What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-09 compared with 2021-02-26 · 371 added, 233 removed, 718 unchanged (46% of the section changed)

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

All share data included below has been adjusted to reflect Horizon’s three–for–two stock split paid on June 15, 2018.

2020 Highlights

Following are some highlights of Horizon’s financial performance during 2020:

• Earned record net income of $68.5 million, or $1.55 diluted earnings per share, compared to $66.5 million, or $1.53 diluted earnings per share, for 2019.

• Grew pre–tax, pre–provision net income to a record $99.1 million for 2020, compared to $81.8 million for 2019.

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

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

• Grew net interest income to a record $170.9 million for 2020, compared to $160.8 million for 2019.

Adjusted net interest income for 2020 was $167.8 million compared to $155.2 million for 2019.

(See the “Non–GAAP Reconciliation of Net Interest Margin” table below.)

• Reported return on average assets (“ROAA”) of 1.22% and return on average common equity (“ROACE”) of 10.29% for 2020, as well as adjusted ROAA of 1.22% and adjusted ROACE of 10.19%, excluding the impact of gains on sale of investment securities, death benefit on bank owned life insurance and prepayment penalties on borrowings, net of tax.

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

• Grew mortgage–related non–interest income by 106.8% from 2019 with gain on mortgage loan sales of $26.7 million and net mortgage servicing income of $(3.7) million.

The bank originated $756.9 million in mortgage loans during 2020, up 85.1% from 2019.

• Total non–interest income, excluding gains on sale of investment securities and death benefit on bank owned life insurance, grew to a record $55.1 million, up 29.4% from 2019, supported by increases in mortgage–related gains and servicing income.

• Reported net interest margin (“NIM”) of 3.44% and adjusted NIM of 3.38%, with reported NIM declining by 25 basis points and adjusted NIM declining by 19 basis points from 2019.

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

• Increased the allowance for credit losses (“ACL”) by 222.8% from 2019 to $57.0 million at December 31, 2020, representing 1.47% of total loans, reflecting our January 2020 implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the allocation for the Company's identified stressed portfolios.

ACL at period end also represented 1.55% of loans excluding $208.9 million in Federal Paycheck Protection Program (“PPP”) loans, and 212.7% of non–performing loans.

• COVID–19 deferral levels improved to 3.3% of total loans at period end, compared to 4.1% at September 30, 2020 and 14.3% at June 30, 2020, and the bank experienced no material specific loan losses attributed to COVID–19 closures in 2020.

Fourth Quarter and Fully Year 2021 Highlights

• Net income totaled a record $87.1 million, or $1.98 diluted earnings per share for the year ended December 31, 2021 compared to $68.5 million, or $1.55 diluted earnings per share for the year ended December 31, 2020.

• Net interest income grew to a record $181.7 million for the year ended December 31, 2021, up 6.3% from the year ended December 31, 2020.

Reported net interest margin (“NIM”) was 3.13% and adjusted NIM was 3.06%, with reported NIM decreasing by 31 basis points and adjusted NIM decreasing by 32 basis points from the year ended December 31, 2020.

(See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation of adjusted NIM.) Approximately 10 basis points of the NIM and adjusted NIM is attributed to Federal Paycheck Protection Program (“PPP”) lending, offset by an estimated 23 basis point compression attributed to excess liquidity during 2021.

During 2021, Horizon increased the average balance of its investment portfolio by $805.5 million to leverage capital and focus on increasing net interest income.

• The Company was asset sensitive as of December 31, 2021, resulting from the liquidity on the balance sheet, adjustable rate assets and the low betas on deposit pricing based on expected deposit rates.

Based on parallel rate shocks to the balance sheet, at a 100 basis point shock and 200 basis point shock, net interest income would increase approximately $10.0 million and $20.0 million, respectively.

• Commercial loans, excluding PPP and acquired loans, grew by 3.3% during 2021 to a record $2.15 billion, net of PPP and acquired loans, at period end.

• Consumer loans, excluding acquired loans, grew by 2.7% during 2021 to a record $727.3 million at period end, with record production of $397.1 million.

• Residential mortgage loans, excluding acquired loans, declined in–line with expectations by 13.8% during 2021 to $594.4 million at period end, as the addition of new producers and the launch of a new jumbo mortgage product aimed at second home buyers in Horizon's attractive second–home markets began to mitigate the impact of the industry–wide slowdown in mortgage lending from recent historic levels.

Mortgage loan revenues only constituted 10.8% of total revenue in 2021.

• Non–interest expense was $139.3 million in 2021, including ongoing operating expenses associated with the Michigan branch acquisition that closed on September 17, 2021.

Excluding acquisition–related expenses and non–recurring Employee Stock Ownership Plan (“ESOP”) settlement expense accrual, non–interest expense was $135.5 million, representing 2.08% of average assets for 2021, compared to $131.4 million, or 2.34%, for 2020.

Acquisition–related expenses totaled approximately $1.9 million in 2021.

(See the “Non–GAAP Reconciliation of Non–Interest Expense” table for the definition of this non–GAAP calculation of adjusted non–interest expense.)

• Horizon accrued $1.9 million of expense in December for a mediation settlement related to a dispute with the U.S.

Department of Labor (“DOL”) concerning valuations and sale transactions related to Horizon's ESOP trustee business.

Horizon is no longer in the ESOP trustee business and sold all accounts to a third party on September 30, 2021 and recorded a $2.3 million gain on the sale in the third quarter.

HORIZON BANCORP, INC.

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(Table dollars in thousands except per share data)

• Maintained solid asset quality metrics, including non–performing and delinquent loans representing 0.6% and 0.19% of total loans, respectively, at December 31, 2020, while net charge–offs were 0.05% of average outstanding loans for 2020.

• The efficiency ratio for 2021 was 58.12% compared to 57.01% for 2020.

The adjusted efficiency ratio was 57.20% compared to 57.23% for 2019.

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

• Horizon's tangible book value per share increased from $10.63 at December 31, 2019 to $11.81 at December 31, 2020, which includes the accounting adjustment for CECL as of January 1, 2020.

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

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

• Maintained strong liquidity position including approximately $1.6 billion in cash and investment securities, which is approximately 26.3% of total assets, and approximately $1.0 billion in unused availability on lines of credit, at December 31, 2020.

• Continued over thirty years of uninterrupted dividends, and as of year–end, we had in excess of $127 million in cash at the holding company, which provides us with considerable future optionality to build shareholder value.

The adjusted efficiency ratio, excluding acquisition–related expense and non–recurring ESOP settlement expense, was 57.46% for 2021 compared to 57.20% for 2020.

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

• Horizon's in–market consumer and commercial deposit relationships, including those on–boarded as part of its branch acquisition near the end of the third quarter, combined with strategic pricing moves to manage deposit growth and runoff of higher–priced time deposits, contributed to continued improvement in the cost of interest bearing liabilities, which declined to 0.40% in 2021, compared to 0.87% in 2020.

• Horizon recorded a provision release of $2.1 million in 2021, compared to a provision expense of $20.8 million in 2020, as non–performing loans declined to $19.0 million, or 0.53% of total loans, on December 31, 2021.

• Horizon's book value and tangible book value per share increased to $16.61 and $12.58.

