HORIZON BANCORP INC /IN/ 10-Q

ITEM 1 – FINANCIAL STATEMENTS HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollar Amounts in Thousands) March 31, 2021 December 31, 2020 (Unaudited) Assets Cash and due from banks $ 529,336 $ 249,711 Interest earning time deposits 7,983 8,965 Investment securities, available for sale 1,262,175 1,134,025 Investment securities, held to maturity (fair value of $ 170,949 and $ 179,990 ) 161,650 168,676 Loans held for sale 7,798 13,538 Loans, net of allowance for credit losses of $ 57,186 and $ 57,027 3,607,250 3,810,356 Premises and equipment, net 92,109 92,416 Federal Home Loan Bank stock 23,023 23,023 Goodwill 151,238 151,238 Other intangible assets 22,058 22,955 Interest receivable 20,951 21,396 Cash value of life insurance 97,262 96,751 Other assets 72,695 93,564 Total assets $ 6,055,528 $ 5,886,614 Liabilities Deposits Non–interest bearing $ 1,133,412 $ 1,053,242 Interest bearing 3,588,404 3,477,891 Total deposits 4,721,816 4,531,133 Borrowings 481,488 475,000 Subordinated notes 58,640 58,603 Junior subordinated debentures issued to capital trusts 56,604 56,548 Interest payable 1,772 2,712 Other liabilities 45,829 70,402 Total liabilities 5,366,149 5,194,398 Commitments and contingent liabilities Stockholders’ Equity Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares — — Common stock, no par value, Authorized 99,000,000 shares Issued 43,974,258 and 43,905,631 shares, Outstanding 43,949,189 and 43,880,562 shares — — Additional paid-in capital 362,613 362,945 Retained earnings 316,080 301,419 Accumulated other comprehensive income 10,686 27,852 Total stockholders’ equity 689,379 692,216 Total liabilities and stockholders’ equity $ 6,055,528 $ 5,886,614 See notes to condensed consolidated financial statements 3 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended March 31, 2021 2020 Interest Income Loans receivable $ 40,818 $ 44,958 Investment securities – taxable 1,548 2,898 Investment securities – tax exempt 5,223 3,798 Total interest income 47,589 51,654 Interest Expense Deposits 2,343 7,716 Borrowed funds 1,269 2,238 Subordinated notes 880 — Junior subordinated debentures issued to capital trusts 559 775 Total interest expense 5,051 10,729 Net Interest Income 42,538 40,925 Credit loss expense 367 8,600 Net Interest Income after Credit Loss Expense 42,171 32,325 Non–interest Income Service charges on deposit accounts 2,234 2,446 Wire transfer fees 255 171 Interchange fees 2,340 1,896 Fiduciary activities 1,743 2,528 Gains on sale of investment securities (includes $ 914 and $ 339 for the three months ended March 31, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications) 914 339 Gain on sale of mortgage loans 5,296 3,473 Mortgage servicing income net of impairment 213 25 Increase in cash value of bank owned life insurance 511 554 Death benefit on bank owned life insurance — 233 Other income 367 398 Total non–interest income 13,873 12,063 Non–interest Expense Salaries and employee benefits 16,871 16,591 Net occupancy expenses 3,318 3,252 Data processing 2,376 2,405 Professional fees 544 536 Outside services and consultants 1,702 1,915 Loan expense 2,822 2,099 FDIC insurance expense 800 150 Other losses 283 120 Other expense 3,456 4,081 Total non–interest expense 32,172 31,149 Income Before Income Taxes 23,872 13,239 Income tax expense (includes $ 192 and $ 71 for the three months ended March 31, 2021 and 2020, respectively, related to income tax expense from reclassification items) 3,450 1,584 Net Income $ 20,422 $ 11,655 Basic Earnings Per Share $ 0.46 $ 0.26 Diluted Earnings Per Share 0.46 0.26 See notes to condensed consolidated financial statements 4 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Unaudited) (Dollar Amounts in Thousands) Three Months Ended March 31 2021 2020 Net Income $ 20,422 $ 11,655 Other Comprehensive Income Change in fair value of derivative instruments: Change in fair value of derivative instruments for the period 3,053 ( 3,965 ) Income tax effect ( 641 ) 833 Changes from derivative instruments 2,412 ( 3,132 ) Change in securities: 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 (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 5 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Balances, January 1, 2020 $ — $ — $ 379,853 $ 269,738 $ 6,432 $ 656,023 Net income — — — 11,655 — 11,655 Other comprehensive income, net of tax — — — — 2,890 2,890 Amortization of unearned compensation — — 200 — — 200 Exercise of stock options — — 255 — — 255 Stock option expense — — 50 — — 50 Stock issued stock plans — — 297 — — 297 Repurchase of outstanding stock — — ( 19,636 ) — — ( 19,636 ) Cash dividends on common stock ($ 0.12 per share) — — — ( 5,257 ) — ( 5,257 ) Balances, March 31, 2020 $ — $ — $ 361,019 $ 260,501 $ 9,322 $ 630,842 Balances, January 1, 2021 $ — $ — $ 362,945 $ 301,419 $ 27,852 $ 692,216 Net income — — — 20,422 — 20,422 Other comprehensive loss, net of tax — — — — ( 17,166 ) ( 17,166 ) Amortization of unearned compensation — — 335 — — 335 Exercise of stock options — — 653 — — 653 Stock option expense — — 27 — — 27 Stock awards vested — — ( 1,347 ) — — ( 1,347 ) Cash dividends on common stock ($ 0.12 per share) — — — ( 5,761 ) — ( 5,761 ) Balances, March 31, 2021 $ — $ — $ 362,613 $ 316,080 $ 10,686 $ 689,379 See notes to condensed consolidated financial statements 6 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Three Months Ended March 31 2021 2020 Operating Activities Net income $ 20,422 $ 11,655 Items not requiring (providing) cash Provision for credit losses 367 8,600 Depreciation and amortization 2,657 2,610 Share based compensation 27 50 Mortgage servicing rights income 23 ( 347 ) Mortgage servicing rights net impairment ( 236 ) 322 Premium amortization on securities, net 2,224 1,997 Gain on sale of investment securities ( 914 ) ( 339 ) Gain on sale of mortgage loans ( 5,296 ) ( 3,473 ) Proceeds from sales of loans 137,060 68,892 Loans originated for sale ( 126,024 ) ( 67,576 ) Change in cash value life insurance ( 511 ) ( 554 ) Gain on sale of other real estate owned — ( 8 ) Net change in: Interest receivable 445 1,054 Interest payable ( 940 ) ( 290 ) Other assets 9,223 6,068 Other liabilities ( 5,156 ) ( 484 ) Net cash provided by operating activities 33,371 28,177 Investing Activities