HORIZON BANCORP INC /IN/ 10-Q

ITEM 1 – FINANCIAL STATEMENTS HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollar Amounts in Thousands) September 30, 2021 December 31, 2020 (Unaudited) Assets Cash and due from banks $ 971,817 $ 249,711 Interest earning time deposits 5,767 8,965 Investment securities, available for sale 1,669,634 1,134,025 Investment securities, held to maturity (fair value of $ 768,099 and $ 179,990 ) 769,240 168,676 Loans held for sale 4,811 13,538 Loans, net of allowance for credit losses of $ 56,779 and $ 57,027 3,603,302 3,810,356 Premises and equipment, net 93,866 92,416 Federal Home Loan Bank stock 24,440 23,023 Goodwill 162,788 151,238 Other intangible assets 21,150 22,955 Interest receivable 24,762 21,396 Cash value of life insurance 97,003 96,751 Other assets 85,660 93,564 Total assets $ 7,534,240 $ 5,886,614 Liabilities Deposits Non–interest bearing $ 1,324,757 $ 1,053,242 Interest bearing 4,655,142 3,477,891 Total deposits 5,979,899 4,531,133 Borrowings 670,753 475,000 Subordinated notes 58,713 58,603 Junior subordinated debentures issued to capital trusts 56,722 56,548 Interest payable 1,427 2,712 Other liabilities 58,184 70,402 Total liabilities 6,825,698 5,194,398 Commitments and contingent liabilities Stockholders’ Equity Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares — — Common stock, no par value, Authorized 99,000,000 shares Issued 43,609,536 and 43,905,631 shares, Outstanding 43,520,694 and 43,880,562 shares — — Additional paid-in capital 351,954 362,945 Retained earnings 348,943 301,419 Accumulated other comprehensive income 7,645 27,852 Total stockholders’ equity 708,542 692,216 Total liabilities and stockholders’ equity $ 7,534,240 $ 5,886,614 See notes to condensed consolidated financial statements 3 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Interest Income Loans receivable $ 40,392 $ 44,051 $ 120,446 $ 132,927 Investment securities – taxable 4,565 1,704 8,641 6,923 Investment securities – tax exempt 5,911 4,391 16,790 12,294 Total interest income 50,868 50,146 145,877 152,144 Interest Expense Deposits 1,808 3,616 6,204 15,838 Borrowed funds 1,075 1,662 3,640 5,974 Subordinated notes 880 895 2,641 953 Junior subordinated debentures issued to capital trusts 561 576 1,678 2,061 Total interest expense 4,324 6,749 14,163 24,826 Net Interest Income 46,544 43,397 131,714 127,318 Credit loss expense (recovery) 1,112 2,052 ( 13 ) 17,709 Net Interest Income after Credit Loss Expense (Recovery) 45,432 41,345 131,727 109,609 Non–interest Income Service charges on deposit accounts 2,291 2,154 6,682 6,488 Wire transfer fees 210 298 687 699 Interchange fees 2,587 2,438 7,819 6,661 Fiduciary activities 2,124 2,105 5,828 6,398 Gains on sale of investment securities (includes $ 0 and $ 1,088 for the three months ended September 30, 2021 and 2020, respectively, and $ 914 and $ 1,675 for the nine months ended September 30, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications) — 1,088 914 1,675 Gain on sale of mortgage loans 4,088 8,813 14,996 18,906 Mortgage servicing income net of impairment 336 ( 1,308 ) 2,052 ( 4,043 ) Increase in cash value of bank owned life insurance 534 566 1,547 1,677 Death benefit on bank owned life insurance 517 31 783 264 Other income 3,357 515 3,816 1,163 Total non–interest income 16,044 16,700 45,124 39,888 Non–interest Expense Salaries and employee benefits 18,901 18,832 53,502 51,052 Net occupancy expenses 2,935 3,107 9,337 9,549 Data processing 2,526 2,237 7,290 7,074 Professional fees 522 688 1,654 1,742 Outside services and consultants 2,330 1,561 6,252 5,235 Loan expense 2,645 2,876 8,574 7,667 FDIC insurance expense 279 570 1,579 955 Other losses 69 114 358 427 Other expense 4,142 3,422 11,363 11,287 Total non–interest expense 34,349 33,407 99,909 94,988 Income Before Income Taxes 27,127 24,638 76,942 54,509 Income tax expense (includes $ 0 and $ 228 for the three months ended September 30, 2021 and 2020, respectively, and $ 192 and $ 352 for the nine months ended September 30, 2021 and 2020, respectively, related to income tax expense from reclassification items) 4,056 4,326 11,276 7,903 Net Income $ 23,071 $ 20,312 $ 65,666 $ 46,606 4 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Basic Earnings Per Share $ 0.53 $ 0.46 $ 1.50 $ 1.06 Diluted Earnings Per Share 0.52 0.46 1.49 1.06 See notes to condensed consolidated financial statements 5 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Unaudited) (Dollar Amounts in Thousands) Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Net Income $ 23,071 $ 20,312 $ 65,666 $ 46,606 Other Comprehensive Income Change in fair value of derivative instruments: Change in fair value of derivative instruments for the period 555 ( 359 ) 3,590 ( 4,459 ) Income tax effect ( 117 ) 75 ( 754 ) 936 Changes from derivative instruments 438 ( 284 ) 2,836 ( 3,523 ) Change in securities: Unrealized appreciation (depreciation) for the period on AFS securities ( 14,488 ) 4,019 ( 28,304 ) 27,518 Accretion (amortization) from transfer of securities from available for sale to held to maturity securities 19 ( 31 ) 50 ( 60 ) Reclassification adjustment for securities gains realized in income — ( 1,088 ) ( 914 ) ( 1,675 ) Income tax effect 3,038 ( 608 ) 6,125 ( 5,414 ) Unrealized gains (losses) on securities ( 11,431 ) 2,292 ( 23,043 ) 20,369 Other Comprehensive Income (Loss), Net of Tax ( 10,993 ) 2,008 ( 20,207 ) 16,846 Comprehensive Income $ 12,078 $ 22,320 $ 45,459 $ 63,452 See notes to condensed consolidated financial statements 6 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, July 1, 2020 $ — $ — $ 361,087 $ 269,849 $ 21,270 $ 652,206 Net income — — — 20,312 — 20,312 Other comprehensive income, net of tax — — — — 2,008 2,008 Amortization of unearned compensation — — 335 — — 335 Exercise of stock options — — — — — — Stock option expense — — 28 — — 28 Stock issued stock plans — — 730 — — 730 Cash dividends on common stock ($ 0.12 per share) — — — ( 5,326 ) — ( 5,326 ) Balances, September 30, 2020 $ — $ — $ 362,180 $ 284,835 $ 23,278 $ 670,293 Balances, July 1, 2021 $ — $ — $ 359,227 $ 332,509 $ 18,638 $ 710,374 Net income — — — 23,071 — 23,071 Other comprehensive