(See the “Non–GAAP Reconciliation of Tangible Stockholders' Equity and Tangible Book Value per Share” table below.) Held to Maturity (“HTM”) securities were increased in the fourth quarter through a transfer from Available for Sale (“AFS”) securities and purchases to 57.2% of the investment portfolio.

This increase in HTM securities will help manage the impact of unrealized losses to tangible capital in a rising rate environment.

• The integration of 14 branches purchase from TCF National Bank that closed on September 17, 2021 is complete and was very successful.

The deposit runoff has stabilized at approximately 8% with the plan to begin to rebuild this runoff as we enter into 2022.

The financial impact of this transaction to date is in line with management's projections.

Critical Accounting Policies

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Actual losses incurred may differ materially from our estimates.

Particularly, the impact of COVID–19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.

Particularly, the impact of COVID–19 on

HORIZON BANCORP, INC.

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(Table dollars in thousands except per share data)

both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.

Allowance for Credit Losses on Off–Balance Sheet Credit Exposures

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The goodwill value is supported by revenue that is in part driven by the volume of business transacted.

A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods.

FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.

A decrease in earnings resulting from a decline in the customer base or the inability

HORIZON BANCORP, INC.

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(Table dollars in thousands except per share data)

to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods.

FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.

At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment.

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These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value.

Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting.

The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting

HORIZON BANCORP, INC.

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changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting.

The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815–10.

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Analysis of Financial Condition

Horizon’s total assets were $5.9 billion as of December 31, 2020, an increase of $639.8 million from December 31, 2019.

The increase was primarily in investment securities available for sale of $299.2 million, net loans of $191.2 million, cash and due from banks of $150.9 million and other assets of $26.9 million, offset by a decrease in investment securities held to maturity of $39.2 million.

Horizon’s total assets were $7.4 billion as of December 31, 2021, an increase of $1.5 billion from December 31, 2020.

The increase was primarily in investment securities of $1.4 billion, and cash and due from banks of $343.8 million, offset by decreases in net loans of $257.0 million, and other assets of $12.8 million.

Investment Securities

Investment securities carrying values totaled $2.7 billion at December 31, 2021, and consisted of Treasury and federal agency securities of $311.2 million (11.5%);

state and municipal securities of $995.3 million (76.4%);

state and municipal securities of $1.5 billion (55.4%);

federal agency mortgage–backed pools of $414.5 million and federal agency collateralized mortgage obligations of $110.1 million (24.2%);

private labeled mortgage–backed pools of $131.6 million (4.9%);

and corporate securities of $242.5 million (8.9%).

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The average life is the average amount of time that each dollar of principal is expected to be outstanding.

As of December 31, 2020, the mortgage–backed securities and collateralized mortgage obligations in the investment portfolio had an average duration of 2.46 years.

Securities that have interest rates above current market rates are purchased at a premium.

As of December 31, 2021, the mortgage–backed securities and collateralized mortgage obligations in

HORIZON BANCORP, INC.

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(Table dollars in thousands except per share data)

the investment portfolio had an average duration of 5.8 years.

Securities that have interest rates above current market rates are purchased at a premium.

Available for sale municipal securities are priced by a third party using a pricing grid which estimates prices based on recent sales of similar securities.

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Unrealized gains and losses on available for sale securities, deemed temporary, are recorded, net of income tax, in a separate component of other comprehensive income on the balance sheet.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

The following is a schedule of maturities of each categories of available for sale and held to maturity debt securities and the related weighted–average yield of such securities as of December 31, 2021:

or Less After One Year

Through Five Years After Five Years

Through Ten Years After Ten Years

(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield

Available for sale

Treasury and federal agencies (1)

$ 501 0.13 % $ 45,754 0.80 % $ 67,723 1.54 % $ 3,001 1.67 %

State and municipal 22,482 1.43 % 64,974 1.97 % 209,906 2.53 % 342,384 2.74 %

Federal agency collateralized mortgage obligations (2)

— — % 5,556 2.77 % 13,701 2.86 % 42,320 3.23 %

Federal agency mortgage-backed pools (2)

— — % 833 2.72 % 43,387 2.67 % 181,854 1.84 %

Private labeled mortgage-backed pools (2)

— — % 2,932 2.80 % 18,541 3.18 % 10,144 2.08 %

Corporate notes — — % 45,670 2.73 % 38,496 3.01 % 653 — %

Total available for sale 22,983 1.40 % 165,719 1.90 % 391,754 2.47 % 580,356 2.47 %

Held to maturity

Treasury and federal agencies (1)

— — % 20,993 1.40 % 43,305 1.85 % 129,928 2.18 %

State and municipal 5,265 3.36 % 45,989 3.62 % 76,761 3.77 % 750,902 2.44 %

Federal agency collateralized mortgage obligations (2)

— — % — — % — — % 47,465 1.85 %

Federal agency mortgage-backed pools (2)

— — % — — % 98,116 1.75 % 87,849 1.77 %

Private labeled mortgage-backed pools (2)

596 2.72 % — — % 56,500 2.46 % 41,080 2.53 %

Corporate notes — — % — — % 155,242 3.77 % — — %

Total held to maturity 5,861 3.30 % 66,982 2.92 % 429,924 2.94 % 1,057,224 2.33 %

Total investment securities $ 28,844 1.78 % $ 232,701 2.19 % $ 821,678 2.72 % $ 1,637,580 2.38 %

(1) Fair value is based on contractual maturity or call date where a call option exists

(2) Maturity based upon final maturity date

The weighted–average interest rates are based on coupon rates for securities purchased at par value an on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount.

Yields are not presented on a tax–equivalent basis.

As a member of the Federal Home Loan Bank system, Horizon is required to maintain an investment in the common stock of the Federal Home Loan Bank.

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Total loans, net of deferred fees/costs, the principal earning asset of the Bank, were $3.6 billion at December 31, 2021.

The current level of total loans increased 5.3% from the December 31, 2019, level of $3.6 billion primarily due to an increase in mortgage warehouse loans and PPP loans originated during the year.

The current level of total loans decreased 6.7% from the December 31, 2020, level of $3.8 billion primarily due to a decrease in mortgage warehouse loans and PPP loans originated during the year.

The table below provides comparative detail on the loan categories.

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Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the maturity distribution of our loan portfolio as December 31, 2021.

The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

or Less After One,

Five Years After Five,

Fifteen Years After

Fifteen Years Total

Commercial $ 270,815 $ 942,259 $ 880,945 $ 82,940 $ 2,176,959

Real estate 2,452 7,193 71,218 513,519 594,382

Mortgage warehouse 109,031 — — — 109,031

Consumer 13,882 265,700 251,616 196,061 727,259

Total $ 396,180 $ 1,215,152 $ 1,203,779 $ 792,520 $ 3,607,631

Loans with fixed interest rates:

Commercial $ 111,051 $ 567,554 $ 240,027 $ 28,345 $ 946,977

Real estate 2,406 6,126 46,473 226,097 281,102

Mortgage warehouse — — — — —

Consumer 7,212 243,534 218,036 7,140 475,922

Total $ 120,669 $ 817,214 $ 504,536 $ 261,582 $ 1,704,001

Loans with variable interest rates:

Commercial $ 159,764 $ 374,705 $ 640,918 $ 54,595 $ 1,229,982

Real estate 46 1,067 24,745 287,422 313,280

Mortgage warehouse 109,031 — — — 109,031

Consumer 6,670 22,166 33,580 188,921 251,337

Total $ 275,511 $ 397,938 $ 699,243 $ 530,938 $ 1,903,630

Commercial Loans

Commercial loans totaled $2.18 billion, or 60.3% of total loans as of December 31, 2021, compared to $2.19 billion, or 56.7% as of December 31, 2020.

