock

   4,421    —   

Liabilities assumed

   152,130    —   

Acquisition of LaPorte, measurement period adjustments

   703   

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

    

Fair value of assets acquired

   —      546,770 

Less: common stock issued

   —      60,306 

Cash paid for the capital stock

   —      38,328 

Liabilities assumed

   —      448,136 

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

    

Fair value of assets acquired

   —      155,873 

Less: common stock issued

   —      14,470 

Cash paid for the capital stock

   —      8,513 

Liabilities assumed

   —      132,890 

See notes to condensed consolidated financial statements

HORIZON BANCORP 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 an Indiana commercial bank effective June 23, 2017. All inter-companyinter–company balances and transactions have been eliminated. The results of operations for the periods ended SeptemberJune 30, 20172021 and SeptemberJune 30, 20162020 are not necessarily indicative of the operating results for the full year of 20172021 or 2016.2020. 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 Form10-K 10–K for 20162020 filed with the Securities and Exchange Commission on February 28, 2017.26, 2021. The condensed consolidated balance sheet of Horizon as of December 31, 20162020 has been derived from the audited balance sheet as of that date.

On October 18, 2016,July 16, 2019, the Board of Directors of the Company approvedauthorized athree-for-two stock splitrepurchase program for up to 2,250,000 shares of the Company’s authorizedHorizon’s issued and outstanding common stock, no par value. All share andAs of June 30, 2021, Horizon had repurchased a total of 373,323 shares at an average price per share amounts inof $15.86. In addition to the condensed consolidated financial statements and notes thereto have been retroactively adjusted, where necessary,stock repurchase program, Horizon agreed to reflect thisthree-for-two stock split. The effect of thethree-for-two stock split on the outstanding commonrepurchase 1,000,000 shares is that shareholders of record as of the close of business on October 31, 2016, the record date, received an additional halfat a price per share of common stock held, with shareholders receiving cash in lieu of any fractional shares. The additional shares issued in the stock split were issued$15.19 from an individual shareholder on November 14, 2016, and the common shares began trading on a split-adjusted basis on or about November 15, 2016.

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-averageweighted–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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table shows computation of basic and diluted earnings per share.

  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 

Basic earnings per share

    

Net income

 $8,171  $6,602  $25,467  $18,309 

Less: Preferred stock dividends

  —     —     —     42 
 

 

 

  

 

 

  

 

 

  

 

 

 

Net income available to common shareholders

 $8,171  $6,602  $25,467  $18,267 

Weighted average common shares outstanding(1)

  22,580,160   21,538,752   22,326,454   19,252,295 

Basic earnings per share

 $0.36  $0.31  $1.14  $0.95 
 

 

 

  

 

 

  

 

 

  

 

 

 

Diluted earnings per share

    

Net income available to common shareholders

 $8,171  $6,602  $25,467  $18,267 

Weighted average common shares outstanding(1)

  22,580,160   21,538,752   22,326,454   19,252,295 

Effect of dilutive securities:

    

Restricted stock

  36,749   33,650   33,791   27,590 

Stock options

  98,364   79,551   95,553   66,491 
 

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average shares outstanding

  22,715,273   21,651,953   22,455,798   19,346,376 

Diluted earnings per share

 $0.36  $0.30  $1.13  $0.94 
 

 

 

  

 

 

  

 

 

  

 

 

 

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

Three Months EndedSix Months Ended
June 30June 30
2021202020212020
Basic earnings per share
Net income$22,173 $14,639 $42,595 $26,294 
Weighted average common shares outstanding43,950,501 43,781,249 43,935,111 44,219,880 
Basic earnings per share$0.50 $0.33 $0.97 $0.59 
Diluted earnings per share
Net income$22,173 $14,639 $42,595 $26,294 
Weighted average common shares outstanding43,950,501 43,781,249 43,935,111 44,219,880 
Effect of dilutive securities:
Restricted stock106,175 7,614 104,421 40,017 
Stock options54,427 13,931 53,045 26,967 
Weighted average common shares outstanding44,111,103 43,802,794 44,092,577 44,286,864 
Diluted earnings per share$0.50 $0.33 $0.97 $0.59 

10

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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)
There were zero137,705 and 137,705 shares for the three and ninesix months ended SeptemberJune 30, 2017 and 20162021, which were not included in the computation of diluted earnings per share because they werenon-dilutive.

non–dilutive. There were 504,085 and 285,588 shares for the three and six months ended June 30, 2020, which were not included in the computation of diluted earnings per share because they were non–dilutive.

Horizon has share-basedshare–based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 20162020 Annual Report on Form10-K.

Reclassifications

Certain reclassifications 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 madeidentified 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 2016 condensed consolidated financial statementsstatements.
Note 2 – Acquisitions
On May, 25, 2021, Horizon Bank entered into a definitive purchase and assumption agreement to acquire 14 TCF National Bank (“TCF”) branches in 11 Michigan counties with approximately $976 million in deposits and $278 million in associated loans, which are being divested by TCF Financial Corporation in connection with its merger with Huntington Bancshares Incorporated. The transaction, which is expected to be comparablecompleted by the end of the third quarter of 2021, is subject to 2017. These reclassifications had no effect on net income.

regulatory approval and other customary closing conditions and adjustments.

11

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 2 – Acquisitions

Kosciusko Financial, Inc.

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million. The Company has had approximately $1.6 million in costs related to the acquisition. These expenses are classified in thenon-interest expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Kosciusko acquisition is detailed in the following table. The final valuation numbers were received in September 2016 which changed the goodwill estimate from $6.9 million to $6.4 million.

ASSETS

    LIABILITIES  

Cash and due from banks

  $38,950   Deposits  

Investment securities, available for sale

   1,191   Non-interest bearing  $27,871 
       NOW accounts  35,213 

Commercial

   70,006   Savings and money market   26,953 

Residential mortgage

   26,244   Certificates of deposits   32,771 
      

 

 

 

Consumer

   6,319   

Total deposits

   122,808 
  

 

 

     

Total loans

   102,569     
       Borrowings  9,038 

Premises and equipment, net

   1,466   Interest payable   55 

FRB and FHLB stock

   582   Other liabilities   989 

Goodwill

   6,443     

Core deposit intangible

   526     

Interest receivable

   636     

Cash value of life insurance

   2,745     

Other assets

   765     
  

 

 

     

 

 

 

Total assets purchased

  $155,873   Total liabilities assumed  $132,890 
  

 

 

     

 

 

 

Common shares issued

  $14,470     

Cash paid

   8,513     
  

 

 

     

Total estimated purchase price

  $22,983     
  

 

 

     

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

Contractually required principal and interest at acquisition

  $2,682 

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

   25 
  

 

 

 

Expected cash flows at acquisition

   2,657 

Interest component of expected cash flows (accretable discount)

   634 
  

 

 

 

Fair value of acquired loans accounted for under ASC310-30

  $2,023 
  

 

 

 

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

LaPorte Bancorp, Inc.

On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and Horizon Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.9435 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte Bancorp stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, less the consideration used to pay off LaPorte’s ESOP loan receivable, the transaction has an implied valuation of approximately $98.6 million. The Company has had approximately $4.0 million in costs related to the acquisition. These expenses are classified in thenon-interest expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

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

ASSETS

    LIABILITIES  

Cash and due from banks

  $154,849   Deposits  

Investment securities, available for sale

   23,779   Non-interest bearing  $66,733 
       NOW accounts  99,346 

Commercial

   153,750   Savings and money market   117,688 

Residential mortgage

   42,603   Certificates of deposits   87,605 
      

 

 

 

Consumer

   16,801   

Total deposits

   371,372 

Mortgage Warehousing

   99,752     
  

 

 

     

Total loans

   312,906     
       Borrowings  64,793 

Premises and equipment, net

   6,022   Interest payable   178 

FHLB stock

   4,029   Subordinated debt   4,504 

Goodwill

   20,993   Other liabilities   10,056 

Core deposit intangible

   2,514     

Interest receivable

   844     

Cash value of life insurance

   15,267     

Other assets

   8,334     
  

 

 

     

 

 

 

Total assets purchased

  $549,537   Total liabilities assumed  $450,903 
  

 

 

     

 

 

 

Common shares issued

  $60,306     

Cash paid

   38,328     
  

 

 

     

Total estimated purchase price

  $98,634     
  

 

 

     

Of the total estimated purchase price of $98.6 million, $2.5 million has been allocated to core deposit intangible. Additionally, $21.0 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over ten years on a straight line basis.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

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

The following table details an estimate of the acquired loans that are accounted for in accordance with ASC310-30 as of July 18, 2016.

Contractually required principal and interest at acquisition

  $12,545 

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

   4,492 
  

 

 

 

Expected cash flows at acquisition

   8,053 

Interest component of expected cash flows (accretable discount)

   1,258 
  

 

 

 

Fair value of acquired loans accounted for under ASC310-30

  $6,795 
  

 

 

 

Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. Goodwill was increased by $703,000 during the nine months ended September 30, 2017 due to measurement period adjustments.

CNB Bancorp

On November 7, 2016, Horizon completed the acquisition of CNB Bancorp, an Indiana corporation headquartered in Attica, Indiana (“CNB”) and the Bank’s acquisition of The Central National Bank and Trust Company (“Central National Bank & Trust”), through mergers effective November 7, 2016. Under terms of the acquisition, shareholders of CNB received merger consideration in the form of cash. The total value of the consideration for the acquisition was $5.3 million.

Under the acquisition method of accounting, the total estimated purchase price is allocated to CNB’s net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of the tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the CNB acquisition is allocated as follows:

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

ASSETS

    LIABILITIES  

Cash and due from banks

  $27,860   Deposits  

Investment securities, available for sale

   16,393   Non-interest bearing  $24,079 
       NOW accounts  9,038 

Commercial

   2,267   Savings and money market   13,829 
      

 

 

 

Residential mortgage

   6,624   Certificates of deposits   3,342 

Consumer

   1,579   

Total deposits

   50,288 
  

 

 

     

Total loans

   10,470     
       Borrowings  459 

Premises and equipment, net

   444   Interest payable   7 

FHLB stock

   50   Other liabilities   154 

Goodwill

   609     

Core deposit intangible

   190     

Interest receivable

   154     

Other assets

   49     
  

 

 

     

 

 

 

Total assets purchased

  $56,219   Total liabilities assumed  $50,908 
  

 

 

     

 

 

 

Cash paid

   5,311     
  

 

 

     

Total estimated purchase price

  $5,311     
  

 

 

     

Of the total purchase price of $5.3 million, $190,000 has been allocated to core deposit intangible. Additionally, $609,000 has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over 10 years on a straight line basis.

The Company acquired the $10.8 million performing loan portfolio with an estimated fair value of $10.5 million. No loans were purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected or which are considered to be credit impaired.

Bargersville Branch Purchase

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction of $3.4 million and a 3.0% premium on deposits. Customer deposit balances were recorded at $14.8 million and a core deposit intangible of $463,000 was recorded in the transaction, which will be amortized over ten years on a straight line basis. There was no goodwill generated in the transaction.

Lafayette Community Bancorp

On September 1, 2017, Horizon completed the acquisition of Lafayette Community Bancorp, an Indiana corporation (“Lafayette”) and Horizon Bank’s acquisition of Lafayette Community Bank, a state-chartered bank and wholly-owned subsidiary of Lafayette, through mergers effective September 1, 2017. Under the terms of the Merger Agreement, shareholders of Lafayette received 0.5878 shares of Horizon common stock and $1.73 in cash for each outstanding share of Lafayette common stock. Lafayette shareholders owning fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,091,259. Based upon the August 31, 2017 closing price of $26.17 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million. The Company has had approximately $1.5 million in costs

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

related to the acquisition. These expenses are classified in thenon-interest expense section of the income statement and are primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

Horizon held a 5% ownership in Lafayette immediately preceding the merger date. In accordance with ASC 805-10 – Business Combinations, Horizon was required to remeasure the equity interest in Lafayette’s common stock and recognize the resulting gain or loss, if any, in earnings. Since Lafayette was traded in the OTC market, the remeasurement was based on the closing price of Lafayette’s common stock immediately prior to the acquisition announcement and immediately prior to Horizon taking control of Lafayette. A control premium was calculated which is not indicative of the fair value of Horizon’s equity ownership interest immediately preceding the acquisition announcement. The control premium was immaterial to the financial statements taken as a whole.

The purchase price allocated to net tangible and intangible assets was made based upon provisional amounts as the initial accounting was not complete as of September 30, 2017. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Lafayette acquisition is detailed in the following table. Prior to the end of the one year measurement period for finalizing 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

  $24,846  Deposits  

Investment securities, available for sale

   6  Non-interest bearing  $34,990 
      NOW accounts  30,174 

Commercial

   98,011  Savings and money market   53,663 

Residential mortgage

   30,997  Certificates of deposits   32,271 
     

 

 

 

Consumer

   5,345  

Total deposits

   151,098 
  

 

 

    

Total loans

   134,353    
      Borrowings  —   

Premises and equipment, net

   7,818  Interest payable   42 

FHLB stock

   395  Other liabilities   990 

Goodwill

   16,106    

Core deposit intangible

   777    

Interest receivable

   338    

Other assets

   2,020    
  

 

 

    

 

 

 

Total assets purchased

  $186,659  Total liabilities assumed  $152,130 
  

 

 

    

 

 

 

Common shares issued

  $30,108(1)    

Cash paid

   4,421    
  

 

 

    

Total estimated purchase price

  $34,529    
  

 

 

    

(1)This includes $955,000 of common shares previously held by Horizon.

Of the total estimated purchase price of $34.5 million, $777,000 has been allocated to core deposit intangible. Additionally, $16.1 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over ten years on a straight-line basis.

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

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such aspast-due andnon-accrual status, borrower credit scores and recentloan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The Company acquired the $134.4 million loan portfolio at an estimated fair value discount of $3.4 million. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided. When completed, the excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC310-30.

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

The results of operations of Lafayette, CNB, LaPorte Bancorp and Kosciusko have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includespro-forma results for the three and nine months ended September 30, 2017 and 2016 as if the Lafayette, CNB, LaPorte Bancorp and Kosciusko acquisitions had occurred as of the beginning of the comparable prior reporting periods.

  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 

Summary of Operations:

    

Net Interest Income

 $28,856  $26,628  $84,471  $80,515 

Provision for Loan Losses

  725   455   1,438   1,219 

Net Interest Income after Provision for Loan Losses

  28,131  $26,173   83,033   79,296 

Non-interest Income

  8,077   10,534   24,175   32,547 

Non-Interest Expense

  26,523   32,400   73,003   86,781 

Income before Income Taxes

  9,685   4,307   34,205   25,062 

Income Tax Expense

  2,394   1,997   9,260   8,328 

Net Income

  7,291   2,310   24,945   16,734 

Net Income Available to Common Shareholders

 $7,291  $2,310  $24,945  $16,692 

Basic Earnings Per Share

 $0.32  $0.11  $1.12  $0.87 

Diluted Earnings Per Share

 $0.32  $0.11  $1.11  $0.86 
  22,580,160   21,538,752   22,326,454   19,252,295 
  22,715,273   21,651,953   22,455,798   19,346,376 

Thepro-forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects.

Thepro-forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Wolverine Bancorp, Inc.

On October 17, 2017, Horizon completed the acquisition of Wolverine Bancorp, Inc., a Maryland corporation (“Wolverine”) and Horizon Bank’s acquisition of Wolverine Bank, a federally-chartered savings bank and wholly-owned subsidiary of Wolverine, through mergers effective October 17, 2017. Under the terms of the Merger Agreement, shareholders of Wolverine received 1.0152 shares of Horizon common stock and $14.00 in cash for each outstanding share of Wolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331, and the shares of Horizon common stock issued to Wolverine shareholders totaled 2,161,610. Based upon the October 16, 2017 closing price of $29.06 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $95.1 million.

As of October 17, 2017, Wolverine had total assets of approximately $363.2 million, total deposits of approximately $256.5 million and total net loans of approximately $308.1 million.

Utilizing September 30, 2017 financials for both Horizon and Wolverine and an estimate of the fair market value adjustments associated with the merger, Horizon would have total assets of approximately $3.9 billion, total deposits of approximately $2.9 billion and total net loans of approximately $2.7 billion on a pro forma basis. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 3 – Securities

The fair value of securities is as follows:

       Gross   Gross     
September 30, 2017  Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 

Available for sale

        

U.S. Treasury and federal agencies

  $17,996   $3   $(114  $17,885 

State and municipal

   141,751    2,288    (556   143,483 

Federal agency collateralized mortgage obligations

   135,511    131    (1,440   134,202 

Federal agency mortgage-backed pools

   213,071    496    (1,516   212,051 

Private labeled mortgage-backed pools

   1,841    —      (11   1,830 

Corporate notes

   275    118    —      393 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $510,445   $3,036   $(3,637  $509,844 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity

        

State and municipal

  $177,473   $4,249   $(862  $180,860 

Federal agency collateralized mortgage obligations

   5,902    25    (31   5,896 

Federal agency mortgage-backed pools

   15,230    307    (71   15,466 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $198,605   $4,581   $(964  $202,222 
  

 

 

   

 

 

   

 

 

   

 

 

 
       Gross   Gross     
December 31, 2016  Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 

Available for sale

        

U.S. Treasury and federal agencies

  $8,051   $2   $(64  $7,989 

State and municipal

   117,327    324    (1,059   116,592 

Federal agency collateralized mortgage obligations

   139,040    254    (2,099   137,195 

Federal agency mortgage-backed pools

   180,183    251    (3,707   176,726 

Corporate notes

   1,238    91    —      1,329 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $445,839   $922   $(6,929  $439,831 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity

        

State and municipal

  $165,607   $2,700   $(2,485  $165,822 

Federal agency collateralized mortgage obligations

   6,530    31    (71   6,490 

Federal agency mortgage-backed pools

   21,057    897    (180   21,774 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $193,194   $3,628   $(2,736  $194,086 
  

 

 

   

 

 

   

 

 

   

 

 

 

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio andheld-to-maturity, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At September 30, 2017, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2017.

June 30, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available for sale
U.S. Treasury and federal agencies$191,490 $228 $(617)$191,101 
State and municipal1,090,693 27,993 (5,193)1,113,493 
Federal agency collateralized mortgage obligations96,344 2,280 (2)98,622 
Federal agency mortgage-backed pools165,016 2,641 (147)167,510 
Private labeled mortgage-backed pools33,074 508 (14)33,568 
Corporate notes85,637 1,318 (63)86,892 
Total available for sale investment securities$1,662,254 $34,968 $(6,036)$1,691,186 
Held to maturity
State and municipal$144,430 $9,176 $$153,606 
Federal agency collateralized mortgage obligations1,007 16 1,023 
Federal agency mortgage-backed pools3,733 175 3,908 
Private labeled mortgage-backed pools4,114 4,114 
Total held to maturity investment securities$153,284 $9,367 $$162,651 
December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available for sale
U.S. Treasury and federal agencies$19,750 $$(35)$19,715 
State and municipal803,100 35,014 (271)837,843 
Federal agency collateralized mortgage obligations144,022 3,448 (17)147,453 
Federal agency mortgage-backed pools114,484 4,315 118,799 
Corporate notes9,007 1,208 10,215 
Total available for sale investment securities$1,090,363 $43,985 $(323)$1,134,025 
Held to maturity
State and municipal$157,421 $11,035 $$168,456 
Federal agency collateralized mortgage obligations2,661 36 2,697 
Federal agency mortgage-backed pools8,594 243 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 SeptemberJune 30, 20172021 and December 31, 2016,2020, 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.

   September 30, 2017   December 31, 2016 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 

Available for sale

        

Within one year

  $9,772   $9,784   $7,455   $7,480 

One to five years

   44,771    44,811    37,483    37,479 

Five to ten years

   44,163    44,851    21,112    20,984 

After ten years

   61,316    62,315    60,566    59,967 
  

 

 

   

 

 

   

 

 

   

 

 

 
   160,022    161,761    126,616    125,910 

Federal agency collateralized mortgage obligations

   135,511    134,202    139,040    137,195 

Federal agency mortgage-backed pools

   213,071    212,051    180,183    176,726 

Private labeled mortgage-backed pools

   1,841    1,830    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $510,445   $509,844   $445,839   $439,831 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity

        

Within one year

  $7,383   $7,373   $—     $—   

One to five years

   37,402    38,645    24,594    25,271 

Five to ten years

   88,399    90,371    87,645    88,805 

After ten years

   44,289    44,471    53,368    51,746 
  

 

 

   

 

 

   

 

 

   

 

 

 
   177,473    180,860    165,607    165,822 

Federal agency collateralized mortgage obligations

   5,902    5,896    6,530    6,490 

Federal agency mortgage-backed pools

   15,230    15,466    21,057    21,774 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $198,605   $202,222   $193,194   $194,086 
  

 

 

   

 

 

   

 

 

   

 

 

 

12

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
June 30, 2021December 31, 2020
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Available for sale
Within one year$46,747 $46,784 $44,206 $44,192 
One to five years156,088 157,620 61,594 63,006 
Five to ten years362,439 366,313 136,857 145,102 
After ten years802,546 820,769 589,200 615,473 
1,367,820 1,391,486 831,857 867,773 
Federal agency collateralized mortgage obligations96,344 98,622 144,022 147,453 
Federal agency mortgage–backed pools165,016 167,510 114,484 118,799 
Private labeled mortgage–backed pools$33,074 $33,568 $$
Total available for sale investment securities$1,662,254 $1,691,186 $1,090,363 $1,134,025 
Held to maturity
Within one year$4,314 $4,349 $7,302 $7,327 
One to five years43,418 44,942 42,742 44,358 
Five to ten years73,870 78,956 82,087 88,300 
After ten years22,828 25,359 25,290 28,471 
144,430 153,606 157,421 168,456 
Federal agency collateralized mortgage obligations1,007 1,023 2,661 2,697 
Federal agency mortgage–backed pools3,733 3,908 8,594 8,837 
Private labeled mortgage–backed pools4,114 4,114 
Total held to maturity investment securities$153,284 $162,651 $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.

