What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-30 compared with 2020-11-02 · 175 added, 344 removed, 426 unchanged (55% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Forward–Looking Statements

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

• economic conditions and their impact on Horizon and its customers;

• COVID–19 related impact on Horizon and its customers (See Part II, Item 1A.

Risk Factors within this Report on Form 10–Q for additional details)

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

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

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

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

• volatility in interest rates and their impact on mortgage loan volumes and the outflow of deposits;

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

• loss of key Horizon personnel;

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

• loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g.

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

• potential loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g.

Apple Pay or Bitcoin) take a greater market share of the payment systems;

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

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

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

• the impact of the Basel III capital rules;

• legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular;

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

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

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

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

For the Three Months ended March 31, 2021 and 2020

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

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

• changes in the legal and regulatory and enforcement environment including financial, fiduciary (generally and as an ESOP fiduciary), and taxes and tariffs;

• rapid technological developments and changes;

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

• the rising costs of effective cybersecurity;

• containing costs and expenses;

• the slowing or failure of economic recovery;

• the ability of the U.S.

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• the potential influence on the U.S.

financial markets and economy from the effects of climate change and social justice initiatives;

• the potential influence on the U.S.

financial markets and economy from material changes outside the U.S.

or in overseas relations, including changes in the U.S.

trade relations related to imposition of tariffs, Brexit and the phase out in 2021 of the London Interbank Offered Rate (“LIBOR”);

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

• the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings.

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We do not undertake to update any forward–looking statements, whether written or oral, that may be made from time to time by us or on our behalf.

For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2019 Annual Report on Form 10-K, in Part II, Item 1A of this Report on Form 10-Q, and in the subsequent reports we file with the SEC.

Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana.

Horizon provides a broad range of banking services in northern and central Indiana and southern and central Michigan through its bank subsidiary.

For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward–looking statements, see “Risk Factors” in Item 1A of Part I of our 2020 Annual Report on Form 10–K and in the subsequent reports we file with the SEC.

Horizon Bancorp, Inc.

(“Horizon” or the “Company”) is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana.

Horizon provides a broad range of banking services in northern and central Indiana and southern and central Michigan through its bank subsidiary, Horizon Bank (“Horizon Bank” or the “Bank”) and other affiliated entities and Horizon Risk Management, Inc.

Horizon operates as a single segment, which is commercial banking.

Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC.

The Bank was originally chartered as a national banking association in 1873 and has operated continuously since that time and converted to an Indiana state–chartered bank effective on June 23, 2017.

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

The Bank is a full–service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

Upon approval of a name change by Horizon’s shareholders at the annual meeting on May 3, 2018, Horizon’s full corporate name became “Horizon Bancorp, 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.

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.

Horizon Risk Management, Inc.

is a captive insurance company incorporated in Nevada and was formed as a wholly–owned subsidiary of Horizon.

Over the last 20 years, Horizon has expanded its geographic reach and experienced financial growth through a combination of both organic expansion and mergers and acquisitions.

Horizon's initial operations focused on northwest Indiana, but since then, the Company has developed a presence in new markets in southern and central Michigan and northeastern and central Indiana.

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Third Quarter 2020 Highlights

• Earned net income of $20.3 million, or $0.46 diluted earnings per share, compared to $14.6 million, or $0.33 diluted earnings per share, for the second quarter of 2020 and $20.5 million, or $0.46 diluted earnings per share, for the third quarter of 2019.

• Grew pre–tax, pre–provision net income to $26.7 million for the quarter, compared to $23.7 million for the second quarter of 2020 and $24.9 million for the third quarter of 2019.

For the Three Months ended March 31, 2021 and 2020

First Quarter 2021 Highlights

• Generated return on average assets (“ROAA”) of 1.40% and return on average common equity (“ROACE”) of 11.88% in the quarter, as well as adjusted ROAA of 1.35% and adjusted ROACE of 11.46%, excluding the impact of gains on sale of investment securities, net of tax.

(See the “Non–GAAP Reconciliation of Return on Average Assets” and the “Non–GAAP Reconciliation of Return on Average Common Equity” tables below.)

• Earned net income of $20.4 million, or $0.46 diluted earnings per share, compared to $21.9 million, or $0.50 diluted earnings per share, for the fourth quarter of 2020 and $11.7 million, or $0.26 diluted earnings per share, for the first quarter of 2020.

• Pre–tax, pre–provision net income totaled a first–quarter record $24.2 million, compared to $26.9 million for the fourth quarter of 2020 and $21.8 million for the first three months of 2020.

This non–GAAP financial measure is utilized by banks to provide a greater understanding of pre–tax profitability before giving effect to credit loss expense.

(See the “Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income” table below.)

• Reported return on average assets (“ROAA”) of 1.40% and return on average common equity (“ROACE”) of 12.08% in the quarter, as well as adjusted ROAA of 1.34% and adjusted ROACE of 11.55%, excluding the impact of gains on sale of investment securities, net of tax.

(See the “Non–GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity” tables below.)

• Increased the allowance for credit losses (“ACL”) 2.2% during the quarter and 218.8% year–to–date to $56.3 million at period end, representing 1.39% of total loans, reflecting implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the Company’s general reserves.

ACL at period end also represented 1.51% of loans excluding $310.8 million in Federal Paycheck Protection Program (“PPP”) loans, and 192.1% of non–performing loans.

• Maintained solid asset quality metrics, including non–performing and delinquent loans representing 0.72% and 0.15% of total loans, respectively, at September 30, 2020, while net charge–offs were 0.02% of average loans for the period.

• COVID–19 deferral levels improved to 4.1% of total loans at period end, from 14.3% on June 30, 2020.

• Reported non–interest expense of $33.4 million, representing 2.30% of average assets on an annualized basis compared to 2.18% for the second quarter of 2020 and 2.34% for the third quarter of 2019.