The increase during 2020 was primarily due to the origination of PPP loans during 2020 which totaled $208.9 million at December 31, 2020, offset by principal reductions from payments.

The decrease during 2021 was primarily due to a decrease in PPP loans of $183.0 million to $25.8 million at December 31, 2021 compared to $208.9 million at December 31, 2020.

Commercial loans consisted of the following types of loans at December 31:

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The recognition of the loan and swap fair values are recorded in the income statement and for 2021 equally offset each other.

Fair values are determined by the counterparty using a proprietary model that uses live market inputs to value interest rate swaps.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

are determined by the counterparty using a proprietary model that uses live market inputs to value interest rate swaps.

The model is subject to daily market tests as current and future positions are priced and valued.

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Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio.

The decrease during 2020 was primarily due to the increase in refinance activity during the year as a result of historically low interest rates.

The decrease during 2021 was primarily due to continued refinance activity during the year as a result of historically low interest rates.

In addition to the customary real estate loans described above, the Bank also had outstanding on December 31, 2021, $248.7 million in home equity lines of credit compared to $226.6 million at December 31, 2020.

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These loans are classified as consumer loans in the Loans table above and in Note 5 of the Consolidated Financial Statements at Item 8.

HORIZON BANCORP, INC.

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Residential real estate lending is a highly competitive business.

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Total real estate loans $ 606,961 $ 637,824

The decrease in adjustable rate residential mortgage loans and increase in fixed rate residential mortgage loans during 2020 was primarily due to the decrease in overall interest rates.

The decrease in adjustable rate residential mortgage loans and increase in fixed rate residential mortgage loans during 2021 was primarily due customers moved to fixed rate products during the low interest rate environment.

In addition to the real estate loan portfolio, the Bank originates and sells real estate loans and retains the servicing rights.

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The unpaid principal balances of loans serviced for others totaled approximately $1.5 billion and $1.5 billion at December 31, 2021 and 2020.

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

The aggregate fair value of capitalized mortgage servicing rights at December 31, 2021, totaled approximately $15.2 million compared to the carrying value of $15.2 million.

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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

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

loan is sold to the secondary market by 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.

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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.

The greatest risk related to these loans is transaction and fraud risk.

During 2021, Horizon processed approximately $4.9 billion in mortgage warehouse loans.

At December 31, 2021, the mortgage warehouse loan balance was $109.0 million compared to $395.6 million as of December 31, 2020.

The increase in mortgage warehouse loans reflected a decrease in long–term interest rates in 2020 and higher refinance volume.

HORIZON BANCORP, INC.

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Consumer Loans

Consumer loans totaled $727.3 million, or 20.2% of total loans as of December 31, 2021, compared to $655.2 million, or 16.9% as of December 31, 2020.

The decrease during 2020 was due to home equity loans paying down when they were refinanced through first mortgages.

The increase during 2021 was due to record production during the year of approximately $397.1 million and the loans purchased through the branch acquisition completed during the third quarter of 2021.

Allowance and Provision for Credit Losses

The table below provides an allocation of the year–end allowance for credit losses on loans by loan portfolio segment;

however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments.

Amount of Allowance Allocated Percent of Loans in Each Category to Total Loans Total Loans Ratio of Allowance Allocated to Loans in Each Category

December 31, 2021

Commercial $ 40,775 60.3 % $ 2,176,959 1.87 %

Real estate 3,856 16.5 % 594,382 0.65 %

Mortgage warehouse 1,059 3.0 % 109,031 0.97 %

Consumer 8,596 20.2 % 727,259 1.18 %

Total $ 54,286 100.0 % $ 3,607,631 1.50 %

Excluding PPP loans $ 54,286 $ 3,581,787 1.52 %

December 31, 2020

Commercial $ 42,210 56.8 % $ 2,192,271 1.93 %

Real estate 4,620 16.1 % 624,286 0.74 %

Mortgage warehouse 1,267 10.2 % 395,626 0.32 %

Consumer 8,930 16.9 % 655,200 1.36 %

Total $ 57,027 100.0 % $ 3,867,383 1.47 %

Excluding PPP loans $ 57,027 $ 3,658,501 1.56 %

At December 31, 2021, the allowance for credit losses was $54.3 million, or 1.50% of total loans outstanding, compared to $57.0 million, or 1.47%, at December 31, 2020.

During 2020, the expense for provision for credit losses totaled $20.8 million compared to $2.0 million in 2019.

The increase credit loss expense during 2020 reflects our January 2020 implementation of the CECL accounting method and prudent increases in the allocation for the Company's identified stressed portfolios.

During 2021, a release of provision for credit losses was recorded totaling $2.1 million compared to a provision expense of $20.8 million in 2020.

The credit loss expense recorded during 2020 reflects our January 2020 implementation of the CECL accounting method and prudent increases in the allocation for the Company's identified stressed portfolios.

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

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Non–performing loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management.

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

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

Further, it is management's policy to place a commercial loan on non–accrual status when delinquent in excess of 90 days or management has determined that the borrower's ability to continue to make payments is in doubt.

The officer responsible for the loan, Executive Vice President and Chief Commercial Banking Officer and the senior commercial loan workout officer must review all loans placed on non–accrual status.

Management continues to work diligently toward returning non–performing loans to an earning asset basis.

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December 31, December 31, December 31,

2020 2019 2018

(dollars in thousands) 2021 2020 2019

Non–performing loans

More than 90 days past due $ — $ — $ —

Non–accrual 6,621 12,714 4,782

Trouble debt restructuring – accruing 603 168 1,484

Trouble debt restructuring – non–accrual 285 1,466 1,081

More than 90 days past due 66 17 1

Non–accrual 5,626 5,674 7,614

Trouble debt restructuring – accruing 1,421 1,381 1,561

Trouble debt restructuring – non–accrual 892 922 708

Mortgage warehouse

More than 90 days past due — — —

Non–accrual — — —

Trouble debt restructuring – accruing — — —

Trouble debt restructuring – non–accrual — — —

More than 90 days past due 79 245 145

Non–accrual 2,715 3,754 3,283

Trouble debt restructuring – accruing 367 244 309

Trouble debt restructuring – non–accrual 344 222 217

Total non–performing loans 19,019 26,807 21,185

Other real estate owned and repossessed collateral

Commercial 2,861 1,908 3,698

Real estate 695 — 28

Mortgage warehouse — — —

Consumer 5 — —

Total other real estate owned and repossessed collateral 3,561 1,908 3,726

Total non–performing assets $ 22,580 $ 28,715 $ 24,911

Non–performing loans total 35.0%, 47.0% and 119.9% of the allowance for credit losses at December 31, 2021, 2020 and 2019, respectively.

Non–performing loans at December 31, 2020 totaled $26.8 million, an increase from a balance of $21.2 million as of December 31, 2019 and an increase from the balance of $15.2 million as of December 31, 2018.