   Less than 12 Months  12 Months or More  Total 
   Fair   Unrealized  Fair   Unrealized  Fair   Unrealized 
September 30, 2017  Value   Losses  Value   Losses  Value   Losses 

U.S. Treasury and federal agencies

  $15,233   $(71 $1,372   $(43 $16,605   $(114

State and municipal

   41,995    (483  28,127    (935  70,122    (1,418

Federal agency collateralized mortgage obligations

   61,135    (480  47,213    (991  108,348    (1,471

Federal agency mortgage-backed pools

   81,397    (567  61,624    (1,020  143,021    (1,587

Private labeled mortgage-backed pools

   1,830    (11  —      —     1,830    (11
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total temporarily impaired securities

  $201,590   $(1,612 $138,336   $(2,989 $339,926   $(4,601
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
   Less than 12 Months  12 Months or More  Total 
   Fair   Unrealized  Fair   Unrealized  Fair   Unrealized 
December 31, 2016  Value   Losses  Value   Losses  Value   Losses 

U.S. Treasury and federal agencies

  $6,987   $(64 $—     $—    $6,987   $(64

State and municipal

   142,466    (3,544  —      —     142,466    (3,544

Federal agency collateralized mortgage obligations

   112,414    (1,918  10,199    (252  122,613    (2,170

Federal agency mortgage-backed pools

   163,768    (3,887  —      —     163,768    (3,887
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total temporarily impaired securities

  $425,635   $(9,413 $10,199   $(252 $435,834   $(9,665
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

June 30, 2021
Less than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Investment Securities
U.S. Treasury and federal agencies$96,033 $(617)$$$96,033 $(617)
State and municipal346,889 (5,103)1,435 (90)348,324 (5,193)
Federal agency collateralized mortgage obligations412 (2)412 (2)
Federal agency mortgage–backed pools77,091 (147)77,091 (147)
Private labeled mortgage–backed pools9,510 (14)9,510 (14)
Corporate notes22,169 (63)22,169 (63)
Total temporarily impaired securities$552,104 $(5,946)$1,435 $(90)$553,539 $(6,036)
13

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

December 31, 2020
Less than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Investment Securities
U.S. Treasury and federal agencies$17,215 $(35)$$$17,215 $(35)
State and municipal56,287 (242)1,245 (29)57,532 (271)
Federal agency collateralized mortgage obligations6,358 (17)6,358 (17)
Total temporarily impaired securities$79,860 $(294)$1,245 $(29)$81,105 $(323)
NaN allowance for credit losses for available for sale debt securities or held to maturity securities was needed at June 30, 2021 or December 31, 2020. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $10.3 million at June 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 September 30   Nine Months Ended September 30 
   2017   2016   2017   2016 

Sales of securities available for sale (Unaudited)

        

Proceeds

  $387   $—     $5,490   $25,077 

Gross gains

   6    —      151    1,060 

Gross losses

   —      —      (113   (185

Three Months EndedSix Months Ended
June 30June 30
2021202020212020
Sales of securities available for sale
Proceeds$$5,146 $27,514 $37,182 
Gross gains248 914 637 
Gross losses(50)



14

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 4 – Loans

   September 30
2017
   December 31
2016
 

Commercial

    

Working capital and equipment

  $599,427   $539,403 

Real estate, including agriculture

   624,009    485,620 

Tax exempt

   20,987    15,486 

Other

   29,367    29,447 
  

 

 

   

 

 

 

Total

   1,273,790    1,069,956 

Real estate

    

1–4 family

   563,993    526,024 

Other

   7,069    5,850 
  

 

 

   

 

 

 

Total

   571,062    531,874 

Consumer

    

Auto

   230,976    174,773 

Recreation

   8,969    5,669 

Real estate/home improvement

   59,641    53,898 

Home equity

   163,205    144,508 

Unsecured

   3,614    3,875 

Other

   19,085    15,706 
  

 

 

   

 

 

 

Total

   485,490    398,429 

Mortgage warehouse

   95,483    135,727 
  

 

 

   

 

 

 

Total loans

   2,425,825    2,135,986 

Allowance for loan losses

   (15,586   (14,837
  

 

 

   

 

 

 

Loans, net

  $2,410,239   $2,121,149 
  

 

 

   

 

 

 

The table below identifies the Company’s loan portfolio segments and classes.
Portfolio SegmentClass of Financing Receivable
CommercialOwner occupied real estate
Non-owner occupied real estate
Residential spec homes
Development & spec land
Commercial and industrial
Real estateResidential mortgage
Residential construction
Mortgage warehouseMortgage warehouse
ConsumerDirect 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 June 30, 2021 and December 31, 2020:
June 30,
2021
December 31,
2020
Commercial
Owner occupied real estate$475,908 $496,306 
Non–owner occupied real estate995,314 999,636 
Residential spec homes9,215 10,070 
Development & spec land23,188 26,372 
Commercial and industrial601,002 659,887 
Total commercial2,104,627 2,192,271 
Real estate
Residential mortgage537,259 598,700 
Residential construction22,178 25,586 
Mortgage warehouse205,311 395,626 
Total real estate764,748 1,019,912 
Consumer
Direct installment36,189 38,046 
Indirect installment358,161 357,511 
Home equity255,794 259,643 
Total consumer650,144 655,200 
Total loans3,519,519 3,867,383 
Allowance for credit losses(55,649)(57,027)
Net loans$3,463,870 $3,810,356 

15

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
As of June 30, 2021 and December 31, 2020, Federal Paycheck Protection Program (“PPP”) loans totaled approximately $169.4 million and $208.9 million, respectively, and are included with commercial loans. Total loans include net deferred loan fees of $3.2 million and $1.7 million at June 30, 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-termshort–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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

properties securing the Company’sCompany'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-occupiedowner–occupied commercial real estate loans versusnon-owner non–owner occupied loans.


Real Estate and Consumer


With respect to residential loans that are secured by1-4 1–4 family residences and are generally owner occupied, the Company generally establishes a maximumloan-to-value loan–to–value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in1-4 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


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’sHorizon'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 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.

16

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)

Based on thethese 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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table shows the recorded investment of individual loan categories.

September 30, 2017  Loan
Balance
   Interest Due   Deferred
Fees / (Costs)
   Recorded
Investment
 

Owner occupied real estate

  $403,184   $1,371   $880   $405,435 

Non owner occupied real estate

   531,560    656    2,202    534,418 

Residential spec homes

   4,031    11    —      4,042 

Development & spec land loans

   43,299    100    84    43,483 

Commercial and industrial

   288,086    2,475    464    291,025 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   1,270,160    4,613    3,630    1,278,403 

Residential mortgage

   553,451    1,814    2,786    558,051 

Residential construction

   14,825    29    —      14,854 

Mortgage warehouse

   95,483    480    —      95,963 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   663,759    2,323    2,786    668,868 

Direct installment

   85,726    249    (566   85,409 

Direct installment purchased

   88    —      —      88 

Indirect installment

   207,293    437    173    207,903 

Home equity

   194,050    795    (1,274   193,571 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   487,157    1,481    (1,667   486,971 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   2,421,076    8,417    4,749    2,434,242 

Allowance for loan losses

   (15,586   —      —      (15,586
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loans

  $2,405,490   $8,417   $4,749   $2,418,656 
  

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2016  Loan
Balance
   Interest Due   Deferred
Fees / (Costs)
   Recorded
Investment
 

Owner occupied real estate

  $337,548   $899   $1,022   $339,469 

Non owner occupied real estate

   461,897    624    2,176    464,697 

Residential spec homes

   5,006    8    (2   5,012 

Development & spec land loans

   31,228    56    119    31,403 

Commercial and industrial

   230,520    1,906    442    232,868 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   1,066,199    3,493    3,757    1,073,449 

Residential mortgage

   508,233    1,492    3,030    512,755 

Residential construction

   20,611    33    —      20,644 

Mortgage warehouse

   135,727    480    —      136,207 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   664,571    2,005    3,030    669,606 

Direct installment

   71,150    199    (385   70,964 

Direct installment purchased

   119    —      —      119 

Indirect installment

   153,204    345    —      153,549 

Home equity

   175,126    703    (785   175,044 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   399,599    1,247    (1,170   399,676 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   2,130,369    6,745    5,617    2,142,731 

Allowance for loan losses

   (14,837   —      —      (14,837
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loans

  $2,115,532   $6,745   $5,617   $2,127,894 
  

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 5 – Accounting for Certain


Non–performing Loans Acquired in a Transfer

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

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

The carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:

  September 30  September 30  September 30  September 30  September 30  September 30 
  2017  2017  2017  2017  2017  2017 
  Heartland  Summit  Peoples  Kosciusko  LaPorte  Total 

Commercial

 $521  $4,657  $398  $962  $1,086  $7,624 

Real estate

  241   895   139   411   1,017   2,703 

Consumer

  —     —     —     —     35   35 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Outstanding balance

 $762  $5,552  $537  $1,373  $2,138  $10,362 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Carrying amount, net of allowance of $71

      $10,291 
      

 

 

 
  December 31  December 31  December 31  December 31  December 31  December 31 
  2016  2016  2016  2016  2016  2016 
  Heartland  Summit  Peoples  Kosciusko  LaPorte  Total 

Commercial

 $774  $5,245  $692  $1,652  $3,200  $11,563 

Real estate

  534   967   165   457   1,114   3,237 

Consumer

  2   —     —     —     41   43 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Outstanding balance

 $1,310  $6,213  $856  $2,109  $4,355  $14,843 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Carrying amount, net of allowance of $0

      $14,843 
      

 

 

 

Accretable yield, or income expected to be collected for the nine months ended September 30, is as follows:

   Nine Months Ended September 30, 2017 
   Heartland  Summit  Peoples  Kosciusko  LaPorte  Total 

Balance at January 1

  $557  $502  $389  $530  $1,479  $3,457 

Additions

   —     —     —     —     —     —   

Accretion

   (99  (268  (388  (80  (194  (1,029

Reclassification from nonaccretable difference

   —     —     —     —     —     —   

Disposals

   (6  (2  (1  (42  (264  (315
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at September 30

  $452  $232  $—    $408  $1,021  $2,113 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   Nine Months Ended September 30, 2016 
   Heartland  Summit  Peoples  Kosciusko  LaPorte  Total 

Balance at January 1

  $795  $708  $555  $—    $—    $2,058 

Additions

   —     —     —     634   1,736   2,370 

Accretion

   (127  (139  (92  (38  —     (396

Reclassification from nonaccretable difference

   —     —     —     —     —     —   

Disposals

   (74  (35  (59  (23  —     (191
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at September 30

  $594  $534  $404  $573  $—    $3,841 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

During the nine months ended September 30, 2017 and 2016, the Company increased the allowance for loan losses on purchased loans by a charge to the income statement of $71,000 and $0, respectively.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 6 – Allowance for Loan Losses

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes the five-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.

   Three Months Ended
September 30
   Nine Months Ended
September 30
 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 

Balance at beginning of the period

  $15,027   $14,226   $14,837   $14,534 

Loanscharged-off:

        

Commercial

        

Owner occupied real estate

   12    4    12    182 

Non owner occupied real estate

   20    (1   20    471 

Residential development

   —      —      —      —   

Development & Spec Land Loans

   —      —      1    —   

Commercial and industrial

   232    8    273    47 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   264    11    306    700 

Real estate

        

Residential mortgage

   37    12    89    127 

Residential construction

   —      —      —      —   

Mortgage warehouse

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   37    12    89    127 

Consumer

        

Direct Installment

   84    55    331    159 

Direct Installment Purchased

   —      —      —      —   

Indirect Installment

   254    296    862    851 

Home Equity

   24    32    95    271 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   362    383    1,288    1,281 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loanscharged-off

   663    406    1,683    2,108 

Recoveries of loans previouslycharged-off:

        

Commercial

        

Owner occupied real estate

   7    2    8    31 

Non owner occupied real estate

   4    1    29    55 

Residential development

   2    2    6    6 

Development & Spec Land Loans

   —      —      —      —   

Commercial and industrial

   82    12    204    107 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   95    17    247    199 

Real estate

        

Residential mortgage

   13    12    35    75 

Residential construction

   —      —      —      —   

Mortgage warehouse

   —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   13    12    35    75 

Consumer

        

Direct Installment

   260    26    311    70 

Direct Installment Purchased

   —      —      —      —   

Indirect Installment

   119    160    384    400 

Home Equity

   25    34    85    135 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   404    220    780    605 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loan recoveries

   512    249    1,062    879 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loanscharged-off (recovered)

   151    157    621    1,229 
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision charged to operating expense

        

Commercial

   429    165    1,357    (471

Real estate

   361    102    (113   (147

Consumer

   (80   188    126    1,837 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision charged to operating expense

   710    455    1,370    1,219 
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at the end of the period

  $15,586   $14,524   $15,586   $14,524 
  

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Certain loans are individually evaluated for impairment, and the Company’s general practice is to proactively charge down impaired loans to the fair value, which is the appraised value less estimated selling costs, of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except1-4 family residential properties and consumer, the Company promptlycharges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partialcharge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Companycharges-off1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company alsocharges-off unsecuredopen-end loans when the loan is contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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


The following table presents the balance in the allowance for loan losses and the recorded investment innon–accrual loans, by portfolio segment and based on impairment analysis:

           Mortgage         
September 30, 2017  Commercial   Real Estate   Warehousing   Consumer   Total 

Allowance For Loan Losses

          

Ending allowance balance attributable to loans:

          

Individually evaluated for impairment

  $—     $—     $—     $—     $—   

Collectively evaluated for impairment

   7,877    2,129    1,048    4,532    15,586 

Loans acquired with deteriorated credit quality

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $7,877   $2,129   $1,048   $4,532   $15,586 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Individually evaluated for impairment

  $3,451   $—     $—     $—     $3,451 

Collectively evaluated for impairment

   1,274,952    572,905    95,963    486,971    2,430,791 

Loans acquired with deteriorated credit quality

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loans balance

  $1,278,403   $572,905   $95,963   $486,971   $2,434,242 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           Mortgage         
December 31, 2016  Commercial   Real Estate   Warehousing   Consumer   Total 

Allowance For Loan Losses

          

Ending allowance balance attributable to loans:

          

Individually evaluated for impairment

  $4   $—     $—     $—     $4 

Collectively evaluated for impairment

   6,575    2,090    1,254    4,914    14,833 

Loans acquired with deteriorated credit quality

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $6,579   $2,090   $1,254   $4,914   $14,837 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

          

Individually evaluated for impairment

  $2,250   $—     $—     $—     $2,250 

Collectively evaluated for impairment

   1,071,199    533,399    136,207    399,676    2,140,481 

Loans acquired with deteriorated credit quality

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loans balance

  $1,073,449   $533,399   $136,207   $399,676   $2,142,731 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 7 –Non-performing Loans and Impaired Loans

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

September 30, 2017  Non-accrual   Loans Past
Due Over 90
Days Still
Accruing
   Non-
Performing
TDRs
   Performing
TDRs
   Total Non-
Performing
Loans
 

Commercial

          

Owner occupied real estate

  $894   $—     $29   $—     $923 

Non owner occupied real estate

   218    —      483    —      701 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   102    —      —      —      102 

Commercial and industrial

   1,707    —      —      —      1,707 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   2,921    —      512    —      3,433 

Real estate

          

Residential mortgage

   3,269    119    460    1,473    5,321 

Residential construction

   —      —      —      224    224 

Mortgage warehouse

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   3,269    119    460    1,697    5,545 

Consumer

          

Direct Installment

   310    —      —      —      310 

Direct Installment Purchased

   —      —      —      —      —   

Indirect Installment

   1,019    15    —      —      1,034 

Home Equity

   1,546    28    220    318    2,112 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

   2,875    43    220    318    3,456 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $9,065   $162   $1,192   $2,015   $12,434 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2016  Non-accrual   Loans Past
Due Over 90
Days Still
Accruing
   Non-Performing
TDRs
   Performing
TDRs
   Total Non-
Performing
Loans
 

Commercial

          

Owner occupied real estate

  $1,532   $183   $—     $—     $1,715 

Non owner occupied real estate

   440    —      —      —      440 

Residential development

   —      —      —      —      —   

Development & Spec Land Loans

   118    —      —      —      118 

Commercial and industrial

   159    —      —      —      159 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   2,249    183    —      —      2,432 

Real estate

          

Residential mortgage

   2,959    —      576    1,254    4,789 

Residential construction

   —      —      233    —      233 

Mortgage warehouse

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

   2,959    —      809    1,254    5,022 

Consumer

          

Direct Installment

   512    —      —      —      512 

Direct Installment Purchased

   —      —      —      —      —   

Indirect Installment

   659    49    —      —      708 

Home Equity

   1,557    9    205    238    2,009 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

   2,728    58    205    238    3,229 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $7,936   $241   $1,014   $1,492   $10,683 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


June 30, 2021
Non–accrualLoans 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$6,847 $$603 $$7,450 $2,378 
Non–owner occupied real estate1,020 303 1,323 1,323 
Residential spec homes
Development & spec land820 820 820 
Commercial and industrial694 58 752 510 
Total commercial9,381 964 10,345 5,031 
Real estate
Residential mortgage5,458 924 1,459 7,841 6,263 
Residential construction
Mortgage warehouse
Total real estate5,458 924 1,459 7,841 6,263 
Consumer
Direct installment18 18 18 
Indirect installment828 828 828 
Home equity2,490 406 394 3,290 2,896 
Total consumer3,336 406 394 4,136 3,742 
Total$18,175 $$2,294 $1,853 $22,322 $15,036 
17

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

December 31, 2020
Non–accrualLoans 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$10,581 $$630 $168 $11,379 $6,305 
Non–owner occupied real estate237 330 567 567 
Residential spec homes
Development & spec land70 70 70 
Commercial and industrial1,826 506 2,332 1,847 
Total commercial12,714 1,466 168 14,348 8,789 
Real estate
Residential mortgage5,674 17 922 1,381 7,994 7,097 
Residential construction
Mortgage warehouse
Total real estate5,674 17 922 1,381 7,994 7,097 
Consumer
Direct installment12 13 13 
Indirect installment1,174 120 1,294 1,294 
Home equity2,568 124 222 244 3,158 2,628 
Total consumer3,754 245 222 244 4,465 3,935 
Total$22,142 $262 $2,610 $1,793 $26,807 $19,821 
There was 0 interest income recognized on non–accrual loans during the three and six months ended June 30, 2021 and 2020, respectively, while the loans were in non–accrual status. Included in the $9.1$18.2 million ofnon-accrual non–accrual loans and the $1.2$2.3 million ofnon-performing non–performing TDRs at SeptemberJune 30, 20172021 were $4.3$2.5 million and $339,000,$902,000, respectively, of loans acquired for which there were accretable yield wasyields recognized.

From time


18

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to time,Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents the Bank obtains information that may lead managementpayment status by class of loan, excluding non–accrual loans of $18.2 million and non–performing TDRs of $2.3 million at June 30, 2021:
June 30, 2021
Current30–59 Days
Past Due
60–89 Days
Past Due
90 Days or
Greater
Past Due
Total 
Past Due
Loans
Total
Loans
Commercial
Owner occupied real estate$468,458 $$$$$468,458 
Non–owner occupied real estate993,914 77 77 993,991 
Residential spec homes9,215 9,215 
Development & spec land22,368 22,368 
Commercial and industrial599,623 445 182 627 600,250 
Total commercial2,093,578 445 259 704 2,094,282 
Real estate
Residential mortgage529,780 865 232 1,097 530,877 
Residential construction22,178 22,178 
Mortgage warehouse205,311 205,311 
Total real estate757,269 865 232 1,097 758,366 
Consumer
Direct installment36,162 36,171 
Indirect installment356,485 709 139 848 357,333 
Home equity252,220 500 178 678 252,898 
Total consumer644,867 1,211 324 1,535 646,402 
Total$3,495,714 $2,521 $815 $$3,336 $3,499,050 
Percentage of total loans99.90 %0.07 %0.02 %0.00 %0.10 %100.00 %

19

Table of Contents
HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to believe thatCondensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents the collectionpayment status by class of payments may be doubtful on a particular loan. In recognitionloan, excluding non–accrual loans of this, it is management’s policy to convert the loan from an “earning asset” to anon-accruing loan. $22.1 million and non–performing TDRs of $2.6 million at December 31, 2020:
December 31, 2020
Current30–59 Days
Past Due
60–89 Days
Past Due
90 Days or
Greater
Past Due
Total 
Past Due
Loans
Total
Commercial
Owner occupied real estate$484,282 $683 $130 $$813 $485,095 
Non–owner occupied real estate997,816 599 654 1,253 999,069 
Residential spec homes10,070 10,070 
Development & spec land25,552 750 750 26,302 
Commercial and industrial657,027 249 279 528 657,555 
Total commercial2,174,747 1,531 1,813 3,344 2,178,091 
Real estate
Residential mortgage590,944 905 238 17 1,160 592,104 
Residential construction25,586 25,586 
Mortgage warehouse395,626 395,626 
Total real estate1,012,156 905 238 17 1,160 1,013,316 
Consumer
Direct installment37,965 69 69 38,034 
Indirect installment354,655 1,356 206 120 1,682 356,337 
Home equity255,908 554 266 125 945 256,853 
Total consumer648,528 1,979 472 245 2,696 651,224 
Total$3,835,431 $4,415 $2,523 $262 $7,200 $3,842,631 
Percentage of total loans99.81 %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. Further, it is management’s policy
Troubled Debt Restructurings
Loans modified as TDRs generally consist of allowing borrowers to generally placedefer 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 anon-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible monthly basis and evaluated for the loanimpairment annually and the Chief Credit Officer and/or the Chief Operations Officer must review all loans placed onnon-accrual status. Subsequent payments onnon-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured.Non-accrual loans are returnedtransferred to non–accrual status when in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning anon-accrual loan to accrual status.