• Improved the efficiency ratio in the period to 55.59% compared to 56.23% for the second quarter of 2020.

(See the “Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” tables below.)

• Generated record gain on mortgage loan sales of $8.8 million, up 33.1% from the linked quarter and 226.2% from the prior year period, and originated $207.1 million in mortgage loans during the quarter, down 18.1% from the record second quarter of 2020 and up 71.0% from the third quarter of 2019.

• Reported net interest margin of 3.39% and adjusted net interest margin of 3.27%, with each declining by 8 basis points from the second quarter of 2020.

(See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this Non–GAAP calculation).

An estimated 4 basis points of compression is attributed to PPP lending and an estimated 8 basis points of compression is attributed to subordinated notes during the quarter, for both net interest margin and adjusted net interest margin.

• Horizon's book value per share increased from $14.29 at December 31, 2019 to $15.28 at September 30, 2020.

• Horizon’s tangible book value per share increased from $10.63 at December 31, 2019 to $11.29 at September 30, 2020, which includes the accounting adjustment for CECL as of January 1, 2020.

This represents the highest tangible book value per share in the Company’s history.

(See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” tables below.)

• Maintained strong liquidity position including approximately $1.3 billion in cash and investment securities, which is approximately 22.4% of total assets, and approximately $928.0 million in unused availability on lines of credit, at September 30, 2020.

(See the “Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income” table below.)

• Non–interest expense was $32.2 million in the quarter, or 2.20% of average assets on an annualized basis, compared to $36.5 million, or 2.47%, in the fourth quarter of 2020 and $31.1 million, or 2.38%, in the first quarter of 2020.

• The efficiency ratio for the period was 57.03% compared to 57.54% for the fourth quarter of 2020 and 58.79% for the first quarter of 2020.

The adjusted efficiency ratio was 57.97% compared to 56.48% for the fourth quarter of 2020 and 59.43% for the first quarter of 2020.

(See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below.)

• Following record residential lending last year and during what has historically been its seasonally lightest volume quarter, mortgage–related non–interest income remained strong in the first three months of 2021, with gain on mortgage loan sales of $5.3 million and net mortgage servicing income of $213,000.

The bank originated $155.6 million in mortgage loans during the quarter, with 65% of volume from refinances, as Horizon continued to focus residential lending on prime borrowers in Indiana and Michigan markets.

• Net interest income was $42.5 million for the quarter, compared to $43.6 million for the fourth quarter of 2020 and $40.9 million for the first quarter of 2020.

First quarter 2021 net interest income remained relatively stable in the current environment, given previously disclosed initiatives to optimize returns on earning assets, including increasing investment securities to 23.5% of assets from 22.1% in the fourth quarter of 2020 and 20.6% in the first quarter of 2020.

• Reported net interest margin (“NIM”) of 3.29% and adjusted NIM of 3.17%, with reported NIM declining by 5 basis points and adjusted NIM decreasing by 27 basis points from the fourth quarter of 2020.

(See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation.) An estimated 10 basis points attributed to Federal Paycheck Protection Program (“PPP”) lending improved the margin, offset by an estimated 16 basis point compression attributed to excess liquidity held during the quarter, for both NIM and adjusted NIM.

• Horizon’s in–market consumer and commercial deposit relationships, combined with strategic pricing moves to manage deposit growth and runoff of higher–priced time deposits, contributed to continued improvement in the cost of interest bearing liabilities, which declined to 0.50% in the quarter, compared to 0.94% in the fourth quarter of 2020 and 1.13% in the first quarter of 2020.

• Increased the allowance for credit losses (“ACL”) 0.3% year–to–date to $57.2 million at period end, representing 1.56% of total loans, reflecting implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the Company’s general reserves.

• COVID–19 deferral levels improved to 2.5% of total loans at period end, compared to 3.3% on December 31, 2020, and the bank experienced no material specific loan losses attributable to COVID–19 closures.

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

For the Three Months ended March 31, 2021 and 2020

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

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

Loans excluding PPP lending totaled $3.67 billion on December 31, 2020 and $3.71 billion on March 31, 2020.

• Horizon announced an 8.3% increase in its quarterly cash dividend in March to $0.13 per share, paying uninterrupted dividends for over 30 years.

As of March 31, 2021, in excess of $127 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value.

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

Coronavirus Update/Status

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

◦ Implemented pandemic plan in March after completing test run in February 2020.

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

◦ Steadily reducing percentage of employees working remotely from early second quarter peak.

◦ Increased paid time off and sick time benefits.

◦ 100% of our branch locations are now open for walk–in traffic.

◦ Installed nine additional Interactive Teller Machines (“ITMs”) staffed by remote video tellers.

◦ Opened fourth call center location.

◦ Substantial reduction in percentage of employees working remotely.

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

◦ Payment relief

▪ Approximately $8 million consumer and mortgage loans have been modified as of September 30, 2020, down from $63 million as of June 30, 2020.

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

▪ Continued to provide new loans to qualified applicants.

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◦ Payment Relief Programs

▪ Approximately $152 million in commercial loans with payment extensions as of September 30, 2020, down from $470 million as of June 30, 2020.

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

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

▪ Continued to provide new loans to qualified applicants.

▪ Began accepting PPP forgiveness applications on September 1, 2020.