loss, net of tax — — — — ( 10,993 ) ( 10,993 ) Amortization of unearned compensation — — 449 — — 449 Exercise of stock options — — — — — — Stock option expense — — 13 — — 13 Repurchase of outstanding stock — — ( 7,607 ) — — ( 7,607 ) Stock retirement plans — — ( 128 ) — — ( 128 ) Cash dividends on common stock ($ 0.15 per share) — — — ( 6,637 ) — ( 6,637 ) Balances, September 30, 2021 $ — $ — $ 351,954 $ 348,943 $ 7,645 $ 708,542 7 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Nine Months Ended Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Balances, January 1, 2020 $ — $ — $ 379,853 $ 269,738 $ 6,432 $ 656,023 Net income — — — 46,606 — 46,606 Other comprehensive income, net of tax — — — — 16,846 16,846 Impact of adoption of ASU No. 2016–13 — — — ( 15,635 ) — ( 15,635 ) Amortization of unearned compensation — — 457 — — 457 Exercise of stock options — — 157 — — 157 Stock option expense — — 105 — — 105 Stock issued stock plans — — 1,244 — — 1,244 Repurchase of outstanding stock — — ( 19,636 ) — — ( 19,636 ) Cash dividends on common stock ($ 0.36 per share) — — — ( 15,874 ) — ( 15,874 ) Balances, September 30, 2020 $ — $ — $ 362,180 $ 284,835 $ 23,278 $ 670,293 Balances, January 1, 2021 $ — $ — $ 362,945 $ 301,419 $ 27,852 $ 692,216 Net income — — — 65,666 — 65,666 Other comprehensive loss, net of tax — — — — ( 20,207 ) ( 20,207 ) Amortization of unearned compensation — — 1,233 — — 1,233 Exercise of stock options — — 769 — — 769 Stock option expense — — 55 — — 55 Stock awards vested — — ( 1,347 ) — — ( 1,347 ) Repurchase of outstanding stock — — ( 7,607 ) — — ( 7,607 ) Stock retirement plans — — ( 4,094 ) — — ( 4,094 ) Cash dividends on common stock ($ 0.41 per share) — — — ( 18,142 ) — ( 18,142 ) Balances, September 30, 2021 $ — $ — $ 351,954 $ 348,943 $ 7,645 $ 708,542 See notes to condensed consolidated financial statements 8 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Nine Months Ended September 30 2021 2020 Operating Activities Net income $ 65,666 $ 46,606 Items not requiring (providing) cash Provision for (recovery of) credit losses ( 13 ) 17,709 Depreciation and amortization 8,085 7,539 Share based compensation 55 105 Mortgage servicing rights income 90 ( 630 ) Mortgage servicing rights net impairment ( 2,142 ) 4,673 Premium amortization on securities, net 7,279 6,649 Gain on sale of investment securities ( 914 ) ( 1,675 ) Gain on sale of mortgage loans ( 14,996 ) ( 18,906 ) Proceeds from sales of loans 366,004 436,285 Loans originated for sale ( 342,281 ) ( 426,344 ) Change in cash value life insurance ( 1,547 ) ( 1,677 ) Gain on sale of other real estate owned ( 76 ) ( 119 ) Net change in: Interest receivable ( 2,847 ) ( 1,628 ) Interest payable ( 1,301 ) ( 581 ) Other assets 11,200 ( 7,048 ) Other liabilities ( 3,443 ) 1,873 Net cash provided by operating activities 88,819 62,831 Investing Activities Purchases of securities available for sale ( 820,485 ) ( 396,133 ) Proceeds from sales, maturities, calls and principal repayments of securities available for sale 250,808 237,645 Purchases of securities held to maturity ( 625,397 ) — Proceeds from maturities of securities held to maturity 23,368 26,359 Net change in interest earning time deposits 3,198 ( 758 ) Change in FHLB stock ( 1,417 ) ( 576 ) Net change in loans 412,873 ( 394,167 ) Proceeds on the sale of OREO and repossessed assets 1,119 1,426 Change in premises and equipment, net ( 462 ) ( 4,252 ) Death benefit on bank owned life insurance 783 264 Repurchase of outstanding stock ( 7,607 ) ( 19,636 ) Net cash received in branch acquisition 616,832 — Net cash used in investing activities ( 146,387 ) ( 549,828 ) Financing Activities Net change in: Deposits 602,357 405,287 Borrowings 196,037 37,654 Net change from issuance of stock ( 578 ) 1,401 Net proceeds from issuance of subordinated notes — 58,824 Dividends paid on common stock ( 18,142 ) ( 15,874 ) Net cash provided by financing activities 779,674 487,292 9 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Net Change in Cash and Cash Equivalents 722,106 295 Cash and Cash Equivalents, Beginning of Period 249,711 98,831 Cash and Cash Equivalents, End of Period $ 971,817 $ 99,126 Additional Supplemental Information Interest paid $ 15,448 $ 25,407 Income taxes paid 1,225 9,825 Transfer of loans to other real estate and repossessed assets 964 1,795 Transfer of premises to other real estate 1,753 — See notes to condensed 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 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”), which is an Indiana commercial bank. All inter–company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2021 and September 30, 2020 are not necessarily indicative of the operating results for the full year of 2021 or 2020. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments. Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10–K for 2020 filed with the Securities and Exchange Commission on February 26, 2021. The condensed consolidated balance sheet of Horizon as of December 31, 2020 has been derived from the audited balance sheet as of that date. On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of September 30, 2021, Horizon had repurchased a total of 803,349 shares at an average price per share of $ 16.89 . In addition to the stock repurchase program, Horizon agreed to repurchase 1,000,000 shares at a price per share of $ 15.19 from an individual shareholder on March 6, 2020. Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted–average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share. Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Basic earnings per share Net income $ 23,071 $ 20,312 $ 65,666 $ 46,606 Weighted average common shares outstanding 43,810,729 43,862,435 43,893,194 44,099,862 Basic earnings per share $ 0.53 $ 0.46 $ 1.50 $ 1.06 Diluted earnings per share Net income $ 23,071 $ 20,312 $ 65,666 $ 46,606 Weighted average common shares outstanding 43,810,729 43,862,435 43,893,194 44,099,862 Effect of dilutive securities: Restricted stock 99,666 8,246 102,446 32,574 Stock options 48,475 33,200 51,403 33,214 Weighted average common shares outstanding 43,958,870 43,903,881 44,047,043 44,165,650 Diluted earnings per share $ 0.52 $ 0.46 $ 1.49 $ 1.06 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) There were 142,705 and 153,582 shares for the three and nine months ended September 30, 2021, which were not included in the computation of diluted earnings per share because they were non–dilutive. There were 492,273 and 273,776 shares for the three and nine months ended September 30, 2020, which were not included in the computation of diluted earnings per share because they were non–dilutive. Horizon has share–based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2020 Annual Report on Form 10–K. Also, the Company's shareholders approved the 2021 Omnibus Equity Incentive Plan at its Annual Meeting on May 6, 2021, adding 1.4 million additional shares to the plan and with no other significant changes from the Company's previous plan. Accounting Guidance Issued But Not Yet Adopted FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rates on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: • A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria. • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform. The Company has been conducting monthly meetings to address contracts and hedge accounting relationships that reference LIBOR. All contracts referencing LIBOR as an interest rate have been identified and are in the process of being rewritten or refinanced by December 31, 2021, except for commercial loan interest rate swaps. Hedge accounting relationships referencing LIBOR will be modified by the counter parties. The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements. 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) Note 2 – Acquisitions On September 17, 2021, Horizon Bank completed the purchase and assumption of certain assets and liabilities of 14 former TCF National Bank (“TCF”) branches in 11 Michigan counties. Net cash of $ 618.2 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans of $ 206.3 million, fixed assets of $ 6.9 million, cash of $ 4.0 million and a 1.75 % premium on deposits. Customer deposit balances were recorded at $ 846.4 million and a core deposit intangible of $ 887,000 was recorded in the transaction, which will be amortized over 10 years on a straight line basis. Goodwill of $ 11.5 million was generated in the transaction. Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the TCF branches is detailed in the following table. Final estimates of fair value on the date of acquisition have not been received yet. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date. Assets Liabilities Cash and due from banks $ 4,012 Deposits Loans Non-interest bearing $ 181,403 Commercial 99,893 NOW accounts 303,050 Residential mortgage 54,218 Savings and money market 262,488 Consumer 52,224 Certificates of deposit 99,468 Total loans 206,335 Total deposits 846,409 Premises and equipment, net 6,901 Interest payable 16 Goodwill 11,550 Other liabilities 2,206 Core deposit intangible 887 Interest receivable 519 Other assets 260 Total assets purchased $ 230,204 Total liabilities assumed $ 848,631 Net cash received $ ( 618,167 ) Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past due and non–accrual status, borrower credit scores and recent loan–to–value percentages. Management continues to complete its evaluation to determine if any loans were purchased with credit deterioration. 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 – Securities The fair value of securities is as follows: September 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 119,159 $ 136 $ ( 707 ) $ 118,588 State and municipal 1,108,057 22,276 ( 11,210 ) 1,119,123 Federal agency collateralized mortgage obligations 73,922 1,607 ( 4 ) 75,525 Federal agency mortgage-backed pools 236,432 2,341 ( 1,068 ) 237,705 Private labeled mortgage-backed pools 32,948 274 ( 285 ) 32,937 Corporate notes 84,672 1,201 ( 117 ) 85,756 Total available for sale investment securities $ 1,655,190 $ 27,835 $ ( 13,391 ) $ 1,669,634 Held to maturity State and municipal $ 283,858 $ 8,170 $ ( 2,909 ) $ 289,119 Federal agency collateralized mortgage obligations 69,537 10 ( 793 ) 68,754 Federal agency mortgage-backed pools 215,873 167 ( 3,542 ) 212,498 Private labeled mortgage-backed pools 66,298 7 ( 753 ) 65,552 Corporate notes 133,674 — ( 1,498 ) 132,176 Total held to maturity investment securities $ 769,240 $ 8,354 $ ( 9,495 ) $ 768,099 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 19,750 $ — $ ( 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 September 30, 2021 and December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 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) September 30, 2021 December 31, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Available for sale Within one year $ 28,888 $ 28,885 $ 44,206 $ 44,192 One to five years 133,651 134,899 61,594 63,006 Five to ten years 320,561 322,940 136,857 145,102 After ten years 828,788 836,743 589,200 615,473 1,311,888 1,323,467 831,857 867,773 Federal agency collateralized mortgage obligations 73,922 75,525 144,022 147,453 Federal agency mortgage–backed pools 236,432 237,705 114,484 118,799 Private labeled mortgage–backed pools $ 32,948 $ 32,937 $ — $ — Total available for sale investment securities $ 1,655,190 $ 1,669,634 $ 1,090,363 $ 1,134,025 Held to maturity Within one year $ 4,612 $ 4,666 $ 7,302 $ 7,327 One to five years 45,148 46,573 42,742 44,358 Five to ten years 185,847 188,962 82,087 88,300 After ten years 181,925 181,094 25,290 28,471 417,532 421,295 157,421 168,456 Federal agency collateralized mortgage obligations 69,537 68,754 2,661 2,697 Federal agency mortgage–backed pools 215,873 212,498 8,594 8,837 Private labeled mortgage–backed pools 66,298 65,552 — — Total held to maturity investment securities $ 769,240 $ 768,099 $ 168,676 $ 179,990 The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. September 30, 2021 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Investment Securities U.S. Treasury and federal agencies $ 108,551 $ ( 688 ) $ 2,731 $ ( 19 ) $ 111,282 $ ( 707 ) State and municipal 680,184 ( 13,892 ) 5,316 ( 227 ) 685,500 ( 14,119 ) Federal agency collateralized mortgage obligations 57,191 ( 797 ) — — 57,191 ( 797 ) Federal agency mortgage–backed pools 363,453 ( 4,610 ) — — 363,453 ( 4,610 ) Private labeled mortgage–backed pools 77,208 ( 1,038 ) — — 77,208 ( 1,038 ) Corporate notes 144,177 ( 1,615 ) — — 144,177 ( 1,615 ) Total temporarily impaired securities $ 1,430,764 $ ( 22,640 ) $ 8,047 $ ( 246 ) $ 1,438,811 $ ( 22,886 ) 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) 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 ) 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 September 30, 2021 or December 31, 2020. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $ 13.1 million at September 30, 2021 and $ 8.1 million at December 31, 2020 and is excluded from the estimate of credit losses. The U.S. government sponsored entities and agencies and mortgage–backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities were due to changes in interest rates. Due to the contractual terms, the issuers of state and municipal securities are not allowed to settle for less than the amortized cost of the security. In addition, the Company does not intend to sell these securities prior to the recovery of the amortized cost, which may not occur until maturity. Information regarding security proceeds, gross gains and gross losses are presented below. Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Sales of securities available for sale Proceeds $ — $ 17,012 $ 27,514 $ 54,194 Gross gains — 1,094 914 1,731 Gross losses — ( 6 ) — ( 56 ) 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) Note 4 – 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 September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Commercial Owner occupied real estate $ 521,186 $ 496,306 Non–owner occupied real estate 1,016,377 999,636 Residential spec homes 10,142 10,070 Development & spec land 31,957 26,372 Commercial and industrial 593,538 659,887 Total commercial 2,173,200 2,192,271 Real estate Residential mortgage 580,364 598,700 Residential construction 23,176 25,586 Mortgage warehouse 169,909 395,626 Total real estate 773,449 1,019,912 Consumer Direct installment 67,176 38,046 Indirect installment 365,756 357,511 Home equity 280,500 259,643 Total consumer 713,432 655,200 Total loans 3,660,081 3,867,383 Allowance for credit losses ( 56,779 ) ( 57,027 ) Net loans $ 3,603,302 $ 3,810,356 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) As of September 30, 2021 and December 31, 2020, Federal Paycheck Protection Program (“PPP”) loans totaled approximately $ 92.3 million and $ 208.9 million, respectively, and are included with commercial loans. Total loans include net deferred loan costs of $ 316,000 at September 30, 2021 and net deferred loan fees of $ 1.7 million at 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 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) sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days. Based on 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: September 30, 2021 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–accrual with no Allowance for Credit Losses Commercial Owner occupied real estate $ 8,651 $ — $ — $ 603 $ 9,254 $ 4,074 Non–owner occupied real estate 2,853 — 292 — 3,145 3,145 Residential spec homes — — — — — — Development & spec land 964 — — — 964 964 Commercial and industrial 2,758 — — — 2,758 2,021 Total commercial 15,226 — 292 603 16,121 10,204 Real estate Residential mortgage 6,291 — 911 1,439 8,641 8,641 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 6,291 — 911 1,439 8,641 8,641 Consumer Direct installment 16 3 — — 19 19 Indirect installment 817 56 — — 873 873 Home equity 2,787 141 401 391 3,720 3,720 Total consumer 3,620 200 401 391 4,612 4,612 Total $ 25,137 $ 200 $ 1,604 $ 2,433 $ 29,374 $ 23,457 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) 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 and nine months ended September 30, 2021 and 2020, respectively, while the loans were in non–accrual status. Included in the $ 25.1 million of non–accrual loans and the $ 1.6 million of non–performing TDRs at September 30, 2021 were $ 2.2 million and $ 295,000 , respectively, of loans acquired for which there were accretable yields recognized. 20 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents the payment status by class of loan, excluding non–accrual loans of $ 25.1 million and non–performing TDRs of $ 1.6 million at September 30, 2021: September 30, 2021 Current 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Total Loans Commercial Owner occupied real estate $ 512,306 $ 188 $ 41 $ — $ 229 $ 512,535 Non–owner occupied real estate 1,013,232 — — — — 1,013,232 Residential spec homes 10,142 — — — — 10,142 Development & spec land 30,993 — — — — 30,993 Commercial and industrial 590,559 39 182 — 221 590,780 Total commercial 2,157,232 227 223 — 450 2,157,682 Real estate Residential mortgage 572,129 728 305 — 1,033 573,162 Residential construction 23,176 — — — — 23,176 Mortgage warehouse 169,909 — — — — 169,909 Total real estate 765,214 728 305 — 1,033 766,247 Consumer Direct installment 66,809 323 25 3 351 67,160 Indirect installment 363,828 1,001 54 56 1,111 364,939 Home equity 276,060 1,001 110 141 1,252 277,312 Total consumer 706,697 2,325 189 200 2,714 709,411 Total $ 3,629,143 $ 3,280 $ 717 $ 200 $ 4,197 $ 3,633,340 Percentage of total loans 99.88 % 0.09 % 0.02 % 0.01 % 0.12 % 100.00 % 21 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table 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 September 30, 2021, the types of concessions the Company has made on restructured loans have been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of September 30, 2021, the Company had $ 4.0 million in TDRs and $ 2.4 million were performing according to the restructured terms and $ 603,000 TDRs were returned to accrual status during 2021. There were no specific reserves allocated to TDRs at September 30, 2021 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). 