Purchases of securities available for sale ( 230,708 ) ( 129,405 ) Proceeds from sales, maturities, calls and principal repayments of securities available for sale 76,869 71,395 Proceeds from maturities of securities held to maturity 6,623 6,708 Net change in interest earning time deposits 982 ( 784 ) Net change in loans 202,290 ( 68,685 ) Proceeds on the sale of OREO and repossessed assets 507 155 Change in premises and equipment, net ( 1,118 ) ( 2,030 ) Death benefit on bank owned life insurance — 233 Repurchase of outstanding stock — ( 19,636 ) Net cash provided by (used in) investing activities 55,445 ( 142,049 ) Financing Activities Net change in: Deposits 190,683 ( 48,731 ) Borrowings 6,581 154,935 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 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 7 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Cash and Cash Equivalents, End of Period $ 529,336 $ 86,458 Additional Supplemental Information Interest paid $ 5,991 $ 11,019 Income taxes paid — — Transfer of loans to other real estate and repossessed assets 449 609 See notes to condensed consolidated financial statements 8 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 1 - Accounting Policies The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp, Inc. (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”). Horizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. All inter–company balances and transactions have been eliminated. 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. Those adjustments consist only of normal recurring adjustments. Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10–K for 2020 filed with the Securities and Exchange Commission on February 26, 2021. The condensed consolidated balance sheet of Horizon as of December 31, 2020 has been derived from the audited balance sheet as of that date. On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of March 31, 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. Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted–average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share. Three Months Ended March 31 2021 2020 Basic earnings per share Net income $ 20,422 $ 11,655 Weighted average common shares outstanding 43,919,549 44,658,512 Basic earnings per share $ 0.46 $ 0.26 Diluted earnings per share Net income $ 20,422 $ 11,655 Weighted average common shares outstanding 43,919,549 44,658,512 Effect of dilutive securities: Restricted stock 102,048 39,845 Stock options 50,984 58,359 Weighted average common shares outstanding 44,072,581 44,756,716 Diluted earnings per share $ 0.46 $ 0.26 9 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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. Accounting Guidance Issued But Not Yet Adopted FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rates on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: • A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria. • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform. The Company 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. 10 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 2 – Securities The fair value of securities is as follows: March 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 40,155 $ — $ ( 553 ) $ 39,602 State and municipal 992,461 22,182 ( 9,592 ) 1,005,051 Federal agency collateralized mortgage obligations 116,072 3,019 ( 3 ) 119,088 Federal agency mortgage-backed pools 84,609 2,866 ( 124 ) 87,351 Corporate notes 10,015 1,072 ( 4 ) 11,083 Total available for sale investment securities $ 1,243,312 $ 29,139 $ ( 10,276 ) $ 1,262,175 Held to maturity State and municipal $ 151,474 $ 9,109 $ — $ 160,583 Federal agency collateralized mortgage obligations 1,959 22 ( 2 ) 1,979 Federal agency mortgage-backed pools 8,217 171 ( 1 ) 8,387 Total held to maturity investment securities $ 161,650 $ 9,302 $ ( 3 ) $ 170,949 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 19,750 $ — $ ( 35 ) $ 19,715 State and municipal 803,100 35,014 ( 271 ) 837,843 Federal agency collateralized mortgage obligations 144,022 3,448 ( 17 ) 147,453 Federal agency mortgage-backed pools 114,484 4,315 — 118,799 Corporate notes 9,007 1,208 — 10,215 Total available for sale investment securities $ 1,090,363 $ 43,985 $ ( 323 ) $ 1,134,025 Held to maturity State and municipal $ 157,421 $ 11,035 $ — $ 168,456 Federal agency collateralized mortgage obligations 2,661 36 — 2,697 Federal agency mortgage-backed pools 8,594 243 — 8,837 Total held to maturity investment securities $ 168,676 $ 11,314 $ — $ 179,990 The amortized cost and fair value of securities available for sale and held to maturity at March 31, 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. 11 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) March 31, 2021 December 31, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Available for sale Within one year $ 48,715 $ 48,714 $ 44,206 $ 44,192 One to five years 72,803 74,114 61,594 63,006 Five to ten years 204,419 207,260 136,857 145,102 After ten years 716,694 725,648 589,200 615,473 1,042,631 1,055,736 831,857 867,773 Federal agency collateralized mortgage obligations 116,072 119,088 144,022 147,453 Federal agency mortgage–backed pools 84,609 87,351 114,484 118,799 Total available for sale investment securities $ 1,243,312 $ 1,262,175 $ 1,090,363 $ 1,134,025 Held to maturity Within one year $ 6,303 $ 6,329 $ 7,302 $ 7,327 One to five years 43,736 45,317 42,742 44,358 Five to ten years 77,214 82,247 82,087 88,300 After ten years 24,221 26,690 25,290 28,471 151,474 160,583 157,421 168,456 Federal agency collateralized mortgage obligations 1,959 1,979 2,661 2,697 Federal agency mortgage–backed pools 8,217 8,387 8,594 8,837 Total held to maturity investment securities $ 161,650 $ 170,949 $ 168,676 $ 179,990 The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. March 31, 2021 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Investment Securities U.S. Treasury and federal agencies $ 37,697 $ ( 553 ) $ — $ — $ 37,697 $ ( 553 ) State and municipal 459,377 ( 9,485 ) 1,458 ( 107 ) 460,835 ( 9,592 ) Federal agency collateralized mortgage obligations 2,380 ( 5 ) — — 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 ) 12 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) December 