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

• Communities

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

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

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

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

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

◦ Supported flood victims in Midland, Michigan.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2021 and 2020

Financial Summary

For the Three Months Ended

September 30, June 30, September 30,

March 31, December 31, March 31,

Net Interest Income and Net Interest Margin 2021 2020 2020

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Adjusted net interest margin 3.17 % 3.44 % 3.44 %

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

For the Three Months Ended

September 30, June 30, September 30,

March 31, December 31, March 31,

Asset Yields and Funding Costs 2021 2020 2020

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Non–interest Income and

Mortgage Banking Income September 30, June 30, September 30,

Mortgage Banking Income March 31, December 31, March 31,

2021 2020 2020

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For the Three Months Ended

September 30, June 30, September 30,

March 31, December 31, March 31,

Non–interest Expense 2021 2020 2020

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At or for the Three Months Ended

Credit Quality September 30, June 30, September 30,

Credit Quality March 31, December 31, March 31,

2021 2020 2020

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Percent of net charge–offs to average loans outstanding for the period 0.01 % 0.01 % 0.01 %

CECL Adoption

Allowance for December 31, January 1, Net Reserve Build September 30,

Credit Losses 2019 Impact 2020 1Q20 2Q20 3Q20 2020

Allowance for December 31, Net Reserve Build March 31,

Credit Losses 2020 1Q20 2021

Commercial $ 42,210 $ 770 $ 42,980

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ACL/Total Loans 1.47 % 1.56 %

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2019 contain a summary of the Company’s significant accounting policies.

Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.

Management has identified as critical

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

accounting policies the allowance for loan losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

For the Three Months ended March 31, 2021 and 2020

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2020 contain a summary of the Company’s significant accounting policies.

Management has identified as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for Credit Losses

The allowance for credit losses on loans and leases replaces the allowance for loan and leases losses as a critical accounting estimate, as of January 1, 2020 with the adoption of ASU 2016–13, Financial Instruments–Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases.

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Recoveries of amounts previously charged–off are credited to the ACL.

PCD assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date.

Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date.

At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL.

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FASB ASC 350–10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill.

At September 30, 2020, Horizon had core deposit intangibles of $23.9 million subject to amortization and $151.2 million of goodwill, which is not subject to amortization.

At March 31, 2021, Horizon had core deposit intangibles of $22.1 million subject to amortization and $151.2 million of goodwill, which is not subject to amortization.

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired.

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Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and stress testing performed.

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

At the conclusion of the most recent qualitative assessment, the Company determined that as of March 31, 2021, it was more likely than not that the fair value exceeded its carrying values.

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

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

For the Three Months ended March 31, 2021 and 2020

Mortgage Servicing Rights

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

For the Three Months ended March 31, 2021 and 2020

Valuation Measurements

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Financial Condition

On September 30, 2020, Horizon’s total assets were $5.8 billion, an increase of approximately $543.3 million compared to December 31, 2019.

The increase was primarily in net loans of $354.9 million, investment securities available for sale of $180.6 million and other assets of $25.5 million.

These increases were offset by a decrease in investment securities held to maturity of $27.6 million.

On March 31, 2021, Horizon’s total assets were $6.1 billion, an increase of approximately $168.9 million compared to December 31, 2020.

The increase was primarily in cash and due from banks of $279.6 million and investment securities available for sale of $128.2 million.

These increases were offset by a decrease in net loans of $203.1 million and other assets of $20.9 million.

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Value Amortized

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Total held to maturity investment securities $ 161,650 $ 170,949 $ 168,676 $ 179,990

Investment securities available for sale increased $180.6 million since December 31, 2019 to $1.0 billion as of September 30, 2020.

Investment securities available for sale increased $128.2 million since December 31, 2020 to $1.3 billion as of March 31, 2021.

This increase was due to additional purchases to increase earning assets.

Gross loans increased $402.5 million since December 31, 2019 to $4.0 billion as of September 30, 2020.

Commercial, mortgage warehouse and loans held for sale increased $275.0 million, $224.4 million and $9.0 million, respectively, offset by a decrease in residential mortgage and consumer loans of $95.5 million and $10.3 million, respectively.

The majority of the increase in gross loans was due to the origination of approximately $310.8 million in PPP loans which are included in the commercial loan category.

Total deposits increased $405.3 million since December 31, 2019 to $4.3 billion as of September 30, 2020.

Gross loans decreased $208.7 million since December 31, 2020 to $3.7 billion as of March 31, 2021.

Mortgage warehouse, residential mortgage, consumer, commercial and loans held for sale decreased $129.4 million, $42.4 million, $16.8 million, $14.4 million and $5.7 million.

PPP loans increased $43.4 million since December 31, 2020 to $252.3 million as of March 31, 2021.

Total deposits increased $190.7 million since December 31, 2020 to $4.7 billion as of March 31, 2021.

This increase was primarily due to Federal stimulus payments to consumers and funds from the origination of PPP loans.

Total borrowings increased from $549.7 million as of December 31, 2019 to $587.5 million as of September 30, 2020.

At September 30, 2020, the Company had $188.7 million in short-term funds borrowed compared to $398.8 million at December 31, 2019 as long–term funding provided opportunities to extend borrowings at lower rates.

The Company also issued $60.0 million in subordinated notes during the second quarter of 2020.

Total borrowings increased from $475.0 million as of December 31, 2020 to $481.5 million as of March 31, 2021.

At March 31, 2021, the Company had $166.0 million in short-term funds borrowed compared to $315.5 million at December 31, 2020.

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Stockholders’ equity totaled $670.3 million at September 30, 2020 compared to $656.0 million at December 31, 2019.

The increase in stockholders’ equity during the period was due to the generation of net income and an increase in accumulated other comprehensive income during the period, offset by the repurchase of outstanding stock, the impact of the adoption of ASU 2016–13 and dividends declared during the period.

Book value per common share at September 30, 2020 increased to $15.28 compared to $14.59 at December 31, 2019.

For the Three Months ended March 31, 2021 and 2020

Stockholders’ equity totaled $689.4 million at March 31, 2021 compared to $692.2 million at December 31, 2020.

The decrease in stockholders’ equity during the period was due to a decrease in accumulated other comprehensive income during the period, offset by the generation of net income.

Book value per common share at March 31, 2021 decreased to $15.69 compared to $15.78 at December 31, 2020 as a result of the decrease in accumulated other comprehensive income during the period.