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) The following table presents TDRs by class of loan: September 30, 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 292 — 292 330 — 330 Residential spec homes — — — — — — Development & spec land — — — — — — Commercial and industrial — — — 506 — 506 Total commercial 292 603 895 1,466 168 1,634 Real estate Residential mortgage 911 1,439 2,350 922 1,381 2,303 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 911 1,439 2,350 922 1,381 2,303 Consumer Direct installment — — — — — — Indirect installment — — — — — — Home equity 401 391 792 222 244 466 Total consumer 401 391 792 222 244 466 Total $ 1,604 $ 2,433 $ 4,037 $ 2,610 $ 1,793 $ 4,403 Loans Modified under the CARES Act The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At September 30, 2021 and December 31, 2020, the Bank modified loans totaling $ 29.2 million and $ 126.7 million, respectively, which qualify for treatment under the CARES Act. Collateral Dependent Financial Assets A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent. 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) 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. September 30, 2021 Real Estate Accounts Receivable/Equipment Other Total ACL Allocation Commercial Owner occupied real estate $ 12,386 $ 103 $ — $ 12,489 $ 1,179 Non–owner occupied real estate 3,172 — — 3,172 — Residential spec homes — — — — — Development & spec land 964 — — 964 — Commercial and industrial 1,214 2,406 — 3,620 218 Total commercial 17,736 2,509 — 20,245 1,397 Total collateral dependent loans $ 17,736 $ 2,509 $ — $ 20,245 $ 1,397 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 $ 3,000,000 to $ 6,000,000 ) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (“CCBO”). • Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO, Senior Commercial Credit Officer (“SCCO”) or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO, SCCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO or SCCO, however, lenders must present their factual information to either the Loan Committee, CCBO or SCCO when recommending an upgrade. • The CCBO, or a designee, meets periodically with loan officers to discuss the status of past due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. 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) • 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 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. 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) 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. 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) 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. 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) The following tables present loans by credit grades and origination year at September 30, 2021. September 30, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Commercial Owner occupied real estate Pass $ 51,502 $ 59,563 $ 66,358 $ 48,852 $ 46,074 $ 154,262 $ 45,993 $ 472,604 Special Mention — 77 735 2,396 8,567 7,539 — 19,314 Substandard — 1,007 1,201 3,989 3,956 15,220 3,895 29,268 Doubtful — — — — — — — — Total owner occupied real estate $ 51,502 $ 60,647 $ 68,294 $ 55,237 $ 58,597 $ 177,021 $ 49,888 $ 521,186 Non–owner occupied real estate Pass $ 111,223 $ 110,627 $ 106,765 $ 61,794 $ 135,791 $ 269,509 $ 150,423 $ 946,132 Special Mention — 845 1,203 29,409 4,470 5,687 519 42,133 Substandard — — 15,240 1,390 429 8,683 2,370 28,112 Doubtful — — — — — — — — Total non–owner occupied real estate $ 111,223 $ 111,472 $ 123,208 $ 92,593 $ 140,690 $ 283,879 $ 153,312 $ 1,016,377 Residential spec homes Pass $ 1,117 $ 758 $ 338 $ — $ — $ 913 $ 7,016 $ 10,142 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total residential spec homes $ 1,117 $ 758 $ 338 $ — $ — $ 913 $ 7,016 $ 10,142 Development & spec land Pass $ 1,520 $ 550 $ 512 $ 12 $ 1,849 $ 12,915 $ 12,640 $ 29,998 Special Mention — — — — — 184 358 542 Substandard — — — — 17 651 749 1,417 Doubtful — — — — — — — — Total development & spec land $ 1,520 $ 550 $ 512 $ 12 $ 1,866 $ 13,750 $ 13,747 $ 31,957 Commercial & industrial Pass $ 214,792 $ 56,773 $ 50,106 $ 51,700 $ 68,635 $ 71,387 $ 37,613 $ 551,006 Special Mention 1,586 2,765 1,385 4,119 6,809 4,015 2,586 23,265 Substandard 1,546 146 3,242 5,748 2,400 1,582 4,603 19,267 Doubtful — — — — — — — — Total commercial & industrial $ 217,924 $ 59,684 $ 54,733 $ 61,567 $ 77,844 $ 76,984 $ 44,802 $ 593,538 Total commercial $ 383,286 $ 233,111 $ 247,085 $ 209,409 $ 278,997 $ 552,547 $ 268,765 $ 2,173,200 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) September 30, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 79,466 $ 111,732 $ 50,187 $ 58,431 $ 68,812 $ 203,095 $ — $ 571,723 Non–performing — — 376 875 — 7,390 — 8,641 Total residential mortgage $ 79,466 $ 111,732 $ 50,563 $ 59,306 $ 68,812 $ 210,485 $ — $ 580,364 Residential construction Performing $ — $ — $ — $ — $ — $ — $ 23,176 $ 23,176 Non–performing — — — — — — — — Total residential construction $ — $ — $ — $ — $ — $ — $ 23,176 $ 23,176 Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 169,909 $ 169,909 Non–performing — — — — — — — — Total mortgage warehouse $ — $ — $ — $ — $ — $ — $ 169,909 $ 169,909 Total real estate $ 79,466 $ 111,732 $ 50,563 $ 59,306 $ 68,812 $ 210,485 $ 193,085 $ 773,449 September 30, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Consumer Direct installment Performing $ 15,487 $ 14,385 $ 15,628 $ 8,051 $ 7,093 $ 6,358 $ 155 $ 67,157 Non–performing — — — — 12 7 — 19 Total direct installment $ 15,487 $ 14,385 $ 15,628 $ 8,051 $ 7,105 $ 6,365 $ 155 $ 67,176 Indirect installment Performing $ 121,665 $ 101,476 $ 67,748 $ 46,969 $ 20,871 $ 6,154 $ — $ 364,883 Non–performing 22 176 184 178 199 114 — 873 Total indirect installment $ 121,687 $ 101,652 $ 67,932 $ 47,147 $ 21,070 $ 6,268 $ — $ 365,756 Home equity Performing $ 51,598 $ 56,690 $ 36,628 $ 28,529 $ 24,523 $ 71,590 $ 7,222 $ 276,780 Non–performing 9 148 10 82 131 1,604 1,736 3,720 Total home equity $ 51,607 $ 56,838 $ 36,638 $ 28,611 $ 24,654 $ 73,194 $ 8,958 $ 280,500 Total consumer $ 188,781 $ 172,875 $ 120,198 $ 83,809 $ 52,829 $ 85,827 $ 9,113 $ 713,432 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 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 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) 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 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) Note 