The increase in non–performing loans in 2020 was primarily due to two commercial relationships moving to non–accrual, neither of which were the direct result of the economic slowdown.

Non–performing loans as a percentage of total loans was 0.69% as of December 31, 2020, an increase from 0.58% as of December 31, 2019 and 0.50% from December 31, 2018.

COVID–19 related loan deferrals decreased to $126.7 million, or 3.3% of total loans at December 31, 2020, compared to $160.1 million, or 4.1% of total loans at September 30, 2020 and $533.9 million, or 14.3% of total loans at June 30, 2020.

Other Real Estate Owned (“OREO”) net of any related allowance for OREO losses for the previous three years ending December 31 were as follows:

December 31, December 31, December 31,

2020 2019 2018

Other real estate owned $ 1,908 $ 3,726 $ 2,027

OREO totaled $1.9 million on December 31, 2020, a decrease of $1.8 million from December 31, 2019 and $119,000 from December 31, 2018.

On December 31, 2020, OREO was comprised of 7 properties, all of which were commercial real estate.

Non–performing loans at December 31, 2021 totaled $19.0 million, a decrease from a balance of $26.8 million as of December 31, 2020 and from a balance of $21.2 million as of December 31, 2019.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

The decrease in non–performing loans in 2021 was primarily due to the upgrade of a two previously non–performing commercial relationships to performing status during the year.

Non–performing loans as a percentage of total loans was 0.53% as of December 31, 2021, a decrease from 0.69% as of December 31, 2020 and 0.58% from December 31, 2019.

Non–Performing Loans Percent of Non–Performing Loans in Each Category to Total Loans Total Loans

December 31, 2021

Commercial $ 7,509 0.34 % $ 2,176,959

Real estate 8,005 1.35 % 594,382

Mortgage warehouse — 0.00 % 109,031

Consumer 3,505 0.48 % 727,259

Total $ 19,019 0.53 % $ 3,607,631

Excluding PPP loans $ 19,019 0.53 % $ 3,581,787

Allowance for credit losses on loans $ 54,286

Ratio of allowance for credit losses on loans to non–performing loans 285.43 %

December 31, 2020

Commercial $ 14,348 0.65 % $ 2,192,271

Real estate 7,994 1.28 % 624,286

Mortgage warehouse — 0.00 % 395,626

Consumer 4,465 0.68 % 655,200

Total $ 26,807 0.69 % $ 3,867,383

Excluding PPP loans $ 26,807 0.73 % $ 3,658,501

Allowance for credit losses on loans $ 57,027

Ratio of allowance for credit losses on loans to non–performing loans 212.73 %

COVID–19 related loan deferrals decreased to $10.8 million, or 0.3% of total loans at December 31, 2021, compared to $126.7 million, or 3.3% of total loans at December 31, 2020.

Other Real Estate Owned (“OREO”) totaled $3.6 million on December 31, 2021, an increase of $1.7 million from December 31, 2020 and a decrease of $165,000 from December 31, 2019.

On December 31, 2021, OREO was comprised of 12 properties, seven of these properties were bank owned properties from branch closures, four properties were residential and one of these properties was commercial real estate.

No mortgage warehouse loans were non–performing or OREO as of December 31, 2021, 2020 or 2019.

4 unchanged sentences

(Table dollars in thousands except per share data)

Horizon had a net deferred tax asset totaling $188,000 as of December 31, 2020 and a net deferred tax liability of $3.5 million as of December 31, 2019.

Horizon had a net deferred tax asset totaling $3.3 million as of December 31, 2021 and a net deferred tax asset of $188,000 as of December 31, 2020.

The following table shows the major components of deferred tax:

3 unchanged sentences

Director and employee benefits 2,094 2,035

Accrued pension — 775

Other 1,785 3,139

22 unchanged sentences

Total deposits $ 5,086,025 $ 4,247,366 $ 3,765,326

The $482.0 million increase in average deposits during 2020 was primarily due to the level of stimulus payments received by our customers, in addition to commercial customers depositing their proceeds from PPP lending.

The transactional accounts average balances, as the lower cost funding sources, increased $611.9 million and the average balances for higher cost time deposits decreased $129.8 million.

Horizon continually enhances its interest

The $838.7 million increase in average deposits during 2021 was primarily due to the acquisition of 14 branches on September 17.

The transactional accounts average balances, as the lower cost funding sources, increased $1.0 billion and the average balances for higher cost time deposits decreased $166.5 million.

Horizon continually enhances its interest bearing consumer and commercial demand deposit products based on local market conditions and its need for funding to support various types of assets.

HORIZON BANCORP, INC.

3 unchanged sentences

(Table dollars in thousands except per share data)

bearing consumer and commercial demand deposit products based on local market conditions and its need for funding to support various types of assets.

As of December 31, 2021 and 2020, approximately $2.4 billion and $1.9 billion, respectively, or our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for Horizon Bank's regulatory reporting requirements.

Certificates of deposit of $250,000 or more, which are considered to be rate sensitive and are not considered a part of core deposits, mature as follows as of December 31, 2021:

9 unchanged sentences

or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

Contractual Obligations

The following tables summarize Horizon’s contractual obligations and other commitments to make payments as of December 31, 2020:

Total Within One Year One to Three Years Three to Five Years After Five Years

Certificates of deposit $ 675,218 $ 445,914 $ 195,558 $ 33,524 $ 222

Borrowings (1)

475,000 174,516 220 100,190 200,074

Subordinated notes (2)

58,603 — — — 58,603

Junior subordinated debentures issued to capital trusts (3)

56,548 — — — 56,548

(1) Includes debt obligations to the Federal Home Loan Bank and term repurchase agreements with maturities beyond one year borrowed by Horizon's banking subsidiary.

See Note 12 in Horizon's Consolidated Financial Statements at Item 8.

(2) Includes subordinated notes issued by Horizon Bancorp, Inc.

(3) Includes Trust Preferred Capital Securities issued by Horizon Statutory Trusts II and III and those assumed in the acquisitions of Alliance Bank in 2005, American Trust in 2009, Heartland in 2012, LaPorte/City Savings in 2016 and Salin in 2019.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Expiration by Period

One Year Greater

Letters of credit $ 3,717 $ 8,711

Unfunded loan commitments 430,306 487,105

Capital Resources

3 unchanged sentences

Consolidated net income was $87.1 million, or $1.98 per diluted share, in 2021, $68.5 million or $1.55 per diluted share in 2020, and $66.5 million or $1.53 per diluted share in 2019.

The increase in net income from the previous year reflects an increase in net interest income of $10.1 million, an increase in non–interest income of $16.6 million and a decrease in income tax expense of $3.4 million, partially offset by an increase in credit loss expense of $18.8 million and non–interest expenses of $9.4 million.

The increase in diluted earnings per share compared to the previous year reflects an increase in net income, partially offset by an increase in diluted shares.

The increase in net income from the previous year reflects a decrease in credit loss expense of $22.8 million and an increase in net interest income of $10.8 million, offset by an increase in non–interest expense of $7.8 million, an increase in income tax expense of $5.5 million and a decrease in non–interest income of $1.7 million.

The increase in diluted earnings per share compared to the previous year reflects an increase in net income and a decrease in diluted shares.

Adjusted net income for the year ended December 31, 2021 was $88.6 million, or $2.00 diluted earnings per share, compared to $67.8 million, or $1.53 diluted earnings per share, for the year ended December 31, 2020.