Results of Operations

Consolidated net income for the three–month period ended September 30, 2020 was $20.3 million, or $0.46 diluted earnings per share, compared to $20.5 million, or $0.46 diluted earnings per share for the same period in 2019.

The decrease in net income for the three–month period ended September 30, 2020 when compared to the same prior year period reflects an increase in non–interest expense of $3.3 million, an increase in credit loss expense of $1.7 million and an increase in income tax expense of $322,000, offset by an increase in non–interest income of $5.2 million.

Excluding gain/loss on sale of investment securities and death benefit on bank owned life insurance (“adjusted net income”), adjusted net income for the third quarter of 2020 was $19.4 million, or $0.45 diluted earnings per share, compared to $20.3 million, or $0.45 diluted earnings per share for the third quarter of 2019.

Consolidated net income for the nine–month period ended September 30, 2020 was $46.6 million, or $1.06 diluted earnings per share, compared to $48.0 million, or $1.11 diluted earnings per share for the same period in 2019.

The decrease in net income for the nine–month period ended September 30, 2020 when compared to the same prior year period reflects an increase in credit loss expense of $16.1 million and an increase in non–interest expense of $3.6 million, offset by an increase in net interest income of $8.0 million, an increase in non–interest income of $8.8 million and a decrease in tax expense of $1.5 million.

Adjusted net income for the nine–month period ended September 30, 2020 was $45.0 million, or $1.02 diluted earnings per share, compared to $52.1 million, or $1.21 diluted earnings per share for the same period in 2019.

Consolidated net income for the three–month period ended March 31, 2021 was $20.4 million, or $0.46 diluted earnings per share, compared to $11.7 million, or $0.26 diluted earnings per share for the same period in 2020.

The increase in net income for the three–month period ended March 31, 2021 when compared to the same prior year period reflects an increase in net interest income of $1.6 million, an increase in non–interest income of $1.8 million and a decrease in credit loss expense of $8.2 million, offset by increases in non–interest expense of $1.0 million and income tax expense of $1.9 million.

Excluding gain on sale of investment securities and death benefit on bank owned life insurance (“adjusted net income”), adjusted net income for the first quarter of 2021 was $19.7 million, or $0.44 diluted earnings per share, compared to $11.2 million, or $0.24 diluted earnings per share for the first quarter of 2020.

Net Interest Income

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Net interest margin refers to net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities.

Net interest income during the three months ended September 30, 2020 was $43.4 million, a decrease of $66,000 from the $43.5 million earned during the same period in 2019.

Yields on the Company’s interest–earning assets decreased by 97 basis points to 3.90% for the three months ended September 30, 2020 from 4.87% for the three months ended September 30, 2019.

Interest income decreased $5.6 million from $55.7 million for the three months ended September 30, 2019 to $50.1 million for the same period in 2020.

The decrease in interest income was due to a decrease in interest rates during the third quarter of 2020.

Interest income from acquisition–related purchase accounting adjustments was $1.5 million for the three months ending September 30, 2020 compared to $1.7 million for the same period of 2019.

Rates paid on interest–bearing liabilities decreased by 68 basis points for the three–month period ended September 30, 2020 compared to the same period in 2019.

Interest expense decreased $5.5 million when compared to the three–month period ended September 30, 2019 to $6.7 million for the same period in 2020.

Net interest income during the three months ended March 31, 2021 was $42.5 million, an increase of $1.6 million from the $40.9 million earned during the same period in 2020.

Yields on the Company’s interest earning assets decreased by 81 basis points to 3.66% for the three months ended March 31, 2021 from 4.47% for the three months ended March 31, 2020.

Interest income decreased $4.1 million from $51.7 million for the three months ended March 31, 2020 to $47.6 million for the same period in 2021.

The decrease in interest income was due to a decrease in yield as interest earning assets reprice during the current low rate environment.

Interest income from acquisition–related purchase accounting adjustments was $1.6 million for the three months ending March 31, 2021 compared to $1.4 million for the same period of 2020.

Rates paid on interest bearing liabilities decreased by 63 basis points for the three–month period ended March 31, 2021 compared to the same period in 2020.

Interest expense decreased $5.7 million when compared to the three–month period ended March 31, 2020 to $5.1 million for the same period in 2021.

This decrease was due to lower rates paid on deposits and borrowings.

The cost on average interest bearing deposits decreased 69 basis points while the cost of average borrowings decreased 61 basis points.

Average balances of interest–bearing deposits increased $201.6 million and average balances of borrowings increased $163.6 million for the three-month period ended September 30, 2020 when compared to the same period in 2019.

The net interest margin decreased 43 basis points from 3.82% for the three–month period ended September 30, 2019 to 3.39% for the same period in 2020.

The decrease in the margin for the three–month period ended September 30, 2020

Average balances of interest bearing deposits increased $298.8 million and average balances of borrowings decreased $55.9 million for the three-month period ended March 31, 2021 when compared to the same period in 2020.

The net interest margin decreased 27 basis points from 3.56% for the three–month period ended March 31, 2020 to 3.29% for the same period in 2021.

The decrease in the margin for the three–month period ended March 31, 2021 compared to the same period in 2020 was due to a decrease in the yield on interest earning assets, offset by a decrease in the cost of interest bearing liabilities.

Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 3.17% for the three-month period ending March 31, 2021 compared to 3.44% for the same period in 2020.

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

compared to the same period in 2019 was due to a decrease in the yield of interest–earning assets, offset by a decrease in the cost of interest–bearing liabilities.

Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 3.27% for the three-month period ending September 30, 2020 compared to 3.67% for the same period in 2019.

For the Three Months ended March 31, 2021 and 2020

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

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Three Months Ended Three Months Ended

September 30, 2020 September 30, 2019

March 31, 2021 March 31, 2020

Balance Interest Average

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

The net interest margin was impacted during the second and third quarters of 2020 due to the PPP loans that were originated.