5 – Allowance for Credit and Loan Losses The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, 2021 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 41,766 $ 4,108 $ 1,155 $ 8,620 $ 55,649 Provision for credit losses on loans 1,330 ( 400 ) ( 101 ) 283 1,112 PCD loan charge–offs — — — — — Charge–offs ( 10 ) — — ( 189 ) ( 199 ) Recoveries 35 29 — 153 217 Balance, end of period $ 43,121 $ 3,737 $ 1,054 $ 8,867 $ 56,779 Three Months Ended September 30, 2020 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 39,147 $ 5,832 $ 1,190 $ 8,921 $ 55,090 Provision for credit losses on loans 1,136 ( 232 ) 60 1,088 2,052 Charge–offs ( 502 ) ( 144 ) — ( 510 ) ( 1,156 ) Recoveries 14 8 — 311 333 Balance, end of period $ 39,795 $ 5,464 $ 1,250 $ 9,810 $ 56,319 Nine Months Ended September 30, 2021 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 42,210 $ 4,620 $ 1,267 $ 8,930 $ 57,027 Provision for credit losses on loans 1,090 ( 1,000 ) ( 213 ) 110 ( 13 ) PCD loan charge–offs ( 6 ) — — — ( 6 ) Charge–offs ( 273 ) — — ( 661 ) ( 934 ) Recoveries 100 117 — 488 705 Balance, end of period $ 43,121 $ 3,737 $ 1,054 $ 8,867 $ 56,779 Nine Months Ended September 30, 2020 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 11,996 $ 923 $ 1,077 $ 3,671 $ 17,667 Impact of adopting ASC 326 10,832 4,048 — 4,911 19,791 Initial PCD allowance 2,786 — — — 2,786 Provision for credit losses on loans 14,655 670 173 2,211 17,709 Charge–offs ( 586 ) ( 204 ) — ( 1,654 ) ( 2,444 ) Recoveries 112 27 — 671 810 Balance, end of period $ 39,795 $ 5,464 $ 1,250 $ 9,810 $ 56,319 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”). 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) To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look–back period includes January 2012 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit–related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible. The Company’s CECL estimate applies to a forecast that incorporates macroeconomic trends and other environmental factors. Management utilized National, Regional and Local Leading Economic Indexes, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and qualitative adjustments were utilized to reflect the forecast and other relevant factors. The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, loan purpose, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of the borrower and concentrations, and historical or expected credit loss patterns. Note 6 – Loan Servicing Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $ 1.5 billion and $ 1.5 billion at September 30, 2021 and December 31, 2020. The aggregate fair value of capitalized mortgage servicing rights was approximately $ 14.9 million and $ 12.5 million at September 30, 2021 and December 31, 2020, compared to the carrying values of $ 14.9 million and $ 12.5 million at September 30, 2021 and December 31, 2020, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights. 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) September 30, December 31, 2021 2020 Mortgage servicing rights Balance, beginning of period $ 17,644 $ 15,046 Servicing rights capitalized 3,209 5,530 Amortization of servicing rights ( 2,960 ) ( 2,932 ) Balance, end of period 17,893 17,644 Impairment allowance Balance, beginning of period ( 5,172 ) ( 719 ) Additions — ( 5,106 ) Reductions 2,142 653 Balance, end of period ( 3,030 ) ( 5,172 ) Mortgage servicing rights, net $ 14,863 $ 12,472 The Bank reduced impairment by approximately $ 2.1 million for the nine months ended September 30, 2021. The Bank recorded additional impairment of approximately $ 4.5 million for the year ended December 31, 2020. Note 7 – Goodwill The following table presents the Company’s carrying amount of goodwill as of September 30, 2021 and December 31, 2020. September 30, December 31, 2021 2020 Balance, beginning of period $ 151,238 $ 151,238 Goodwill acquired during the period 11,550 — Balance, end of period $ 162,788 $ 151,238 In accordance with ASC 350–20, the Company conducts a goodwill impairment test at least annually, or more frequently as events occur or circumstances change that would more–likely–than–not reduce the fair value below its carrying amount. In the second quarter of 2020, the onset of the COVID–19 pandemic prompted the Company to assess qualitative and 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 their analysis above during the third quarter of 2021 which resulted in no goodwill impairment charges for the nine months ended September 30, 2021. The goodwill acquired during the period was calculated based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date. 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) Note 8 – Repurchase Agreements The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the 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: September 30, 2021 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to one year One to three years Three to five years Five to ten years Beyond ten years Total Repurchase Agreements and repurchase-to-maturity transactions Repurchase Agreements $ 145,164 $ — $ — $ — $ — $ — $ 145,164 Securities pledged for Repurchase Agreements Federal agency collateralized mortgage obligations $ 38,641 $ — $ — $ — $ — $ — $ 38,641 Federal agency mortgage–backed pools 111,415 — — — — — 111,415 Total $ 150,056 $ — $ — $ — $ — $ — $ 150,056 Note 9 – Subordinated Notes On June 24, 2020, Horizon issued $ 60.0 million in aggregate principal amount of 5.625 % fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625 % per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the benchmark rate, which is expected to be Three–Month Term SOFR (the “Benchmark Rate”), plus 549 basis points, payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, commencing on October 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark Rate is less than zero, the Benchmark Rate shall be deemed to be zero. Horizon may, at its option, beginning with the interest payment date of July 1, 2025 and on any interest payment date thereafter, redeem the Notes, in whole or in part. The Notes will not otherwise be redeemable by Horizon prior to maturity, unless certain events occur. The redemption price for any redemption is 100 % of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations. The Notes are unsecured subordinated obligations, and rank pari passu, or equally, with all of Horizon's future unsecured subordinated debt and are junior to all existing and future senior debt. The Notes are structurally subordinated to all existing and future liabilities of Horizon's subsidiaries, including the deposit liabilities and claims of other creditors of Horizon Bank, and are effectively subordinated to Horizon’s existing and future secured indebtedness. There is no sinking fund for the Notes. The Notes are obligations of Horizon only and are not obligations of, and are not guaranteed by, any of Horizon’s subsidiaries. 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) Note 10 – 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 September 30, 2021 and December 31, 2020, respectively. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.62 % on a notional amount of $ 10.0 million at December 31, 2020. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.81 % on a notional amount of $ 50.0 million at September 30, 2021 and December 31, 2020. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At September 30, 2021, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months. Fair Value Hedges – Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At September 30, 2021, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months. 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 $ 478.2 million at September 30, 2021 and $ 442.7 million at December 31, 2020. Other Derivative Instruments – The Company enters into non–hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At September 30, 2021, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income. The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans. 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) The following tables summarize the fair value of derivative financial instruments utilized by Horizon: Asset Derivatives Liability Derivatives September 30, 2021 September 30, 2021 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other assets $ 19,391 Other liabilities $ 24,044 Total derivatives designated as hedging instruments 19,391 24,044 Derivatives not designated as hedging instruments Mortgage loan contracts Other assets 666 Other liabilities 333 Total derivatives not designated as hedging instruments 666 333 Total derivatives $ 20,057 $ 24,377 Asset Derivatives Liability Derivatives December 31, 2020 December 31, 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other assets $ 35,388 Other liabilities $ 43,631 Total derivatives designated as hedging instruments 35,388 43,631 Derivatives not designated as hedging instruments Mortgage loan contracts Other assets 1,045 Other liabilities — Total derivatives not designated as hedging instruments 1,045 — Total derivatives $ 36,433 $ 43,631 The effect of the derivative instruments on the condensed consolidated statements of income for the three and nine–month periods ending September 30 is as follows: Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Derivatives in cash flow hedging relationship Interest rate contracts $ 438 $ ( 107 ) $ 2,836 $ ( 3,239 ) FASB Accounting Standards Codification (“ASC”) Topic 820–10–20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820–10–55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. 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) Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Derivative in fair value hedging relationship Interest rate contracts Interest income - loans $ 3,302 $ ( 3,162 ) $ 15,997 $ ( 29,492 ) Interest rate contracts Interest income - loans ( 3,302 ) 3,162 ( 15,997 ) 29,492 Total $ — $ — $ — $ — Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Derivative not designated as hedging relationship Mortgage contracts Other income - gain on sale of loans $ ( 167 ) $ ( 679 ) $ ( 712 ) $ 364 Note 11 – 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 September 30, 2021. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Available for sale securities When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s 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 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) 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: September 30, 2021 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Available for sale securities U.S. Treasury and federal agencies $ 118,588 $ — $ 118,588 $ — State and municipal 1,119,123 — 1,119,123 — Federal agency collateralized mortgage obligations 75,525 — 75,525 — Federal agency mortgage–backed pools 237,705 — 237,705 — Private labeled mortgage–backed pools 32,937 — 32,937 Corporate notes 85,756 — 85,756 — Total available for sale securities 1,669,634 — 1,669,634 — Interest rate swap agreements asset 19,391 — 19,391 — Forward sale commitments 666 — 666 — Interest rate swap agreements liability ( 24,044 ) — ( 24,044 ) — Commitments to originate loans ( 333 ) — ( 333 ) — 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) 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 ( 43,631 ) — ( 43,631 ) — Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows: Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Non-interest Income Total gains and losses from: Hedged loans $ 3,302 $ ( 3,162 ) $ 15,997 $ ( 29,492 ) Fair value interest rate swap agreements ( 3,302 ) 3,162 ( 15,997 ) 29,492 Derivative loan commitments ( 167 ) ( 679 ) ( 712 ) 364 $ ( 167 ) $ ( 679 ) $ ( 712 ) $ 364 Certain other assets are measured at fair value on a non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment): Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2021 Collateral dependent loans $ 18,848 $ — $ — $ 18,848 Mortgage servicing rights 14,863 — — 14,863 December 31, 2020 Collateral dependent loans $ 13,123 $ — $ — $ 13,123 Mortgage servicing rights 12,472 — — 12,472 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) 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. 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 increased by $ 2.1 million during the first nine months of 2021 and decreased by $ 3.2 million during the first nine months of 2020. The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill. September 30, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 18,848 Collateral based measurement Discount to reflect current market conditions and ultimate collectibility 0.0 %- 65.0 % ( 6.9 %) Mortgage servicing rights 14,863 Discounted cash flows Discount rate, Constant prepayment rate, Probability of default 8.0 %- 8.0 % ( 8.0 %), 9.5 %- 16.7 % ( 12.7 %), 0.0 %- 18.5 %( 0.4 %) December 31, 2020 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 13,123 Collateral based measurement Discount to reflect current market conditions and ultimate collectibility 0.0 %- 72.0 %( 12.4 %) Mortgage servicing rights 12,472 Discounted cash flows Discount rate, Constant prepayment rate, Probability of default 7.8 %- 7.8 % ( 7.8 %), 11.5 %- 20.9 %( 17.5 %), 0.0 %- 1.0 %( 0.8 %) Note 12 – 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. 41 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 September 30, 2021 and December 31, 2020. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off–balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Due from Banks – The carrying amounts approximate fair value. 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. 42 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. September 30, 2021 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Cash and due from banks $ 971,817 $ 971,817 $ — $ — Interest–earning time deposits 5,767 — 5,881 — Investment securities, held to maturity 769,240 — 768,099 — Loans held for sale 4,811 — — 4,811 Loans (excluding loan level hedges), net 3,603,302 — — 3,518,194 Stock in FHLB 24,440 — 24,440 — Interest receivable 24,762 — 24,762 — Liabilities Non–interest bearing deposits $ 1,324,757 $ 1,324,757 $ — $ — Interest bearing deposits 4,655,142 — 4,603,849 — Borrowings 670,753 — 669,517 — Subordinated notes 58,713 — 58,176 — Junior subordinated debentures issued to capital trusts 56,722 — 53,384 — Interest payable 1,427 — 1,427 — December 31, 2020 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Cash and due from banks $ 249,711 $ 249,711 $ — $ — Interest–earning time deposits 8,965 — 9,136 — Investment securities, held to maturity 168,676 — 179,990 — Loans held for sale 13,538 — — 13,538 Loans (excluding loan level hedges), net 3,810,356 — — 3,767,348 Stock in FHLB 23,023 — 23,023 — Interest receivable 21,396 — 21,396 — Liabilities Non–interest bearing deposits $ 1,053,242 $ 1,053,242 $ — $ — Interest bearing deposits 3,477,891 — 3,466,522 — Borrowings 475,000 — 483,245 — Subordinated notes 58,603 — 57,626 — Junior subordinated debentures issued to capital trusts 56,548 — 52,676 — Interest payable 2,712 — 2,712 — 43 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 13 – Accumulated Other Comprehensive Income September 30, 2021 December 31, 2020 Unrealized gain on securities available for sale $ 14,444 $ 43,662 Unamortized loss on securities held to maturity, previously transferred from AFS ( 115 ) ( 165 ) Unrealized loss on derivative instruments ( 4,653 ) ( 8,243 ) Tax effect ( 2,031 ) ( 7,402 ) Total accumulated other comprehensive income $ 7,645 $ 27,852 Note 14 – 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 September 30, 2021 and December 31, 2020, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the third quarter of 2021 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well capitalized status for bank holding companies. In October 2019, the federal banking agencies finalized a new rule that will simplify capital requirements for qualified community banks that opt into the new community bank leverage ratio framework. The new framework was available to use in March 31, 2020 Call Reports or Forms FRY-9C (as applicable) for depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, among other qualifying criteria. Horizon did not elect the new community bank leverage ratio framework. As of March 31, 2020, the Company and Bank elected the transition option of the 2019 CECL Rule which allows banking organizations to phase in over a three–year period the day–one adverse effects of CECL on their regulatory capital ratios. 44 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 September 30, 2021 and December 31, 2020 were as follows: Actual Required for Capital Adequacy Purposes (1) Required For Capital Adequacy Purposes with Capital Buffer (1) Well Capitalized Under Prompt Corrective Action Provisions (1) Amount Ratio Amount Ratio Amount Ratio Amount Ratio September 30, 2021 Total capital (to risk–weighted assets) (1) Consolidated $ 678,665 15.27 % $ 355,555 8.00 % $ 466,666 10.50 % N/A N/A Bank 575,693 12.97 % 355,092 8.00 % 466,058 10.50 % $ 443,865 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 634,105 14.27 % 266,617 6.00 % 377,708 8.50 % N/A N/A Bank 526,731 11.86 % 266,474 6.00 % 377,505 8.50 % 355,299 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 518,670 11.67 % 200,001 4.50 % 311,113 7.00 % N/A N/A Bank 526,731 11.86 % 199,856 4.50 % 310,887 7.00 % 288,681 6.50 % Tier 1 capital (to average assets) (1) Consolidated 634,105 10.03 % 252,883 4.00 % 252,883 4.00 % N/A N/A Bank 526,731 8.38 % 251,423 4.00 % 251,423 4.00 % 314,279 5.00 % December 31, 2020 Total capital (to risk–weighted assets) (1) Consolidated $ 648,804 14.91 % $ 348,024 8.00 % $ 456,782 10.50 % N/A N/A Bank 532,315 12.21 % 348,810 8.00 % 457,813 10.50 % $ 436,013 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 607,340 13.96 % 261,018 6.00 % 369,775 8.50 % N/A N/A Bank 492,221 11.29 % 261,606 6.00 % 370,609 8.50 % 348,808 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 491,281 11.29 % 195,764 4.50 % 304,522 7.00 % N/A N/A Bank 492,221 11.29 % 196,205 4.50 % 305,207 7.00 % 283,407 6.50 % Tier 1 capital (to average assets) (1) Consolidated 607,340 10.68 % 227,507 4.00 % 227,507 4.00 % N/A N/A Bank 492,221 8.71 % 226,158 4.00 % 226,158 4.00 % 282,697 5.00 % (1) As defined by regulatory agencies Note 15 – 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. 45 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition And Results of Operations For the Three and Nine Months ended September 30, 2021 and 2020