31, 2020 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Investment Securities U.S. Treasury and federal agencies $ 17,215 $ ( 35 ) $ — $ — $ 17,215 $ ( 35 ) State and municipal 56,287 ( 242 ) 1,245 ( 29 ) 57,532 ( 271 ) Federal agency collateralized mortgage obligations 6,358 ( 17 ) — — 6,358 ( 17 ) Federal agency mortgage–backed pools — — — — — — 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. The U.S. government sponsored entities and agencies and mortgage–backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities were due to changes in interest rates. Due to the contractual terms, the issuers of state and municipal securities are not allowed to settle for less than the amortized cost of the security. In addition, the Company does not intend to sell these securities prior to the recovery of the amortized cost, which may not occur until maturity. Information regarding security proceeds, gross gains and gross losses are presented below. Three Months Ended March 31 2021 2020 Sales of securities available for sale Proceeds $ 27,514 $ 32,036 Gross gains 914 389 Gross losses — ( 50 ) 13 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 3 – Loans The table below identifies the Company’s loan portfolio segments and classes. Portfolio Segment Class of Financing Receivable Commercial Owner occupied real estate Non-owner occupied real estate Residential spec homes Development & spec land Commercial and industrial Real estate Residential mortgage Residential construction Mortgage warehouse Mortgage warehouse Consumer Direct installment Indirect installment Home equity Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Class of financing receivable is defined as a group of financing receivables determined on the basis of both of the following, 1) risk characteristics of the financing receivable, and 2) an entity’s method for monitoring and assessing credit risk. Generally, the Bank does not move loans from a revolving loan to a term loan other than construction loans. Construction loans are reviewed and rewritten prior to being originated as a term loan. The following table presents total loans outstanding by portfolio class, as of March 31, 2021: March 31, 2021 December 31, 2020 Commercial Owner occupied real estate $ 482,687 $ 496,306 Non–owner occupied real estate 998,304 999,636 Residential spec homes 10,131 10,070 Development & spec land 26,384 26,372 Commercial and industrial 660,352 659,887 Total commercial 2,177,858 2,192,271 Real estate Residential mortgage 558,374 598,700 Residential construction 23,555 25,586 Mortgage warehouse 266,246 395,626 Total real estate 848,175 1,019,912 Consumer Direct installment 35,622 38,046 Indirect installment 352,189 357,511 Home equity 250,592 259,643 Total consumer 638,403 655,200 Total loans 3,664,436 3,867,383 Allowance for credit losses ( 57,186 ) ( 57,027 ) Net loans $ 3,607,250 $ 3,810,356 14 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 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. 15 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Based on these agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement. Non–performing Loans The following table presents non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructurings (“TDRs”) by class of loans: March 31, 2021 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–accrual with no Allowance for Credit Losses Commercial Owner occupied real estate $ 9,945 $ — $ 603 $ — $ 10,548 $ 5,441 Non–owner occupied real estate 225 — 316 — 541 541 Residential spec homes — — — — — — Development & spec land 70 — — — 70 70 Commercial and industrial 1,585 — 58 — 1,643 1,294 Total commercial 11,825 — 977 — 12,802 7,346 Real estate Residential mortgage 5,427 71 940 1,478 7,916 7,797 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 5,427 71 940 1,478 7,916 7,797 Consumer Direct installment 8 26 — — 34 34 Indirect installment 853 34 — — 887 887 Home equity 2,587 136 354 350 3,427 3,427 Total consumer 3,448 196 354 350 4,348 4,348 Total $ 20,700 $ 267 $ 2,271 $ 1,828 $ 25,066 $ 19,491 16 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) December 31, 2020 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–accrual with no Allowance for Credit Losses Commercial Owner occupied real estate $ 10,581 $ — $ 630 $ 168 $ 11,379 $ 6,305 Non–owner occupied real estate 237 — 330 — 567 567 Residential spec homes — — — — — — Development & spec land 70 — — — 70 70 Commercial and industrial 1,826 — 506 — 2,332 1,847 Total commercial 12,714 — 1,466 168 14,348 8,789 Real estate Residential mortgage 5,674 17 922 1,381 7,994 7,097 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 5,674 17 922 1,381 7,994 7,097 Consumer Direct installment 12 1 — — 13 13 Indirect installment 1,174 120 — — 1,294 1,294 Home equity 2,568 124 222 244 3,158 2,628 Total consumer 3,754 245 222 244 4,465 3,935 Total $ 22,142 $ 262 $ 2,610 $ 1,793 $ 26,807 $ 19,821 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. 17 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 Greater Past Due Total Past Due Loans Total Loans Commercial Owner occupied real estate $ 471,589 $ 550 $ — $ — $ 550 $ 472,139 Non–owner occupied real estate 996,904 859 — — 859 997,763 Residential spec homes 10,131 — — — — 10,131 Development & spec land 25,564 750 — — 750 26,314 Commercial and industrial 658,555 105 49 — 154 658,709 Total commercial 2,162,743 2,264 49 — 2,313 2,165,056 Real estate Residential mortgage 550,699 431 806 71 1,308 552,007 Residential construction 23,555 — — — — 23,555 Mortgage warehouse 266,246 — — — — 266,246 Total real estate 840,500 431 806 71 1,308 841,808 Consumer Direct installment 35,481 99 8 26 133 35,614 Indirect installment 350,692 547 63 34 644 351,336 Home equity 246,683 543 289 136 968 247,651 Total consumer 632,856 1,189 360 196 1,745 634,601 Total $ 3,636,099 $ 3,884 $ 1,215 $ 267 $ 5,366 $ 3,641,465 Percentage of total loans 99.85 % 0.11 % 0.03 % 0.01 % 0.15 % 100.00 % 18 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents 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 Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Total Commercial Owner occupied real estate $ 484,282 $ 683 $ 130 $ — $ 813 $ 485,095 Non–owner occupied real estate 997,816 599 654 — 1,253 999,069 Residential spec homes 10,070 — — — — 10,070 Development & spec land 25,552 — 750 — 750 26,302 Commercial and industrial 657,027 249 279 — 528 657,555 Total commercial 2,174,747 1,531 1,813 — 3,344 2,178,091 Real estate Residential mortgage 590,944 905 238 17 1,160 592,104 Residential construction 25,586 — — — — 25,586 Mortgage warehouse 395,626 — — — — 395,626 Total real estate 1,012,156 905 238 17 1,160 1,013,316 Consumer Direct installment 37,965 69 — — 69 38,034 Indirect installment 354,655 1,356 206 120 1,682 356,337 Home equity 255,908 554 266 125 945 256,853 Total consumer 648,528 1,979 472 245 2,696 651,224 Total $ 3,835,431 $ 4,415 $ 2,523 $ 262 $ 7,200 $ 3,842,631 Percentage of total loans 99.81 % 0.11 % 0.07 % 0.01 % 0.19 % 100.00 % The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Troubled Debt Restructurings Loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans' contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default. At March 31, 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”). 19 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents TDRs by class of loan: March 31, 2021 December 31, 2020 Non–accrual Accruing Total Non–accrual Accruing Total Commercial Owner occupied real estate $ 603 $ — $ 603 $ 630 $ 168 $ 798 Non–owner occupied real estate 316 — 316 330 — 330 Residential spec homes — — — — — — Development & spec land — — — — — — Commercial and industrial 58 — 58 506 — 506 Total commercial 977 — 977 1,466 168 1,634 Real estate Residential mortgage 940 1,478 2,418 922 1,381 2,303 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 940 1,478 2,418 922 1,381 2,303 Consumer Direct installment — — — — — — Indirect installment — — — — — — Home equity 354 350 704 222 244 466 Total consumer 354 350 704 222 244 466 Total $ 2,271 $ 1,828 $ 4,099 $ 2,610 $ 1,793 $ 4,403 Loans Modified under the CARES Act The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At March 31, 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. 20 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The 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 Allocation Commercial 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 Allocation Commercial 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 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. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. 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 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 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 21 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management's analysis of the adequacy of the Allowance for Credit Losses. For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non–accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non–accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass. Horizon Bank employs a nine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below. Risk Grade 1: Excellent (Pass) Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges. Risk Grade 2: Good (Pass) Loans to businesses that have strong financial statements containing an unmodified opinion from a CPA firm and at least three years consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five years satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long–term debt ratings of Baa or better and meeting defined key financial metric ranges. Risk Grade 3: Satisfactory (Pass) Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered and meeting defined key financial metric ranges. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply: • At inception, the loan was properly underwritten, did not possess an unwanted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory. • At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss. • The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. • During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. 22 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (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. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank's minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization. Risk Grade 4W: Management Watch (Pass) Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion. Commercial construction loans are graded as 4W Management Watch until the projects are completed and stabilized. Risk Grade 5: Special Mention Loans which possess some temporary (normally less than one year) credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,“ impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength and must meet defined key financial metric ranges. Risk Grade 6: Substandard One or more of the following characteristics may be exhibited in loans classified Substandard: • Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. • Loans are inadequately protected by the current net worth and paying capacity of the obligor. • The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. • Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. • Unusual courses of action are need to maintain a high probability of repayment. • The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments. • The lender is forced into a subordinated or unsecured position due to flaws in documentation. • Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms. • The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. • There is a significant deterioration in market conditions to which the borrower is highly vulnerable. • The borrower meets defined key financial metric ranges. 