(See the “Non–GAAP Reconciliation of Net Income and Diluted Earnings per Share” table under the heading “Use of Non–GAAP Financial Measures” below for the definition of adjusted net income.)

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Net Interest Income

8 unchanged sentences

Interest income decreased $5.4 million to $200.0 million for 2021 from $205.4 million in 2020.

This decrease was due to the overall decrease in interest rates during 2020, offset by an increase in the recognition of interest income from the acquisition–related purchase accounting adjustments of approximately $1.3 million from $5.6 million in 2019 to $6.9 million in 2020.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

This decrease was due to the overall decrease in interest rates during 2021 and a decrease in the recognition of interest income from the acquisition–related purchase accounting adjustments of approximately $2.4 million from $6.9 million in 2020 to $4.5 million in 2021, offset by an increase in the average balance of interest earning assets of $901.6 million.

Interest expense decreased $16.1 million from $34.4 million in 2020 to $18.3 million in 2021.

This decrease was due to the overall decrease in interest rates during 2020 and was partially offset by $3.8 million in prepayment penalties on borrowings.

This decrease was due to the overall decrease in interest rates during 2021 and $3.8 million in prepayment penalties on borrowings paid during 2020.

The prepayment penalties on borrowings were incurred as part of a deleverage strategy in which $83.0 million in FHLB advances with an average cost of 2.61% were paid off during the 4th quarter of 2020.

2 unchanged sentences

Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin.

Net interest income during 2019 was $160.8 million, an increase of $26.2 million, or 19.5%, over the $134.6 million earned in 2018.

Yields on the Company’s interest earning assets increased by 19 basis points to 4.75% during 2019 from 4.56% in 2018.

Interest income increased $42.2 million to $208.3 million for 2019 from $166.2 million in 2018.

This increase was due to increased volume in interest earning assets primarily due to the Salin acquisition, offset by a decrease in the recognition of interest income from the acquisition–related purchase accounting adjustments of approximately $499,000 from $6.1 million in 2018 to $5.6 million in 2019.

Interest expense increased $15.9 million from $31.6 million in 2018 to $47.5 million in 2019.

This increase was due to increased volume in interest bearing liabilities primarily due to the Salin acquisition.

The increase in the yield on the Company's interest earning assets combined with the increase in rates paid on interest bearing liabilities resulted in a decrease in the net interest margin of two basis points from 3.71% for 2018 to 3.69% in 2019.

Excluding interest income recognized from acquisition–related purchase accounting adjustments, the margin would have been 3.57% for 2019 compared to 3.54% for 2018.

Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company's net interest margin.

HORIZON BANCORP, INC.

3 unchanged sentences

(Table dollars in thousands except per share data)

The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related weighted average yields and rates on our interest earning assets and interest bearing liabilities for the periods indicated.

Twelve Months Ended Twelve Months Ended Twelve Months Ended

22 unchanged sentences

Borrowings 425,214 4,546 1.07 % 459,752 11,160 2.43 % 386,895 9,991 2.58 %

Repurchase agreements 123,675 155 0.13 % 100,201 270 0.27 % 81,264 681 0.84 %

Subordinated notes 58,672 3,522 6.00 % 30,610 1,824 5.96 % — — — %

20 unchanged sentences

(Table dollars in thousands except per share data)

Net interest income during 2020 was $170.9 million, an increase of $10.1 million, or 6.3%, over the $160.8 million earned in 2019.

Yields on the Company’s interest earning assets decreased by 64 basis points to 4.11% during 2020 from 4.75% in 2019.

Interest income decreased $3.0 million to $205.4 million for 2020 from $208.3 million in 2019.

Interest expense decreased $13.1 million from $47.5 million in 2019 to $34.4 million in 2020.

This decrease was due to the overall decrease in interest rates during 2020 and was partially offset by $3.8 million in prepayment penalties on borrowings.

The prepayment penalties on borrowings were incurred as part of a deleverage strategy in $83.0 million in FHLB advances with an average cost of 2.61% were paid off during the 4th quarter of 2020.

The decrease in rates paid on interest bearing liabilities in addition to the decrease in the yield on the Company's interest earning assets resulted in a decrease in the net interest margin of 25 basis points from 3.69% for 2019 to 3.44% in 2020.

Excluding interest income recognized from acquisition–related purchase accounting adjustments and prepayment penalties on borrowings, the margin would have been 3.38% for 2020 compared to 3.57% for 2019.

Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company's net interest margin.

2021 - 2020 2020 - 2019

13 unchanged sentences

Borrowings (6,614) (783) (5,831) 1,169 1,797 (628)

Repurchase agreements (115) 53 (168) (411) 131 (542)

Subordinated notes 1,698 1,684 14 1,824 1,824 —

4 unchanged sentences

Horizon assesses the adequacy of its ACL by regularly reviewing the performance of its loan portfolios.

Credit loss expense totaled $20.8 million in 2020 compared to $2.0 million in 2019.

Total loan net charge–offs were $1.9 million, which included commercial loan net charge–offs of $497,000, residential mortgage loan net charge–offs of $167,000 and consumer loan net charge–offs of $1.2 million for the year ending December 31, 2020.

Credit loss expense totaled a recovery of $2.1 million in 2021 compared to an expense of $20.8 million in 2020.

Total loan net charge–offs were $1.6 million, which included commercial loan net charge–offs of $1.1 million, residential mortgage loan net charge–offs of $9,000 and consumer loan net charge–offs of $533,000 for the year ending December 31, 2021.

The higher level of credit loss expense for 2020 was due to the adoption of CECL at the beginning of 2020 increasing credit loss expense for economic factors due to the economic shutdown and exposures to loans with nature and characteristics that have greater loss exposure due to economic uncertainty brought on by COVID–19.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Credit loss expense totaled $20.8 million in 2020 compared to $2.0 million in 2019.

The lower level of credit loss expense for loan losses in 2019 was due to all–time low historical loss rates and stable economic factors.

Additional information related to credit loss expense (recovery) and net charge–offs (recoveries) is presented in the table below.

Also see Note 6 – Allowance for Credit and Loan Losses in the accompanying notes to consolidated financial statements included elsewhere in this report.

Credit Loss Expense (Recovery) Net (Charge–Offs) Recoveries Average Loans Ratio of Annualized Net (Charge–Offs) Recoveries to Average Loans

Twelve Months Ended December 31, 2021

Commercial $ (1,320) $ (1,099) $ 2,155,018 (0.05) %

Real estate (755) (9) 591,395 0.00 %

Mortgage warehouse (208) — 206,932 0.00 %

Consumer 199 (533) 666,291 (0.08) %

Total (2,084) (1,641) 3,619,636 (0.05) %

Excluding PPP loans $ (2,084) $ (1,641) $ 3,453,491 (0.05) %

Twelve Months Ended December 31, 2020

Commercial $ 19,198 $ (497) $ 2,218,812 (0.02) %

Real estate (184) (167) 725,168 (0.02) %

Mortgage warehouse 190 — 259,727 0.00 %

Consumer 1,547 (1,199) 663,405 (0.18) %

Total 20,751 (1,863) 3,867,112 (0.05) %

Excluding PPP loans $ 20,751 $ (1,863) $ 3,668,729 (0.05) %

Twelve Months Ended December 31, 2019

Commercial $ 2,165 $ (664) $ 1,980,948 (0.03) %

Real estate (635) (47) 778,844 (0.01) %

Mortgage warehouse — — 107,259 0.00 %

Consumer 446 (1,418) 633,598 (0.22) %

Total 1,976 (2,129) 3,500,649 (0.06) %

Excluding PPP loans $ 1,976 $ (2,129) $ 3,500,649 (0.06) %

HORIZON BANCORP, INC.

20 unchanged sentences

Total non–interest income $ 57,952 $ 59,621 $ (1,669) (2.8) % $ 59,621 $ 43,058 $ 16,563 38.5 %

During 2021, the Company originated approximately $438.1 million of mortgage loans to be sold on the secondary market, compared to $584.1 million in 2020 as long–term interest rates began to increase during 2021.

This decrease in volume in addition to a slight decrease in the percentage earned on the sale of mortgage loans, resulted in a decrease in the overall gain on sale of mortgage loans of $7.6 million compared to the prior year.

Gain on the sale of investment securities decreased $3.4 million in 2021 due to the deleverage strategy executed in 2020.

Fiduciary activities income decreased $1.7 million during 2021 primarily due to the sale of ESOP trustee accounts which was completed during the third quarter.

Mortgage servicing net of impairment increased by $6.1 million during 2021 compared to 2020 primarily due to the recovery net impairment charges of $2.6 million recorded during 2021.

Other income increased $2.7 million during 2021 primarily due to the gain on sale of ESOP trustee accounts of $2.3 million.

The increase in interchange fee income in 2021 compared to 2020 was the result of organic growth in transactional deposit accounts and volume during 2021.

During 2020, the Company originated approximately $584.1 million of mortgage loans to be sold on the secondary market, compared to $269.7 million in 2019 primarily due to the decrease in long–term interest rates.

This increase in volume in addition to an increase in the percentage earned on the sale of mortgage loans, resulted in an increase in the overall gain on sale of mortgage loans of $17.5 million compared to the prior year.

Gain on the sale of investment securities increased $4.4 million in 2020.

Gain on the sale of investment securities increased $4.4 million in 2020 due to the deleverage strategy executed during the year.

Mortgage servicing net of impairment decreased by $5.6 million during 2020 compared to 2019 primarily due to net impairment charges of $4.5 million recorded during 2020.

1 unchanged sentence

The decrease in service charges on deposit accounts income in 2020 was due to an increase in digital transactions and stimulus funds resulting in a decrease in non–sufficient funds fee income.

During 2019, the Company originated approximately $269.7 million of mortgage loans to be sold on the secondary market, compared to $188.8 million in 2018.

This increase in volume offset by a decrease in the percentage earned on the sale of mortgage loans, resulted in an increase in the overall gain on sale of mortgage loans of $2.6 million compared to the prior year.

Gain on the sale of investment securities increased $368,000 in 2019.

Mortgage servicing net of impairment decreased by $206,000 during 2019 compared to 2018.

The increase in service charges on deposit accounts and interchange fee income in 2019 compared to 2018 was the result of the deposits acquired from Salin, in addition to organic growth in transactional deposit accounts and volume during 2019.

HORIZON BANCORP, INC.

24 unchanged sentences

Total non–interest expense $ 139,279 $ 131,441 $ 7,838 6.0 % $ 131,441 $ 122,031 $ 9,410 7.7 %

For the twelve months ended December 31, 2021, salaries increased $2.4 million reflecting annual merit increases and the additional employees from the branch acquisition completed during the third quarter.

Outside services and consultants and other expenses each increased by $1.1 million during 2021.

This was partially due to acquisition–related expenses of $671,000 in outside services and consultants and $674,000 in other expenses.

Other losses increased $1.1 million primarily due to $1.9 million in ESOP settlement expenses recorded during the fourth quarter of 2021.

For the twelve months ended December 31, 2020, commission and bonuses increased by $3.6 million reflecting record mortgage origination volume and related commission expense.

3 unchanged sentences

Offsetting these increases was a decrease of $1.5 million in other expenses.

For the twelve months ended December 31, 2019, salaries, commission and bonuses, and employee benefits expense increased by $3.8 million, $1.3 million and $3.5 million, respectively, reflecting the acquisition of Salin, overall company growth and an increase of approximately 102 full and part–time employees.

Outside services and consultants expense increased $2.9 million, primarily due to $2.5 million in merger–related expenses during 2019.

Loan expense increased $2.3 million, primarily due to the increased volume in consumer lending and the timing of related origination and amortization costs.

The increase in other expenses of $3.5 million, net occupancy expenses of $1.7 million and data processing of $1.7 million reflect the acquisition of Salin during the first quarter of 2019 and overall company growth.

Offsetting these increases was a decrease of $1.2 million in FDIC deposit insurance.

FDIC insurance decreased due to the assessment credits the Bank received during the third quarter of 2019 as the FDIC reserve was overfunded at that time.

Income tax expense totaled $15.4 million for the year ended December 31, 2021, an increase of $5.5 million when compared to the year ended December 31, 2020.

The increase was primarily due to an increase in income before income taxes of $24.1 million in 2021 and fewer tax credits recognized due to delays in projects the Company has invested in offset by an increase in tax exempt municipal investments.

Income tax expense totaled $9.9 million for the year ended December 31, 2020, a decrease of $3.4 million when compared to the year ended December 31, 2019.

The decrease was primarily due to the ability to recognize solar tax credits from completed projects the Company has invested in along with an increase in tax exempt municipal investments.

Income tax expense totaled $13.3 million for the year ended December 31, 2019, an increase of $2.9 million when compared to the year ended December 31, 2018.

The increase was primarily due to an increase in income before income tax expense of $16.3 million when comparing 2019 to the prior year.

HORIZON BANCORP, INC.

28 unchanged sentences

Net income as reported $ 87,091 $ 68,499 $ 66,538

Merger expenses — 5,650 487

Acquisition expenses 1,925 — 5,650

Tax effect (401) — (987)

Net income excluding merger expenses 68,499 71,201 53,502

Net income excluding acquisition expenses 88,615 68,499 71,201

Credit loss expense on acquired loans 2,034 — —

Tax effect (427) — —

Net income excluding credit loss expense on acquired loans 90,222 68,499 71,201

Gain on sale of ESOP trustee accounts (2,329) — —

Tax effect 489 — —

Net income excluding gain on sale of ESOP trustee accounts 88,382 68,499 71,201

ESOP settlement expenses 1,900 — —

Tax effect (315) — —

Net income excluding ESOP settlement expenses 89,967 68,499 71,201

(Gain) / loss on sale of investment securities (914) (4,297) 75

7 unchanged sentences

Adjusted net income $ 88,561 $ 67,845 $ 70,680

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non–GAAP Reconciliation of Diluted Earnings per Share

3 unchanged sentences

Diluted earnings per share (“EPS”) as reported $ 1.98 $ 1.55 $ 1.53

Merger expenses — 0.13 0.01

Acquisition expenses 0.04 — 0.13

Tax effect — — (0.02)

Diluted EPS excluding merger expenses 1.55 1.64 1.39

Diluted EPS excluding acquisition expenses 2.02 1.55 1.64

Credit loss expense on acquired loans 0.05 — —

Tax effect (0.01) — —

Diluted EPS excluding credit loss expense on acquired loans 2.06 1.55 1.64

Gain on sale of ESOP trustee accounts (0.05) — —

Tax effect 0.01 — —

Diluted EPS excluding gain on sale of ESOP trustee accounts 2.02 1.55 1.64

ESOP settlement expenses 0.04 — —

Tax effect (0.01) — —

Diluted EPS excluding ESOP settlement expenses 2.05 1.55 1.64

(Gain) / loss on sale of investment securities (0.02) (0.10) —

7 unchanged sentences

Adjusted diluted EPS $ 2.00 $ 1.53 $ 1.63

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

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

6 unchanged sentences

Pre–tax, pre–provision income $ 100,363 $ 99,120 $ 81,817

Merger expenses — 5,650 487

Acquisition expenses 1,925 — 5,650

Gain on sale of ESOP trustee accounts (2,329) — —

ESOP settlement expenses 1,900 — —

(Gain) / loss on sale of investment securities (914) (4,297) 75

2 unchanged sentences

Adjusted pre–tax, pre–provision income $ 100,287 $ 98,363 $ 86,962

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non–GAAP Reconciliation of Net Interest Margin

11 unchanged sentences

Adjusted net interest margin 3.06 % 3.38 % 3.57 %

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non–GAAP Reconciliation of Return on Average Assets

4 unchanged sentences

Return on average assets (“ROAA”) as reported 1.34 % 1.22 % 1.35 %

Merger expenses — % 0.11 % 0.01 %

Acquisition expenses 0.03 % — % 0.11 %

Tax effect (0.01) % — % (0.02) %

ROAA excluding merger expenses 1.22 % 1.44 % 1.32 %

ROAA excluding acquisition expenses 1.36 % 1.22 % 1.44 %

Credit loss expense on acquired loans 0.03 % — % — %

Tax effect (0.01) % — % — %

ROAA excluding credit loss expense on acquired loans 1.38 % 1.22 % 1.44 %

Gain on sale of ESOP trustee accounts (0.04) % — % — %

Tax effect 0.01 % — % — %

ROAA excluding gain on sale of ESOP trustee accounts 1.35 % 1.22 % 1.44 %

ESOP settlement expenses 0.03 % — % — %

Tax effect — % — % — %

ROAA excluding ESOP settlement expenses 1.38 % 1.22 % 1.44 %

(Gain) / loss on sale of investment securities (0.01) % (0.08) % — %

7 unchanged sentences

Adjusted ROAA 1.36 % 1.22 % 1.43 %

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

Non–GAAP Reconciliation of Return on Average Common Equity

4 unchanged sentences

Return on average common equity (“ROACE”) as reported 12.23 % 10.29 % 10.98 %

Merger expenses — % 0.93 % 0.10 %

Acquisition expenses 0.27 % — % 0.93 %

Tax effect (0.06) % — % (0.16) %

ROACE excluding merger expenses 10.29 % 11.75 % 11.30 %

ROACE excluding acquisition expenses 12.44 % 10.29 % 11.75 %

Credit loss expense on acquired loans 0.29 % — % — %

Tax effect (0.06) % — % — %

ROACE excluding credit loss expense on acquired loans 12.67 % 10.29 % 11.75 %

Gain on sale of ESOP trustee accounts (0.33) % — % — %

Tax effect 0.07 % — % — %

ROACE excluding gain on sale of ESOP trustee accounts 12.41 % 10.29 % 11.75 %

ESOP settlement expenses 0.27 % — % — %

Tax effect (0.04) % — % — %

ROACE excluding ESOP settlement expenses 12.64 % 10.29 % 11.75 %

(Gain) / loss on sale of investment securities (0.13) % (0.65) % 0.01 %

7 unchanged sentences

Adjusted ROACE 12.45 % 10.19 % 11.66 %

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

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

8 unchanged sentences

Tangible book value per common share $ 12.58 $ 12.05 $ 12.24 $ 11.74 $ 11.81

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

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

8 unchanged sentences

Non–interest expense as reported $ 139,279 $ 131,441 $ 122,032

Merger expenses — (5,650) (487)

Non–interest expense excluding merger expenses 131,441 116,382 102,029

Acquisition expenses (1,925) — (5,650)

ESOP settlement expenses (1,900) — —

Non–interest expense excluding acquisition expenses and ESOP settlement expenses 135,454 131,441 116,382

Net interest income as reported 181,690 170,940 160,791

2 unchanged sentences

Non–interest income as reported 57,952 59,621 43,058

Gain on sale of ESOP trustee accounts (2,329) — —

(Gain) / loss on sale of investment securities (914) (4,297) 75

Death benefit on bank owned life insurance (783) (264) (580)

Non–interest income excluding (gain) / loss on sale of investment securities and death benefit on bank owned life insurance $ 55,060 $ 42,553 $ 34,702

Non–interest income excluding gain on sale of ESOP trustee accounts, (gain) / loss on sale of investment securities and death benefit on bank owned life insurance $ 53,926 $ 55,060 $ 42,553

Adjusted efficiency ratio 57.46 % 57.20 % 57.23 %

12 unchanged sentences

Other sources of liquidity for Horizon include earnings, loan repayments, investment security sales, cashflows and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the FHLB and the Federal Reserve Bank (“FRB”).

At December 31, 2020, Horizon had available approximately $1.04 billion in available credit from various money center banks, including the FHLB and the FRB Discount Window.

At December 31, 2021, Horizon had available approximately $672.7 million in available credit from various money center banks, including the FHLB and the FRB Discount Window.

The following factors could impact Horizon’s funding needs in the future:

◦ Horizon had outstanding borrowings of over $365.6 million with the FHLB and total borrowing capacity with the FHLB of $728.2 million.

◦ Horizon had outstanding borrowings of approximately $525.5 million with the FHLB and total borrowing capacity with the FHLB of $549.2 million.

Generally, the loan terms from the FHLB are better than the terms Horizon can receive from other sources, making it less expensive to borrow money from the FHLB.

5 unchanged sentences

These securities may mature, call, or be sold, which would reduce the available collateral.

◦ Horizon had approximately $632.4 million of unpledged investment securities at December 31, 2020.

◦ Horizon had approximately $2.0 billion of unpledged investment securities at December 31, 2021.

◦ A downgrade in Horizon’s ability to obtain credit due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition could impact the availability of funding sources.

12 unchanged sentences

(Table dollars in thousands except per share data)

During 2020, cash flows were generated primarily from net cash received from sales, maturities, and prepayments of investment securities of $356.4 million and an increase in deposits of $600.1 million.

Cash flows were used to purchase investments totaling $590.3 million, to fund an increase in loans of $234.2 million and a decrease in borrowings of $74.7 million.

During 2021, cash flows were generated primarily from net cash received from the branch acquisition totaling $622.2 million, the sales, maturities, and prepayments of investment securities of $318.3 million, a net decrease in loans of $488.9 million and an increase in deposits of $425.4 million.

Cash flows were primarily used to purchase investments totaling $1.8 billion.

The net cash and cash equivalent position increased by $94.1 million during 2021.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2020.

Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

One Year One to

Three Years Three to

Five Years After Five

Remaining contractual maturities of time deposits $ 675,218 $ 445,914 $ 195,558 $ 33,524 $ 222

Borrowings 475,000 174,516 220 100,190 200,074

Subordinated notes 58,603 — — — 58,603

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

Loan commitments 917,411 430,306 487,105 — —

Letters of credit 12,428 3,717 8,711 — —

Total $ 2,195,208 $ 1,054,453 $ 691,594 $ 133,714 $ 315,447

At December 31, 2021, the Bank had $1.3 billion in commitments to extend credit outstanding, excluding interest rate lock commitments for residential mortgage loans intended for sale in the secondary market that meet the definition of a derivative.

Time deposits due within one year of December 31, 2021 totaled $511.7 million, or 70.0% of time deposits.

We believe the large percentage of time deposits that mature within one year reflects customers' hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressure.

The balance also includes $15.3 million in brokered time deposits at December 31, 2021.

If these maturing time deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.

Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits due on or before December 31, 2022.

We believe, however, based on past experience that a significant portion of our time deposits will remain with us.

We have the ability to attract and retain deposits by adjusting the interest rates offered.

Interest Rate Sensitivity

6 unchanged sentences

At December 31, 2020, this same model reported that the amount of assets that reprice within one year was approximately 257% of the amount of liabilities that reprice within the same time period.

During the year 2020, the increase in the cost of funding outpaced the increase in the yield of interest-earning assets resulting in a decrease in net interest margin.

During the year 2021, the decrease in the yield of interest–earning assets outpaced the decrease in the cost of funding resulting in a decrease in net interest margin.

HORIZON BANCORP, INC.

20 unchanged sentences

Cumulative GAP $ 1,506,793 $ 1,484,447 $ 1,465,790

Quantitative and Qualitative Disclosures about Market Risk

Horizon’s primary market risk exposure is interest rate risk.

Interest rate risk (“IRR”) is the risk that Horizon’s earnings and capital will be adversely affected by changes in interest rates.

The primary approach to IRR management is one that focuses on adjustments to the asset/liability mix in order to limit the magnitude of IRR.

Horizon’s exposure to interest rate risk arises from repricing or mismatch risk, embedded options risk, and yield curve risk.

Repricing risk is the risk of adverse consequence from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect Horizon’s assets and liabilities.

Basis risk is the risk that the spread, or rate difference, between instruments of similar maturities will change.

Options risk arises whenever products give the customer the right, but not the obligation, to alter the quantity or timing of cash flows.

Yield curve risk is the risk that changes in prevailing interest rates will affect instruments of different maturities by different amounts.

Horizon’s objective is to remain reasonably neutral with respect to IRR.

Horizon utilizes a variety of strategies to maintain this position, including the sale of mortgage loans on the secondary market, hedging certain balance sheet items using derivatives, varying maturities of FHLB advances, certificates of deposit funding and investment securities.

The table which follows provides information about Horizon’s financial instruments that were sensitive to changes in interest rates as of December 31, 2020.

The table incorporates Horizon’s internal system generated data related to the maturity and repayment/withdrawal of interest earning assets and interest bearing liabilities.

For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted–average interest rates by contractual maturities as well as the historical experience of Horizon related to the impact of interest rate fluctuations on the prepayment of residential loans and mortgage–backed securities.

From a risk management perspective, Horizon believes that repricing dates are more relevant than contractual maturity dates when analyzing the value of financial instruments.

For deposits with no contractual maturity dates, the table presents principal cash flows and weighted average rate, as applicable, based upon Horizon’s experience and management’s judgment concerning the most likely withdrawal behaviors.

HORIZON BANCORP, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(Table dollars in thousands except per share data)

2021 2022 2023 2024 2025 2026 & Beyond Total Fair Value December 31,

Rate–sensitive assets

Fixed interest rate loans $ 735,982 $ 419,249 $ 205,524 $ 124,376 $ 66,334 $ 92,082 $ 1,643,547 $ 1,543,967

Average interest rate 3.95 % 3.97 % 4.71 % 4.62 % 4.56 % 4.62 % 4.16 %

Variable interest rate loans 1,713,622 162,388 119,039 92,309 79,135 70,881 2,237,374 2,236,919

Average interest rate 3.72 % 4.18 % 4.30 % 4.22 % 4.08 % 3.84 % 3.82 %

Total loans 2,449,604 581,637 324,563 216,685 145,469 162,963 3,880,921 3,780,886

Average interest rate 3.79 % 4.03 % 4.56 % 4.45 % 4.30 % 4.28 % 3.97 %

Securities, including FHLB stock 160,793 84,029 69,828 53,457 58,717 898,900 1,325,724 1,325,724

Average interest rate 2.22 % 2.92 % 3.15 % 2.92 % 2.93 % 2.85 % 2.80 %

Other interest earning assets 167,088 — — — — — 167,088 167,088

Average interest rate 0.24 % — % — % — % — % — % 0.24 %

Total earning assets $ 2,777,485 $ 665,666 $ 394,391 $ 270,142 $ 204,186 $ 1,061,863 $ 5,373,733 $ 5,273,698

Average interest rate 3.48 % 3.89 % 4.31 % 4.15 % 3.90 % 3.07 % 3.56 %

Rate–sensitive liabilities

Non–interest bearing deposits $ 99,637 $ 90,211 $ 81,677 $ 73,950 $ 66,955 $ 640,812 $ 1,053,242 $ 1,053,242

NOW accounts 109,349 95,067 82,651 71,857 62,472 415,876 837,272 808,687

Average interest rate 0.07 % 0.07 % 0.07 % 0.07 % 0.07 % 0.07 % 0.07 %

Savings and money market accounts 288,857 245,851 209,317 178,272 151,883 891,221 1,965,401 1,976,512

Average interest rate 0.13 % 0.13 % 0.13 % 0.13 % 0.13 % 0.12 % 0.12 %

Certificates of deposit 445,914 151,805 43,753 23,807 9,717 222 675,218 681,323

Average interest rate 0.97 % 0.92 % 1.84 % 1.80 % 1.09 % 0.14 % 1.04 %

Total deposits 943,757 582,934 417,398 347,886 291,027 1,948,131 4,531,133 4,519,764

Average interest rate 0.50 % 0.30 % 0.27 % 0.20 % 0.12 % 0.07 % 0.22 %

Fixed interest rate borrowings 103,234 61,633 85,211 58,968 57,877 108,077 475,000 483,245

Average interest rate 0.72 % 0.38 % 1.19 % 1.40 % 0.59 % 1.32 % 0.97 %

Variable interest rate borrowings 56,548 — — — 58,603 — 115,151 110,301

Average interest rate 4.87 % — % — % — % 5.63 % — % 5.25 %

Total funds $ 1,103,539 $ 644,567 $ 502,609 $ 406,854 $ 407,507 $ 2,056,208 $ 5,121,284 $ 5,113,310

Average interest rate 0.74 % 0.31 % 0.43 % 0.38 % 0.98 % 0.14 % 0.40 %

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required under this item is incorporated by reference to the information appearing in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

The Company was asset sensitive as of December 31, 2021, resulting from the liquidity on the balance sheet, adjustable rate assets and the low beta's on deposit pricing based on expected deposit rates.

Based on parallel rate shocks to the balance sheet, at a 100 basis point shock and 200 basis point shock, net interest income increases approximately $10.0 million and $20.0 million, respectively.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis