What changed in this filing

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Item 1. Financial Statements

2021-04-30 compared with 2020-11-02 · 385 added, 748 removed, 905 unchanged (56% of the section changed)

FINANCIAL STATEMENTS

ITEM 1 – FINANCIAL STATEMENTS

HORIZON BANCORP, INC.

2 unchanged sentences

(Dollar Amounts in Thousands)

September 30,

2021 December 31,

5 unchanged sentences

Loans held for sale 7,798 13,538

Loans, net of allowance for loan losses of $ 56,319 and $ 17,667

Loans, net of allowance for credit losses of $ 57,186 and $ 57,027

3,607,250 3,810,356

11 unchanged sentences

Borrowings 481,488 475,000

Subordinated debentures 58,566 —

Subordinated notes 58,640 58,603

Junior subordinated debentures issued to capital trusts 56,604 56,548

13 unchanged sentences

See notes to condensed consolidated financial statements

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

Three Months Ended

Interest Income

17 unchanged sentences

Fiduciary activities 1,743 2,528

Gains on sale of investment securities (includes $ 1,088 and $ — for the three months ended September 30, 2020 and 2019, respectively, and $ 1,675 and $( 85 ) for the nine months ended September 30, 2020 and 2019, respectively, related to accumulated other comprehensive earnings reclassifications)

1,088 — 1,675 ( 85 )

Gains on sale of investment securities (includes $ 914 and $ 339 for the three months ended March 31, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications)

Gain on sale of mortgage loans 5,296 3,473

16 unchanged sentences

Income Before Income Taxes 23,872 13,239

Income tax expense (includes $ 228 and $ — for the three months ended September 30, 2020 and 2019, respectively, and $ 352 and $( 18 ) for the nine months ended September 30, 2020 and 2019, respectively, related to income tax expense from reclassification items)

4,326 4,004 7,903 9,383

Income tax expense (includes $ 192 and $ 71 for the three months ended March 31, 2021 and 2020, respectively, related to income tax expense from reclassification items)

Net Income $ 20,422 $ 11,655

2 unchanged sentences

See notes to condensed consolidated financial statements

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

Three Months Ended Nine Months Ended

September 30 September 30

2020 2019 2020 2019

Three Months Ended

Net Income $ 20,422 $ 11,655

5 unchanged sentences

Change in securities:

Unrealized appreciation for the period on AFS securities 4,019 3,963 27,518 22,591

Amortization from transfer of securities from available for sale to held to maturity securities ( 31 ) ( 15 ) ( 60 ) ( 83 )

Unrealized appreciation (depreciation) for the period on AFS securities ( 23,885 ) 7,992

Accretion (amortization) from transfer of securities from available for sale to held to maturity securities 17 ( 30 )

Reclassification adjustment for securities gains realized in income ( 914 ) ( 339 )

Income tax effect 5,204 ( 1,601 )

Unrealized gains on securities 2,292 3,121 20,369 17,848

Other Comprehensive Income, Net of Tax 2,008 2,439 16,846 14,790

Unrealized gains (losses) on securities ( 19,578 ) 6,022

Other Comprehensive Income (Loss), Net of Tax ( 17,166 ) 2,890

Comprehensive Income $ 3,256 $ 14,545

See notes to condensed consolidated financial statements

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

5 unchanged sentences

Comprehensive

Balances, July 1, 2019 $ — $ — $ 380,735 $ 241,519 $ 4,207 $ 626,461

Net income — — — 20,537 — 20,537

Other comprehensive income, net of tax — — — — 2,439 2,439

Amortization of unearned compensation — — 202 — — 202

Exercise of stock options — — 7 — — 7

Stock option expense — — 50 — — 50

Stock issued stock plans — — 49 — — 49

Repurchase of outstanding stock — — ( 1,595 ) — — ( 1,595 )

Cash dividends on common stock ($ 0.12 per share)

— — — ( 5,439 ) — ( 5,439 )

Balances, September 30, 2019 $ — $ — $ 379,448 $ 256,617 $ 6,646 $ 642,711

Balances, July 1, 2020 $ — $ — $ 361,087 $ 269,849 $ 21,270 $ 652,206

Net income — — — 20,312 — 20,312

Other comprehensive income, net of tax — — — — 2,008 2,008

Amortization of unearned compensation — — 335 — — 335

Exercise of stock options — — — — — —

Stock option expense — — 28 — — 28

Stock issued stock plans — — 730 — — 730

Cash dividends on common stock ($ 0.12 per share)

— — — ( 5,326 ) — ( 5,326 )

Balances, September 30, 2020 $ — $ — $ 362,180 $ 284,835 $ 23,278 $ 670,293

See notes to condensed consolidated financial statements

Nine Months Ended

Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

Income (Loss) Total

Balances, January 1, 2020 $ — $ — $ 379,853 $ 269,738 $ 6,432 $ 656,023

5 unchanged sentences

Stock issued stock plans — — 297 — — 297

Stock issued in Salin acquisition — — 102,722 — — 102,722

Repurchase of outstanding stock — — ( 19,636 ) — — ( 19,636 )

1 unchanged sentence

— — — ( 5,257 ) — ( 5,257 )

Balances, September 30, 2019 $ — $ — $ 379,448 $ 256,617 $ 6,646 $ 642,711

Balances, March 31, 2020 $ — $ — $ 361,019 $ 260,501 $ 9,322 $ 630,842

Balances, January 1, 2021 $ — $ — $ 362,945 $ 301,419 $ 27,852 $ 692,216

Net income — — — 20,422 — 20,422

Other comprehensive income, net of tax — — — — 16,846 16,846

Impact of adoption of ASU No.

2016-13 — — — ( 15,635 ) — ( 15,635 )

Other comprehensive loss, net of tax — — — — ( 17,166 ) ( 17,166 )

Amortization of unearned compensation — — 335 — — 335

1 unchanged sentence

Stock option expense — — 27 — — 27

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

Repurchase of outstanding stock — — ( 19,636 ) — — ( 19,636 )

Stock awards vested — — ( 1,347 ) — — ( 1,347 )

Cash dividends on common stock ($ 0.12 per share)

— — — ( 5,761 ) — ( 5,761 )

Balances, September 30, 2020 $ — $ — $ 362,180 $ 284,835 $ 23,278 $ 670,293

Balances, March 31, 2021 $ — $ — $ 362,613 $ 316,080 $ 10,686 $ 689,379

See notes to condensed consolidated financial statements

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

Nine Months Ended

Three Months Ended

Operating Activities

7 unchanged sentences

Premium amortization on securities, net 2,224 1,997

(Gain) loss on sale of investment securities ( 1,675 ) 85

Gain on sale of investment securities ( 914 ) ( 339 )

Gain on sale of mortgage loans ( 5,296 ) ( 3,473 )

14 unchanged sentences

Net change in interest earning time deposits 982 ( 784 )

Change in FHLB stock ( 576 ) ( 803 )

Net change in loans 202,290 ( 68,685 )

3 unchanged sentences

Repurchase of outstanding stock — ( 19,636 )

Net cash received in acquisition, Salin — 128,745

Net cash used in investing activities ( 549,828 ) ( 48,883 )

Net cash provided by (used in) investing activities 55,445 ( 142,049 )

Financing Activities

2 unchanged sentences

Borrowings 6,581 154,935

Proceeds from issuance of stock 1,401 1,552

Net change from issuance of stock ( 694 ) 552

Net proceeds from issuance of subordinated notes — —

Dividends paid on common stock ( 5,761 ) ( 5,257 )

Net cash provided by (used in) financing activities 487,292 ( 82,875 )

Net cash provided by financing activities 190,809 101,499

Net Change in Cash and Cash Equivalents 279,625 ( 12,373 )

Cash and Cash Equivalents, Beginning of Period 249,711 98,831

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

Cash and Cash Equivalents, End of Period $ 529,336 $ 86,458

3 unchanged sentences

Transfer of loans to other real estate and repossessed assets 449 609

Transfer of premises to other real estate — 1,705

Right-of-use assets exchanged for lease obligations — 3,411

See notes to condensed consolidated financial statements

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

5 unchanged sentences

All inter–company balances and transactions have been eliminated.

The results of operations for the periods ended September 30, 2020 and September 30, 2019 are not necessarily indicative of the operating results for the full year of 2020 or 2019.

The results of operations for the periods ended March 31, 2021 and March 31, 2020 are not necessarily indicative of the operating results for the full year of 2021 or 2020.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented.

4 unchanged sentences

On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value.

As of September 30, 2020, Horizon had repurchased a total of 373,323 shares at an average price per share of $ 15.86 .

As of March 31, 2021, Horizon had repurchased a total of 373,323 shares at an average price per share of $ 15.86 .

In addition to the stock repurchase program, Horizon agreed to repurchase 1,000,000 shares at a price per share of $ 15.19 from an individual shareholder on March 6, 2020.

2 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30 September 30

2020 2019 2020 2019

Three Months Ended

Basic earnings per share

10 unchanged sentences

Diluted earnings per share $ 0.46 $ 0.26

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

There were 492,273 and 273,776 shares for the three and nine months ended September 30, 2020, which were not included in the computation of diluted earnings per share because they were non–dilutive.

There were 340,540 shares for the three and nine months ended September 30, 2019, which were not included in the computation of diluted earnings per share because they were non–dilutive.

There were 138,010 shares for the three months ended March 31, 2021, which were not included in the computation of diluted earnings per share because they were non–dilutive.

There were 293,665 shares for the three months ended March 31, 2020, which were not included in the computation of diluted earnings per share because they were non–dilutive.

Horizon has share–based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2020 Annual Report on Form 10–K.

Adoption of New Accounting Standards

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No.

2016–13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments – On January 1, 2020, the Company adopted ASU No.

2016–13, “ Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments” (“CECL”).

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held to maturity securities.

It also applies to off–balance sheet (“OBS”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar agreements).

In addition, ASC 326 made changes to the accounting for available for sale debt securities.

One such change is to require credit losses to be presented as an allowance, rather than as a write–down, on available for sale debt securities management does not intend to sell or believe that it is not more likely than not they will be required to sell.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures.

Results for reporting periods beginning after December 31, 2019, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company recorded a net decrease to retained earnings of $ 15.6 million as of January 1, 2020 for the cumulative effect of adopting ASC 326.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”), previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310–30.

In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.

On January 1, 2020, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $ 2.8 million of allowance for credit losses (“ACL”) on loans.

The following table illustrates the impact of ASC 326.

January 1, 2020

ASC 326 Pre-ASC 326

Adoption Impact of

Commercial $ 25,614 $ 11,996 $ 13,618

Real estate 4,971 923 4,048

Mortgage warehouse 1,077 1,077 —

Consumer 8,582 3,671 4,911

Allowance for credit losses on loans $ 40,244 $ 17,667 $ 22,577

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost.

Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, and deferred loan fees and costs.

Accrued interest receivable totaling $ 13.4 million at September 30, 2020 was excluded from the ACL calculation and was reported in accrued interest receivable on the consolidated balance sheets.

Interest income is accrued on the unpaid principal balance.

Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the effective yield method without anticipating prepayments.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan.

In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non–accruing loan.

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Further, it is management’s policy to generally place a loan on a non–accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management.

The officer responsible for the loan and the Chief Commercial Banking Officer and/or the Chief Operations Officer must review all loans placed on non–accrual status.

Subsequent payments on non–accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured.

Non–accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms.

The Company requires a period of satisfactory performance of not less than six months before returning a non–accrual loan to accrual status.

Consistent with regulatory guidance, charge–offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible.

The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1–4 family residential properties and consumer, the Company promptly charges–off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations.

For impaired loans that are considered to be solely collateral dependent, a partial charge–off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges–off 1–4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss.

The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge–down or specific allocation of family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due.

Pursuant to such guidelines, the Company also charges–off unsecured open–end loans when the loan is contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 90 days past due.

Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well–secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.

When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor.

The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement.

However, if a particular loan has a determinable market value for its collateral, the creditor may use that value.

Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral.

Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Smaller–balance, homogeneous loans are evaluated for impairment in total.

Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans.

Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment.

When analysis of borrower operating results and financial condition indicate that underlying cash flows of a

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment.

Often this is associated with a delay or shortfall in payments of 30 days or more.

Loans are generally moved to non–accrual status when they are 90 days or more past due.

These loans are often considered impaired.

Impaired loans, or portions thereof, are charged–off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including troubled debt restructurings, are measured for impairment.

Allowable methods for determining the amount of impairment include the three methods described above.

Purchased Credit Deteriorated Loans

The Company has purchased loans, some of which have experienced credit deterioration since origination.

PCD loans are recorded at the amount paid.

An ACL on loans is determined using the same methodology as other loans held for investment.

The initial ACL on loans determined on a collective basis is allocated to individual loans.

The sum of the loan’s purchase price and ACL on loans becomes its initial amortized cost basis.

The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan.

Subsequent changes to the ACL on loans are recorded through credit loss expense.

The Company adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310–30.

In accordance with the standard, we did not assess whether PCI loans met the criteria of PCD as of the date of adoption and all loans previously classified as PCI were updated to the PCD classification.

Pools utilized for PCI accounting under ASC 310–30 were not considered since the Company did not have PCI pools at the time of adoption.

PCD loans were assessed using prior specific loan reviews for the initial PCD loan ACL.

At the date of adoption, no securities were determined to be PCD.

Allowance for Credit Losses on Loans

The ACL on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged–off against the allowance when management believes the loan balance is confirmed to no longer be collectible.

Expected recoveries do not exceed the aggregate of amounts previously charged–off and expected to be charged–off.

Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan–specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, changes in economic conditions, or other relevant factors.

The Company considers the following when estimating credit losses:

1) available information relevant to assessing the collectibility of cash flows including internal information, external information or a combination of both relating to past events, current conditions and reasonable and supportable forecasts;

2) relevant qualitative and quantitative factors relating to the environment in which the Bank operates and factors specific to the borrower;

3) off–balance sheet credit exposures;

and credit support.

ACL on loans is measured on a collective basis and reflects impairment in groups of loans aggregated on the basis of similar risk characteristics which may include any one or a combination of the following:

internal credit ratings, risk ratings or classification, financial asset type, collateral type, size, industry of the borrower, historical or expected credit loss patterns, and reasonable and supportable forecast periods.

The ACL for a specific portfolio segment is computed by multiplying the loss rate by the amortized cost balance of the segment with adjustments for other qualitative factors as described above.

As appropriate, newer credit products or portfolios with limited historical loss may use applicable external data for determining the ACL until experience justifies that sufficient product maturity supports the estimate of expected credit losses.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Pursuant to ASC 326–20–30–9, an entity shall not rely solely on past events to estimate expected credit losses, and should consider adjustments to historical information to reflect the extent to which management expects current conditions and forecasted conditions to differ from the periods utilized for the historical loss rate calculation.

Management has incorporated an adjustment of the historical loss rate calculated within the model to reflect current and forecasted condition and has applied this adjustment on a qualitative factor basis to the aggregate pool loss rate.

The qualitative adjustment is based on a combination of external econometric data and internal factors such as portfolio composition, changes in management, changes in loan policy and other factors.

The economic forecast is based in part on economic indexes and quantitative matrices with a six to twelve month forecast.

The qualitative adjustment is calculated based on current and forecasted conditions and evaluated each quarter by management, and therefore is dynamic in nature.

As a result of the forecast being applied as a qualitative factor and adjusted quarterly, no reversion to the historical loss rate is necessary, as the historical base loss rate is preserved in the calculation of “all in” loss rate.

Specific reserves reflect impairment on loans identified for evaluation or individually considered non–performing, including troubled debt restructurings and receivables where the Company has determined foreclosure is probable.

These loans no longer have similar risk characteristics to collectively evaluated loans due to changes in credit risk, borrower circumstances, recognition of write–offs, or cash collections that have been fully applied to principal on the basis of non–accrual policies.

At a minimum, the population of loans subject to individual evaluation include individual loans and leases where it is probable we will be unable to collect all amounts due, according to the original contractual terms.

These include commercial impaired loans, jumbo residential mortgages (as defined), and jumbo home equity loans with a balance exceeding $250,000, and other loans as determined by management.

ACL for residential and consumer loans are, primarily, determined by meaningful pools of similar loans and are evaluated on a quarterly basis.

Loans that do not share risk characteristics are evaluated on an individual basis.

Loans evaluated individually are not also included in the collective evaluation.

When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

The provision for credit losses on loans on individually evaluated loans is recognized on the fair value of collateral adjusted for estimated costs to sell, the basis of the present value of expected future cash flows discounted at the effective interest rate or the observable market price as of the relevant date.

T he table below identifies the Company’s loan portfolio segments and classes.

Portfolio Segment Class of Financing Receivable

Commercial Owner occupied real estate

Non-owner occupied real estate

Residential spec homes

Development & spec land

Commercial and industrial

Real estate Residential mortgage

Residential construction

Mortgage warehouse Mortgage warehouse

Consumer Direct installment

Indirect installment

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.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Commercial loans are primarily based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower.

The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value.

Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee.

However, some short–term loans may be made on an unsecured basis.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are viewed primarily as cash flow loans and, secondarily, as loans secured by real estate.

Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy, or fluctuations in interest rates.

The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit.

Management monitors and evaluates commercial real estate loans based on collateral, cash flow, and risk grade criteria.

As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk.

In addition, management tracks the level of owner–occupied commercial real estate loans versus non–owner occupied loans.

Real Estate and Consumer

With respect to residential loans that are secured by 1–4 family residences and are generally owner occupied, the Company generally establishes a maximum loan–to–value ratio and requires private mortgage insurance if that ratio is exceeded.

Home equity loans are typically secured by a subordinate interest in 1–4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles.

Some consumer loans are unsecured, such as small installment loans and certain lines of credit.

Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.

Repayment can also be impacted by changes in property values on residential properties.

Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank.

Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company.

Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company.

In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan.

At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement.

Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company.

When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees.

The remaining balance from the sale is forwarded to the mortgage company.

These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days.

Interest income is accrued during this period and collected at the time each loan is sold.

Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note.

Horizon also has the option to request that the mortgage company 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, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Determining the Contractual Term

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals and modifications unless either of the following applies:

management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Troubled Debt Restructurings (“TDR”)

A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR.

The ACL on loans on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provides all banks with the option to elect either or both of the following from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the termination of the national emergency:

to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR;

to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019;

and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The Company determines the estimated amount of expected credit extensions based on historical usage to calculate the amount of exposure for a loss estimate.

After review of the expected credit losses on OBS, the Company determined the amount not being recorded as immaterial at this time.

Allowance for Credit Losses on Available for Sale Securities

For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recorded in other comprehensive income.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Changes in the ACL are recorded as provision for, or reversal of, credit loss expense.

Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Allowance for Credit Losses on Held to Maturity Securities

For held to maturity securities, the Company conducts an assessment of its held to maturity securities at the time of purchase and on at least an annual basis to ensure such investment securities remain within appropriate levels of risk and continue to perform satisfactorily in fulfilling its obligations.

The Company considers, among other factors, the nature of the securities and credit ratings or financial condition of the issuer.

If available, the Company obtains a credit rating for issuers from the Nationally Recognized Statistical Rating Organization (“NRSRO”) for consideration.

If this assessment indicates that a material credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss.

After completing this assessment, management determined any credit losses as of September 30, 2020 were not material to the consolidated financial statements.

2017–04, Intangibles – Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment – On January 1, 2020, the Company adopted the provision of ASU No.

2017–04, which eliminates Step 2 from the goodwill impairment test.

Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.

Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize an impairment charge 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.

Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.

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 sensitivities performed.

At the conclusion of the assessment, the Company determined that as of September 30, 2020 it was more likely than not that the fair value exceeded its carrying values.

Horizon will continue to monitor developments regarding the COVID–19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.

The adoption of this new guidance did not have a material impact on our consolidated financial statements.

2018–13, Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement – On January 1, 2020, the Company adopted the provision of ASU 2018–13, which modifies the disclosure requirements on fair value measurements.

The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy;

the policy for timing of transfers between levels;

and the valuation processes for Level 3 fair value measurements.

The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

For certain unobservable inputs, the Company may disclose other quantitative information in lieu of the weighted average if we determine that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

The adoption of this new guidance did not have a material impact on our consolidated financial statements.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Reclassifications

Certain reclassifications have been made to the 2019 condensed consolidated financial statements to be comparable to 2020.

These reclassifications had no effect on net income.

Note 2 – Acquisitions

Salin Bancshares, Inc.

On March 26, 2019, Horizon completed the acquisition of Salin Bancshares, Inc.

(“Salin”), an Indiana corporation, and Horizon Bank’s acquisition of Salin Bank and Trust Company (“Salin Bank”), an Indiana commercial bank and wholly–owned subsidiary of Salin, through mergers effective March 26, 2019.

Under the terms of the Merger Agreement, shareholders of Salin received 23,907.5 shares of Horizon common stock and $ 87,417.17 in cash for each outstanding share of Salin common stock.

Salin shares outstanding at the closing to be exchanged were 275 , and the shares of Horizon common stock issued to Salin shareholders totaled 6,563,697 .

The Salin shareholders received cash in lieu of fractional shares.

Based upon the March 25, 2019 closing price of $ 15.65 per share of Horizon common stock immediately prior to the effectiveness of the merger the transaction had an implied valuation of approximately $ 126.7 million.

The Company incurred approximately $ 5.6 million in costs related to the acquisition.

These expenses are classified in the non–interest expense section of the income statement and are primarily located in the data processing, professional fees, outside services and consultants 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 was allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition.

Assets Liabilities

Cash and due from banks $ 152,745 Deposits

Investment securities, available for sale 54,319 Non–interest bearing $ 188,744

Loans NOW accounts 207,567

Commercial 352,798 Savings and money market 274,504

Residential mortgage 131,008 Certificates of deposit 70,529

Consumer 85,112 Total deposits 741,344

Total loans 568,918 Borrowings 70,495

Premises and equipment, net 20,425 Subordinated debentures 18,376

FRB and FHLB stock 3,571 Interest payable 826

Goodwill 31,358 Other liabilities 8,759

Core deposit intangible 19,818 Total liabilities assumed $ 839,800

Interest receivable 2,488

Other assets 112,880

Total assets purchased $ 966,522

Common shares issued $ 102,722

Cash paid 24,000

Total purchase price $ 126,722

Of the total purchase price of $ 126.7 million, $ 19.8 million was allocated to core deposit intangible.

Additionally, $ 31.4 million was allocated to goodwill and none of the purchase price is deductible.

The core deposit intangible is being amortized over 10 years on a straight–line basis.

The Company acquired various loans in the acquisition that had evidence of deterioration of credit quality since origination

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired.

Evidence of credit quality deterioration as of the purchase date may include information such as past–due and non–accrual status, borrower credit scores and recent loan–to–value percentages.

Purchased credit–impaired loans at the acquisition date, were accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310–30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan.

Accordingly, an allowance for credit losses related to these loans was 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 incorporated the estimate of current assumptions, such as default rates, severity and prepayment speeds.

The following table details the acquired loans that are accounted for in accordance with ASC 310–30 as of March 26, 2019.

Contractually required principal and interest at acquisition $ 22,672

Contractual cash flows not expected to be collected (nonaccretable differences) 6,694

Expected cash flows at acquisition 15,978

Interest component of expected cash flows (accretable discount) 735

Fair value of acquired loans accounted for under ASC310-30 $ 15,243

Estimates of certain loans, those for which specific credit–related deterioration has occurred since origination, were 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 results of operations of Salin have been included in the Company’s consolidated financial statements since the acquisition date.

The following schedule includes pro–forma results for the three and nine months ended September 30, 2019 as if the Salin acquisition had occurred as of the beginning of the comparable prior reporting period.

Three Months Ended Nine Months Ended

September 30 September 30

Summary of Operations:

Net Interest Income $ 43,463 $ 127,174

Provision for Loan Losses 376 1,936

Net Interest Income after Provision for Loan Losses 43,087 125,238

Non-interest Income 11,514 31,538

Non-interest Expense 30,060 103,796

Income before Income Taxes 24,541 52,980

Income Tax Expense 4,004 9,326

Net Income 20,537 43,654

Net Income Available to Common Shareholders $ 20,537 $ 43,654

Basic Earnings per Share $ 0.46 $ 0.97

Diluted Earnings per Share $ 0.46 $ 0.97

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

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Accounting Guidance Issued But Not Yet Adopted

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 believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements.

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

Note 2 – Securities

The fair value of securities is as follows:

September 30, 2020

March 31, 2021

Available for sale

23 unchanged sentences

Total held to maturity investment securities $ 168,676 $ 11,314 $ — $ 179,990

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

While these securities are held in the available for sale portfolio and held to maturity, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2021 and December 31, 2020, by contractual maturity, are shown below.

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2020 and December 31, 2019, 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, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Value Amortized

18 unchanged sentences

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.

September 30, 2020

March 31, 2021

Less than 12 Months 12 Months or More Total

6 unchanged sentences

Federal agency collateralized mortgage obligations 2,380 ( 5 ) — — 2,380 ( 5 )

Federal agency mortgage-backed pools 12,081 ( 125 ) — — 12,081 ( 125 )

Corporate notes 996 ( 4 ) — — 996 ( 4 )

Total temporarily impaired securities $ 512,531 $ ( 10,172 ) $ 1,458 $ ( 107 ) $ 513,989 $ ( 10,279 )

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

11 unchanged sentences

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

No allowance for credit losses for available for sale debt securities or held to maturity securities was needed at March 31, 2021 or December 31, 2020.

Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $ 8.7 million at March 31, 2021 and $ 8.1 million at December 31, 2020 and is excluded from the estimate of credit losses.

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 Nine Months Ended

September 30 September 30

2020 2019 2020 2019

Three Months Ended

Sales of securities available for sale

2 unchanged sentences

Gross losses — ( 50 )

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Note 3 – Loans

The following table presents total loans outstanding by portfolio class, as of September 30, 2020:

September 30,

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

Portfolio Segment Class of Financing Receivable

Commercial Owner occupied real estate

Non-owner occupied real estate

Residential spec homes

Development & spec land

Commercial and industrial

Real estate Residential mortgage

Residential construction

Mortgage warehouse Mortgage warehouse

Consumer Direct installment

Indirect installment

Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

Generally, the Bank does not move loans from a revolving loan to a term loan other than construction loans.

Construction loans are reviewed and rewritten prior to being originated as a term loan.

The following table presents total loans outstanding by portfolio class, as of March 31, 2021:

2021 December 31,

Owner occupied real estate $ 482,687 $ 496,306

13 unchanged sentences

Total loans 3,664,436 3,867,383

Allowance for loan losses ( 56,319 )

Allowance for credit losses ( 57,186 ) ( 57,027 )

Net loans $ 3,607,250 $ 3,810,356

As of September 30, 2020, loans originated under the Federal Paycheck Protection Program (“PPP”) totaled approximately $ 310.8 million.

Total loans include net deferred loan fees of $ 5.7 million at September 30, 2020.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents total loans outstanding, as of December 31, 2019:

Working capital and equipment $ 938,317

Real estate, including agriculture 978,891

Tax exempt 63,571

Total 2,046,651

1–4 family 762,571

Total 770,717

Recreation 16,262

Real estate/home improvement 43,585

Home equity 237,979

Unsecured 7,286

Total 669,180

Mortgage warehouse 150,293

Total loans 3,636,841

Allowance for loan losses ( 17,667 )

Loans, net $ 3,619,174

Note 5 – Accounting for Certain Loans Acquired in a Transfer

The Company has acquired loans in acquisitions, whereby 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.

Evidence of credit quality deterioration as of the purchase date may include information such as past–due and non–accrual status, borrower credit scores and recent loan–to–value percentages prior to January 1, 2020.

Purchased credit–impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310–30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan.

Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date.

Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The carrying amounts of those loans included in the balance sheet amounts of loans receivable as of December 31, 2019 are as follows:

December 31, 2019

Commercial Real Estate Consumer Outstanding

Balance Allowance

Losses Carrying

Heartland $ 197 $ 99 $ — $ 296 $ — $ 296

Summit 88 473 — 561 — 561

Peoples 229 35 — 264 — 264

Kosciusko 244 131 — 375 — 375

LaPorte 353 793 20 1,166 — 1,166

Lafayette 1,867 — — 1,867 — 1,867

Wolverine 2,289 — — 2,289 — 2,289

Salin 4,938 1,912 962 7,812 133 7,679

Total $ 10,205 $ 3,443 $ 982 $ 14,630 $ 133 $ 14,497

Accretable yield, or income expected to be collected for the nine months ended September 30, 2019 is as follows:

Nine Months Ended September 30, 2019

balance Additions Accretion Reclassification

nonaccretable

difference Disposals Ending

Heartland $ 174 $ — $ ( 24 ) $ — $ — $ 150

Summit 42 — ( 7 ) — ( 11 ) 24

Kosciusko 300 — ( 49 ) — ( 2 ) 249

LaPorte 829 — ( 85 ) — 4 748

Lafayette 609 — ( 97 ) — ( 193 ) 319

Wolverine 698 — ( 243 ) — ( 306 ) 149

Salin — 2,002 ( 375 ) — ( 30 ) 1,597

Total $ 2,652 $ 2,002 $ ( 880 ) $ — $ ( 538 ) $ 3,236

During the nine months ended September 30, 2019, the Company increased the allowance for loan losses on purchased loans by a charge to the income statement of $ 10,000 .

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 6 – 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 months ended September 30, 2020 and 2019:

Three Months Ended September 30, 2020

Commercial Real Estate Mortgage Warehouse Consumer Total

Balance, beginning of period $ 39,147 $ 5,832 $ 1,190 $ 8,921 $ 55,090

Provision for credit losses on loans 1,136 ( 232 ) 60 1,088 2,052

Charge–offs ( 502 ) ( 144 ) — ( 510 ) ( 1,156 )

Recoveries 14 8 — 311 333

Balance, end of period $ 39,795 $ 5,464 $ 1,250 $ 9,810 $ 56,319

Three Months Ended September 30, 2019

Commercial Real Estate Mortgage Warehouse Consumer Total

Balance, beginning of period $ 11,881 $ 1,732 $ 1,040 $ 3,652 $ 18,305

Provision for credit losses on loans 393 ( 290 ) 1 272 376

Charge–offs ( 224 ) — — ( 758 ) ( 982 )

Recoveries 32 7 — 218 257

Balance, end of period $ 12,082 $ 1,449 $ 1,041 $ 3,384 $ 17,956

The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30, 2020

Commercial Real Estate Mortgage Warehouse Consumer Total

Balance, beginning of period $ 11,996 $ 923 $ 1,077 $ 3,671 $ 17,667

Impact of adopting ASC 326 10,832 4,048 — 4,911 19,791

Initial PCD allowance 2,786 — — — 2,786

Provision for credit losses on loans 14,655 670 173 2,211 17,709

Charge–offs ( 586 ) ( 204 ) — ( 1,654 ) ( 2,444 )

Recoveries 112 27 — 671 810

Balance, end of period $ 39,795 $ 5,464 $ 1,250 $ 9,810 $ 56,319

Nine Months Ended September 30, 2019

Commercial Real Estate Mortgage Warehouse Consumer Total

Balance, beginning of period $ 10,495 $ 1,676 $ 1,006 $ 4,643 $ 17,820

Provision for credit losses on loans 2,105 ( 220 ) 35 ( 284 ) 1,636

Charge–offs ( 640 ) ( 48 ) — ( 1,669 ) ( 2,357 )

Recoveries 122 41 — 694 857

Balance, end of period $ 12,082 $ 1,449 $ 1,041 $ 3,384 $ 17,956

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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”).

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.

The $17.7 million ACL provision included special allocations related to the potential impact due to the nature and characteristics on certain loan types including, non–owner occupied retail, leisure and hospitality, and unstabilized commercial real estate while continuing allocations for hotels and restaurants, as a result of the COVID–19 business restrictions implemented by the Federal Government and the states in which Horizon operates (Indiana and Michigan).

Extensive analysis and monitoring of these portfolios has been undertaken and, while no loss has been specifically identified, the risks to certain borrowers are elevated and, therefore, the special allocation was deemed prudent.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC 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 credit loss and the recorded investment in loans, by portfolio segment, and based on impairment analysis as of December 31, 2019:

December 31, 2019

Commercial Real Estate Mortgage

Warehousing Consumer Total

Allowance For Loan Losses

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 541 $ — $ — $ — $ 541

Collectively evaluated for impairment 11,455 923 1,077 3,671 17,126

Loans acquired with deteriorated credit quality — — — — —

Total ending allowance balance $ 11,996 $ 923 $ 1,077 $ 3,671 $ 17,667

Individually evaluated for impairment $ 7,347 $ — $ — $ — $ 7,347

Collectively evaluated for impairment 2,040,299 770,705 150,293 665,952 3,627,249

Loans acquired with deteriorated credit quality — — — — —

Total ending loans balance $ 2,047,646 $ 770,705 $ 150,293 $ 665,952 $ 3,634,596

HORIZON BANCORP, INC.

AND SUBSIDIARIES

As of March 31, 2021 and December 31, 2020, loans originated under the Federal Paycheck Protection Program (“PPP”) totaled approximately $ 252.3 million and $ 208.9 million, respectively, and are included with commercial loans.

Total loans include net deferred loan fees of $ 5.0 million and $ 1.7 million at March 31, 2021 and December 31, 2020, respectively.

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

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.

The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value.

Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee;

however, some short–term loans may be made on an unsecured basis.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates.

The properties securing the Company's commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit.

Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria.

As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk.

In addition, management tracks the level of owner–occupied commercial real estate loans versus non–owner occupied loans.

Real Estate and Consumer

Home equity loans are typically secured by a subordinate interest in 1–4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles.

Some consumer loans are unsecured such as small installment loans and certain lines of credit.

Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.

Repayment can also be impacted by changes in property values on residential properties.

Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Mortgage Warehousing

Horizon's mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank.

Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon's agreement with the mortgage company.

In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan.

At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement.

The 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.

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 7 – Non-performing Loans

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

September 30, 2020

Based on these agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note.

Horizon also has the option to request that the mortgage company reacquire an individual mortgage.

Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company.

Non–performing Loans

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

March 31, 2021

Non–accrual Loans Past

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Total $ 20,700 $ 267 $ 2,271 $ 1,828 $ 25,066 $ 19,491

There was no interest income recognized on non–accrual loans during the three and nine months ended September 30, 2020 and 2019 while the loans were in non–accrual status.

Included in the $ 24.5 million of non–accrual loans and the $ 2.7 million of non–performing TDRs at September 30, 2020 were $ 3.5 million and $ 993,000 , respectively, of loans acquired for which accretable yield was recognized.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

22 unchanged sentences

Total $ 22,142 $ 262 $ 2,610 $ 1,793 $ 26,807 $ 19,821

Troubled Debt Restructurings

Loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans’ contractual terms.

TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan.

TDRs that subsequently default are individually evaluated for impairment at the time of default.

At September 30, 2020, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances.

Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan.

A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate.

As of September 30, 2020, the Company had $ 4.5 million in TDRs, $ 1.8 million were performing according to the restructured terms, and one TDR was returned to accrual status during the first nine months of 2020.

There were $ 117,000 of specific reserves allocated to TDRs at September 30, 2020 based on the discounted cash flows or, when appropriate, the fair value of the collateral.

These TDRs are exclusive of loans modified under the CARES Act during the first nine months of 2020.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

There was no interest income recognized on non–accrual loans during the three months ended March 31, 2021 and 2020 while the loans were in non–accrual status.

Included in the $ 20.7 million of non–accrual loans and the $ 2.3 million of non–performing TDRs at March 31, 2021 were $ 2.4 million and $ 907,000 , respectively, of loans acquired for which there were accretable yields recognized.

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents TDRs by loan portfolio:

September 30, 2020 December 31, 2019

Non–accrual Accruing Total Non–accrual Accruing Total

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

March 31, 2021

Current 30–59 Days

Past Due 60–89 Days

Past Due 90 Days or

Past Due Total

Owner occupied real estate $ 471,589 $ 550 $ — $ — $ 550 $ 472,139

13 unchanged sentences

Total $ 3,636,099 $ 3,884 $ 1,215 $ 267 $ 5,366 $ 3,641,465

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 September 30, 2020, the Bank modified loans totaling $ 160.1 million 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 a 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.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Percentage of total loans 99.85 % 0.11 % 0.03 % 0.01 % 0.15 % 100.00 %

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The table below presents the value of collateral dependent loans by loan class as of September 30, 2020:

September 30, 2020

Owner occupied real estate $ 3,018

Non–owner occupied real estate 488

Commercial and industrial 754

Total commercial 4,260

Total collateral dependent loans $ 4,260

The following table presents the payment status by class of loan, excluding non–accrual loans of $ 24.5 million and non–performing TDRs of $ 2.7 million at September 30, 2020:

September 30, 2020

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

December 31, 2020

Current 30–59 Days

18 unchanged sentences

Percentage of total loans 99.81 % 0.11 % 0.07 % 0.01 % 0.19 % 100.00 %

HORIZON BANCORP, INC.

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The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Troubled Debt Restructurings

TDRs that subsequently default are individually evaluated for impairment at the time of default.

At March 31, 2021, the type of concessions the Company has made on restructured loans have been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances.

Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan.

A restructured loan is returned to accruing status after six consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate.

As of March 31, 2021, the Company had $ 4.1 million in TDRs and $ 1.8 million were performing according to the restructured terms and no TDRs were returned to accrual status during 2021.

There were no specific reserves allocated to TDRs at March 31, 2021 based on the discounted cash flows or, when appropriate, the fair value of the collateral.

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

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents the payment status by class of loan, excluding non–accrual loans of $ 15.7 million and non–performing TDRs of $ 2.0 million at December 31, 2019:

December 31, 2019

Current 30–59 Days

Past Due 60–89 Days

Past Due 90 Days or

Past Due Total

The following table presents TDRs by class of loan:

March 31, 2021 December 31, 2020

Non–accrual Accruing Total Non–accrual Accruing Total

Owner occupied real estate $ 603 $ — $ 603 $ 630 $ 168 $ 798

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Total $ 2,271 $ 1,828 $ 4,099 $ 2,610 $ 1,793 $ 4,403

Percentage of total loans 99.78 % 0.20 % 0.01 % 0.01 % 0.22 % 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.

Loans Modified under the CARES Act

The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR;

and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

At March 31, 2021 and December 31, 2020, the Bank modified loans totaling $ 91.6 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.

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

March 31, 2021

Real Estate Accounts Receivable/Equipment Other Total ACL

Owner occupied real estate $ 10,404 $ 145 $ — $ 10,549 $ 1,600

Non–owner occupied real estate 541 — — 541 —

Residential spec homes — — — — —

Development & spec land 70 — — 70 —

Commercial and industrial — 1,643 — 1,643 195

Total commercial 11,015 1,788 — 12,803 1,795

Total collateral dependent loans $ 11,015 $ 1,788 $ — $ 12,803 $ 1,795

December 31, 2020

Real Estate Accounts Receivable/Equipment Other Total ACL

Owner occupied real estate $ 11,309 $ 114 $ — $ 11,423 $ 1,605

Non–owner occupied real estate 1,032 — — 1,032 —

Residential spec homes — — — — —

Development & spec land 70 — — 70 —

Commercial and industrial 2,245 210 — 2,455 252

Total commercial 14,656 324 — 14,980 1,857

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

Credit Quality Indicators

Horizon Bank's processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re–evaluated for credit quality.

The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.

• For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan.

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

• For new and renewed commercial loans, the Bank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade of the loans.

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

• Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO or Loan Committee.

1 unchanged sentence

Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO when recommending an upgrade.

• The CCBO, or his designee, meets regularly with loan officers to discuss the status of past-due loans and classified loans.

• The CCBO, or a designee, meets periodically with loan officers to discuss the status of past due loans and classified loans.

These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.

• Monthly, senior management meets with the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets.

This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions.

The information reviewed in this meeting acts as a precursor for developing management’s analysis of the adequacy of the Allowance for Credit Losses for loans.

HORIZON BANCORP, INC.

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• Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets.

This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

owned and personal property repossessions.

The information reviewed in this meeting acts as a precursor for developing management's analysis of the adequacy of the Allowance for Credit Losses.

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency.

5 unchanged sentences

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).

Loan grade definitions are reviewed annually via the approval of the overall loan policy.

The most recent review and approval of the loan policy was in October 2020.

The loan grade definitions are detailed below.

3 unchanged sentences

Risk Grade 2:

Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits;

loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive;

Loans to businesses that have strong financial statements containing an unmodified opinion from a CPA firm and at least three years consecutive years of profits;

loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five years satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive;

loans secured by publicly traded marketable securities with required margins where there is no impediment to liquidation;

7 unchanged sentences

Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

• At inception, the loan was properly underwritten, did not possess an 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.

3 unchanged sentences

If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Risk Grade 4:

Satisfactory/Monitored (Pass)

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

2 unchanged sentences

Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.

Risk Grade 4W Management Watch:

Risk Grade 4W:

Management Watch (Pass)

Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, but with above normal risk.

Borrower displays potential indicators of weakness in the primary source of repayment resulting in a

HORIZON BANCORP, INC.

AND SUBSIDIARIES

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

higher reliance on secondary sources of repayment.

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.

17 unchanged sentences

• Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

• Unusual courses of action are needed to maintain a high probability of repayment.

• Unusual courses of action are need to maintain a high probability of repayment.

• The borrower is not generating enough cash flow to repay loan principal;

5 unchanged sentences

• The borrower meets defined key financial metric ranges.

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Risk Grade 7:

7 unchanged sentences

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible.

Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all of a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following tables present loans by credit grades and origination year.

September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total

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

March 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total

Owner occupied real estate

29 unchanged sentences

Total commercial $ 181,104 $ 355,873 $ 259,134 $ 222,409 $ 282,439 $ 615,384 $ 261,515 $ 2,177,858

HORIZON BANCORP, INC.

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HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total

March 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total

Residential mortgage

11 unchanged sentences

Total real estate $ 19,705 $ 109,655 $ 57,292 $ 72,583 $ 80,610 $ 218,529 $ 289,801 $ 848,175

September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total

March 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total

Direct installment

10 unchanged sentences

Total consumer $ 47,126 $ 198,179 $ 135,151 $ 100,441 $ 60,939 $ 89,461 $ 7,106 $ 638,403

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HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

December 31, 2019

Mention Substandard Doubtful Total

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

December 31, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total

Owner occupied real estate

Pass $ 57,726 $ 65,558 $ 49,455 $ 49,032 $ 47,480 $ 127,373 $ 40,027 $ 436,651

Special Mention — 1,081 5,928 10,205 4,207 12,787 325 34,533

Substandard 1,021 1,231 4,012 2,504 2,839 9,673 3,842 25,122

Doubtful — — — — — — — —

Total owner occupied real estate $ 58,747 $ 67,870 $ 59,395 $ 61,741 $ 54,526 $ 149,833 $ 44,194 $ 496,306

Non–owner occupied real estate

Pass $ 115,667 $ 120,023 $ 73,669 $ 133,396 $ 99,674 $ 208,649 $ 166,986 $ 918,064

Special Mention 862 1,236 28,723 1,298 2,548 13,182 4,072 51,921

Substandard — 15,552 1,477 107 6,422 4,521 1,572 29,651

Doubtful — — — — — — — —

Total non–owner occupied real estate $ 116,529 $ 136,811 $ 103,869 $ 134,801 $ 108,644 $ 226,352 $ 172,630 $ 999,636

Residential spec homes

Pass $ 737 $ 237 $ — $ 298 $ 368 $ 1,177 $ 7,253 $ 10,070

Special Mention — — — — — — — —

Substandard — — — — — — — —

Doubtful — — — — — — — —

Total residential spec homes $ 737 $ 237 $ — $ 298 $ 368 $ 1,177 $ 7,253 $ 10,070

Development & spec land

Commercial and industrial 468,893 18,652 18,314 — 505,859

Pass $ 573 $ 736 $ 1,522 $ 2,461 $ 672 $ 11,971 $ 6,907 $ 24,842

Special Mention — — — — — 274 — 274

Substandard — — — — — 506 750 1,256

Doubtful — — — — — — — —

Total development & spec land $ 573 $ 736 $ 1,522 $ 2,461 $ 672 $ 12,751 $ 7,657 $ 26,372

Commercial & industrial

Pass $ 253,953 $ 63,772 $ 58,978 $ 88,121 $ 26,044 $ 70,706 $ 30,845 $ 592,419

Special Mention 8,779 1,164 1,088 9,306 1,835 11,870 3,040 37,082

Substandard 4,233 7,079 11,072 1,660 636 3,322 2,384 30,386

Doubtful — — — — — — — —

Total commercial & industrial $ 266,965 $ 72,015 $ 71,138 $ 99,087 $ 28,515 $ 85,898 $ 36,269 $ 659,887

Total commercial $ 443,551 $ 277,669 $ 235,924 $ 298,388 $ 192,725 $ 476,011 $ 268,003 $ 2,192,271

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Notes to Condensed Consolidated Financial Statements

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

December 31, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total

Residential mortgage

Performing $ 109,487 $ 68,556 $ 86,572 $ 89,051 $ 65,718 $ 171,322 $ — $ 590,706

Non–performing — 296 636 39 300 6,723 — 7,994

Total residential mortgage $ 109,487 $ 68,852 $ 87,208 $ 89,090 $ 66,018 $ 178,045 $ — $ 598,700

Residential construction

Performing $ — $ — $ — $ — $ — $ — $ 25,586 $ 25,586

Non–performing — — — — — — — —

Total residential construction $ — $ — $ — $ — $ — $ — $ 25,586 $ 25,586

Mortgage warehouse

Performing $ — $ — $ — $ — $ — $ — $ 395,626 $ 395,626

Non–performing — — — — — — — —

Total mortgage warehouse $ — $ — $ — $ — $ — $ — $ 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, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total

Direct installment

Performing $ 12,552 $ 9,552 $ 5,828 $ 5,946 $ 2,124 $ 2,019 $ 12 $ 38,033

Non–performing — — — 5 3 5 — 13

Total direct installment $ 12,552 $ 9,552 $ 5,828 $ 5,951 $ 2,127 $ 2,024 $ 12 $ 38,046

Indirect installment

Home equity 273,665 — 2,550 — 276,215

Performing $ 134,394 $ 97,408 $ 74,215 $ 36,763 $ 8,636 $ 4,801 $ — $ 356,217

Non–performing 84 223 392 361 80 154 — 1,294

Total indirect installment $ 134,478 $ 97,631 $ 74,607 $ 37,124 $ 8,716 $ 4,955 $ — $ 357,511

Performing $ 63,946 $ 42,762 $ 34,807 $ 27,553 $ 22,450 $ 59,503 $ 5,464 $ 256,485

Non–performing — 9 111 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

Total $ 3,541,122 $ 34,804 $ 58,670 $ — $ 3,634,596

Percentage of total loans 97.43 % 0.96 % 1.61 % 0.00 % 100.00 %

Commercial loans modified due to the impact of the COVID–19 pandemic were immediately downgraded one level resulting in the increase of Special Mention commercial loans from December 31, 2019 to September 30, 2020.

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Notes to Condensed Consolidated Financial Statements

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Note 4 – 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 months ended March 31, 2021 and 2020:

Three Months Ended March 31, 2021

Commercial Real Estate Mortgage Warehouse Consumer Total

Balance, beginning of period $ 42,210 $ 4,620 $ 1,267 $ 8,930 $ 57,027

Provision for credit losses on loans 928 ( 456 ) ( 104 ) ( 1 ) 367

Charge–offs ( 196 ) — — ( 235 ) ( 431 )

Recoveries 38 65 — 120 223

Balance, end of period $ 42,980 $ 4,229 $ 1,163 $ 8,814 $ 57,186

Three Months Ended March 31, 2020

Commercial Real Estate Mortgage Warehouse Consumer Total

Balance, beginning of period $ 11,996 $ 923 $ 1,077 $ 3,671 $ 17,667

Impact of adopting ASC 326 13,618 4,048 — 4,911 22,577

Provision for credit losses on loans 6,916 700 ( 22 ) 1,006 8,600

Charge–offs ( 69 ) ( 26 ) — ( 618 ) ( 713 )

Recoveries 89 9 — 211 309

Balance, end of period $ 32,550 $ 5,654 $ 1,055 $ 9,181 $ 48,440