A loan becomes impaired when, based on current information, it is probable that a creditorany remaining principal and interest payments due on the loan will not be unable to collect all amounts due according tocollected in accordance with the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may useloan. TDRs that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loanssubsequently default are individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysisat the time of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements,default.

At June 30, 2021, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved tonon-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include the three methods described above.

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At September 30, 2017, the typetypes of concessions the Company has made on restructured loans hashave been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six6 consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of SeptemberJune 30, 2017,2021, the Company had $3.2$4.1 million in TDRs and $2.0$1.9 million were performing according to the restructured terms and $298,000 in$93,000 TDRs were returned to accrual status during the first nine months of 2017.2021. There were zero0 specific reserves allocated to TDRs at SeptemberJune 30, 20172021 based on the discounted cash flows or, when appropriate, the fair value of the collateral.

These TDRs are exclusive of loans modified under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).


20

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 following table presents commercial loans individually evaluated for impairmentTDRs by class of loan:

               Three Months Ending   Nine Months Ending 
September 30, 2017  Unpaid
Principal
Balance
   Recorded
Investment
   Allowance For
Loan Loss
Allocated
   Average
Balance in
Impaired
Loans
   Cash/Accrual
Interest
Income
Recognized
   Average
Balance in
Impaired
Loans
   Cash/Accrual
Interest
Income
Recognized
 

With no recorded allowance

              

Commercial

              

Owner occupied real estate

  $923   $934   $—     $1,167   $4   $1,033   $4 

Non owner occupied real estate

   701    701    —      468    —      308    2 

Residential development

   —      —      —      —      —      —      —   

Development & Spec Land Loans

   102    102    —      222    —      230    —   

Commercial and industrial

   1,707    1,714    —      2,066    3    1,071    19 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   3,433    3,451    —      3,923    7    2,642    25 

With an allowance recorded

              

Commercial

              

Owner occupied real estate

   —      —      —      —      —      —      —   

Non owner occupied real estate

   —      —      —      —      —      —      —   

Residential development

   —      —      —      —      —      —      —   

Development & Spec Land Loans

   —      —      —      —      —      —      —   

Commercial and industrial

   —      —      —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   —      —      —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,433   $3,451   $—     $3,923   $7 $    2,642   $25 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
               Three Months Ending   Nine Months Ending 
September 30, 2016  Unpaid
Principal
Balance
   Recorded
Investment
   Allowance For
Loan Loss
Allocated
   Average
Balance in
Impaired
Loans
   Cash/Accrual
Interest
Income
Recognized
   Average
Balance in
Impaired
Loans
   Cash/Accrual
Interest
Income
Recognized
 

With no recorded allowance

              

Commercial

              

Owner occupied real estate

  $994   $995   $—     $1,029   $—     $1,062   $—   

Non owner occupied real estate

   3,106    3,120    —      3,150    1    3,776    3 

Residential development

   —      —      —      —      —      —      —   

Development & Spec Land Loans

   —      —      —      —      —      —      —   

Commercial and industrial

   1,740    1,740    —      1,984    —      878    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   5,840    5,855    —      6,163    1    5,716    3 

With an allowance recorded

              

Commercial

              

Owner occupied real estate

   —      —      —      —      —      —      —   

Non owner occupied real estate

   —      —      —      —      —      —      —   

Residential development

   —      —      —      —      —      —      —   

Development & Spec Land Loans

   —      —      —      —      —      —      —   

Commercial and industrial

   —      —      —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   —      —      —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $5,840   $5,855   $—     $6,163   $1   $5,716   $3 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2021December 31, 2020
Non–accrualAccruingTotalNon–accrualAccruingTotal
Commercial
Owner occupied real estate$603 $$603 $630 $168 $798 
Non–owner occupied real estate303 303 330 330 
Residential spec homes
Development & spec land
Commercial and industrial58 58 506 506 
Total commercial964 964 1,466 168 1,634 
Real estate
Residential mortgage924 1,459 2,383 922 1,381 2,303 
Residential construction
Mortgage warehouse
Total real estate924 1,459 2,383 922 1,381 2,303 
Consumer
Direct installment
Indirect installment
Home equity406 394 800 222 244 466 
Total consumer406 394 800 222 244 466 
Total$2,294 $1,853 $4,147 $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 June 30, 2021 and December 31, 2020, the Bank modified loans totaling $52.5 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.

21

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 following table below presents the payment status by class of loan:

         90 Days or          
   30-59 Days  60-89 Days  Greater Past  Total Past  Loans Not    
September 30, 2017  Past Due  Past Due  Due  Due  Past Due  Total 

Commercial

       

Owner occupied real estate

  $2,282  $—    $—    $2,282  $400,902  $403,184 

Non owner occupied real estate

   132   —     —     132   531,428   531,560 

Residential development

   135   —     —     135   3,896   4,031 

Development & Spec Land Loans

   —     —     —     —     43,299   43,299 

Commercial and industrial

   255   166   —     421   287,665   288,086 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   2,804   166   —     2,970   1,267,190   1,270,160 

Real estate

       

Residential mortgage

   1,012   167   119   1,298   552,153   553,451 

Residential construction

   —     —     —     —     14,825   14,825 

Mortgage warehouse

   —     —     —     —     95,483   95,483 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   1,012   167   119   1,298   662,461   663,759 

Consumer

       

Direct Installment

   67   —     —     67   85,659   85,726 

Direct Installment Purchased

   —     —     —     —     88   88 

Indirect Installment

   1,192   181   15   1,388   205,905   207,293 

Home Equity

   611   84   28   723   193,327   194,050 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

   1,870   265   43   2,178   484,979   487,157 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $5,686  $598  $162  $6,446  $2,414,630  $2,421,076 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   0.23  0.02  0.01  0.27  99.73 
         90 Days or          
   30-59 Days  60-89 Days  Greater Past  Total Past  Loans Not    
December 31, 2016  Past Due  Past Due  Due  Due  Past Due  Total 

Commercial

       

Owner occupied real estate

  $1,068  $—    $183  $1,251  $336,297  $337,548 

Non owner occupied real estate

   357   —     —     357   461,540   461,897 

Residential development

   —     —     —     —     5,006   5,006 

Development & Spec Land Loans

   1   —     —     1   31,227   31,228 

Commercial and industrial

   982   —     —     982   229,538   230,520 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   2,408   —     183   2,591   1,063,608   1,066,199 

Real estate

       

Residential mortgage

   886   123   —     1,009   507,224   508,233 

Residential construction

   —     —     —     —     20,611   20,611 

Mortgage warehouse

   —     —     —     —     135,727   135,727 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   886   123   —     1,009   663,562   664,571 

Consumer

       

Direct Installment

   139   4   —     143   71,007   71,150 

Direct Installment Purchased

   —     —     —     —     119   119 

Indirect Installment

   1,339   237   49   1,625   151,579   153,204 

Home Equity

   912   267   9   1,188   173,938   175,126 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total consumer

   2,390   508   58   2,956   396,643   399,599 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $5,684  $631  $241  $6,556  $2,123,813  $2,130,369 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   0.27  0.03  0.01  0.31  99.69 

The entire balance of a loan is considered delinquent if the minimum payment contractually requiredamortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to be made is not received by the specified due date.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

determine expected credit losses.

June 30, 2021
Real EstateAccounts Receivable/EquipmentOtherTotalACL
Allocation
Commercial
Owner occupied real estate$7,341 $109 $$7,450 $1,267 
Non–owner occupied real estate1,323 1,323 
Residential spec homes
Development & spec land820 820 
Commercial and industrial752 752 160 
Total commercial9,484 861 10,345 1,427 
Total collateral dependent loans$9,484 $861 $$10,345 $1,427 
December 31, 2020
Real EstateAccounts Receivable/EquipmentOtherTotalACL
Allocation
Commercial
Owner occupied real estate$11,309 $114 $$11,423 $1,605 
Non–owner occupied real estate1,032 1,032 
Residential spec homes
Development & spec land70 70 
Commercial and industrial2,245 210 2,455 252 
Total commercial14,656 324 14,980 1,857 
Total collateral dependent loans$14,656 $324 $$14,980 $1,857 
Credit Quality Indicators
Horizon Bank’sBank'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 beingre-evaluated 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’sBank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade toof the loan.loans. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective marketsregions (ranging from $1,000,000 to $3,500,000) are validated by the Loan Committee, which is chaired by the Chief CreditCommercial Banking Officer (CCO)(“CCBO”).

Commercial loan officers are responsible for reviewing their loan portfolios and reportreporting any adverse material change to the CCOCCBO, 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 CCOCCBO, SCCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCO,CCBO or SCCO, however, lenders must present their factual information to either the Loan Committee, CCBO or the CCOSCCO when recommending an upgrade.

The CCO,CCBO, or hisa designee, meets weeklyperiodically with loan officers to discuss the status ofpast-due 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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HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Monthly, senior management meets withas members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management’smanagement's analysis of the adequacy of the Allowance for Loan and LeaseCredit 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, onnon-accrual, 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 onnon-accrual. 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-gradenine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.

Risk Grade 1: Excellent (Pass)

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration;equivalents or loans to any publicly held company with a current long-termlong–term debt rating of A or better.

better and meeting defined key financial metric ranges.

Risk Grade 2: Good (Pass)

Loans to businesses that have strong financial statements containing an unqualifiedunmodified 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-yearfive 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 history;histories; or loans to publicly held companies with current long-termlong–term debt ratings of Baa or better.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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.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, didnot possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

At inception, the loan was properly underwritten, did not possess an 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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HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Risk Grade 44: Satisfactory/Monitored:

Monitored (Pass)

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans.rated loans and meet defined key financial metric ranges. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’sBank'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 4W4W: Management Watch:

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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 neededneed 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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HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
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,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 orof a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.



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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 presentstables present loans by credit grades.

      Special          
September 30, 2017  Pass  Mention  Substandard  Doubtful  Total 

Commercial

      

Owner occupied real estate

  $386,856  $5,776  $10,552  $—    $403,184 

Non owner occupied real estate

   523,831   1,008   6,721   —     531,560 

Residential development

   4,031   —     —     —     4,031 

Development & Spec Land Loans

   43,066   —     233   —     43,299 

Commercial and industrial

   272,622   4,969   10,495   —     288,086 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   1,230,406   11,753   28,001   —     1,270,160 

Real estate

      

Residential mortgage

   548,249   —     5,202   —     553,451 

Residential construction

   14,601   —     224   —     14,825 

Mortgage warehouse

   95,483   —     —     —     95,483 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   658,333   —     5,426   —     663,759 

Consumer

      

Direct Installment

   85,416   —     310   —     85,726 

Direct Installment Purchased

   88   —     —     —     88 

Indirect Installment

   206,259   —     1,034   —     207,293 

Home Equity

   191,938   —     2,112   —     194,050 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Consumer

   483,701   —     3,456   —     487,157 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $2,372,439  $11,753  $36,883  $—    $2,421,076 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   97.99  0.49  1.52  0.00 
      Special          
December 31, 2016  Pass  Mention  Substandard  Doubtful  Total 

Commercial

      

Owner occupied real estate

  $322,924  $4,960  $9,664  $—    $337,548 

Non owner occupied real estate

   455,648   341   5,908   —     461,897 

Residential development

   5,006   —     —     —     5,006 

Development & Spec Land Loans

   31,057   —     171   —     31,228 

Commercial and industrial

   220,424   3,728   6,368   —     230,520 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total commercial

   1,035,059   9,029   22,111   —     1,066,199 

Real estate

      

Residential mortgage

   503,444   —     4,789   —     508,233 

Residential construction

   20,378   —     233   —     20,611 

Mortgage warehouse

   135,727   —     —     —     135,727 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total real estate

   659,549   —     5,022   —     664,571 

Consumer

      

Direct Installment

   70,638   —     512   —     71,150 

Direct Installment Purchased

   119   —     —     —     119 

Indirect Installment

   152,496   —     708   —     153,204 

Home Equity

   173,117   —     2,009   —     175,126 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Consumer

   396,370   —     3,229   —     399,599 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $2,090,978  $9,029  $30,362  $—    $2,130,369 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percentage of total loans

   98.15  0.42  1.43  0.00 

grades and origination year at June 30, 2021.

June 30, 202120212020201920182017PriorRevolving LoansTotal
Commercial
Owner occupied real estate
Pass$29,263 $56,383 $56,495 $48,945 $43,937 $153,980 $39,681 $428,684 
Special Mention1,023 1,129 8,852 11,638 22,642 
Substandard1,012 1,005 3,919 1,568 13,275 3,803 24,582 
Doubtful
Total owner occupied real estate$29,263 $57,395 $58,523 $53,993 $54,357 $178,893 $43,484 $475,908 
Non–owner occupied real estate
Pass$69,815 $111,666 $109,816 $60,224 $133,171 $267,245 $166,989 $918,926 
Special Mention851 1,214 29,438 4,512 12,111 303 48,429 
Substandard15,417 1,155 94 8,921 2,372 27,959 
Doubtful
Total non–owner occupied real estate$69,815 $112,517 $126,447 $90,817 $137,777 $288,277 $169,664 $995,314 
Residential spec homes
Pass$500 $368 $606 $$$841 $6,900 $9,215 
Special Mention
Substandard
Doubtful
Total residential spec homes$500 $368 $606 $0 $0 $841 $6,900 $9,215 
Development & spec land
Pass$1,445 $563 $563 $1,480 $2,169 $12,177 $3,247 $21,644 
Special Mention190 200 390 
Substandard404 750 1,154 
Doubtful
Total development & spec land$1,445 $563 $563 $1,480 $2,169 $12,771 $4,197 $23,188 
Commercial & industrial
Pass$205,256 $85,641 $55,244 $50,770 $68,524 $63,323 $32,927 $561,685 
Special Mention3,152 3,455 1,086 2,394 6,996 4,508 910 22,501 
Substandard2,689 570 2,213 3,001 1,717 4,321 2,305 16,816 
Doubtful
Total commercial & industrial$211,097 $89,666 $58,543 $56,165 $77,237 $72,152 $36,142 $601,002 
Total commercial$312,120 $260,509 $244,682 $202,455 $271,540 $552,934 $260,387 $2,104,627 
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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)

June 30, 202120212020201920182017PriorRevolving LoansTotal
Real estate
Residential mortgage
Performing$52,716 $103,892 $48,617 $61,616 $68,983 $193,594 $$529,418 
Non–performing377 634 6,830 7,841 
Total residential mortgage$52,716 $103,892 $48,994 $62,250 $68,983 $200,424 $0 $537,259 
Residential construction
Performing$$$$$$$22,178 $22,178 
Non–performing
Total residential construction$0 $0 $0 $0 $0 $0 $22,178 $22,178 
Mortgage warehouse
Performing$$$$$$$205,311 $205,311 
Non–performing
Total mortgage warehouse$0 $0 $0 $0 $0 $0 $205,311 $205,311 
Total real estate$52,716 $103,892 $48,994 $62,250 $68,983 $200,424 $227,489 $764,748 
June 30, 202120212020201920182017PriorRevolving LoansTotal
Consumer
Direct installment
Performing$7,408 $9,665 $7,494 $4,271 $4,174 $3,151 $$36,171 
Non–performing15 18 
Total direct installment$7,408 $9,665 $7,494 $4,271 $4,189 $3,154 $8 $36,189 
Indirect installment
Performing$78,798 $113,258 $77,097 $54,691 $25,441 $8,048 $$357,333 
Non–performing83 177 204 229 135 828 
Total indirect installment$78,798 $113,341 $77,274 $54,895 $25,670 $8,183 $0 $358,161 
Home equity
Performing$30,630 $60,376 $36,093 $28,389 $23,158 $68,575 $5,283 $252,504 
Non–performing10 38 10 84 73 1,296 1,779 3,290 
Total home equity$30,640 $60,414 $36,103 $28,473 $23,231 $69,871 $7,062 $255,794 
Total consumer$116,846 $183,420 $120,871 $87,639 $53,090 $81,208 $7,070 $650,144 

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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 tables present loans by credit grades and origination year at December 31, 2020.
December 31, 202020202019201820172016PriorRevolving LoansTotal
Commercial
Owner occupied real estate
Pass$57,726 $65,558 $49,455 $49,032 $47,480 $127,373 $40,027 $436,651 
Special Mention1,081 5,928 10,205 4,207 12,787 325 34,533 
Substandard1,021 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 Mention862 1,236 28,723 1,298 2,548 13,182 4,072 51,921 
Substandard15,552 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 $$298 $368 $1,177 $7,253 $10,070 
Special Mention
Substandard
Doubtful
Total residential spec homes$737 $237 $0 $298 $368 $1,177 $7,253 $10,070 
Development & spec land
Pass$573 $736 $1,522 $2,461 $672 $11,971 $6,907 $24,842 
Special Mention274 274 
Substandard506 750 1,256 
Doubtful
Total development & spec land$573 $736 $1,522 $2,461 $672 $12,751 $7,657 $26,372 
Commercial & industrial
Pass$253,953 $63,772 $58,978 $88,121 $26,044 $70,706 $30,845 $592,419 
Special Mention8,779 1,164 1,088 9,306 1,835 11,870 3,040 37,082 
Substandard4,233 7,079 11,072 1,660 636 3,322 2,384 30,386 
Doubtful
Total commercial & industrial$266,965 $72,015 $71,138 $99,087 $28,515 $85,898 $36,269 $659,887 
Total commercial$443,551 $277,669 $235,924 $298,388 $192,725 $476,011 $268,003 $2,192,271 
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
December 31, 202020202019201820172016PriorRevolving LoansTotal
Real estate
Residential mortgage
Performing$109,487 $68,556 $86,572 $89,051 $65,718 $171,322 $$590,706 
Non–performing296 636 39 300 6,723 7,994 
Total residential mortgage$109,487 $68,852 $87,208 $89,090 $66,018 $178,045 $0 $598,700 
Residential construction
Performing$$$$$$$25,586 $25,586 
Non–performing
Total residential construction$0 $0 $0 $0 $0 $0 $25,586 $25,586 
Mortgage warehouse
Performing$$$$$$$395,626 $395,626 
Non–performing
Total mortgage warehouse$0 $0 $0 $0 $0 $0 $395,626 $395,626 
Total real estate$109,487 $68,852 $87,208 $89,090 $66,018 $178,045 $421,212 $1,019,912 
December 31, 202020202019201820172016PriorRevolving LoansTotal
Consumer
Direct installment
Performing$12,552 $9,552 $5,828 $5,946 $2,124 $2,019 $12 $38,033 
Non–performing13 
Total direct installment$12,552 $9,552 $5,828 $5,951 $2,127 $2,024 $12 $38,046 
Indirect installment
Performing$134,394 $97,408 $74,215 $36,763 $8,636 $4,801 $$356,217 
Non–performing84 223 392 361 80 154 1,294 
Total indirect installment$134,478 $97,631 $74,607 $37,124 $8,716 $4,955 $0 $357,511 
Home equity
Performing$63,946 $42,762 $34,807 $27,553 $22,450 $59,503 $5,464 $256,485 
Non–performing111 74 121 1,237 1,606 3,158 
Total home equity$63,946 $42,771 $34,918 $27,627 $22,571 $60,740 $7,070 $259,643 
Total consumer$210,976 $149,954 $115,353 $70,702 $33,414 $67,719 $7,082 $655,200 


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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 5 – 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 six months ended June 30, 2021 and 2020:
Three Months Ended June 30, 2021
CommercialReal EstateMortgage WarehouseConsumerTotal
Balance, beginning of period$42,980 $4,229 $1,163 $8,814 $57,186 
Provision for credit losses on loans(1,168)(144)(8)(172)(1,492)
PCD loan charge–offs(6)(6)
Charge–offs(67)(237)(304)
Recoveries27 23 215 265 
Balance, end of period$41,766 $4,108 $1,155 $8,620 $55,649 
Three Months Ended June 30, 2020
CommercialReal EstateMortgage WarehouseConsumerTotal
Balance, beginning of period$32,550 $5,654 $1,055 $9,181 $48,440 
Provision for credit losses on loans6,603 202 135 117 7,057 
Charge–offs(15)(34)(526)(575)
Recoveries10 149 168 
Balance, end of period$39,147 $5,832 $1,190 $8,921 $55,090 
Six Months Ended June 30, 2021
CommercialReal EstateMortgage WarehouseConsumerTotal
Balance, beginning of period$42,210 $4,620 $1,267 $8,930 $57,027 
Provision for credit losses on loans(240)(600)(112)(173)(1,125)
PCD loan charge–offs(6)(6)
Charge–offs(263)(472)(735)
Recoveries65 88 335 488 
Balance, end of period$41,766 $4,108 $1,155 $8,620 $55,649 
Six Months Ended June 30, 2020
CommercialReal EstateMortgage WarehouseConsumerTotal
Balance, beginning of period$11,996 $923 $1,077 $3,671 $17,667 
Impact of adopting ASC 32613,618 4,048 4,911 22,577 
Provision for credit losses on loans13,519 902 113 1,123 15,657 
Charge–offs(84)(60)(1,144)(1,288)
Recoveries98 19 360 477 
Balance, end of period$39,147 $5,832 $1,190 $8,921 $55,090 

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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HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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.
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 6 – 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 $1.5 billion and $1.5 billion at June 30, 2021 and December 31, 2020.

The aggregate fair value of capitalized mortgage servicing rights was approximately $14.5 million and $12.5 million at June 30, 2021 and December 31, 2020, compared to the carrying values of $14.5 million and $12.5 million at June 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.

June 30,December 31,
20212020
Mortgage servicing rights
Balance, beginning of period$17,644 $15,046 
Servicing rights capitalized2,161 5,530 
Amortization of servicing rights(2,014)(2,932)
Balance, end of period17,791 17,644 
Impairment allowance
Balance, beginning of period(5,172)(719)
Additions(5,106)
Reductions1,843 653 
Balance, end of period(3,329)(5,172)
Mortgage servicing rights, net$14,462 $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)

The Bank reduced impairment by approximately $1.8 million for the six months ended June 30, 2021. The Bank recorded additional impairment of approximately $4.5 million for the year ended December 31, 2020.


Note 7 – Goodwill

The following table presents the Company’s carrying amount of goodwill as of June 30, 2021 and December 31, 2020.
June 30,December 31,
20212020
Balance, beginning of period$151,238 $151,238 
Goodwill acquired during the period
Balance, end of period$151,238 $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 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 0 goodwill impairment.

The Company updated their analysis above during the second quarter of 2021 which resulted in 0 goodwill impairment charges for the six months ended June 30, 2021.

Note 8 – 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 Bank’sCompany’s control.


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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 shows repurchase agreements accounted for as secured borrowings:

September 30, 2017

  Remaining Contractual Maturity of the Agreements 
   Overnight and
Continuous
   Up to one
year
   One to three
years
   Three to
five years
   Five to ten
years
   Beyond ten
years
   Total 

Repurchase Agreements andrepurchase-to-maturity transactions

              

Repurchase Agreements

  $63,081   $—     $—     $—     $—     $—     $63,081 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities pledged for Repurchase Agreements

              

U.S. Treasury and federal agencies

   —      —      —      —      —      —      —   

Federal agency collateralized mortgage obligations

   40,740    —      —      —      —      —      40,740 

Federal agency mortgage-backed pools

   38,476    —      —      —      —      —      38,476 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $79,216   $—     $—     $—     $—     $—     $79,216 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
borrowings and the related securities, at fair value, pledged for repurchase agreements:
June 30, 2021
Remaining Contractual Maturity of the Agreements
Overnight
and
Continuous
Up to one
year
One to three
years
Three to five
years
Five to ten
years
Beyond ten
years
Total
Repurchase Agreements and repurchase-to-maturity transactions
Repurchase Agreements$128,453 $$$$$$128,453 
Securities pledged for Repurchase Agreements
Federal agency collateralized mortgage obligations$47,460 $$$$$$47,460 
Federal agency mortgage–backed pools82,188 82,188 
Total$129,648 $$$$$$129,648 


Note 9 – 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 rate (which is expected to be Three–Month Term SOFR), 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 is less than zero, the Benchmark rate shall be deemed to be zero.
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.

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 monthmonths LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14%4.20% on a notional amount of $30.5$12.0 million at SeptemberJune 30, 20172021 and December 31, 2016.

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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)
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 weighted average fixed rate of 2.31%2.62% on a notional amount of $30.0$10.0 million at September 30, 2017 and December 31, 2016.2020. 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 June 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 SeptemberJune 30, 2017,2021, 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 SeptemberJune 30, 2017,2021, 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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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 $152.2$459.6 million at SeptemberJune 30, 20172021 and $122.4$442.7 million at December 31, 2016.

2020.

Other Derivative Instruments

The Company enters intonon-hedging 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 SeptemberJune 30, 2017,2021, 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.

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

   Asset Derivatives   Liability Derivatives 
   September 30, 2017   September 30, 2017 
Derivatives designated as hedging instruments (Unaudited)  Balance Sheet
Location
   Fair Value   Balance Sheet
Location
   Fair Value 

Interest rate contracts

   Loans   $—      Other liabilities  $429 

Interest rate contracts

   Other Assets    429    Other liabilities    2,390 
    

 

 

     

 

 

 

Total derivatives designated as hedging instruments

     429      2,819 
    

 

 

     

 

 

 

Derivatives not designated as hedging instruments

        

Mortgage loan contracts

   Other assets    286    Other liabilities    31 
    

 

 

     

 

 

 

Total derivatives not designated as hedging instruments

     286      31 
    

 

 

     

 

 

 

Total derivatives

    $715     $2,850 
    

 

 

     

 

 

 
   Asset Derivatives   Liability Derivatives 
   December 31, 2016   December 31, 2016 
Derivatives designated as hedging instruments  Balance Sheet
Location
   Fair Value   Balance Sheet
Location
   Fair Value 

Interest rate contracts

   Loans   $—      Other liabilities   $6 

Interest rate contracts

   Other Assets    6    Other liabilities    3,132 
    

 

 

     

 

 

 

Total derivatives designated as hedging instruments

     6      3,138 
    

 

 

     

 

 

 

Derivatives not designated as hedging instruments

        

Mortgage loan contracts

   Other assets    602    Other liabilities    22 
    

 

 

     

 

 

 

Total derivatives not designated as hedging instruments

     602      22 
    

 

 

     

 

 

 

Total derivatives

    $608     $3,160 
    

 

 

     

 

 

 

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Asset DerivativesLiability Derivatives
June 30, 2021June 30, 2021
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedging instruments
Interest rate contractsOther assets$22,693 Other liabilities$27,901 
Total derivatives designated as hedging instruments22,693 27,901 
Derivatives not designated as hedging instruments
Mortgage loan contractsOther assets499 Other liabilities
Total derivatives not designated as hedging instruments499 
Total derivatives$23,192 $27,901 
Asset DerivativesLiability Derivatives
December 31, 2020December 31, 2020
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedging instruments
Interest rate contractsOther assets$35,388 Other liabilities$43,631 
Total derivatives designated as hedging instruments35,388 43,631 
Derivatives not designated as hedging instruments
Mortgage loan contractsOther assets1,045 Other liabilities
Total derivatives not designated as hedging instruments1,045 
Total derivatives$36,433 $43,631 
The effect of the derivative instruments on the condensed consolidated statements of income for the three-monththree and nine-monthsix–month periods ending SeptemberJune 30 is as follows:

   Comprehensive Income on Derivative   Comprehensive Income on Derivative 
   (Effective Portion)   (Effective Portion) 
   Three Months Ended September 30   Nine Months Ended September 30 
Derivative in cash flow  2017   2016   2017   2016 

hedging relationship

  (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 

Interest rate contracts

  $193   $522   $483   $103 

Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative
(Effective Portion)
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Derivatives in cash flow hedging relationship
Interest rate contracts$(14)$(107)$2,398 $(3,239)
FASB Accounting Standards Codification (“ASC”) Topic820-10-20 820–10–20 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. Topic820-10-55 820–10–55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

      Amount of Gain (Loss) Recognized on Derivative 
      Three Months Ended September 30  Nine Months Ended September 30 
Derivative in fair value  Location of gain (loss)  2017  2016  2017  2016 

hedging relationship

  

recognized on derivative

  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 

Interest rate contracts

  Interest income-loans  $(4 $(830 $423  $2,781 

Interest rate contracts

  Interest income-loans   4   830   (423  (2,781
    

 

 

  

 

 

  

 

 

  

 

 

 

Total

    $—    $—    $—    $—   
    

 

 

  

 

 

  

 

 

  

 

 

 
      Amount of Gain (Loss) Recognized on Derivative 
      Three Months Ended September 30  Nine Months Ended September 30 
Derivative not designated  Location of gain (loss)  2017  2016  2017  2016 

as hedging relationship

  

recognized on derivative

  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 

Mortgage contracts

  Other income-gain on sale of loans  $(112 $(324 $(324 $145 
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Location of gain
(loss)
recognized on derivative
Amount of Gain (Loss) Recognized on Derivative
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Derivative in fair value hedging relationship
Interest rate contractsInterest income - loans$(4,830)$(3,162)$12,695 $(29,492)
Interest rate contractsInterest income - loans4,830 3,162 (12,695)29,492 
Total$$$$

Location of gain
(loss)
recognized on derivative
Amount of Gain (Loss) Recognized on Derivative
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Derivative not designated as hedging relationship
Mortgage contractsOther income - gain on sale of loans$696 $(679)$(545)$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 1Quoted prices in active markets for identical assets or liabilities
Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3
Level 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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 SeptemberJune 30, 2017.2021. 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-backedmortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-incomefixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark
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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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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:

       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 

September 30, 2017

        

Available-for-sale securities

        

U.S. Treasury and federal agencies

  $17,885   $—     $17,885   $—   

State and municipal

   143,483    —      143,483    —   

Federal agency collateralized mortgage obligations

   134,202    —      134,202    —   

Federal agency mortgage-backed pools

   212,051    —      212,051    —   

Private labeled mortgage-backed pools

   1,830    —      1,830    —   

Corporate notes

   393    —      393    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalavailable-for-sale securities

   509,844    —      509,844    —   

Hedged loans

   152,216    —      152,216    —   

Forward sale commitments

   286    —      286    —   

Interest rate swap agreements

   (2,819   —      (2,819   —   

Commitments to originate loans

   (31   —      (31   —   

December 31, 2016

        

Available-for-sale securities

        

U.S. Treasury and federal agencies

  $7,989   $—     $7,989   $—   

State and municipal

   116,592    —      116,592    —   

Federal agency collateralized mortgage obligations

   137,195    —      137,195    —   

Federal agency mortgage-backed pools

   176,726    —      176,726    —   

Corporate notes

   1,329    —      1,329    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Totalavailable-for-sale securities

   439,831    —      439,831    —   

Hedged loans

   122,345    —      122,345    —   

Forward sale commitments

   602    —      602    —   

Interest rate swap agreements

   (3,138   —      (3,138   —   

Commitments to originate loans

   (22   —      (22   —   

June 30, 2021
Fair ValueQuoted 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$191,101 $$191,101 $
State and municipal1,113,493 1,113,493 
Federal agency collateralized mortgage obligations98,622 98,622 
Federal agency mortgage–backed pools167,510 167,510 
Private labeled mortgage–backed pools33,568 33,568 0
Corporate notes86,892 86,892 
Total available for sale securities1,691,186 1,691,186 
Interest rate swap agreements asset22,693 22,693 
Forward sale commitments499 499 
Interest rate swap agreements liability(27,901)(27,901)
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
December 31, 2020
Fair ValueQuoted Prices in Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Available for sale securities
U.S. Treasury and federal agencies$19,715 $$19,715 $
State and municipal837,843 837,843 
Federal agency collateralized mortgage obligations147,453 147,453 
Federal agency mortgage–backed pools118,799 118,799 
Corporate notes10,215 10,215 
Total available for sale securities1,134,025 1,134,025 
Interest rate swap agreements asset35,388 35,388 
Forward sale commitments1,045 1,045 
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 September 30   Nine Months Ended September 30 
Non Interest Income  2017   2016   2017   2016 
Total gains and losses from:  (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 

Hedged loans

  $(4  $(830  $423   $2,781 

Fair value interest rate swap agreements

   4    830    (423   (2,781

Derivative loan commitments

   (112   (324   (324   145 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $(112  $(324  $(324  $145 
  

 

 

   

 

 

   

 

 

   

 

 

 

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Non-interest Income
Total gains and losses from:
Hedged loans$(4,830)$(3,162)$12,695 $(29,492)
Fair value interest rate swap agreements4,830 3,162 (12,695)29,492 
Derivative loan commitments696 (679)(545)364 
$696 $(679)$(545)$364 
Certain other assets are measured at fair value on anon-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):

       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 

September 30, 2017

        

Impaired loans

  $3,433   $—     $—     $3,433 

Mortgage servicing rights

   11,485    —      —      11,485 

December 31, 2016

        

Impaired loans

  $2,246   $—     $—     $2,246 

Mortgage servicing rights

   11,174    —      —      11,174 

Impaired (collateral dependent): Loans for which it is probable that the Company will not collect all principal and interest due according

Fair ValueQuoted Prices in Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2021
Collateral dependent loans$8,918 $$$8,918 
Mortgage servicing rights14,462 14,462 
December 31, 2020
Collateral dependent loans$13,123 $$$13,123 
Mortgage servicing rights12,472 12,472 


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HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan isCondensed 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.

Impaired

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

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’smonth-end 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 decreasedincreased by $75,000$1.8 million during the first ninesix months of 20172021 and decreased by $193,000$3.2 million during the first ninesix months of 2016.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

2020.


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

  Fair Value at  Valuation   Range (Weighted 
  September 30, 2017  

Technique

 

Unobservable Inputs

 Average) 
   

Discount to reflect current market

conditions and ultimate

 

Impaired loans

 $3,433  Collateral based measurement collectability  11% - 17% (14%
   Discount rate, Constant  11% - 17% (14%), 
   prepayment rate, Probability of  4% - 8% (5.1%), 

Mortgage servicing rights

 $11,485  Discounted cashflows default  1% - 11% (5.0%
  Fair Value at  Valuation   Range (Weighted 
  December 31, 2016  

Technique

 

Unobservable Inputs

 Average) 
   Discount to reflect current 
   market conditions and ultimate 

Impaired loans

 $2,246  Collateral based measurement collectability  10% - 16% (13%
   Discount rate, Constant  10% - 16% (13%), 
   prepayment rate, Probability of  4% - 7% (4.6%), 

Mortgage servicing rights

 $11,174  Discounted cashflows default  1% - 10% (4.5%
June 30, 2021
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted Average)
Collateral dependent loans$8,918 Collateral based measurementDiscount to reflect current market conditions and ultimate collectibility0.0%-66.0% (13.8%)
Mortgage servicing rights14,462 Discounted cash flows
Discount rate,
Constant prepayment rate,
Probability of default
8.0%-8.0% (8.0%),
9.9%-28.5% (13.6%),
0.0%-4.5%(0.5%)

December 31, 2020
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted Average)
Collateral dependent loans$13,123 Collateral based measurementDiscount to reflect current market conditions and ultimate collectibility0.0%-72.0%(12.4%)
Mortgage servicing rights12,472 Discounted cash flowsDiscount 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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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 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 SeptemberJune 30, 20172021 and December 31, 2016.2020. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certainoff-balance 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.

Held-to-Maturity

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 SaleThe carrying amounts approximate fair value.

Net Loans The fair value of portfolionet loans isare estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similaron an exit price basis incorporating discounts for credit, ratingsliquidity and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

marketability factors.

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

FHLB.

Interest Receivable/Payable The carrying amounts approximate fair value.

Deposits The fair value of demand deposits, savings accounts, interest-bearinginterest–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-ratefixed–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-termshort–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 (unaudited).

   September 30, 2017 
       Quoted Prices         
       in Active   Significant     
       Markets for   Other   Significant 
       Identical   Observable   Unobservable 
   Carrying   Assets   Inputs   Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 

Assets

        

Cash and due from banks

  $72,662   $72,662   $—     $—   

Investment securities, held to maturity

   198,605    —      202,222    —   

Loans held for sale

   3,616    —      —      3,616 

Loans excluding loan level hedges, net

   2,258,023    —      —      2,205,681 

Stock in FHLB and FRB

   15,340    —      15,340    —   

Interest receivable

   14,880    —      14,880    —   

Liabilities

        

Non-interest bearing deposits

  $563,536   $563,536   $—     $—   

Interest-bearing deposits

   2,044,739    —      1,948,765    —   

Borrowings

   458,152    —      453,303    —   

Subordinated debentures

   37,607    —      36,241    —   

Interest payable

   700    —      700    —   

fall.

June 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)
Assets
Cash and due from banks$304,171 $304,171 $$
Interest–earning time deposits6,994 7,107 
Investment securities, held to maturity153,284 162,651 
Loans held for sale7,228 7,228 
Loans (excluding loan level hedges), net3,463,870 3,389,962 
Stock in FHLB23,023 23,023 
Interest receivable21,702 21,702 
Liabilities
Non–interest bearing deposits$1,102,950 $1,102,950 $$
Interest bearing deposits3,678,676 3,658,436 
Borrowings439,094 439,763 
Subordinated notes58,676 58,033 
Junior subordinated debentures issued to capital trusts56,662 53,163 
Interest payable2,430 2,430 
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 $$
Interest–earning time deposits8,965 9,136 
Investment securities, held to maturity168,676 179,990 
Loans held for sale13,538 13,538 
Loans (excluding loan level hedges), net3,810,356 3,767,348 
Stock in FHLB23,023 23,023 
Interest receivable21,396 21,396 
Liabilities
Non–interest bearing deposits$1,053,242 $1,053,242 $$
Interest bearing deposits3,477,891 3,466,522 
Borrowings475,000 483,245 
Subordinated notes58,603 57,626 
Junior subordinated debentures issued to capital trusts56,548 52,676 
Interest payable2,712 2,712 

41

Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

   December 31, 2016 
       Quoted Prices         
       in Active   Significant     
       Markets for   Other   Significant 
       Identical   Observable   Unobservable 
   Carrying   Assets   Inputs   Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 

Assets

        

Cash and due from banks

  $70,832   $70,832   $—     $—   

Investment securities, held to maturity

   193,194    —      194,086    —   

Loans held for sale

   8,087    —      —      8,087 

Loans excluding loan level hedges, net

   1,998,804    —      —      1,965,928 

Stock in FHLB and FRB

   23,932    —      23,932    —   

Interest receivable

   12,713    —      12,713    —   

Liabilities

        

Non-interest bearing deposits

  $496,248   $496,248   $—     $—   

Interest-bearing deposits

   1,974,962    —      1,839,167    —   

Borrowings

   267,489    —      261,141    —   

Subordinated debentures

   37,456    —      36,371    —   

Interest payable

   472    —      472    —   

Note 1213 – Accumulated Other Comprehensive Income

   September 30   December 31 
   2017   2016 
   (Unaudited)     

Unrealized gain (loss) on securities available for sale

  $(601  $(6,007

Unamortized gain on securities held to maturity, previously transferred from AFS

   256    456 

Unrealized loss on derivative instruments

   (2,390   (3,132

Tax effect

   958    3,039 
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

  $(1,777  $(5,644
  

 

 

   

 

 

 
June 30,
2021
December 31,
2020
Unrealized gain on securities available for sale$28,932 $43,662 
Unamortized loss on securities held to maturity, previously transferred from AFS(134)(165)
Unrealized loss on derivative instruments(5,208)(8,243)
Tax effect(4,952)(7,402)
Total accumulated other comprehensive income$18,638 $27,852 

Note 1314 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agenciesagencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and are assigned to aConsumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital category.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 Bank’sCompany’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certainoff-balance-sheet off–balance–sheet items as calculated under regulatory accounting practices. The 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.

Quantitative measures established by regulation

The Company and Bank are subject to ensureminimum regulatory capital adequacy requirerequirements as defined and calculated in accordance with the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For September 30, 2017, Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined). Additionally,III–based regulations. As allowed under Basel III rules, the Company made the decision was made toopt-out opt–out of including accumulated other comprehensive income in regulatory capital.

HORIZON BANCORP AND SUBSIDIARIES

Notes The minimum regulatory capital requirements are set forth in the table below.

In addition, to Condensed Consolidated Financial Statements

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

To be categorized as well capitalized, the Company and Bank must maintain minimum Total risk-based,risk–based, Tier I risk-based,risk–based, common equity Tier I risk-based (September 30, 2017)risk–based and Tier I leverage ratios as set forth in the table below. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, 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 thirdsecond quarter of 20172021 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalizedwell 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 SeptemberJune 30, 20172021 and December 31, 20162020 were as follows:

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

As of September 30, 2017

             

Total capital1(to risk-weighted assets)

             

Consolidated

  $347,601    13.22  210,274    8.00  226,833    8.63  N/ A    N/ A 

Bank

   339,596    12.93  210,162    8.00  226,713    8.63 $262,703    10.00

Tier 1 capital1(to risk-weighted assets)

             

Consolidated

   331,962    12.63  157,705    6.00  174,264    6.63  N/ A    N/ A 

Bank

   323,957    12.33  157,622    6.00  174,172    6.63  210,162    8.00

Common equity tier 1 capital1(to risk-weighted assets)

             

Consolidated

   293,499    11.17  118,279    4.50  134,838    5.13  N/ A    N/ A 

Bank

   323,957    12.33  118,216    4.50  134,766    5.13  170,757    6.50

Tier 1 capital1(to average assets)

             

Consolidated

   331,962    10.11  131,319    4.00  131,319    4.00  N/ A    N/ A 

Bank

   323,957    9.90  130,877    4.00  130,877    4.00  163,596    5.00

As of December 31, 2016

             

Total capital1(to risk-weighted assets)

             

Consolidated

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

Bank

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

Tier 1 capital1(to risk-weighted assets)

             

Consolidated

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

Bank

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

Common equity tier 1 capital1(to risk-weighted assets)

             

Consolidated

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

Bank

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

Tier 1 capital1(to average assets)

             

Consolidated

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

Bank

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

1As defined by regulatory agencies

Note 14 – Preferred Stock Redemption

On February 1, 2016, Horizon completed the redemption (the “Redemption”) of all 12,500 outstanding shares of SeniorNon-Cumulative Perpetual Preferred Stock, Series B (the “SBLF Preferred Stock”) which were held by the U.S. Department of Treasury and issued pursuant to its Small Business Lending Fund (“SBLF”). The SBLF Preferred Stock was redeemed at its liquidation value of $1,000 per share, plus accrued dividends, for a total Redemption price of $12,510,416.67. Horizon funded the Redemption using cash on hand without borrowing and without a special dividend from the Bank. Following the Redemption, Horizon does not have any shares of its SeniorNon-Cumulative Perpetual Preferred Stock, Series B outstanding. The Redemption terminates Horizon’s participation in the SBLF.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 15 – Future Accounting Matters

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)No. 2017-12,Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU)No. 2017-12,Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this ASU also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. For public entities, the new guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the ASU. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).

FASB Accounting Standards UpdateNo. 2017-08,Receivables – Nonrefundable Fees and Other Costs (Subtopic310-20), Premium Amortization on Purchased Callable Debt Securities

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2017-08,Receivables – Nonrefundable Fees and Other Costs (Subtopic310-20), Premium Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The amendments in this update were adopted on January 1, 2017 and did not have a material impact on the consolidated financial statements.

FASB Accounting Standards UpdatesNo. 2017-04,Intangibles – Goodwill and Other(Topic 350):Simplifying the Test for Goodwill Impairment

The FASB has issued Accounting Standards Update (ASU)No. 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

FASB Accounting Standards UpdatesNo. 2017-01,Business Combinations(Topic 805):Clarifying the Definition of a Business

The FASB has issued Accounting Standards Update (ASU)No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The amendments in this update became effective on January 1, 2017 and did not have a material impact on the consolidated financial statements.

FASB Accounting Standards UpdatesNo. 2016-13,Financial Instruments – Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments

The FASB has issued Accounting Standards Update (ASU)No. 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption will be permitted beginning after December 15, 2018. We have formed a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize aone-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any suchone-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

FASB Accounting Standards UpdatesNo. 2016-09,Compensation – Stock Compensation(Topic 718):Improvements to Employee Share-Based Payment Acounting

The FASB has issued Accounting Standards Update (ASU)No. 2016-09,Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.The amendments are intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. The amendments in this update became effective on January 1, 2017 and resulted in a tax benefit of $208,000 and $227,000 for the three and nine months ended September 30, 2017, respectively.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

The FASB has issued Accounting Standards Update (ASU)No. 2016-02,Leases.Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) aright-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding as of December 31, 2016, we do not expect the new standard to have a material impact on our balance sheet or income statement.

FASB Accounting Standards UpdatesNo. 2016-01,Financial Instruments – Overall (Subtopic825-10):Recognition and Measurement of Financial Assets and Financial Liabilities

The FASB has issued Accounting Standards Update (ASU)No. 2016-01,Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies,not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.

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

Actual
Required for Capital
Adequacy Purposes(1)
Required For Capital
Adequacy Purposes
with Capital Buffer(1)
Well Capitalized 
Under Prompt Corrective Action
Provisions(1)
AmountRatioAmountRatioAmountRatioAmountRatio
June 30, 2021
Total capital (to risk–weighted assets)(1)
Consolidated$687,957 16.65 %$330,550 8.00 %$433,847 10.50 %N/AN/A
Bank573,430 14.09 %325,581 8.00 %427,325 10.50 %$406,977 10.00 %
Tier 1 capital (to risk–weighted assets)(1)
Consolidated634,359 15.35 %247,958 6.00 %351,274 8.50 %N/AN/A
Bank520,873 12.80 %244,159 6.00 %345,892 8.50 %325,546 8.00 %
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated519,058 12.56 %185,968 4.50 %289,284 7.00 %N/AN/A
Bank520,873 12.80 %183,119 4.50 %284,852 7.00 %264,506 6.50 %
Tier 1 capital (to average assets)(1)
Consolidated634,359 10.76 %235,821 4.00 %235,821 4.00 %N/AN/A
Bank520,873 8.79 %237,030 4.00 %237,030 4.00 %296,287 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/AN/A
Bank532,315 12.21 %348,810 8.00 %457,813 10.50 %$436,013 10.00 %
Tier 1 capital (to risk–weighted assets)(1)
Consolidated607,340 13.96 %261,018 6.00 %369,775 8.50 %N/AN/A
Bank492,221 11.29 %261,606 6.00 %370,609 8.50 %348,808 8.00 %
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated491,281 11.29 %195,764 4.50 %304,522 7.00 %N/AN/A
Bank492,221 11.29 %196,205 4.50 %305,207 7.00 %283,407 6.50 %
Tier 1 capital (to average assets)(1)
Consolidated607,340 10.68 %227,507 4.00 %227,507 4.00 %N/AN/A
Bank492,221 8.71 %226,158 4.00 %226,158 4.00 %282,697 5.00 %
(1) As defined by regulatory agencies
Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;

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

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

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

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

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

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

FASB Accounting Standards Updates No. 2014-09,Revenue from Contracts with Customers (Topic 606)

The FASB has issued Accounting Standards Update (ASU) No. 2014-09 creating, Revenue from Contracts with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We do not expect the new standard, or any of the amendments detailed below, to result in a material change from our current accounting for revenue, as recognition of interest income and the larger sources of non-interest income from Horizon’s current financial instruments would not be impacted by the guidance. Additional disclosures regarding the composition of Horizon’s revenue sources will be required.

In May 2016, the FASB issued ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and some practical expedients.

In December 2016, the FASB issued ASU No. 2016-20,Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1615 – 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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Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and NineSix Months ended SeptemberJune 30, 20172021 and 2016

2020
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This report contains certain forward-lookingforward–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 N.A. (the “Bank”). Horizon intends such forward-lookingforward–looking statements to be covered by the safe harbor provisions for forward-lookingforward–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-lookingforward–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-lookingforward–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-lookingforward–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-lookingforward–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;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-bearinginterest bearing liabilities, and interest rate sensitivity;

risingthe 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;

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

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

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

volatility and disruption in financial markets;

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

sources of liquidity;

potential risk of environmental liability related to lending activities;

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

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

the possible impact of whole or partial dismantling of provisions of the Dodd-Frank Act under the administration of President Donald J. Trump;

the potential for changes in tax laws, particularly corporate income tax reform, that may affect current returns, Horizon’s deferred tax assets and liabilities, the ability to utilize federal and state net operating loss carryforwards, and the market’s perception on overall value;

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

the impact of the Basel III capital rules;

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

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

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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 Six Months ended June 30, 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 slowing or failure of economic recovery;

the ability of the U.S. federal government to manage federal debt limits;
the potential influence on the U.S. financial markets and economy from the effects of 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-lookingforward–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-lookingforward–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-lookingforward–looking statements, see “Risk Factors” in Item 1A of Part I of our 20162020 Annual Report on Form10-K 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 Northernnorthern and Centralcentral Indiana Southwestern and Centralsouthern and central Michigan and Central Ohio through its bank subsidiary.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. TheHorizon Bank (formerly known as “Horizon Bank, N.A.”) was originally charteredfounded in 1873 as a national banking association, in 1873 and has operated continuously since that time and convertedit remained a national association until its conversion to an Indiana state-charteredcommercial bank effective on June 23, 2017. The Bank is a full-servicefull–service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

On October 17, 2017, Horizon completed the acquisition of Wolverine Bancorp,Risk Management, Inc., is a Maryland corporation (“Wolverine”)captive insurance company incorporated in Nevada and Horizon Bank’s acquisition of Wolverine Bank,was formed as a federally-chartered savings bank and wholly-ownedwholly–owned subsidiary of Wolverine,Horizon.

Over the last 20 years, Horizon has expanded its geographic reach and experienced financial growth through a combination of both organic expansion and mergers effective October 17, 2017. Underand acquisitions. Horizon's initial operations focused on northwest Indiana, but since then, the termsCompany has developed a presence in new markets in southern and central Michigan and northeastern and central Indiana.

45

Table of the Merger Agreement, shareholders of Wolverine received 1.0152 shares of Horizon common stock and $14.00 in cash for each outstanding share of Wolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331 and the shares of Horizon common stock issued to Wolverine shareholders totaled 2,161,610. Based upon the October 16, 2017 closing price of $29.06 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $95.1 million.

On September 1, 2017, Horizon completed the acquisition of Lafayette Community Bancorp, an Indiana corporation (“Lafayette”) and Horizon Bank’s acquisition of Lafayette Community Bank, a state-chartered bank and wholly-owned subsidiary of Lafayette, through mergers effective September 1, 2017. Under the terms of the Merger Agreement, shareholders of Lafayette received 0.5878 shares of Horizon common stock and $1.73 in cash for each outstanding share of Lafayette common stock. Lafayette shareholders owning

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and NineSix Months ended SeptemberJune 30, 20172021 and 2016

fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,091,259. Based upon the August 31, 2017 closing price of $26.17 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million.

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, located in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction and a premium on deposits assumed in the transaction.

On November 7, 2016, Horizon completed the acquisition of CNB Bancorp, an Indiana corporation headquartered in Attica, Indiana (“CNB”) and the Bank’s acquisition of The Central National Bank and Trust Company (“Central National Bank & Trust”), through mergers effective November 7, 2016. Under the terms of the acquisition, shareholders of CNB received merger consideration in the form of cash. The total value of the consideration for the acquisition was $5.3 million.

On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and Horizon Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly-owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.9435 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, the transaction has an implied valuation of approximately $98.6 million.

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock, or a combination of both, for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million.

Following are some highlights of Horizon’s financial performance through the third quarter of 2017:

2020
Second Quarter 2021 Highlights
Net income forgrew to a record $22.2 million, up 8.6% from the thirdlinked quarter of 2017 increased 23.8% to $8.2 million or $0.36 dilutedand 51.5% from the year–ago period. Diluted earnings per share compared(“EPS”) of $0.50 includes the $0.01 after–tax impact of expenses associated with Horizon’s agreement to $6.6acquire 14 TCF National Bank branches, approximately $976 million or $0.30 diluted earnings per share forin deposits and approximately $278 million in loans in a financially and strategically attractive extension of Horizon’s low–cost deposit franchise in Michigan, announced in the third quarter of 2016.

Net income, excluding acquisition-related expenses, gain on sale of investment securities and purchase accounting adjustments (“core net income”), for the third quarter of 2017 increased 10.3% to $9.2 million or $0.41 diluted earnings per share compared to $8.4 million or $0.39 diluted earnings per share for the same period of 2016.

Net incomequarter. EPS was $0.46 for the first ninequarter of 2021 and $0.33 for the second quarter of 2020.

Pre–tax, pre–provision net income grew to a second–quarter record $24.5 million, up 0.9% from the linked quarter and 3.2% from the 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.)

Net interest income was $42.6 million for the quarter, compared to $42.5 million for the first quarter of 2021 and $43.0 million for the second quarter of 2020. Reported net interest margin (“NIM”) was 3.14% and adjusted NIM was 3.13%, with reported NIM declining by 15 basis points and adjusted NIM decreasing by four basis points from the first quarter of 2021. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation of adjusted NIM.) An estimated seven basis points attributed to Federal Paycheck Protection Program (“PPP”) lending improved the margin, offset by an estimated 21 basis point compression attributed to excess liquidity held during the quarter, for both NIM and adjusted NIM.

Horizon’s in–market consumer and commercial deposit relationships, 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 0.45% in the quarter, compared to 0.50% in the first quarter of 2021 and 0.74% in the second quarter of 2020.

Non–interest expense was $33.4 million in the quarter, or 2.18% of average assets on an annualized basis, compared to $32.2 million, or 2.20%, in the first quarter of 2021 and $30.4 million, or 2.18%, in the second quarter of 2020.

The efficiency ratio for the period was 57.73% compared to 57.03% for the first quarter of 2021 and 56.23% for the second quarter of 2020. The adjusted efficiency ratio was 57.45% compared to 57.97% for the first quarter of 2021 and 56.49% for the second quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below.)

Horizon experienced an increased return on average assets (“ROAA”) of 1.45% and return on average common equity (“ROACE”) of 12.59% in the quarter, as well as adjusted ROAA of 1.46% and adjusted ROACE of 12.61%, excluding the impact of acquisition expenses and prepayment penalties, net of tax, and death benefits on bank owned life insurance. (See the “Non–GAAP Reconciliation of Return on Average Assets” and the “Non–GAAP Reconciliation of Return on Average Common Equity” tables below.)

Horizon recorded a provision release of $1.5 million and maintained solid asset quality metrics at period end, including non–performing loans declining 10.9% during the quarter to $22.3 million, or 0.63% of total loans, substandard loans declining 4.6% to $82.5 million, or 2.3% of total loans, net charge–offs declining 81.3% to $39,000, or 0.00% of average loans for the period, and COVID–19 deferrals declining 42.7% to $52.5 million, or 1.5% of total loans.

Total non–interest income grew to $15.2 million, up 9.6% from the linked quarter and 36.7% from the year–ago period, due to favorable impact of mortgage production, bank owned life insurance, banking fees and fiduciary activities. Following record residential lending in 2020, mortgage–related non–interest income remained strong in the second three months of 2017 was $25.52021, with gain on mortgage loan sales of $5.6 million or $1.13 diluted earnings per share comparedand net mortgage servicing income of $1.5 million. The Horizon Bank (the “Bank”) originated $173.0 million in mortgage loans during the quarter, with 61% of volume from purchases, as Horizon continued to $18.3 million or $0.94 diluted earnings per share for the same periodfocus residential lending on prime borrowers in 2016.Indiana and Michigan markets.

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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 NineSix Months ended SeptemberJune 30, 20172021 and 2016

2020
Core net income for
Loans, excluding PPP lending, totaled $3.36 billion on June 30, 2021, were lower reflecting cash reserves maintained by many current and prospective commercial borrowers and retail households through the first nine months of 2017 increased 22.5% to $25.4 million or $1.13 diluted earningsquarter. Loans, excluding PPP lending, totaled $3.42 billion on March 31, 2021 and $3.69 billion on June 30, 2020.

Horizon’s book value per share compared to $20.7 million or $1.07 diluted earnings per share for the same period of 2016.

Return on average assets was 0.96% for the third quarter of 2017 compared to 0.80% for the same period in 2016.

Return on average assets, excluding acquisition-related expenses, gain on sale of investment securities and purchase accounting adjustments (“core return on average assets”), for the third quarter of 2017 was 1.09% compared to 1.02% for the same period of 2016.

Commercial loans, excluding acquired commercial loans, increased by an annualized rate of 12.8%, or $103.1 million, during the first nine months of 2017.

Consumer loans, excluding acquired consumer loans, increased by an annualized rate of 27.2%, or $81.2 million, during the first nine months of 2017.

Total loans, excluding acquired loans, increased by an annualized rate of 9.2%, or $147.7 million, during the first nine months of 2017.

Net interest income for the third quarter of 2017 increased $3.5 million, or 14.2%, compared to the same period in 2016.

Net interest margin was 3.71% for the third quarter of 2017 compared to 3.84% for the prior quarter and 3.37% for the third quarter of 2016. The improvement in net interest margin from the prior year was due to Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016, an increase in average interest-earning assets and an increase in loan yields.

Net interest margin, excluding the impact of purchase accounting adjustments (“core net interest margin”), was 3.63% for the third quarter of 2017 compared to 3.71% for the prior quarter and 3.31% for the same period in 2016.

Horizon’s tangible book value per share roseincreased to $12.38all–time highs of $16.16 and $12.24, respectively. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.)

As part of the Company's annual branch performance review and a third–party analysis of the Bank's retail network, Horizon's Board of Directors approved the permanent closure of nine Indiana branch locations and one in Michigan to occur on August 27, 2021. Access to Horizon branch that provides the same products and services will be in close proximity of the consolidated branch in addition to alternative delivery channels are available, including online banking and mobile banking. Any impairment to fixed assets is not estimated to be material.

Horizon increased cash dividends paid in the quarter by 8.3% to $0.13 per share, as previously announced. As of June 30, 2021, in excess of $129 million in cash was maintained at Septemberthe holding company, providing considerable future optionality to build shareholder value.

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 June 30, 2017, compared to $11.48 at2021, down from $6 million as of December 31, 2016.2020 and $63 million as of June 30, 2020.

On September 1, 2017, Horizon closedContinued to provide new loans to qualified applicants.
Provided mortgage loan education programs.
Provided additional financial assistance in the acquisitionform of Lafayette Community Bancorp (“Lafayette”)fee waivers and its wholly-owned subsidiary, Lafayette Community Bank, headquartereda freeze on all debt collection activities.
Businesses
Preferred SBA Lender
Active participant in Lafayette, Indiana. The system integrationall SBA loan programs (PPP, 7a, Express and 504).
Payment Relief Programs
Approximately $51 million in commercial loans with payment extensions as of Lafayette was successfully completed on September 22, 2017.June 30, 2021, down from $121 million as of December 31, 2020 and $470 million as of June 30, 2020.

On October 17, 2017, Horizon closedProcessed and received approval for 4,003 PPP loans, funding approximately $450.1 million.
As of June 30, 2021, $276.5 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).
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the acquisitionThree and Six Months ended June 30, 2021 and 2020
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.

Financial Summary
For the Three Months Ended
June 30,March 31,June 30,
Net Interest Income and Net Interest Margin202120212020
Net interest income$42,632 $42,538 $42,996 
Net interest margin3.14 %3.29 %3.47 %
Adjusted net interest margin3.13 %3.17 %3.35 %
For the Three Months Ended
June 30,March 31,June 30,
Asset Yields and Funding Costs202120212020
Interest earning assets3.48 %3.66 %4.05 %
Interest bearing liabilities0.45 %0.50 %0.74 %
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income
June 30,March 31,June 30,
202120212020
Total non–interest income$15,207 $13,873 $11,125 
Gain on sale of mortgage loans5,612 5,296 6,620 
Mortgage servicing income net of impairment1,503 213 (2,760)
For the Three Months Ended
June 30,March 31,June 30,
Non–interest Expense202120212020
Total non–interest expense$33,388 $32,172 $30,432 
Annualized non–interest expense to average assets2.18 %2.20 %2.18 %

At or for the Three Months Ended
Credit QualityJune 30,March 31,June 30,
202120212020
Allowance for credit losses to total loans1.58 %1.56 %1.38 %
Non–performing loans to total loans0.63 %0.68 %0.70 %
Percent of net charge–offs to average loans outstanding for the period0.00 %0.01 %0.01 %

48

Table of Wolverine Bancorp, Inc. (“Wolverine”)Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and its wholly-owned subsidiary, Wolverine Bank, headquartered in Midland, Michigan. The system integrationAnalysis of Wolverine is scheduled for November 2017.Financial Condition

And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Allowance forDecember 31,Net ReserveJune 30,
Credit Losses20201Q202Q202021
Commercial$42,210 $770 $(1,214)$41,766 
Retail Mortgage4,620 (391)(121)4,108 
Warehouse1,267 (104)(8)1,155 
Consumer8,930 (116)(194)8,620 
Allowance for Credit Losses (“ACL”)$57,027 $159 $(1,537)$55,649 
ACL/Total Loans1.47 %1.58 %



Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form10-K 10–K for 20162020 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 loancredit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for LoanCredit Losses

An

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 maintained to absorb probable incurred loan losses inherentassessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan portfolio. The determinationlevel 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 is a critical accounting policy that involves management’s ongoing quarterly assessmentson the portfolio of loans and leases as of the probablebalance sheet date. Actual losses incurred losses inherentmay 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 loan portfolio. The identification of loans that have probable incurred losses is subjective; therefore, a general reserve is maintained to cover all probable losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitorduration, spread and address asset quality problems in an adequate and timely manner. Each quarter, various factors affecting the qualityseverity of the loan portfolio are reviewed. Large credits are reviewed on

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

an individual basis forvirus will affect our loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.

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 ASC350-10 350–10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At SeptemberJune 30, 2017,2021, Horizon had core deposit intangibles of $9.5$21.2 million subject to amortization and $93.8$151.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC350-10 350–10 requires an annual evaluation of goodwill for impairment. The evaluation
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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 Six Months ended June 30, 2021 and 2020
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 June 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 for impairment requiresin the use of estimates and assumptions. Market price at the close of business on September 30, 2017 was $29.17 per share compared to a book value of $16.81 per common share.

Horizon has concluded that, based on its own internal evaluation, the recorded value of goodwill is not impaired.

future.

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-retainedservicing–retained basis. Capitalized servicing rights are amortized intonon-interest 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-basedmarket–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-servicingmortgage–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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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, fromtime-to-time, 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 ASC815-10. 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
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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 Six Months ended June 30, 2021 and 2020
change in fair value of both the hedge instruments and the underlying loans is recorded innon-interest 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.

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-retirementpost–retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition

And Results of Operations

For the Three and Nine Months ended September

On June 30, 2017 and 2016

Financial Condition

On September 30, 2017,2021, Horizon’s total assets were $3.5$6.1 billion, an increase of approximately $378.3$222.6 million compared to December 31, 2016.2020. The increase was primarily in net loans of $289.1 million, investment securities available for sale of $70.0 million, goodwill of $16.8$557.2 million and investment securitiescash and due from banks of $54.5 million. These increases were offset by a decrease in net loans of $346.5 million, investments held to maturity of $5.4$15.4 million which were offset by decreases in Federal Reserve Bank stock of $8.6 million,and other assets of $2.8 million and loans held for sale of $4.5$13.9 million.

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

   September 30, 2017   December 31, 2016 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 

Available for sale

        

U.S. Treasury and federal agencies

  $17,996   $17,885   $8,051   $7,989 

State and municipal

   141,751    143,483    117,327    116,592 

Federal agency collateralized mortgage obligations

   135,511    134,202    139,040    137,195 

Federal agency mortgage-backed pools

   213,071    212,051    180,183    176,726 

Private labeled mortgage-backed pools

   1,841    1,830    —      —   

Corporate notes

   275    393    1,238    1,329 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $510,445   $509,844   $445,839   $439,831 
  

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity

        

State and municipal

  $177,473   $180,860   $165,607   $165,822 

Federal agency collateralized mortgage obligations

   5,902    5,896    6,530    6,490 

Federal agency mortgage-backed pools

   15,230    15,466    21,057    21,774 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $198,605   $202,222   $193,194   $194,086 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment

June 30, 2021December 31, 2020
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Available for sale
U.S. Treasury and federal agencies$191,490 $191,101 $19,750 $19,715 
State and municipal1,090,693 1,113,493 803,100 837,843 
Federal agency collateralized mortgage obligations96,344 98,622 144,022 147,453 
Federal agency mortgage–backed pools165,016 167,510 114,484 118,799 
Private labeled mortgage–backed pools33,074 33,568 — — 
Corporate notes85,637 86,892 9,007 10,215 
Total available for sale investment securities$1,662,254 $1,691,186 $1,090,363 $1,134,025 
Held to maturity
State and municipal$144,430 $153,606 $157,421 $168,456 
Federal agency collateralized mortgage obligations1,007 1,023 2,661 2,697 
Federal agency mortgage–backed pools3,733 3,908 8,594 8,837 
Private labeled mortgage–backed pools4,114 4,114 — — 
Total held to maturity investment securities$153,284 $162,651 $168,676 $179,990 
Investment securities available for sale increased by approximately $75.4 million at September 30, 2017 compared to December 31, 2016, primarily due to the investing of cash received from the Bargersville branch purchase and the CNB merger and increasing earning assets due to lower mortgage warehouse balances.

Total loans increased $285.4$557.2 million since December 31, 20162020 to $2.4$1.7 billion as of SeptemberJune 30, 2017.2021. This increase was due to additional purchases to increase earning assets.


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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the resultThree and Six Months ended June 30, 2021 and 2020
Gross loans decreased $354.2 million since December 31, 2020 to $3.5 billion as of an increase inJune 30, 2021. Mortgage warehouse, commercial, loans of $203.8 million, consumer loans of $87.1 million and residential mortgage, loans of $39.2 million, offset by a decrease in mortgage warehouse loans of $40.2 million and a decrease in loans held for sale of $4.5 million. Totaland consumer decreased $190.3 million, $87.6 million, $64.8 million, $6.3 million and $5.1 million, respectively. PPP loans increased $134.4 million as a result of the acquisition of Lafayette during the third quarter of 2017. The growth markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo contributed total loan growth of $120.1 million during the first nine months of 2017 leading to the increase in commercial loans. The addition of a seasoned consumer loan portfolio manager during the fourth quarter of 2016 and an increased focus on the management of direct consumer loans are the main drivers for the increase in consumer loans.

Total deposits increased $137.1decreased $39.4 million since December 31, 20162020 to $2.6$169.4 million as of June 30, 2021.

Total deposits increased $250.5 million since December 31, 2020 to $4.8 billion as of SeptemberJune 30, 2017.Non-interest bearing transaction accounts, interest bearing transaction accounts2021. This increase was primarily due to Federal stimulus payments to consumers and time deposits increased $67.3 million, $37.0 million and $32.7 million, respectively, duringfunds from the nine months ended September 30, 2017. The increase in deposits is primarily attributable to the acquisitionorigination of $151.1 million in depositsPPP loans.
Total borrowings decreased from Lafayette during the third quarter of 2017.

The Company’s borrowings increased $190.7 million from December 31, 2016 to $458.2$475.0 million as of SeptemberDecember 31, 2020 to $439.1 million as of June 30, 2017.2021. At SeptemberJune 30, 2017,2021, the Company had $320.3$178.5 million in short-term funds borrowed compared to $189.0$315.5 million at December 31, 2016. The increase2020. During the second quarter of 2021, the Bank paid–off $50.0 million in borrowings was utilized to fund loan growthlong–term Federal Home Loan Bank of $285.4 million since December 31, 2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and AnalysisIndianapolis advances which resulted in a prepayment penalty of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

$125,000.

Stockholders’ equity totaled $392.1$710.4 million at SeptemberJune 30, 20172021 compared to $340.9$692.2 million at December 31, 2016.2020. The increase in stockholders’ equity during the period was due to the result of the acquisition of Lafayette, generation of net income, net ofoffset by dividends declared. At September 30, 2017,paid and a decrease in accumulated other comprehensive income during the ratio of average stockholders’ equity to average assets was 10.74% compared to 10.59% at December 31, 2016.period. Book value per common share at SeptemberJune 30, 20172021 increased to $16.81$16.16 compared to $15.37$15.78 at December 31, 2016.

2020.


Results of Operations

Overview

Consolidated net income for the three-monththree–month period ended SeptemberJune 30, 20172021 was $8.2$22.2 million, or $0.50 diluted earnings per share, compared to $6.6$14.6 million, or $0.33 diluted earnings per share for the same period in 2016. Earnings per common share for the three months ended September 30, 2017 were $0.36 basic and diluted, compared to $0.31 basic and $0.30 diluted for the same three-month period in the previous year.2020. The increase in net income for the three–month period ended June 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $4.1 million and a decrease in credit loss expense of $8.5 million, offset by an increase in non–interest expense of $3.0 million, an increase in income tax expense of $1.8 million and a decrease in net interest income of $364,000. Excluding acquisition expenses, gain on sale of investment securities, death benefit on bank owned life insurance and prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the second quarter of 2021 was $22.2 million, or $0.50 diluted earnings per share, fromcompared to $14.4 million, or $0.32 diluted earnings per share for the previoussecond quarter of 2020.
Consolidated net income for the six–month period ended June 30, 2021 was $42.6 million, or $0.97 diluted earnings per share, compared to $26.3 million, or $0.59 diluted earnings per share for the same period in 2020. The increase in net income for the six–month period ended June 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $5.9 million, an increase in net interest income of $3.5$1.2 million partiallyand a decrease in credit loss expense of $16.8 million, offset by a decreaseincreases innon-interest income non–interest expense of $1.3$4.0 million and increases in provision for loan losses of $255,000,non-interestincome tax expense of $431,000 and the diluted shares outstanding primarily due to the stock issued in the Kosciusko and LaPorte Bancorp acquisitions.Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy$3.6 million. Excluding acquisition expenses, and other expense. Excluding acquisition-related expenses, gain/lossesgain on sale of investment securities, death benefits on bank owned life insurance and purchase accounting adjustments,prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the third quarter of 2017six–month period ended June 30, 2021 was $9.2$41.9 million, or $0.41$0.95 diluted earnings per share, compared to $8.4$25.6 million, or $0.39$0.57 diluted earnings per share in the same period of 2016.

Consolidated net income for the nine-monthsix–month period ended SeptemberJune 30, 2017 was $25.5 million compared to $18.3 million for the same period in 2016. Earnings per common share for the nine months ended September 30, 2017 were $1.14 basic and $1.13 diluted, compared to $0.95 basic and $0.94 diluted for the same nine-month period in the previous year. The increase in net income and earnings per share from the previous year reflects an increase in net interest income of $15.6 million, partially offset by a decrease innon-interest income of $2.2 million and increases innon-interest expense of $4.2 million, income tax expense of $1.9 million and the diluted shares outstanding primarily due to the stock issued in the Kosciusko and LaPorte Bancorp acquisitions.Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing expense and other expense. Excluding acquisition-related expenses, gains/losses on sale of investment securities and purchase accounting adjustments, net income for the nine months ended September 30, 2017 was $25.4 million or $1.13 diluted earnings per share compared to $20.7 million or $1.07 diluted earnings per share in the same period of 2016.

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-earninginterest earning assets and interest-bearinginterest bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earninginterest earning assets and the average cost of interest-bearinginterest bearing liabilities. Net interest margin refers to net interest income divided by average interest-earninginterest earning assets and is influenced by the level and relative mix of interest-earninginterest earning assets and interest-bearinginterest bearing liabilities.

Net interest income during the three months ended SeptemberJune 30, 20172021 was $27.9$42.6 million, an increasea decrease of $3.5 million$364,000 from the $24.4$43.0 million earned during the same period in 2016.2020. Yields on the Company’s interest-earninginterest earning assets increaseddecreased by 3457 basis points to 3.71% for the three months ending September 30, 2017 from 3.37%3.48% for the three months ended SeptemberJune 30, 2016.2021 from 4.05% for the three months ended June 30, 2020. Interest income increased $3.1decreased $2.9 million from $29.0$50.3 million for the three months ended SeptemberJune 30, 20162020 to $32.1$47.4 million for the same
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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 Six Months ended June 30, 2021 and 2020
period in 2021. The decrease in interest income was due to a decrease in yield as interest earning assets reprice during the current low rate environment. Interest income from acquisition–related purchase accounting adjustments was $230,000 for the three months ending June 30, 2021 compared to $1.6 million for the same period of 2020.
Rates paid on interest bearing liabilities decreased by 29 basis points for the three–month period ended June 30, 2021 compared to the same period in 2020. Interest expense decreased $2.6 million when compared to the three–month period ended June 30, 2020 to $4.8 million for the same period in 2017.2021. This decrease was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $661,000 for the three months ending September 30, 2017 compared to $459,000 for the same period of 2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

Rateslower rates paid on interest-bearing liabilitiesdeposits and borrowings. The cost of average interest bearing deposits decreased by 633 basis points while the cost of average borrowings decreased 20 basis points. Average balances of interest bearing deposits increased $381.1 million and average balances of borrowings decreased $164.4 million for the three-month period ended SeptemberJune 30, 20172021 when compared to the same period in 2016 due to2020.

The net interest margin decreased 33 basis points from 3.47% for the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense decreased $361,000 compared to the three-monththree–month period ended SeptemberJune 30, 20162020 to $4.2 million3.14% for the same period in 2017. This2021. The decrease was due to lower average balances of borrowings in addition to lower rates paid on borrowings, partially offset by higher average balances of interest-bearing deposits. The rates paid on borrowings decreased as a result of Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016.

The net interest margin increased 34 basis points from 3.37% for the three-month period ended September 30, 2016 to 3.71% for the same period in 2017. The increase in the margin for the three-monththree–month period ended SeptemberJune 30, 20172021 compared to the same period in 20162020 was due to an increasea decrease in the yield on interest-earninginterest earning assets, andoffset by a reductiondecrease in the cost on interest-bearingof interest bearing liabilities. Excluding the interest income recognized from the acquisition-relatedacquisition–related purchase accounting adjustments and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.63%3.13% for the three-month period ending SeptemberJune 30, 20172021 compared to 3.31%3.35% for the same period in 2016.

2020.

The net interest margin was impacted due to PPP lending and high level of cash held during the second quarter of 2021. Horizon estimates that the PPP loans increased the net interest margin by seven basis points for the second 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 21 basis points for the second 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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Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and NineSix Months ended SeptemberJune 30, 20172021 and 2016

2020

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

   Three Months Ended  Three Months Ended 
   September 30, 2017  September 30, 2016 
   Average      Average  Average      Average 
   Balance  Interest   Rate  Balance  Interest   Rate 

ASSETS

         

Interest-earning assets

         

Federal funds sold

  $6,770  $24    1.41 $35,492  $20    0.22

Interest-earning deposits

   20,157   49    0.96  55,047   32    0.23

Investment securities - taxable

   426,145   2,094    1.95  530,228   2,446    1.84

Investment securities -non-taxable (1)

   296,716   1,790    3.36  186,074   1,151    3.73

Loans receivable (2)(3)

   2,328,823   28,113    4.82  2,151,103   25,313    4.69
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-earning assets (1)

   3,078,611   32,070    4.25  2,957,944   28,962    3.98

Non-interest-earning assets

         

Cash and due from banks

   41,465      39,875    

Allowance for loan losses

   (15,135     (14,301   

Other assets

   278,721      290,100    
  

 

 

     

 

 

    
  $3,383,662     $3,273,618    
  

 

 

     

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Interest-bearing liabilities

         

Interest-bearing deposits

  $1,961,998  $1,841    0.37 $1,896,156  $1,875    0.39

Borrowings

   460,878   1,753    1.51  510,738   2,128    1.66

Subordinated debentures

   36,386   597    6.51  37,092   549    5.89
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-bearing liabilities

   2,459,262   4,191    0.68  2,443,986   4,552    0.74

Non-interest-bearing liabilities

         

Demand deposits

   540,109      462,253    

Accrued interest payable and other liabilities

   20,915      34,144    

Stockholders’ equity

   363,376      333,235    
  

 

 

     

 

 

    
  $3,383,662     $3,273,618    
  

 

 

     

 

 

    

Net interest income/ spread

   $27,879    3.58  $24,410    3.24
   

 

 

     

 

 

   

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

      3.71     3.37

(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. Interest rate is presented on a tax equivalent basis.
(2)Includes loan fees and late fees. The inclusion of these fees does not have a material effect on the average interest rate.
(3)Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Three Months EndedThree Months Ended
June 30, 2021June 30, 2020
Average
Balance
InterestAverage
Rate
Average
Balance
InterestAverage
Rate
Assets
Interest earning assets
Federal funds sold$359,184 $98 0.11 %$62,832 $17 0.11 %
Interest earning deposits29,584 44 0.60 %20,278 61 1.21 %
Investment securities – taxable645,139 2,386 1.48 %481,552 2,243 1.87 %
Investment securities – non–taxable (1)
1,054,703 5,656 2.72 %647,375 4,105 3.15 %
Loans receivable (2) (3)
3,570,774 39,236 4.43 %3,900,599 43,918 4.54 %
Total interest earning assets5,659,384 47,420 3.48 %5,112,636 50,344 4.05 %
Non–interest earning assets
Cash and due from banks84,469 84,297 
Allowance for credit losses(57,196)(48,611)
Other assets455,850 472,373 
Total average assets$6,142,507 $5,620,695 
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits$3,680,796 $2,053 0.22 %$3,299,661 $4,506 0.55 %
Borrowings453,856 1,296 1.15 %618,274 2,074 1.35 %
Subordinated notes58,653 881 6.02 %4,527 58 5.15 %
Junior subordinated debentures issued to capital trusts56,627 558 3.95 %52,835 710 5.40 %
Total interest bearing liabilities4,249,932 4,788 0.45 %3,975,297 7,348 0.74 %
Non–interest bearing liabilities
Demand deposits1,139,068 924,890 
Accrued interest payable and other liabilities46,855 71,018 
Stockholders’ equity706,652 649,490 
Total average liabilities and stockholders’ equity$6,142,507 $5,620,695 
Net interest income/spread$42,632 3.03 %$42,996 3.31 %
Net interest income as a percent of average interest earning assets (1)
3.14 %3.47 %
(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.



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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 Six Months ended June 30, 2021 and 2020
Net interest income during the ninesix months ended SeptemberJune 30, 20172021 was $80.6$85.2 million, an increase of $15.6$1.2 million from the $65.1$83.9 million earned during the same period in 2016.2020. Yields on the Company’s interest-earninginterest earning assets increaseddecreased by 3468 basis points to 3.77%3.57% for the ninesix months ending Septemberended June 30, 20172021 from 3.43%4.25% for the ninesix months ended SeptemberJune 30, 2016.2020. Interest income increased $14.6decreased $7.0 million from $77.1$102.0 million for the ninesix months ended SeptemberJune 30, 20162020 to $91.7$95.0 million for the same period in 2017. This was due2021. Average interest earning assets during the six months ended June 30, 2021 increased $620.7 million to an increase in average interest-earning assets through organic and acquisition-related growth.$5.6 billion compared to $4.9 billion during the six months ended June 30, 2020. Interest income from acquisition-relatedacquisition–related purchase accounting adjustments was $2.6$1.8 million for the ninesix months ending Septemberended June 30, 20172021 compared to $1.4$3.0 million for the same period of 2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

2020.


Rates paid on interest-bearinginterest bearing liabilities decreased by 1246 basis points for the nine-monthsix–month period ended SeptemberJune 30, 20172021 compared to the same period in 2016 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities.2020. Interest expense decreased $1.0$8.2 million when compared to the nine-monthsix–month period ended SeptemberJune 30, 20162020 to $11.1$9.8 million for the same period in 2017.2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 50 basis points while the cost of average borrowings decreased 40 basis points. Average balances of interest bearing deposits increased $340.4 million and average balances of borrowings in addition to lower rates paid on borrowings, partially offset by higher average balances of interest-bearing deposits. The rates paid on borrowings decreased as a result of Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016.

The net interest margin increased 34 basis points from 3.43%$110.2 million for the nine-monthsix–month period ended SeptemberJune 30, 2016 to 3.77% for the same period in 2017. The increase in the margin for the nine-month period ended September 30, 20172021 when compared to the same period in 20162020.


The net interest margin decreased 30 basis points from 3.51% for the six–month period ended June 30, 2020 to 3.21% for the same period in 2021. The decrease in the margin for the six–month period ended June 30, 2021 compared to the same period in 2020 was due to an increasea decrease in the yield on interest-earningof interest earning assets, andoffset by a reductiondecrease in the cost on interest-bearingof interest bearing liabilities. Excluding the interest income recognized from the acquisition-relatedacquisition–related purchase accounting adjustments and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.65%3.15% for the nine-monthsix–month period ending Septemberended June 30, 20172021 compared to 3.36%3.39% for the same period in 2016.

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

   Nine Months Ended  Nine Months Ended 
   September 30, 2017  September 30, 2016 
   Average      Average  Average      Average 
   Balance  Interest   Rate  Balance  Interest   Rate 

ASSETS

         

Interest-earning assets

         

Federal funds sold

  $3,857  $35    1.21 $13,812  $23    0.22

Interest-earning deposits

   24,177   201    1.11  34,624   59    0.23

Investment securities - taxable

   416,323   6,581    2.11  486,374   7,621    2.09

Investment securities -non-taxable (1)

   286,007   5,193    3.39  183,142   3,583    3.63

Loans receivable (2)(3)

   2,210,295   79,699    4.83  1,873,614   65,854    4.70
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-earning assets (1)

   2,940,659   91,709    4.27  2,591,566   77,140    4.05

Non-interest-earning assets

         

Cash and due from banks

   42,004      36,220    

Allowance for loan losses

   (15,069     (14,334   

Other assets

   279,706      243,021    
  

 

 

     

 

 

    
  $3,247,300     $2,856,473    
  

 

 

     

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Interest-bearing liabilities

         

Interest-bearing deposits

  $1,967,457  $5,315    0.36 $1,680,560  $4,923    0.39

Borrowings

   357,932   4,028    1.50  438,324   5,608    1.71

Subordinated debentures

   36,339   1,721    6.33  34,144   1,556    6.09
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-bearing liabilities

   2,361,728   11,064    0.63  2,153,028   12,087    0.75

Non-interest-bearing liabilities

         

Demand deposits

   510,230      387,768    

Accrued interest payable and other liabilities

   20,220      26,397    

Stockholders’ equity

   355,121      289,280    
  

 

 

     

 

 

    
  $3,247,299     $2,856,473    
  

 

 

     

 

 

    

Net interest income/spread

   $80,645    3.64  $65,053    3.30
   

 

 

     

 

 

   

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

      3.77     3.43

(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. Interest rate is presented on a tax equivalent basis.
(2)Includes loan fees and late fees. The inclusion of these fees does not have a material effect on the average interest rate.
(3)Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

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 NineSix Months ended SeptemberJune 30, 20172021 and 2016

Provision for Loan Losses

2020

Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Six Months EndedSix Months Ended
June 30, 2021June 30, 2020
Average
Balance
InterestAverage
Rate
Average
Balance
InterestAverage
Rate
Assets
Interest earning assets
Federal funds sold$313,467 $164 0.11 %$43,903 $113 0.52 %
Interest earning deposits27,567 90 0.66 %23,391 163 1.40 %
Investment securities – taxable528,250 3,822 1.46 %491,360 4,943 2.02 %
Investment securities – non–taxable (1)
1,005,855 10,879 2.76 %618,080 7,903 3.16 %
Loans receivable (2) (3)
3,674,977 80,054 4.41 %3,752,654 88,876 4.78 %
Total interest earning assets5,550,116 95,009 3.57 %4,929,388 101,998 4.25 %
Non–interest earning assets
Cash and due from banks84,866 81,203 
Allowance for credit losses(57,486)(36,588)
Other assets462,401 459,184 
Total average assets$6,039,897 $5,433,187 
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits$3,602,882 $4,396 0.25 %$3,262,492 $12,222 0.75 %
Borrowings465,502 2,565 1.11 %575,702 4,312 1.51 %
Subordinated debentures58,635 1,761 6.06 %2,264 58 5.15 %
Junior subordinated debentures issued to capital trusts56,599 1,117 3.98 %52,801 1,485 5.66 %
Total interest bearing liabilities4,183,618 9,839 0.47 %3,893,259 18,077 0.93 %
Non–interest bearing liabilities
Demand deposits1,101,377 820,997 
Accrued interest payable and other liabilities52,850 63,393 
Stockholders’ equity702,052 655,538 
Total average liabilities and stockholders’ equity$6,039,897 $5,433,187 
Net interest income/spread$85,170 3.10 %$83,921 3.32 %
Net interest income as a percent of average interest earning assets (1)
3.21 %3.51 %
(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.

Credit Loss Expense

Horizon assesses the adequacy of its Allowance for Loan and LeaseCredit Losses (“ALLL”ACL”) by regularly reviewing the performance of its loan portfolio. During the three-monththree–month period ended SeptemberJune 30, 2017,2021, a provision reversal of $710,000$1.5 million was required to adequately fundreflect the ALLLnature of our loan portfolios and general characteristics of certain loan pools compared to $455,000a provision expense of $7.1 million for the same period of 2016. Commercial2020. During the three–month period ended June 30, 2021, commercial loan net charge-offs during the three-month period ended September 30, 2017charge–offs were $169,000,$46,000, residential mortgage loan net charge-offsrecoveries were $24,000$23,000 and consumer loan net charge-offscharge–offs were negative $42,000. The increase in the provision for loan losses in the third quarter$22,000.
56

Table of 2017 compared to the same period of 2016 was due to increased additional allocations to loans originated in new markets and an increase in allocation for agricultural economic factors. The ALLL balance at September 30, 2017 was $15.6 million or 0.64% of total loans. This compares to an ALLL balance of $14.8 million at December 31, 2016 or 0.69% of total loans. The decrease in the ratio at September 30, 2017 compared to December 31, 2016 was due to an increase in loan balances, excluding acquired loans and loans held for sale, of $187.9 million.

For the nine-month period ended September 30, 2017, the provision for loan losses totaled $1.4 million compared to $1.2 million in the same period of 2016. The higher provision for loan losses for the nine months ended September 30, 2017 compared to the same period of 2016 was due to an increase in loan balances, along with additional allocations to loans originated in new markets and an increase in allocation for agricultural economic factors.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 0.82% as of September 30, 2017. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was 1.24% as of September 30, 2017. The table below illustrates Horizon’s loan loss reserve ratio composition as of September 30, 2017.

Non-GAAP Allowance for Loan and Lease Loss Detail

As of September 30, 2017

(Dollars in Thousands, Unaudited)

   Horizon                         
   Legacy  Heartland  Summit  Peoples  Kosciusko  LaPorte  CNB  Lafayette  Total 

Pre-discount loan balance

  $1,903,322  $12,861  $44,649  $123,332  $64,450  $158,099  $7,694  $125,981  $2,440,388 

Allowance for loan losses (ALLL)

   15,515   71   —     —     —     —     —     —     15,586 

Loan discount

   N/A   846   2,365   2,944   810   4,036   206   3,356   14,563 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

ALLL+ loan discount

   15,515   917   2,365   2,944   810   4,036   206   3,356   30,149 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans, net

  $1,887,807  $11,944  $42,284  $120,388  $63,640  $154,063  $7,488  $122,625  $2,410,239 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

ALLL/pre-discount loan balance

   0.82  0.55  0.00  0.00  0.00  0.00  0.00  0.00  0.64

Loan discount/pre-discount loan balance

   N/A   6.58  5.30  2.39  1.26  2.55  2.68  2.66  0.60

ALLL+ loan discount/pre-discount loan balance

   0.82  7.13  5.30  2.39  1.26  2.55  2.68  2.66  1.24

No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. Horizon considers the allowance for loan losses to be appropriate to cover probable incurred losses in the loan portfolio as of September 30, 2017.

Non-performing loans totaled $12.4 million as of September 30, 2017, up from $10.7 million as of December 31, 2016.Non-performing commercial, real estate and consumer loans increased by $1.0 million, $523,000 and $227,000, respectively, at September 30, 2017 compared to December 31, 2016.

Other Real Estate Owned (OREO) totaled $1.8 million at September 30, 2017 compared to $3.2 million on December 31, 2016 and $3.7 million on September 30, 2016.

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and NineSix Months ended SeptemberJune 30, 20172021 and 2016

Non-interest2020


During the six–month period ended June 30, 2021, a provision reversal of $1.1 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $15.7 million for the same period of 2020. During the six–month period ended June 30, 2021, commercial loan net charge–offs were $204,000, residential mortgage loan net recoveries were $88,000 and consumer net charge–offs were $137,000.

The ACL balance at June 30, 2021 was $55.6 million, or 1.58% 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, including a decrease in PPP loans of $39.4 million which do not require a related ACL balance.

As of June 30, 2021, non–performing loans totaled $22.3 million, which reflects a 6 basis point decrease in non–performing loans to total loans, or a $4.5 million decrease from $26.8 million in non–performing loans as of December 31, 2020. Non–performing commercial loans decreased by $4.0 million, non–performing real estate loans decreased by $153,000 and non–performing consumer loans decreased by $329,000 at June 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 June 30, 2021, the Bank modified loans totaling $52.5 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#Net
Balance
% of
Total
Modifications
% of
Portfolio
Commercial20$50.896.8 %2.4 %
Mortgage (Retained Only)10$1.12.1 %0.2 %
Indirect Auto4$0.00.0 %0.0 %
Consumer Direct4$0.51.0 %0.0 %
Consumer Revolving2$0.10.1 %0.8 %
Total40$52.5100.0 %1.6 %
Mortgage (Serviced Only)27
Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.5 million at June 30, 2021 compared to $1.9 million at December 31, 2020.
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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 Six Months ended June 30, 2021 and 2020
Non–interest Income

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

   Three Months Ended         
   September 30   September 30   Amount   Percent 
   2017   2016   Change   Change 

Non-interest Income

        

Service charges on deposit accounts

  $1,672   $1,605   $67    4.2

Wire transfer fees

   175    292    (117   -40.1

Interchange fees

   1,251    1,156    95    8.2

Fiduciary activities

   1,887    1,653    234    14.2

Gain on sale of investment securities

   6    —      6    NM 

Gain on sale of mortgage loans

   1,950    3,528    (1,578   -44.7

Mortgage servicing net of impairment

   369    409    (40   -9.8

Increase in cash surrender value of bank owned life insurance

   474    449    25    5.6

Other income

   237    226    11    4.9
  

 

 

   

 

 

   

 

 

   

Totalnon-interest income

  $8,021   $9,318   $(1,297   -13.9
  

 

 

   

 

 

   

 

 

   

Three Months Ended
June 30,AmountPercent
20212020ChangeChange
Non–interest Income
Service charges on deposit accounts$2,157 $1,888 $269 14.2 %
Wire transfer fees222 230 (8)(3.5)%
Interchange fees2,892 2,327 565 24.3 %
Fiduciary activities1,961 1,765 196 11.1 %
Gain on sale of investment securities 248 (248)(100.0)%
Gain on sale of mortgage loans5,612 6,620 (1,008)(15.2)%
Mortgage servicing net of impairment1,503 (2,760)4,263 (154.5)%
Increase in cash surrender value of bank owned life insurance502 557 (55)(9.9)%
Death benefit on bank owned life insurance266 — 266 0.0 %
Other income92 250 (158)(63.2)%
Total non–interest income$15,207 $11,125 $4,082 36.7 %
Totalnon-interest non–interest income was $1.3$4.1 million lowerhigher during the thirdsecond quarter of 20172021 compared to the same period of 2016. Service charges on deposit accounts increased $67,000, interchange fees increased by $95,000, and fiduciary activities increased $234,000 primarily due to overall company growth and increased volume.2020. Residential mortgage loan activity during the thirdsecond quarter of 20172021 generated $1.9$5.6 million of income from the gain on sale of mortgage loans, down $1.6from $6.6 million fromfor the same period in 2016. The decrease in the gain on sale of mortgage loans was2020 due to a decreaselower volume of loans sold, offset by an increase in the volumepercentage gain on loans sold. Mortgage servicing rights, net of mortgage loans sold from $98.3impairment, increased $4.3 million induring the thirdsecond quarter of 2016 to $56.4 million in the same period of 2017. Wire transfer fee income decreased $117,000 during the third quarter of 2017 when2021 compared to the same period of 20162020 primarily due to a decreasethe reversal of $1.6 million in mortgage warehouse activityimpairment charges during the second quarter of 2021. Interchange fees, service charges on deposit accounts and related wire transfer fees.

death benefit on bank owned life insurance increased $565,000, $269,000, $266,000, respectively, when comparing the second quarter of 2021 to the same period of 2020.

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

   Nine Months Ended         
   September 30   September 30   Amount   Percent 
   2017   2016   Change   Change 

Non-interest Income

        

Service charges on deposit accounts

  $4,638   $4,310   $328    7.6

Wire transfer fees

   503    588    (85   -14.5

Interchange fees

   3,809    3,065    744    24.3

Fiduciary activities

   5,752    4,753    999    21.0

Gain on sale of investment securities

   38    875    (837   -95.7

Gain on sale of mortgage loans

   5,918    9,171    (3,253   -35.5

Mortgage servicing net of impairment

   1,175    1,356    (181   -13.3

Increase in cash surrender value of bank owned life insurance

   1,346    1,145    201    17.6

Other income

   613    708    (95   -13.4
  

 

 

   

 

 

   

 

 

   

Totalnon-interest income

  $23,792   $25,971   $(2,179   -8.4
  

 

 

   

 

 

   

 

 

   

Six Months Ended
June 30,AmountPercent
20212020ChangeChange
Non–interest Income
Service charges on deposit accounts$4,391 $4,334 $57 1.3 %
Wire transfer fees477 401 76 19.0 %
Interchange fees5,232 4,223 1,009 23.9 %
Fiduciary activities3,704 4,293 (589)(13.7)%
Gain on sale of investment securities914 587 327 55.7 %
Gain on sale of mortgage loans10,908 10,093 815 8.1 %
Mortgage servicing net of impairment1,716 (2,735)4,451 (162.7)%
Increase in cash surrender value of bank owned life insurance1,013 1,111 (98)(8.8)%
Death benefit on bank owned life insurance266 233 33 14.2 %
Other income459 648 (189)(29.2)%
Total non–interest income$29,080 $23,188 $5,892 25.4 %
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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 Six Months ended June 30, 2021 and 2020
Totalnon-interest non–interest income was $2.2$5.9 million lower inhigher for the first nine months of 2017 whensix–month period ended June 30, 2021 compared to the same period of 2016. Service charges on deposit accounts increased $328,000, interchange fees increased $744,000 and fiduciary activities increased $999,000, primarily due to overall company growth and increased volume. Gain on sale of investment securities decreased $837,000 due to gains realized in the first nine months of 2016 as a result of an analysis that determined market conditions provided the opportunity to add

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

gains to capital without negatively impacting loan-term earnings.2020. Residential mortgage loan activity during the first nine monthssix–month period ended June 30, 2021 generated $10.9 million of 2017 generated $5.9 millionincome from the gain on sale of mortgage loans, down $3.3up from $10.1 million fromfor the same period in 2016. The decrease2020 due to an increase in the percentage gain on saleloans sold. Mortgage servicing rights, net of mortgage loans was dueimpairment, increased $4.5 million during the six–month period ended June 30, 2021 compared to a decrease in the volume of mortgage loans sold from $236.7 million in the first nine months of 2016 to $163.9 million in the same period of 2017.

Non-interest2020 due to the reversal of $1.8 million in impairment charges during the six–month period ended June 30, 2021 compared to impairment charges of $3.2 million during the same period in 2020. Interchange fees increased $1.0 million during the six–month period ended June 30, 2021 compared to the same period of 2020.


Non–interest Expense

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

   Three Months Ended         
   September 30   September 30   Amount   Percent 
   2017   2016   Change   Change 

Non-interest expense

        

Salaries

  $9,245   $8,349   $896    10.7

Commission and bonuses

   1,413    1,799    (386   -21.5

Employee benefits

   2,253    2,062    191    9.3

Net occupancy expenses

   2,400    2,174    226    10.4

Data processing

   1,502    1,616    (114   -7.1

Professional fees

   649    612    37    6.0

Outside services and consultants

   2,504    2,686    (182   -6.8

Loan expense

   1,215    1,482    (267   -18.0

FDIC deposit insurance

   270    465    (195   -41.9

Other losses

   58    107    (49   -45.8

Other expense

   3,004    2,730    274    10.0
  

 

 

   

 

 

   

 

 

   

Totalnon-interest expense

  $24,513   $24,082   $431    1.8
  

 

 

   

 

 

   

 

 

   

Three Months Ended
June 30,June 30,
20212020Adjusted
ActualAcquisition
Expenses
AdjustedActualAcquisition
Expenses
AdjustedAmount
Change
Percent
Change
Non–interest Expense
Salaries and employee benefits$17,730 $— $17,730 $15,629 $— $15,629 $2,101 13.4 %
Net occupancy expenses3,084 — 3,084 3,190 — 3,190 (106)(3.3)%
Data processing2,388 — 2,388 2,432 — 2,432 (44)(1.8)%
Professional fees588 (51)537 518 — 518 19 3.7 %
Outside services and consultants2,220 (187)2,033 1,759 — 1,759 274 15.6 %
Loan expense3,107 — 3,107 2,692 — 2,692 415 15.4 %
FDIC deposit insurance500 — 500 235 — 235 265 112.8 %
Other losses— 193 — 193 (187)(96.9)%
Other expenses3,765 (4)3,761 3,784 — 3,784 (23)(0.6)%
Total non–interest expense$33,388 $(242)$33,146 $30,432 $— $30,432 $2,714 8.9 %
Annualized
Non–interest Exp. to Avg. Assets
2.18 %2.16 %2.18 %2.18 %
Totalnon-interest non–interest expense was $431,000$3.0 million higher for the second quarter of 2021 when compared to the second quarter of 2020. Increases in salaries and employee benefits, outside services and consultants, loan expense and FDIC insurance expense were offset in part by decreases in other losses and net occupancy expenses. Salaries and benefits expense for the three months ended June 30, 2020 did not include accruals related to annual bonus payments, while a normalized level of annual bonus accruals were recorded for the three months ended June 30, 2021. Excluding acquisition expenses, total non–interest expense increased by $2.7 million in the thirdsecond quarter when compared to the same period in 2020.
Annualized non–interest expense as a percent of 2017average assets was 2.18% for the three months ended June 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.16% and 2.18% for the three months ended June 30, 2021 and 2020, respectively.


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

Six Months Ended
June 30,June 30,
20212020Adjusted
ActualAcquisition
Expenses
AdjustedActualAcquisition
Expenses
AdjustedAmount
Change
Percent
Change
Non–interest Expense
Salaries and employee benefits$34,601 $— $34,601 $32,220 $— $32,220 $2,381 7.4 %
Net occupancy expenses6,402 — 6,402 6,442 — 6,442 (40)(0.6)%
Data processing4,764 — 4,764 4,837 — 4,837 (73)(1.5)%
Professional fees1,132 (51)1,081 1,054 — 1,054 27 2.6 %
Outside services and consultants3,922 (187)3,735 3,674 — 3,674 61 1.7 %
Loan expense5,929 — 5,929 4,791 — 4,791 1,138 23.8 %
FDIC deposit insurance1,300 — 1,300 385 — 385 915 237.7 %
Other losses289 — 289 313 — 313 (24)(7.7)%
Other expenses7,221 (4)7,217 7,865 — 7,865 (648)(8.2)%
Total non–interest expense$65,560 $(242)$65,318 $61,581 $— $61,581 $3,737 6.1 %
Annualized
Non–interest Exp. to Avg. Assets
2.19 %2.18 %2.28 %2.28 %

Total non–interest expense was $4.0 million higher for the six–month period ended June 30, 2021 compared to the same period of 2016.2020. Increases in salaries and employee benefits, loan expenses and FDIC insurance expense were offset in part by a decrease in other expense. Salaries and benefits expense for the six–month period ended June 30, 2020 did not include accruals related to annual bonus payments, while a normalized level of annual bonus accruals were recorded for the six–month period ended June 30, 2021. Excluding merger-relatedacquisition expenses, of $2.0 million and $3.0 million recorded during the three months ended September 30, 2017 and 2016, respectively, totalnon-interest non–interest expense increased $1.4$3.7 million or 6.5%. Salaries increased by $896,000 duefor the six–month period ended June 30, 2021 compared to the same period of 2020.
Annualized non–interest expense as a larger employee base. Net occupancypercent of average assets was 2.19% and 2.28% for the six–month period ended June 30, 2021 and 2020, respectively. Annualized non–interest expense, increased $226,000 dueexcluding acquisition expenses, as a percent of average assets was 2.18% and 2.28% for the six–month period ended June 30, 2021 and 2020, respectively.

Income Taxes
Income tax expense totaled $3.8 million for the second quarter of 2021, an increase of $1.8 million when compared to Horizon’s investmentthe second quarter of 2020. The increase in growth markets andincome tax expense in the LaPorte Bancorp, CNB and Lafayette acquisitions. Other expense increased $274,000second quarter of 2021 compared to the second quarter of 2020 was primarily due to higher amortizationan increase in income before taxes of $9.3 million.
Income tax expense related to core deposit intangibles. Outside service and consultant, professional fees and other expense decreased $182,000 intotaled $7.2 million for the third quartersix–month period ended June 30, 2021, an increase of 2017$3.6 million when compared to the same period of 2016 primarily due to lower merger-related expenses. FDIC insurance expense was $195,000 lower2020. The increase in the third quarter of 2017 when compared to the same period of 2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and during 2017. Loan expenses decreased $267,000 primarily due to a decrease in loan collection expenses. Data processing expense decreased $114,000 in the third quarter of 2017 when compared to the same period in 2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

The following is a summary of changes innon-interest expense (table dollar amounts in thousands):

   Nine Months Ended         
   September 30   September 30   Amount   Percent 
   2017   2016   Change   Change 

Non-interest Expense

        

Salaries

  $26,867   $22,485   $4,382    19.5

Commission and bonuses

   3,863    4,064    (201   -4.9

Employee benefits

   6,356    6,043    313    5.2

Net occupancy expenses

   7,048    6,011    1,037    17.3

Data processing

   4,311    3,855    456    11.8

Professional fees

   1,797    2,190    (393   -17.9

Outside services and consultants

   4,991    5,983    (992   -16.6

Loan expense

   3,572    4,086    (514   -12.6

FDIC deposit insurance

   776    1,279    (503   -39.3

Other losses

   186    510    (324   -63.5

Other expense

   8,755    9,616    (861   -9.0
  

 

 

   

 

 

   

 

 

   

Totalnon-interest expense

  $68,522   $66,122   $2,400    3.6
  

 

 

   

 

 

   

 

 

   

Totalnon-interest expense was $2.4 million higher for the nine months ended September 30, 2017 compared to the same period of 2016. Excluding merger-related expenses of $2.2 million and $5.5 million recorded during the nine months of September 30, 2017 and 2016, respectively, totalnon-interest expense increased $5.7 million, or 9.3%. Salaries increased by $4.4 million due to a larger employee base. Net occupancy expenses increased $1.0 million due to Horizon’s investment in growth markets and the Kosciusko, LaPorte Bancorp, CNB and Lafayette acquisitions. Data processing expenses increased $456,000 primarily due to company growth. Outside services and consultants, professional fees and other expenses decreased $992,000, $393,000 and $861,000, respectively, for the nine months ended September 30, 2017 compared to the same period of 2016 primarily due toone-time expenses related to the Kosciusko and LaPorte Bancorp acquisitions. FDIC deposit insurance expense was $503,000 lower for the first nine months of 2017 when compared to the same period in 2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and in 2017. Other losses decreased $324,000 for the nine months ended September 30, 2017 when compared to the same period in 2016, primarily due to a decrease in debit card related expense. Loan expense decreased $514,000 as loan collection expenses were lower during the first nine months of 2017 when compared to the same period of 2016.

Income Taxes

Incomeincome tax expense for the third quarter of 2017 was $2.5 million compared to $2.6 million for the same period of 2016. The effective tax rate for the third quarter of 2017 was 23.5% compared to 28.2% in the same period of 2016. The decrease in the effective tax rate for the third quarter of 2017 was primarily due to tax benefits related to the exercisean increase in income before taxes of stock options.

Income tax expense for the nine months ended September 30, 2017 was $9.1 million compared to $7.2 million for the same period of 2016. The effective tax rate for the first nine months of 2017 was 26.3% compared to 28.2% in the same period of 2016. The decrease in the effective tax rate for the nine months ended September 30, 2017 was primarily due to tax benefits related to the exercise of stock options.    

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

$19.9 million.


Liquidity

The Bank maintains a stable base of core deposits provided by long-standinglong–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,
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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 Six Months ended June 30, 2021 and 2020
unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. During the nine months ended SeptemberAt June 30, 2017, cash and cash equivalents increased by approximately $1.8 million. At September 30, 2017,2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $236.3$890.6 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $453.9$1.04 billion at December 31, 2020. The Bank had approximately $1.2 billion of unpledged investment securities at June 30, 2021 compared to $632.4 million at December 31, 2016 and $278.2 million at September 30, 2016.

2020.


Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at SeptemberJune 30, 2017.2021. Stockholders’ equity totaled $392.1$710.4 million as of SeptemberJune 30, 2017,2021, compared to $340.9$692.2 million as of December 31, 2016.2020. For the ninesix months ended SeptemberJune 30, 2017,2021, the ratio of average stockholders’ equity to average assets was 10.94%11.62% compared to 10.22%11.82% for the twelve months ended December 31, 2016.2020. The increase in stockholders’ equity during the period was the result of the generation of net income net ofrecorded during the period offset in part by a decrease in accumulated other comprehensive income and dividends declared, as well as the stock issued in the Lafayette acquisition.

On February 1, 2016, the Companydeclared.

Horizon paid off the $12.5 million in funds received through the Small Business Lending Fund with cash from the holding company, thereby ending its participation in the program, pursuant to which it issued preferred stock to the US Treasury. The funds were paid off due to an increase in the dividend cost that would have gone in effect at the end of February 2016.

Horizon declared common stock dividends in the amount of $0.37$0.25 per share during the first ninesix months of 20172021 and $0.30$0.24 per share for the same period of 2016.2020. The dividend payout ratio (dividends as a percent of basic earnings per share) was 32.4%25.8% and 31.6%40.7% for the first ninesix months of 20172021 and 2016,2020, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form10-K for 2016.

2020.


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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 NineSix Months ended SeptemberJune 30, 20172021 and 2016

2020

Use ofNon-GAAP Non–GAAP Financial Measures

Certain information set forth in this quarterly report on Form10-Q 10–Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have includednon-GAAP non–GAAP financial measures of therelating to net interest margin and the allowance for loan and lease losses excluding the impact of acquisition-related purchase accounting adjustments and net income, and diluted earnings per share, excludingnet 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 ofone-time costs such events as acquisition–related to acquisitions, acquisition-related purchase accounting adjustments, and other events that are considered to benon-recurring.among others we have identified in our reconciliations. Horizon believes that thesenon-GAAP non–GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts andone-time costs of acquisitions andnon-core items, although these 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.

Non-GAAP Reconciliation See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of Net Interest Margin

(Dollars in Thousands, Unaudited)

   Three Months Ended  Nine Months Ended 
   September 30  June 30  September 30  September 30 
   2017  2017  2016  2017  2016 

Net Interest Margin As Reported

      

Net interest income

  $27,879  $27,198  $24,410  $80,645  $65,053 

Average interest-earning assets

   3,078,611   2,943,627   2,957,944   2,940,659   2,591,566 

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

   3.71  3.84  3.37  3.77  3.43

Impact of Acquisitions

      

Interest income from acquisition-related purchase accounting adjustments

  $(661 $(939 $(459 $(2,616 $(1,404

Excluding Impact of Prepayment Penalties and Acquisitions

      

Net interest income

  $27,218  $26,259  $23,951  $78,029  $63,649 

Average interest-earning assets

   3,078,611   2,943,627   2,957,944   2,940,659   2,591,566 

Core Net Interest Margin

   3.63  3.71  3.31  3.65  3.36

the non–GAAP figures identified herein and their most comparable GAAP measures.

Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months EndedSix Months Ended
June 30,March 31,December 31,September 30,June 30,June 30,June 30,
2021202120202020202020212020
Net income as reported$22,173 $20,422 $21,893 $20,312 $14,639 $42,595 $26,294 
Acquisition expenses242 — — — — 242 — 
Tax effect(51)— — — — (51)— 
Net income excluding acquisition expenses22,364 20,422 21,893 20,312 14,639 42,786 26,294 
(Gain)/loss on sale of investment
securities
— (914)(2,622)(1,088)(248)(914)(587)
Tax effect— 192 551 228 52 192 123 
Net income excluding (gain)/loss on sale of investment securities22,364 19,700 19,822 19,452 14,443 42,064 25,830 
Death benefit on bank owned life insurance (“BOLI”)(266)— — (31)— (266)(233)
Net income excluding death benefit on BOLI22,098 19,700 19,822 19,421 14,443 41,798 25,597 
Prepayment penalties on borrowings125 — 3,804 — — 125 — 
Tax effect(26)— (799)— — (26)— 
Net income excluding prepayment penalties on borrowings22,197 19,700 22,827 19,421 14,443 41,897 25,597 
Adjusted net income$22,197 $19,700 $22,827 $19,421 $14,443 $41,897 $25,597 

62

Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and NineSix Months ended SeptemberJune 30, 20172021 and 2016

Non-GAAP Reconciliation2020

Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months EndedSix Months Ended
June 30,March 31,December 31,September 30,June 30,June 30,June 30,
2021202120202020202020212020
Diluted earnings per share (“EPS”) as reported$0.50 $0.46 $0.50 $0.46 $0.33 $0.97 $0.59 
Acquisition expenses0.01 — — — — 0.01 — 
Tax effect— — — — — — — 
Diluted EPS excluding acquisition expenses0.51 0.46 0.50 0.46 0.33 0.98 0.59 
(Gain)/loss on sale of investment securities— (0.02)(0.06)(0.02)(0.01)(0.02)(0.01)
Tax effect— — 0.01 0.01 — — — 
Diluted EPS excluding (gain)/loss on investment securities0.51 0.44 0.45 0.45 0.32 0.96 0.58 
Death benefit on BOLI(0.01)— — — — (0.01)(0.01)
Diluted EPS excluding death benefit on BOLI0.50 0.44 0.45 0.45 0.32 0.95 0.57 
Prepayment penalties on borrowings— — 0.09 — — — — 
Tax effect— — (0.02)— — — — 
Diluted EPS excluding prepayment penalties on borrowings0.50 0.44 0.52 0.45 0.32 0.95 0.57 
Adjusted Diluted EPS$0.50 $0.44 $0.52 $0.45 $0.32 $0.95 $0.57 

Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months EndedSix Months Ended
June 30,March 31,December 31,September 30,June 30,June 30,June 30,
2021202120202020202020212020
Pre–tax income$25,943 $23,872 $23,860 $24,638 $16,632 $49,815 $29,871 
Credit loss expense (reversal)(1,492)367 3,042 2,052 7,057 (1,125)15,657 
Pre–tax, pre–provision net income$24,451 $24,239 $26,902 $26,690 $23,689 $48,690 $45,528 
Pre–tax, pre–provision net income$24,451 $24,239 $26,902 $26,690 $23,689 $48,690 $45,528 
Acquisition expenses242 — — — — 242 — 
(Gain)/loss on sale of investment securities— (914)(2,622)(1,088)(248)(914)(587)
Death benefit on bank owned life insurance(266)— — (31)— (266)(233)
Prepayment penalties on borrowings125 — 3,804 — — 125 — 
Adjusted pre–tax, pre–provision net income$24,552 $23,325 $28,084 $25,571 $23,441 $47,877 $44,708 
63

Table of Net Income and Diluted Earnings per Share

(Dollars in Thousands Except per Share Data)

   Three Months Ended   Nine Months Ended 
   September 30   September 30 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited) 

Non-GAAP Reconciliation of Net Income

        

Net income as reported

  $8,171   $6,602   $25,467   $18,309 

Merger expenses

   2,013    2,953    2,213    5,472 

Tax effect

   (516   (886   (586   (1,582
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding merger expenses

   9,668    8,669    27,094    22,199 

Gain on sale of investment securities

   (6   —      (38   (875

Tax effect

   2    —      13    306 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding gain on sale of investment securities

   9,664    8,669    27,069    21,630 

Acquisition-related purchase accounting adjustments (“PAUs”)

   (661   (459   (2,616   (1,404

Tax effect

   231    161    916    491 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding PAUs

  $9,234   $8,371   $25,369   $20,717 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Reconciliation of Diluted Earnings per Share

        

Diluted earnings per share as reported

  $0.36   $0.30   $1.13   $0.94 

Merger expenses

   0.09    0.14    0.10    0.28 

Tax effect

   (0.02   (0.04   (0.02   (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share excluding merger expenses

   0.43    0.40    1.21    1.14 

Gain on sale of investment securities

   (0.00   —      (0.00   (0.05

Tax effect

   0.00    —      0.00    0.02 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding gain on sale of investment securities

   0.43    0.40    1.21    1.11 

Acquisition-related PAUs

   (0.03   (0.02   (0.12   (0.07

Tax effect

   0.01    0.01    0.04    0.03 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share excluding PAUs

  $0.41   $0.39   $1.13   $1.07 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share

(Dollars in Thousands Except per Share Data)

   September 30   June 30   March 31   December 31   September 30 
   2017   2017   2017   2016   2016 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 

Total stockholders’ equity

  $392,055   $357,259   $348,575   $340,855   $345,736 

Less: Intangible assets

   103,244    86,726    87,094    86,307    83,891 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total tangible stockholders’ equity

  $288,811   $270,533   $261,481   $254,548   $261,845 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common shares outstanding

   23,325,459    22,176,465    22,176,465    22,171,596    22,143,228 

Tangible book value per common share

  $12.38   $12.20   $11.79   $11.48   $11.83 

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and NineSix Months ended SeptemberJune 30, 20172021 and 2016

Non-GAAP Reconciliation2020

Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months EndedSix Months Ended
June 30,March 31,December 31,September 30,June 30,June 30,June 30,
2021202120202020202020212020
Net interest income as reported$42,632 $42,538 $43,622 $43,397 $42,996 $85,170 $83,921 
Average interest earning assets5,659,384 5,439,634 5,365,888 5,251,611 5,112,636 5,550,116 4,929,388 
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”)
3.14 %3.29 %3.34 %3.39 %3.47 %3.21 %3.51 %
Net interest income as reported$42,632 $42,538 $43,622 $43,397 $42,996 $85,170 $83,921 
Acquisition–related purchase accounting adjustments
(“PAUs”)
(230)(1,579)(2,461)(1,488)(1,553)(1,809)(2,987)
Prepayment penalties on borrowings125 — 3,804 — — 125 — 
Adjusted net interest income$42,527 $40,959 $44,965 $41,909 $41,443 $83,486 $80,934 
Adjusted net interest margin3.13 %3.17 %3.44 %3.27 %3.35 %3.15 %3.39 %

Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
June 30,March 31,December 31,September 30,June 30,
20212021202020202020
Total stockholders’ equity$710,374 $689,379 $692,216 $670,293 $652,206 
Less: Intangible assets172,398 173,296 174,193 175,107 176,020 
Total tangible stockholders’ equity$537,976 $516,083 $518,023 $495,186 $476,186 
Common shares outstanding43,950,720 43,949,189 43,880,562 43,874,353 43,821,878 
Book value per common share$16.16 $15.69 $15.78 $15.28 $14.88 
Tangible book value per common
share
$12.24 $11.74 $11.81 $11.29 $10.87 
64

Table of Return on Average Assets

(Dollars in Thousands)

   Three Months Ended  Nine Months Ended 
   September 30  September 30 
   2017  2016  2017  2016 
   (Unaudited)  (Unaudited) 

Non-GAAP Reconciliation of Net Income

     

Average Assets

  $3,383,662  $3,273,618  $3,247,300  $2,856,473 

Net income as reported

   8,171   6,602   25,467   18,309 

Merger expenses

   2,013   2,953   2,213   5,472 

Tax effect

   (516  (886  (586  (1,582
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income excluding merger expenses

   9,668   8,669   27,094   22,199 

Gain on sale of investment securities

   (6  —     (38  (875

Tax effect

   2   —     13   306 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income excluding gain on sale of investment securities

   9,664   8,669   27,069   21,630 

Acquisition-related purchase accounting adjustments (“PAUs”)

   (661  (459  (2,616  (1,404

Tax effect

   231   161   916   491 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income excluding PAUs

  $9,234  $8,371  $25,369  $20,717 
  

 

 

  

 

 

  

 

 

  

 

 

 

Non-GAAP Reconciliation Return on Average Assets

     

Return on average assets as reported

   0.96  0.80  1.05  0.86

Merger expenses

   0.24  0.37  0.09  0.25

Tax effect

   -0.06  -0.11  -0.03  -0.07
  

 

 

  

 

 

  

 

 

  

 

 

 

Return on average assets excluding merger expenses

   1.14  1.06  1.11  1.04

Gain on sale of investment securities

   0.00  0.00  0.00  -0.04

Tax effect

   0.00  0.00  0.00  0.01
  

 

 

  

 

 

  

 

 

  

 

 

 

Return on average assets excluding gain on sale of investment securities

   1.14  1.06  1.11  1.01

Acquisition-related PAUs

   -0.08  -0.06  -0.11  -0.06

Tax effect

   0.03  0.02  0.04  0.02
  

 

 

  

 

 

  

 

 

  

 

 

 

Return on average assets excluding PAUs

   1.09  1.02  1.04  0.97
  

 

 

  

 

 

  

 

 

  

 

 

 

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Quantitative

Management’s Discussion and Qualitative Disclosures About Market Risk

Analysis of Financial Condition

And Results of Operations
For the Three and NineSix Months ended SeptemberJune 30, 20172021 and 2016

2020
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months EndedSix Months Ended
June 30,March 31,December 31,September 30,June 30,June 30,June 30,
2021202120202020202020212020
Non–interest expense as reported$33,388 $32,172 $36,453 $33,407 $30,432 $65,560 $61,581 
Net interest income as reported42,632 42,538 43,622 43,397 42,996 85,170 83,921 
Non–interest income as reported$15,207 $13,873 $19,733 $16,700 $11,125 $29,080 $23,188 
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio")
57.73 %57.03 %57.54 %55.59 %56.23 %57.38 %57.49 %
Non–interest expense as reported$33,388 $32,172 $36,453 $33,407 $30,432 $65,560 $61,581 
Acquisition expenses(242)— — — — (242)— 
Non–interest expense excluding acquisition expenses33,146 32,172 36,453 33,407 30,432 65,318 61,581 
Net interest income as reported42,632 42,538 43,622 43,397 42,996 85,170 83,921 
Prepayment penalties on borrowings125 — 3,804 — — 125 — 
Net interest income excluding prepayment penalties on borrowings42,757 42,538 47,426 43,397 42,996 85,295 83,921 
Non–interest income as reported15,207 13,873 19,733 16,700 11,125 29,080 23,188 
(Gain)/loss on sale of investment securities— (914)(2,622)(1,088)(248)(914)(587)
Death benefit on bank owned life insurance ("BOLI")(266)— — (31)— (266)(233)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI$14,941 $12,959 $17,111 $15,581 $10,877 $27,900 $22,368 
Adjusted efficiency ratio57.45 %57.97 %56.48 %56.64 %56.49 %57.70 %57.94 %
65

Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months EndedSix Months Ended
June 30,March 31,December 31,September 30,June 30,June 30,June 30,
2021202120202020202020212020
Average assets$6,142,507 $5,936,149 $5,864,086 $5,768,691 $5,620,695 $6,039,897 $5,433,187 
Return on average assets ("ROAA") as reported1.45 %1.40 %1.49 %1.40 %1.05 %1.42 %0.97 %
Acquisition expenses0.02 — — — — 0.01 — 
Tax effect— — — — — — — 
ROAA excluding acquisition expenses1.47 1.40 1.49 1.40 1.05 1.43 0.97 
(Gain)/loss on sale of investment securities— (0.06)(0.18)(0.08)(0.02)(0.03)(0.02)
Tax effect— 0.01 0.04 0.02 — 0.01 — 
ROAA excluding (gain)/loss on sale of investment securities1.47 1.35 1.35 1.34 1.03 1.41 0.95 
Death benefit on bank owned life insurance ("BOLI")(0.02)— — — — (0.01)(0.01)
ROAA excluding death benefit on BOLI1.45 1.35 1.35 1.34 1.03 1.40 0.94 
Prepayment penalties on borrowings0.01 — 0.26 — — — — 
Tax effect— — (0.05)— — — — 
ROAA excluding prepayment penalties on borrowings1.46 1.35 1.56 1.34 1.03 1.40 0.94 
Adjusted ROAA1.46 %1.35 %1.56 %1.34 %1.03 %1.40 %0.94 %

66

Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months EndedSix Months Ended
June 30,March 31,December 31,September 30,June 30,June 30,June 30,
2021202120202020202020212020
Average common equity$706,652 $697,401 $680,857 $668,797 $649,490 $702,052 $655,538 
Return on average common equity ("ROACE") as reported12.59 %11.88 %12.79 %12.08 %9.07 %12.23 %8.07 %
Merger expenses0.14 — — — — 0.07 — 
Tax effect(0.03)— — — — (0.01)— 
ROACE excluding merger expenses12.70 11.88 12.79 12.08 9.07 12.29 8.07 
(Gain)/loss on sale of investment securities— (0.53)(1.53)(0.65)(0.15)(0.26)(0.18)
Tax effect— 0.11 0.32 0.14 0.03 0.06 0.04 
ROACE excluding (gain)/loss on sale of investment securities12.70 11.46 11.58 11.57 8.95 12.09 7.93 
Death benefit on bank owned life insurance ("BOLI")(0.15)— — (0.02)— (0.08)(0.07)
ROACE excluding death benefit on BOLI12.55 11.46 11.58 11.55 8.95 12.01 7.86 
Prepayment penalties on borrowings0.07 — 2.22 — — 0.04 — 
Tax effect(0.01)— (0.47)— — (0.01)— 
ROACE excluding prepayment penalties on borrowings12.61 11.46 13.33 11.55 8.95 12.04 7.86 
Adjusted ROACE12.61 %11.46 %13.33 %11.55 %8.95 %12.04 %7.86 %

67

Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months ended June 30, 2021 and 2020

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon’s 20162020 Annual Report on Form10-K 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 20162020 Annual Report on Form10-K.

10–K.
ITEM 4.CONTROLS AND PROCEDURES

ITEM 4.    CONTROLS AND PROCEDURES
Evaluation Ofof Disclosure Controls Andand Procedures

Based on an evaluation of disclosure controls and procedures as of SeptemberJune 30, 2017,2021, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule13a-15(e) 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 Inin 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 SeptemberJune 30, 2017,2021, 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.

68


HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

For the Three and Nine Months ended September 30, 2017 and 2016

ITEM 1.LEGAL PROCEEDINGS

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

ITEM 1A.    RISK FACTORS
There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form10-K 10–K for 2016.

the fiscal year ended December 31, 2020.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
Not Applicable

ITEM 4.MINE SAFETY DISCLOSURES

ITEM 4.    MINE SAFETY DISCLOSURES
Not Applicable

ITEM 5.OTHER INFORMATION

ITEM 5.    OTHER INFORMATION
Not Applicable


69

Table of Contents
HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

For the Three and Nine Months ended September 30, 2017 and 2016

ITEM 6.    EXHIBITS
(a) Exhibits
ITEM 6.EXHIBITS

(a) Exhibits

Exhibit
No.
DescriptionDescriptionLocation
  31.110.1Incorporated by reference to Appendix A to Registrant's definitive proxy statement for 2021 Annual Meeting of Shareholders
10.2Incorporated by reference to Exhibit 10.2 to Registrant's Form 8–K filed on May 11, 2021
10.3Incorporated by reference to Exhibit 10.3 to Registrant's Form 8–K filed on May 11, 2021
10.4Incorporated by reference to Exhibit 10.4 to Registrant's Form 8–K filed on May 11, 2021
10.5Incorporated by reference to Exhibit 10.5 to Registrant's Form 8–K filed on May 11, 2021
10.6Incorporated by reference to Exhibit 10.6 to Registrant's Form 8–K filed on May 11, 2021
31.1Attached
31.2
  31.2Attached
32
  32Attached
101
101Inline Interactive Data FilesAttached
104The cover page from the Company’s Quarterly Report on Form 10–Q for the quarter ended June 30, 2021, has been formatted in Inline XBRLWithin the Inline XBRL document


70

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

Dated:November 8, 2017

/s/ Craig M. Dwight

Craig M. Dwight
Chief Executive OfficerHORIZON BANCORP, INC.
August 3, 2021/s/ Craig M. Dwight
DateCraig M. Dwight
Chief Executive Officer
Dated:August 3, 2021November 8, 2017

/s/ Mark E. Secor

DateMark E. Secor
Mark E. Secor
Chief Financial Officer

72


71