Horizon estimates that the PPP loans compressed the net interest margin by 3 and 4 basis points for the second and third quarters, respectively.

For the Three Months ended March 31, 2021 and 2020

The net interest margin was impacted due to PPP lending and excess liquidity held during the first quarter of 2021.

Horizon estimates that the PPP loans increased the net interest margin by 10 basis points for the first quarter of 2021.

This assumes these PPP loans were not included in average interest earning assets or interest income and were primarily funded by the growth in non–interest bearing deposits.

The compression to the net interest margin for the first nine months of 2020 using the same assumptions was estimated to be 3 basis points.

The net interest margin was also impacted during the second and third quarters of 2020 due to the issuance of $60.0 million in subordinated notes in June 2020.

Horizon estimates that the subordinated notes compressed the net interest margin by 1 and 10 basis points for the second and third quarters, respectively.

This assumes the subordinated notes were not included in average interest bearing liabilities or interest expense and were primarily offset by a reduction in cash.

The compression to the net interest margin for the first nine months of 2020 using the same assumptions was estimated to be 4 basis points.

Net interest income during the nine months ended September 30, 2020 was $127.3 million, an increase of $8.0 million from the $119.3 million earned during the same period in 2019.

Yields on the Company’s interest–earning assets decreased by 68 basis points to 4.13% for the nine months ended September 30, 2020 from 4.81% for the nine months ended September 30, 2019.

Interest income decreased $2.8 million from $154.9 million for the nine months ended September 30, 2019 to $152.1 million for the same period in 2020.

Average interest earning assets during the nine months ended September 30, 2020 increased $660.7 million to $5.0 billion compared to $4.4 billion during the nine months ended September 30, 2019.

Interest income from acquisition–related purchase accounting adjustments was $4.5 million for both the nine months ending September 30, 2020 and 2019.

Rates paid on interest–bearing liabilities decreased by 55 basis points for the nine–month period ended September 30, 2020 compared to the same period in 2019.

Interest expense decreased $10.8 million when compared to the nine–month period ended September 30, 2019 to $24.8 million for the same period in 2020.

This decrease was due to lower rates paid on deposits and borrowings.

The cost on average interest–bearing deposits decreased 50 basis points while the cost of average borrowings decreased 105 basis points.

Average balances of interest–bearing deposits increased $362.2 million and average balances of borrowings increased $113.7 million for the nine–month period ended September 30, 2020 when compared to the same period in 2019.

The net interest margin decreased 24 basis points from 3.72% for the nine–month period ended September 30, 2019 to 3.48% for the same period in 2020.

The decrease in the margin for the nine–month period ended September 30, 2020 compared to the same period in 2019 was due to a decrease in the yield of interest–earning assets, offset by a decrease in the cost of interest–bearing liabilities.

Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 3.36% for the nine–month period ending September 30, 2020 compared to 3.58% for the same period in 2019.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

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

Average Balance Sheets

(Dollar Amount in Thousands, Unaudited)

Nine Months Ended Nine Months Ended

September 30, 2020 September 30, 2019

Balance Interest Average

Interest earning assets

Federal funds sold $ 44,375 $ 125 0.38 % $ 14,778 $ 339 3.07 %

Interest earning deposits 25,083 216 1.15 % 21,938 284 1.73 %

Investment securities – taxable 476,735 6,582 1.84 % 469,330 8,929 2.54 %

Investment securities – non–taxable (1)

652,339 12,294 3.19 % 423,141 8,520 3.37 %

Loans receivable (2) (3)

3,839,008 132,927 4.64 % 3,447,654 136,862 5.32 %

Total interest earning assets 5,037,540 152,144 4.13 % 4,376,841 154,934 4.81 %

Non–interest earning assets

Cash and due from banks 85,511 58,890

Allowance for credit losses (42,864) (18,053)

Other assets 469,509 405,923

Total average assets $ 5,549,696 $ 4,823,601

Liabilities and Stockholders’ Equity

Interest bearing liabilities

Interest bearing deposits $ 3,286,648 $ 15,838 0.64 % $ 2,924,433 $ 24,923 1.14 %

Borrowings 576,288 5,974 1.38 % 462,575 8,391 2.43 %

Subordinated debentures 21,218 953 6.00 % — — — %

Junior subordinated debentures issued to capital trusts 56,398 2,061 4.88 % 48,666 2,348 6.45 %

Total interest bearing liabilities 3,940,552 24,826 0.84 % 3,435,674 35,662 1.39 %

Non–interest bearing liabilities

Demand deposits 879,840 760,717

Accrued interest payable and other liabilities 69,026 37,444

Stockholders’ equity 660,278 589,766

Total average liabilities and stockholders’ equity $ 5,549,696 $ 4,823,601

Net interest income/spread $ 127,318 3.29 % $ 119,272 3.42 %

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

3.48 % 3.72 %

Securities balances represent daily average balances for the fair value of securities.

The average rate is calculated based on the daily average balance for the amortized cost of securities.

The average rate is presented on a tax equivalent basis.

Includes fees on loans.

The inclusion of loan fees does not have a material effect on the average interest rate.

Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding.

Loan totals are shown net of unearned income and deferred loan fees.

The average rate is presented on a tax equivalent basis.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

In addition, Horizon estimates that the high level of cash held on the balance sheet compressed the net interest margin by 16 basis points for the first quarter of 2021.

This assumes that the high level of cash was not included in average interest earning assets or interest income and was excluded from non–interest bearing deposits.

Credit Loss Expense

Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio.

During the three–month period ended September 30, 2020, a provision of $2.1 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to $376,000 for the same period of 2019.

During the three–month period ended September 30, 2020, commercial loan net charge–offs were $488,000, residential mortgage loan net charge–offs were $136,000 and consumer loan net charge–offs were $199,000.

During the nine–month period ended September 30, 2020, a provision of $17.7 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to $1.6 million for the same period of 2019.

During the nine–month period ended September 30, 2020, commercial loan net charge–offs were $474,000, residential mortgage loan net charge–offs were $177,000 and consumer loan net charge–offs were $983,000.

The ACL balance at September 30, 2020 was $56.3 million, or 1.39% of total loans.

This compares to an ACL balance of $17.7 million at December 31, 2019 or 0.49% of total loans.

As of September 30, 2020, non–performing loans totaled $29.3 million, which reflects a 14 basis point increase in non–performing loans to total loans, or an $8.1 million increase from $21.2 million in non–performing loans as of December 31, 2019.

Non–performing commercial loans increased by $8.8 million, non–performing real estate loans decreased by $675,000 and non–performing consumer loans decreased by $18,000 at September 30, 2020 compared to December 31, 2019.

During the three–month period ended March 31, 2021, a provision of $367,000 was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to $8.6 million for the same period of 2020.

During the three–month period ended March 31, 2021, commercial loan net charge–offs were $158,000, residential mortgage loan net recoveries were $65,000 and consumer loan net charge–offs were $115,000.

The ACL balance at March 31, 2021 was $57.2 million, or 1.56% of total loans compared to an ACL balance of $57.0 million at December 31, 2020 or 1.47% of total loans.

The increase in the ACL to total loans ratio was primarily due to a decrease in loans from December 31, 2020 and was primarily driven by allocations for sectors of loans with potentially higher risk of loss due to the nature and characteristics of these portfolios.

As of March 31, 2021, non–performing loans totaled $25.1 million, which reflects a 1 basis point decrease in non–performing loans to total loans, or a $1.7 million decrease from $26.8 million in non–performing loans as of December 31, 2020.

Non–performing commercial loans decreased by $1.5 million, non–performing real estate loans decreased by $78,000 and non–performing consumer loans decreased by $117,000 at March 31, 2021 compared to December 31, 2020.

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

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

At September 30, 2020, the Bank modified loans totaling $160.1 million which qualify for treatment under the CARES Act.

At March 31, 2021, the Bank modified loans totaling $91.6 million which qualify for treatment under the CARES Act.

The following is a summary of loan modifications related to the COVID–19 pandemic by type of loan.

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Mortgage (Serviced Only) 56

Other Real Estate Owned (“OREO”) and repossessed assets totaled $2.3 million at September 30, 2020 compared to $3.7 million at December 31, 2019.

Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.7 million at March 31, 2021 compared to $1.9 million at December 31, 2020.

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

For the Three Months ended March 31, 2021 and 2020

Non–interest Income

The following is a summary of changes in non–interest income for the three months ending September 30, 2020 and 2019 (table dollar amounts in thousands):

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

Three Months Ended

September 30, Amount Percent

2020 2019 Change Change

Non–interest Income

Service charges on deposit accounts $ 2,154 $ 2,836 $ (682) (24.0) %

Wire transfer fees 298 189 109 57.7 %

Interchange fees 2,438 2,138 300 14.0 %

Fiduciary activities 2,105 1,834 271 14.8 %

Gain (loss) on sale of investment securities 1,088 — 1,088 100.0 %

Gain on sale of mortgage loans 8,813 2,702 6,111 226.2 %

Mortgage servicing net of impairment (1,308) 444 (1,752) -394.6 %

Increase in cash surrender value of bank owned life insurance 566 556 10 1.8 %

Death benefit on bank owned life insurance 31 213 (182) 0.0 %

Other income 515 602 (87) (14.5) %

Total non–interest income $ 16,700 $ 11,514 $ 5,186 45.0 %

Total non–interest income was $5.2 million higher during the third quarter of 2020 compared to the same period of 2019.

Residential mortgage loan activity during the third quarter of 2020 generated $8.8 million of income from the gain on sale of mortgage loans, up from $2.7 million for the same period in 2019 due to a higher volume of loans sold and an increase in the percentage gain on loans sold.

Mortgage servicing rights, net of impairment, decreased $1.8 million during the third quarter of 2020 compared to the same period of 2019 primarily due to an impairment charge of $1.5 million recorded during the third quarter of 2020.

Service charges on deposit accounts, death benefit on bank owned life insurance and other income decreased $682,000, $182,000, and $87,000, respectively, when comparing the third quarter of 2020 to the same period of 2019.

The following is a summary of changes in non–interest income for the nine months ending September 30, 2020 and 2019 (table dollar amounts in thousands):

Nine Months Ended

September 30, Amount Percent

March 31, Amount Percent

2021 2020 Change Change

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Total non–interest income $ 13,873 $ 12,063 $ 1,810 15.0 %

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Total non–interest income was $8.8 million higher for the nine–month period ended September 30, 2020 compared to the same period of 2019.

Residential mortgage loan activity during the nine–month period ended September 30, 2020 generated $18.9 million of income from the gain on sale of mortgage loans, up from $6.1 million for the same period in 2019 due to a higher volume of loans sold and an increase in the percentage gain on loans sold.

Mortgage servicing rights, net of impairment, decreased $5.7 million during the nine–month period ended September 30, 2020 compared to the same period of 2019 primarily due to an impairment charge of $4.7 million recorded during 2020.

Total non–interest income was $1.8 million higher during the first quarter of 2021 compared to the same period of 2020.

Residential mortgage loan activity during the first quarter of 2021 generated $5.3 million of income from the gain on sale of mortgage loans, up from $3.5 million for the same period in 2020 due to a higher volume of loans sold and an increase in the percentage gain on loans sold.

Mortgage servicing rights, net of impairment, increased $188,000 during the first quarter of 2021 compared to the same period of 2020.

Fiduciary income decreased $785,000 during the first quarter of 2021 compared to the same period of 2020 due to the timing of the recognition of ESOP related fee income.

Service charges on deposit accounts, death benefit on bank owned life insurance and other income decreased $212,000, $233,000, and $31,000, respectively, when comparing the first quarter of 2021 to the same period of 2020.

Non–interest Expense

The following is a summary of changes in non–interest expense for the three months ending September 30, 2020 and 2019 (table dollar amounts in thousands):

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

Three Months Ended

September 30, September 30,

2020 2019 Adjusted

Actual Merger

Expenses Adjusted Actual Merger

Expenses Adjusted Amount

Change Percent

Non–interest Expense

March 31, March 31, Amount Percent

Non–interest Expense 2021 2020 Change Change

Salaries and employee benefits $ 16,871 $ 16,591 $ 280 1.7 %

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Assets 2.20 % 2.38 %

Total non–interest expense was $3.3 million higher for the third quarter of 2020 when compared to the third quarter of 2019.

Increases in salaries and employee benefits, FDIC deposit insurance, loan expense and professional fees were offset in part by a decrease in other expense.

Annualized non–interest expense as a percent of average assets were 2.30% and 2.34% for the three months ended September 30, 2020 and 2019, respectively.

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

The following is a summary of changes in non–interest expense for the nine months ending September 30, 2020 and 2019 (table dollar amounts in thousands):

Nine Months Ended

September 30, September 30,

2020 2019 Adjusted

Actual Merger

Expenses Adjusted Actual Merger

Expenses Adjusted Amount

Change Percent

Non–interest Expense

Salaries and employee benefits $ 51,052 $ — $ 51,052 $ 48,365 $ (484) $ 47,881 $ 3,171 6.6 %

Net occupancy expenses 9,549 — 9,549 9,051 (75) 8,976 573 6.4 %

Data processing 7,074 — 7,074 6,245 (360) 5,885 1,189 20.2 %

Professional fees 1,742 — 1,742 1,426 (392) 1,034 708 68.5 %

Outside services and consultants 5,235 — 5,235 6,737 (2,466) 4,271 964 22.6 %

Loan expense 7,667 — 7,667 6,195 (2) 6,193 1,474 23.8 %

FDIC deposit insurance 955 — 955 252 — 252 703 279.0 %

Other losses 427 — 427 363 (71) 292 135 46.2 %

Other expenses 11,287 — 11,287 12,748 (1,800) 10,948 339 3.1 %

Total non–interest expense $ 94,988 $ — $ 94,988 $ 91,382 $ (5,650) $ 85,732 $ 9,256 10.8 %

Annualized Non–interest Exp.

Assets 2.29 % 2.29 % 2.53 % 2.38 %

Total non–interest expense was $3.6 million higher for the nine-month period ended September 30, 2020 when compared to the same period of 2019.

Increases in salaries and employee benefits, loan expense, data processing FDIC deposit insurance and net occupancy expenses were offset in part by decreases in outside services and consultants and other expense.

Excluding merger expenses, total non–interest expense increased by $9.3 million for the nine-month period ended September 30, 2020 when compared to the same period of 2019.

This increase was primarily related to the closing of the Salin Bancshares, Inc.

merger on March 26, 2019 and the related increase in costs.

Income tax expense totaled $4.3 million for the third quarter of 2020 an increase of $322,000 when compared to the third quarter of 2019.

The decrease in income tax expense in the third quarter of 2020 compared to the third quarter of 2019 was primarily due to a decrease in income before taxes of $97,000.

Income tax expense totaled $7.9 million for the nine-month period ended September 30, 2020, a decrease of $1.5 million when compared to the same period of 2019.

The decrease in income tax expense was due to a decrease in income before taxes of $2.9 million in addition to an increase in tax–exempt municipal interest income.

For the Three Months ended March 31, 2021 and 2020

Total non–interest expense was $1.0 million higher for the first quarter of 2021 when compared to the first quarter of 2020.

Increases in loan expense, FDIC deposit insurance and salaries and employee benefits were offset in part by a decrease in other expense and outside services and consultants expense.

Annualized non–interest expense as a percent of average assets were 2.20% and 2.38% for the three months ended March 31, 2021 and 2020, respectively.

Income tax expense totaled $3.5 million for the first quarter of 2021 an increase of $1.9 million when compared to the first quarter of 2020.

The increase in income tax expense in the first quarter of 2021 compared to the first quarter of 2020 was primarily due to a increase in income before taxes of $10.6 million.

The Bank maintains a stable base of core deposits provided by long–standing relationships with individuals and local businesses.

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Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB.

At September 30, 2020, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $928.0 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $517.1 million at December 31, 2019.

The Bank had approximately $517.2 million of unpledged investment securities at September 30, 2020 compared to $807.4 million at December 31, 2019.

At March 31, 2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $946.1 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $1.04 billion at December 31, 2020.

The Bank had approximately $772.8 million of unpledged investment securities at March 31, 2021 compared to $632.4 million at December 31, 2020.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2021.

Stockholders’ equity totaled $689.4 million as of March 31, 2021, compared to $692.2 million as of December 31, 2020.

For the three months ended March 31, 2021, the ratio of average stockholders’ equity to average assets was 11.75% compared to 11.82% for the twelve months ended December 31, 2020.

The decrease in stockholders’ equity during the period was the result of a decrease in accumulated other comprehensive income and dividends declared, offset by net income recorded during the period.

Horizon paid common stock dividends in the amount of $0.12 per share during the first three months of 2021 and $0.12 per share for the same period of 2020.

The dividend payout ratio (dividends as a percent of basic earnings per share) was 26.1% and 46.2% for the first three months of 2021 and 2020, respectively.

For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2020.

HORIZON BANCORP, INC.

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And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2020.

Stockholders’ equity totaled $670.3 million as of September 30, 2020, compared to $656.0 million as of December 31, 2019.

For the nine months ended September 30, 2020, the ratio of average stockholders’ equity to average assets was 11.90% compared to 12.28% for the twelve months ended December 31, 2019.