23 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Risk Grade 7: Doubtful One or more of the following characteristics may be present in loans classified Doubtful: • Loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of principal highly improbable. • The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. • The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known. • The borrower meets defined key financial metric ranges. Risk Grade 8: Loss Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all of a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 24 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following 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 Commercial Owner occupied real estate Pass $ 9,140 $ 58,133 $ 66,526 $ 50,807 $ 44,193 $ 166,293 $ 39,369 $ 434,461 Special Mention — — 1,053 1,226 9,358 12,043 — 23,680 Substandard — 1,016 1,020 3,919 2,484 12,306 3,801 24,546 Doubtful — — — — — — — — Total owner occupied real estate $ 9,140 $ 59,149 $ 68,599 $ 55,952 $ 56,035 $ 190,642 $ 43,170 $ 482,687 Non–owner occupied real estate Pass $ 30,379 $ 112,865 $ 108,782 $ 72,116 $ 130,971 $ 296,725 $ 163,134 $ 914,972 Special Mention — 857 1,225 29,458 1,285 15,270 4,022 52,117 Substandard — — 16,883 1,158 99 10,769 2,306 31,215 Doubtful — — — — — — — — Total non–owner occupied real estate $ 30,379 $ 113,722 $ 126,890 $ 102,732 $ 132,355 $ 322,764 $ 169,462 $ 998,304 Residential spec homes Pass $ 500 $ 335 $ 628 $ — $ — $ 1,360 $ 7,308 $ 10,131 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total residential spec homes $ 500 $ 335 $ 628 $ — $ — $ 1,360 $ 7,308 $ 10,131 Development & spec land Pass $ 42 $ 569 $ 724 $ 1,480 $ 2,193 $ 12,613 $ 7,051 $ 24,672 Special Mention — — — — — — — — Substandard — — — 478 — 484 750 1,712 Doubtful — — — — — — — — Total development & spec land $ 42 $ 569 $ 724 $ 1,958 $ 2,193 $ 13,097 $ 7,801 $ 26,384 Commercial & industrial Pass $ 136,320 $ 175,946 $ 58,700 $ 57,056 $ 83,191 $ 80,196 $ 30,175 $ 621,584 Special Mention 2,478 4,317 1,029 987 7,191 4,935 1,096 22,033 Substandard 2,245 1,835 2,564 3,724 1,474 2,390 2,503 16,735 Doubtful — — — — — — — — Total commercial & industrial $ 141,043 $ 182,098 $ 62,293 $ 61,767 $ 91,856 $ 87,521 $ 33,774 $ 660,352 Total commercial $ 181,104 $ 355,873 $ 259,134 $ 222,409 $ 282,439 $ 615,384 $ 261,515 $ 2,177,858 25 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) March 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 19,705 $ 109,655 $ 56,914 $ 71,948 $ 80,572 $ 211,664 $ — $ 550,458 Non–performing — — 378 635 38 6,865 — 7,916 Total residential mortgage $ 19,705 $ 109,655 $ 57,292 $ 72,583 $ 80,610 $ 218,529 $ — $ 558,374 Residential construction Performing $ — $ — $ — $ — $ — $ — $ 23,555 $ 23,555 Non–performing — — — — — — — — Total residential construction $ — $ — $ — $ — $ — $ — $ 23,555 $ 23,555 Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 266,246 $ 266,246 Non–performing — — — — — — — — Total mortgage warehouse $ — $ — $ — $ — $ — $ — $ 266,246 $ 266,246 Total real estate $ 19,705 $ 109,655 $ 57,292 $ 72,583 $ 80,610 $ 218,529 $ 289,801 $ 848,175 March 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Consumer Direct installment Performing $ 2,906 $ 10,729 $ 8,407 $ 5,033 $ 4,871 $ 3,575 $ 67 $ 35,588 Non–performing — 26 — — 4 4 — 34 Total direct installment $ 2,906 $ 10,755 $ 8,407 $ 5,033 $ 4,875 $ 3,579 $ 67 $ 35,622 Indirect installment Performing $ 33,036 $ 125,035 $ 87,287 $ 64,394 $ 30,973 $ 10,577 $ — $ 351,302 Non–performing — 70 164 257 227 169 — 887 Total indirect installment $ 33,036 $ 125,105 $ 87,451 $ 64,651 $ 31,200 $ 10,746 $ — $ 352,189 Home equity Performing $ 11,184 $ 62,319 $ 39,276 $ 30,598 $ 24,791 $ 73,747 $ 5,250 $ 247,165 Non–performing — — 17 159 73 1,389 1,789 3,427 Total home equity $ 11,184 $ 62,319 $ 39,293 $ 30,757 $ 24,864 $ 75,136 $ 7,039 $ 250,592 Total consumer $ 47,126 $ 198,179 $ 135,151 $ 100,441 $ 60,939 $ 89,461 $ 7,106 $ 638,403 26 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables present loans by credit grades and origination year at December 31, 2020. December 31, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total Commercial Owner occupied real estate Pass $ 57,726 $ 65,558 $ 49,455 $ 49,032 $ 47,480 $ 127,373 $ 40,027 $ 436,651 Special Mention — 1,081 5,928 10,205 4,207 12,787 325 34,533 Substandard 1,021 1,231 4,012 2,504 2,839 9,673 3,842 25,122 Doubtful — — — — — — — — Total owner occupied real estate $ 58,747 $ 67,870 $ 59,395 $ 61,741 $ 54,526 $ 149,833 $ 44,194 $ 496,306 Non–owner occupied real estate Pass $ 115,667 $ 120,023 $ 73,669 $ 133,396 $ 99,674 $ 208,649 $ 166,986 $ 918,064 Special Mention 862 1,236 28,723 1,298 2,548 13,182 4,072 51,921 Substandard — 15,552 1,477 107 6,422 4,521 1,572 29,651 Doubtful — — — — — — — — Total non–owner occupied real estate $ 116,529 $ 136,811 $ 103,869 $ 134,801 $ 108,644 $ 226,352 $ 172,630 $ 999,636 Residential spec homes Pass $ 737 $ 237 $ — $ 298 $ 368 $ 1,177 $ 7,253 $ 10,070 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total residential spec homes $ 737 $ 237 $ — $ 298 $ 368 $ 1,177 $ 7,253 $ 10,070 Development & spec land Pass $ 573 $ 736 $ 1,522 $ 2,461 $ 672 $ 11,971 $ 6,907 $ 24,842 Special Mention — — — — — 274 — 274 Substandard — — — — — 506 750 1,256 Doubtful — — — — — — — — Total development & spec land $ 573 $ 736 $ 1,522 $ 2,461 $ 672 $ 12,751 $ 7,657 $ 26,372 Commercial & industrial Pass $ 253,953 $ 63,772 $ 58,978 $ 88,121 $ 26,044 $ 70,706 $ 30,845 $ 592,419 Special Mention 8,779 1,164 1,088 9,306 1,835 11,870 3,040 37,082 Substandard 4,233 7,079 11,072 1,660 636 3,322 2,384 30,386 Doubtful — — — — — — — — Total commercial & industrial $ 266,965 $ 72,015 $ 71,138 $ 99,087 $ 28,515 $ 85,898 $ 36,269 $ 659,887 Total commercial $ 443,551 $ 277,669 $ 235,924 $ 298,388 $ 192,725 $ 476,011 $ 268,003 $ 2,192,271 27 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) December 31, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Total Real estate 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 Consumer 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 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 Home equity 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 28 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 4 – 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 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. 29 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, loan purpose, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of the borrower and concentrations, and historical or expected credit loss patterns. Note 5 – Loan Servicing Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $ 1.532 billion and $ 1.527 billion at March 31, 2021 and December 31, 2020. The aggregate fair value of capitalized mortgage servicing rights was approximately $ 12.9 million and $ 12.5 million at March 31, 2021 and December 31, 2020, compared to the carrying values of $ 12.9 million and $ 12.5 million at March 31, 2021 and December 31, 2020, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights. March 31, December 31, 2021 2020 Mortgage servicing rights Balance, beginning of period $ 17,644 $ 15,046 Servicing rights capitalized 1,130 5,530 Amortization of servicing rights ( 962 ) ( 2,932 ) Balance, end of period 17,812 17,644 Impairment allowance Balance, beginning of period ( 5,172 ) ( 719 ) Additions — ( 5,106 ) Reductions 235 653 Balance, end of period ( 4,937 ) ( 5,172 ) Mortgage servicing rights, net $ 12,875 $ 12,472 The Bank reduced impairment by approximately $ 235,000 for the three months ended March 31, 2021. The Bank recorded additional impairment of approximately $ 4.5 million for the year ended December 31, 2020. Note 6 – Goodwill The following table presents the Company’s carrying amount of goodwill as of March 31, 2021 and December 31, 2020. March 31, December 31, 2021 2020 Balance, beginning of period $ 151,238 $ 151,238 Goodwill acquired during the period — — Balance, end of period $ 151,238 $ 151,238 In accordance with ASC 350–20, the Company conducts a goodwill impairment test at least annually, or more frequently as events occur or circumstances change that would more–likely–than–not reduce the fair value below its carrying amount. In the second quarter of 2020, the onset of the COVID–19 pandemic prompted the Company to assess qualitative and 30 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) quantitative factors to determine whether it was more–likely–than–not the fair value of the Company was less than the carrying amount. The Company assessed relevant events and circumstances, including macroeconomic conditions, industry and market considerations, overall financial performance, changes in the composition or carrying amount of assets and liabilities, the market price of the Company’s common stock and other relevant facts. The Company performed both a market capitalization approach and a discounted cash flow approach to determine the fair value of the Company during the second quarter of 2020 which resulted in no goodwill impairment. The Company updated the analysis above during the first quarter of 2021 which resulted in no goodwill impairment charges for the three months ended March 31, 2021. Note 7 – Repurchase Agreements The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Company’s control. The following table shows repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements: March 31, 2021 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to one year One to three years Three to five years Five to ten years Beyond ten years Total Repurchase Agreements and repurchase-to-maturity transactions Repurchase Agreements $ 116,011 $ — $ — $ — $ — $ — $ 116,011 Securities pledged for Repurchase Agreements Federal agency collateralized mortgage obligations $ 59,030 $ — $ — $ — $ — $ — $ 59,030 Federal agency mortgage–backed pools 59,994 — — — — — 59,994 Total $ 119,024 $ — $ — $ — $ — $ — $ 119,024 Note 8 – Subordinated Notes On June 24, 2020, Horizon issued $ 60.0 million in aggregate principal amount of 5.625 % fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625 % per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three–Month Term SOFR), plus 549 basis points, payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, commencing on October 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero. 31 Table of Contents HORIZON BANCORP, INC AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Horizon may, at its option, beginning with the interest payment date of July 1, 2025 and on any interest payment date thereafter, redeem the Notes, in whole or in part. The Notes will not otherwise be redeemable by Horizon prior to maturity, unless certain events occur. The redemption price for any redemption is 100 % of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations. The Notes are unsecured subordinated obligations, and rank pari passu, or equally, with all of Horizon's future unsecured subordinated debt and are junior to all existing and future senior debt. The Notes are structurally subordinated to all existing and future liabilities of Horizon's subsidiaries, including the deposit liabilities and claims of other creditors of Horizon Bank, and are effectively subordinated to Horizon’s existing and future secured indebtedness. There is no sinking fund for the Notes. The Notes are obligations of Horizon only and are not obligations of, and are not guaranteed by, any of Horizon’s subsidiaries. Note 9 – Derivative Financial Instruments Cash Flow Hedges – As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three months LIBOR and to pay interest to the counterparty at a fixed rate of 4.20 % on a notional amount of $ 12.0 million at March 31, 2021 and December 31, 2020, respectively. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.62 % on a notional amount of $ 10.0 million at December 31, 2020. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.81 % on a notional amount of $ 50.0 million at March 31, 2021 and December 31, 2020. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At March 31, 2021, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months. Fair Value Hedges – Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At March 31, 2021, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months. 32 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan and security agreements being hedged were $ 457.1 million at March 31, 2021 and $ 442.7 million at December 31, 2020. Other Derivative Instruments – The Company enters into non–hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At March 31, 2021, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income. The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans. The following tables summarize the fair value of derivative financial instruments utilized by Horizon: Asset Derivatives Liability Derivatives March 31, 2021 March 31, 2021 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other assets $ 17,864 Other liabilities $ 23,053 Total derivatives designated as hedging instruments 17,864 23,053 Derivatives not designated as hedging instruments Mortgage loan contracts Other assets 504 Other liabilities 701 Total derivatives not designated as hedging instruments 504 701 Total derivatives $ 18,368 $ 23,754 Asset Derivatives Liability Derivatives December 31, 2020 December 31, 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other assets $ 35,388 Other liabilities $ 43,631 Total derivatives designated as hedging instruments 35,388 43,631 Derivatives not designated as hedging instruments Mortgage loan contracts Other assets 1,045 Other liabilities — Total derivatives not designated as hedging instruments 1,045 — Total derivatives $ 36,433 $ 43,631 The effect of the derivative instruments on the condensed consolidated statements of income for the three–month periods ending March 31 is as follows: Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion) Three Months Ended March 31, 2021 March 31, 2020 Derivatives in cash flow hedging relationship Interest rate contracts $ 2,412 $ ( 3,132 ) 33 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) FASB Accounting Standards Codification (“ASC”) Topic 820–10–20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820–10–55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended March 31, 2021 March 31, 2020 Derivative in fair value hedging relationship Interest rate contracts Interest income - loans $ 17,525 $ ( 26,330 ) Interest rate contracts Interest income - loans ( 17,525 ) 26,330 Total $ — $ — Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended March 31, 2021 March 31, 2020 Derivative not designated as hedging relationship Mortgage contracts Other income - gain on sale of loans $ ( 1,241 ) $ 1,043 Note 10 – Disclosures about Fair Value of Assets and Liabilities The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices in active markets for identical assets or liabilities Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2021. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Available for sale securities When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s 34 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features. Hedged loans Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used. Interest rate swap agreements The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following: March 31, 2021 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Available for sale securities U.S. Treasury and federal agencies $ 39,602 $ — $ 39,602 $ — State and municipal 1,005,051 — 1,005,051 — Federal agency collateralized mortgage obligations 119,088 — 119,088 — Federal agency mortgage–backed pools 87,351 — 87,351 — Corporate notes 11,083 — 11,083 — Total available for sale securities 1,262,175 — 1,262,175 — Interest rate swap agreements asset 17,864 — 17,864 — Forward sale commitments 504 — 504 — Interest rate swap agreements liability ( 23,053 ) — ( 23,053 ) — Commitments to originate loans ( 701 ) — ( 701 ) — 35 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) December 31, 2020 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Available for sale securities U.S. Treasury and federal agencies $ 19,715 $ — $ 19,715 $ — State and municipal 837,843 — 837,843 — Federal agency collateralized mortgage obligations 147,453 — 147,453 — Federal agency mortgage–backed pools 118,799 — 118,799 — Corporate notes 10,215 — 10,215 — Total available for sale securities 1,134,025 — 1,134,025 — Interest rate swap agreements asset 35,388 — 35,388 — Forward sale commitments 1,045 — 1,045 — Interest rate swap agreements liability ( 46,631 ) — ( 46,631 ) — Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows: Three Months Ended March 31, 2021 March 31, 2020 Non-interest Income Total gains and losses from: Hedged loans $ 17,525 $ ( 26,330 ) Fair value interest rate swap agreements ( 17,525 ) 26,330 Derivative loan commitments ( 1,241 ) 1,043 $ ( 1,241 ) $ 1,043 Certain other assets are measured at fair value on a non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment): Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2021 Collateral dependent loans $ 11,008 $ — $ — $ 11,008 Mortgage servicing rights 12,875 — — 12,875 December 31, 2020 Collateral dependent loans $ 13,123 $ — $ — $ 13,123 Mortgage servicing rights 12,472 — — 12,472 Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. 36 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month–end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment decreased by $ 236,000 during the first three months of 2021 and increased by $ 322,000 during the first three months of 2020. The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill. March 31, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 11,008 Collateral based measurement Discount to reflect current market conditions and ultimate collectibility 0.0 %- 98.6 % ( 14.0 %) Mortgage servicing rights 12,875 Discounted cash flows Discount rate, Constant prepayment rate, Probability of default 7.8 %- 7.8 % ( 7.8 %), 11.9 %- 30.6 % ( 16.6 %), 0.0 %- 1.2 %( 0.7 %) December 31, 2020 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 13,123 Collateral based measurement Discount to reflect current market conditions and ultimate collectibility 0.0 %- 72.0 %( 12.4 %) Mortgage servicing rights 12,472 Discounted cash flows Discount rate, Constant prepayment rate, Probability of default 7.8 %- 7.8 % ( 7.8 %), 11.5 %- 20.9 %( 17.5 %), 0.0 %- 1.0 %( 0.8 %) Note 11 – Fair Value of Financial Instruments The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts. The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at March 31, 2021 and December 31, 2020. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off–balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Due from Banks – The carrying amounts approximate fair value. 37 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Interest-earning time deposits – The fair values of the Company’s interest–earning time deposits are estimated using discounted cash flow analyses based on current rates for similar types of interest–earning time deposits. Held–to–Maturity Securities – For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities. Loans Held for Sale – The carrying amounts approximate fair value. Net Loans – The fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. FHLB Stock – Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Interest Receivable/Payable – The carrying amounts approximate fair value. Deposits – The fair value of demand deposits, savings accounts, interest–bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity. Borrowings – Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings. Subordinated Notes – The fair value of subordinated notes is based on discounted cash flows based on current borrowing rates for similar types of instruments. Junior Subordinated Debentures Issued to Capital Trusts – Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures. Commitments to Extend Credit and Standby Letters of Credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed–rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short–term nature of these agreements, carrying amounts approximate fair value. 38 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall. March 31, 2021 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Cash and due from banks $ 529,336 $ 529,336 $ — $ — Interest–earning time deposits 7,983 — 8,123 — Investment securities, held to maturity 161,650 — 170,949 — Loans held for sale 7,798 — — 7,798 Loans (excluding loan level hedges), net 3,607,250 — — 3,535,694 Stock in FHLB 23,023 — 23,023 — Interest receivable 20,951 — 20,951 — Liabilities Non–interest bearing deposits $ 1,133,412 $ 1,133,412 $ — $ — Interest bearing deposits 3,588,404 — 3,541,714 — Borrowings 481,488 — 481,549 — Subordinated notes 58,640 — 57,756 — Junior subordinated debentures issued to capital trusts 56,604 — 52,924 — Interest payable 1,772 — 1,772 — December 31, 2020 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Cash and due from banks $ 249,711 $ 249,711 $ — $ — Interest–earning time deposits 8,965 — 9,136 — Investment securities, held to maturity 168,676 — 179,990 — Loans held for sale 13,538 — — 13,538 Loans (excluding loan level hedges), net 3,810,356 — — 3,767,348 Stock in FHLB 23,023 — 23,023 — Interest receivable 21,396 — 21,396 — Liabilities Non–interest bearing deposits $ 1,053,242 $ 1,053,242 $ — $ — Interest bearing deposits 3,477,891 — 3,466,522 — Borrowings 475,000 — 483,245 — Subordinated notes 58,603 — 57,626 — Junior subordinated debentures issued to capital trusts 56,548 — 52,676 — Interest payable 2,712 — 2,712 — 39 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 12 – Accumulated Other Comprehensive Income March 31, 2021 December 31, 2020 Unrealized gain on securities available for sale $ 18,863 $ 43,662 Unamortized loss on securities held to maturity, previously transferred from AFS ( 148 ) ( 165 ) Unrealized loss on derivative instruments ( 5,190 ) ( 8,243 ) Tax effect ( 2,839 ) ( 7,402 ) Total accumulated other comprehensive income $ 10,686 $ 27,852 Note 13 – Regulatory Capital Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital framework (known as “Basel III”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Company and Bank are subject to minimum regulatory capital requirements as defined and calculated in accordance with the Basel III–based regulations. As allowed under Basel III rules, the Company made the decision to opt–out of including accumulated other comprehensive income in regulatory capital. The minimum regulatory capital requirements are set forth in the table below. In addition, to be categorized as well capitalized, the Company and Bank must maintain Total risk–based, Tier I risk–based, common equity Tier I risk–based and Tier I leverage ratios as set forth in the table below. As of March 31, 2021 and December 31, 2020, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the first quarter of 2021 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well capitalized status for bank holding companies. In October 2019, the federal banking agencies finalized a new rule that will simplify capital requirements for qualified community banks that opt into the new community bank leverage ratio framework. The new framework was available to use in March 31, 2020 Call Reports or Forms FRY-9C (as applicable) for depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, among other qualifying criteria. Horizon did not elect the new community bank leverage ratio framework. As of March 31, 2020, the Company and Bank elected the transition option of the 2019 CECL Rule which allows banking organizations to phase in over a three–year period the day–one adverse effects of CECL on their regulatory capital ratios. 40 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Horizon and the Bank’s actual and required capital ratios as of March 31, 2021 and December 31, 2020 were as follows: Actual Required for Capital Adequacy Purposes (1) Required For Capital Adequacy Purposes with Capital Buffer (1) Well Capitalized Under Prompt Corrective Action Provisions (1) Amount Ratio Amount Ratio Amount Ratio Amount Ratio March 31, 2021 Total capital (to risk–weighted assets) (1) Consolidated $ 669,098 16.94 % $ 315,985 8.00 % $ 414,730 10.50 % N/A N/A Bank 548,682 13.86 % 316,700 8.00 % 415,668 10.50 % $ 395,874 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 622,085 15.75 % 236,985 6.00 % 335,728 8.50 % N/A N/A Bank 503,222 12.71 % 237,556 6.00 % 336,537 8.50 % 316,741 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 506,877 12.84 % 177,644 4.50 % 276,335 7.00 % N/A N/A Bank 503,222 12.71 % 178,167 4.50 % 277,148 7.00 % 257,352 6.50 % Tier 1 capital (to average assets) (1) Consolidated 622,085 10.82 % 229,976 4.00 % 229,976 4.00 % N/A N/A Bank 503,222 8.81 % 228,478 4.00 % 228,478 4.00 % 285,597 5.00 % December 31, 2020 Total capital (to risk–weighted assets) (1) Consolidated $ 648,804 14.91 % $ 348,024 8.00 % $ 456,782 10.50 % N/A N/A Bank 532,315 12.21 % 348,810 8.00 % 457,813 10.50 % $ 436,013 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 607,340 13.96 % 261,018 6.00 % 369,775 8.50 % N/A N/A Bank 492,221 11.29 % 261,606 6.00 % 370,609 8.50 % 348,808 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 491,281 11.29 % 195,764 4.50 % 304,522 7.00 % N/A N/A Bank 492,221 11.29 % 196,205 4.50 % 305,207 7.00 % 283,407 6.50 % Tier 1 capital (to average assets) (1) Consolidated 607,340 10.68 % 227,507 4.00 % 227,507 4.00 % N/A N/A Bank 492,221 8.71 % 226,158 4.00 % 226,158 4.00 % 282,697 5.00 % (1) As defined by regulatory agencies Note 14 – General Litigation The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operation and cash flows of the Company. 41 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition And Results of Operations For the Three Months ended March 31, 2021 and 2020