The increase in stockholders’ equity during the period was the result of the net income and the increase in accumulated other comprehensive income, offset by the repurchase of outstanding stock, the impact of the adoption of ASU 2016–13 and dividends declared.

Horizon declared common stock dividends in the amount of $0.36 per share during the first nine months of 2020 and $0.34 per share for the same period of 2019.

The dividend payout ratio (dividends as a percent of basic earnings per share) was 34.0% and 30.5% for the first nine months of 2020 and 2019, respectively.

For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2019.

For the Three Months ended March 31, 2021 and 2020

Use of Non–GAAP Financial Measures

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See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Non–GAAP Reconciliation of Net Income

(Dollars in Thousands, Unaudited)

Three Months Ended Nine Months Ended

September 30, June 30, March 31, December 31, September 30, September 30, September 30,

Three Months Ended

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

Net income as reported $ 20,422 $ 21,893 $ 20,312 $ 14,639 $ 11,655

Merger expenses — — — — — — 5,650

Tax effect — — — — — — (987)

Net income excluding merger expenses 20,312 14,639 11,655 18,543 20,537 46,606 52,658

(Gain)/loss on sale of investment

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Adjusted net income $ 19,700 $ 19,822 $ 19,421 $ 14,443 $ 11,154

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Non–GAAP Reconciliation of Diluted Earnings per Share

Three Months Ended Nine Months Ended

September 30, June 30, March 31, December 31, September 30, September 30, September 30,

Three Months Ended

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

Diluted earnings per share (“EPS”) as reported $ 0.46 $ 0.50 $ 0.46 $ 0.33 $ 0.26

Merger expenses — — — — — — 0.13

Tax effect — — — — — — (0.02)

Diluted EPS excluding merger expenses 0.46 0.33 0.26 0.41 0.46 1.06 1.22

(Gain)/loss on sale of investment securities (0.02) (0.06) (0.02) (0.01) (0.01)

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Adjusted Diluted EPS $ 0.44 $ 0.45 $ 0.45 $ 0.32 $ 0.24

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2021 and 2020

Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income

(Dollars in Thousands, Unaudited)

Three Months Ended Nine Months Ended

September 30, June 30, March 31, December 31, September 30, September 30, September 30,

Three Months Ended

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

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Pre–tax, pre–provision net income $ 24,239 $ 26,902 $ 26,690 $ 23,689 $ 21,839

Merger expenses — — — — — — 5,650

(Gain)/loss on sale of investment securities (914) (2,622) (1,088) (248) (339)

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Adjusted pre–tax, pre–provision net income $ 23,325 $ 24,280 $ 25,571 $ 23,441 $ 21,267

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Non–GAAP Reconciliation of Net Interest Margin

(Dollars in Thousands, Unaudited)

Three Months Ended Nine Months Ended

September 30, June 30, March 31, December 31, September 30, September 30, September 30,

Three Months Ended

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

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(“PAUs”) (1,579) (2,461) (1,488) (1,553) (1,434)

Prepayment penalties on borrowings — 3,804 — — —

Adjusted net interest income $ 40,959 $ 44,965 $ 41,909 $ 41,443 $ 39,491

2 unchanged sentences

(Dollars in Thousands Except per Share Data, Unaudited)

September 30, June 30, March 31, December 31, September 30,

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

10 unchanged sentences

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

For the Three Months ended March 31, 2021 and 2020

Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio

(Dollars in Thousands, Unaudited)

Three Months Ended Nine Months Ended

September 30, June 30, March 31, December 31, September 30, September 30, September 30,

Three Months Ended

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

5 unchanged sentences

Non–interest expense as reported $ 32,172 $ 36,453 $ 33,407 $ 30,432 $ 31,149

Merger expenses — — — — — — (5,650)

Non–interest expense excluding merger expenses 33,407 30,432 31,149 30,650 30,060 94,988 85,732

Net interest income as reported 42,538 43,622 43,397 42,996 40,925

Prepayment penalties on borrowings — 3,804 — — —

Net interest income excluding prepayment penalties on borrowings 42,538 47,426 43,397 42,996 40,925

Non–interest income as reported 13,873 19,733 16,700 11,125 12,063

3 unchanged sentences

Adjusted efficiency ratio 57.97 % 56.48 % 56.64 % 56.49 % 59.43 %

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

Non–GAAP Reconciliation of Return on Average Assets

(Dollars in Thousands, Unaudited)

Three Months Ended Nine Months Ended

September 30, June 30, March 31, December 31, September 30, September 30, September 30,

Three Months Ended

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

1 unchanged sentence

Return on average assets ("ROAA") as reported 1.40 % 1.49 % 1.40 % 1.05 % 0.89 %

Merger expenses — — — — — — 0.16

Tax effect — — — — — — (0.03)

ROAA excluding merger expenses 1.40 1.05 0.89 1.40 1.60 1.12 1.46

(Gain)/loss on sale of investment securities (0.06) (0.18) (0.08) (0.02) (0.03)

8 unchanged sentences

And Results of Operations

For the Three and Nine Months ended September 30, 2020 and 2019

For the Three Months ended March 31, 2021 and 2020

Non–GAAP Reconciliation of Return on Average Common Equity

(Dollars in Thousands, Unaudited)

Three Months Ended Nine Months Ended

September 30, June 30, March 31, December 31, September 30, September 30, September 30,

Three Months Ended

March 31, December 31, September 30, June 30, March 31,

2021 2020 2020 2020 2020

1 unchanged sentence

Return on average common equity ("ROACE") as reported 11.88 % 12.79 % 12.08 % 9.07 % 7.02 %

Merger expenses — — — — — — 1.28

Tax effect — — — — — — (0.22)

ROACE excluding merger expenses 12.08 9.07 7.02 11.26 12.72 9.43 11.94

(Gain)/loss on sale of investment securities (0.53) (1.53) (0.65) (0.15) (0.20)

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis