HORIZON BANCORP INC /IN/ 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HORIZON BANCORP, INC. AND SUBSIDIARIES Consolidated Financial Statements Table of Contents Page Consolidated Financial Statements Consolidated Balance Sheets 67 Consolidated Statements of Income 68 Consolidated Statements of Comprehensive Income 69 Consolidated Statements of Stockholders’ Equity 70 Consolidated Statements of Cash Flows 71 Notes to Consolidated Financial Statements 73 Reports of Independent Registered Public Accounting Fir m ( PCAOB ID: 686 ) 138 Management’s Report on Financial Statements 142 66 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar Amounts in Thousands) December 31 2021 December 31 2020 Assets Cash and due from banks $ 593,508 $ 249,711 Interest-earning time deposits 4,782 8,965 Investment securities, available for sale 1,160,812 1,134,025 Investment securities, held to maturity (fair value of $ 1,559,991 and $ 179,990 ) 1,552,443 168,676 Loans held for sale 12,579 13,538 Loans, net of allowance for credit losses of $ 54,286 and $ 57,027 3,553,345 3,810,356 Premises and equipment, net 93,441 92,416 Federal Home Loan Bank stock 24,440 23,023 Goodwill 154,572 151,238 Other intangible assets 20,941 22,955 Interest receivable 26,137 21,396 Cash value of life insurance 97,150 96,751 Other assets 80,753 93,564 Total assets $ 7,374,903 $ 5,886,614 Liabilities Deposits Non–interest bearing $ 1,360,338 $ 1,053,242 Interest bearing 4,442,653 3,477,891 Total deposits 5,802,991 4,531,133 Borrowings 675,753 475,000 Subordinated notes 58,750 58,603 Junior subordinated debentures issued to capital trusts 56,785 56,548 Interest payable 2,235 2,712 Other liabilities 55,180 70,402 Total liabilities 6,651,694 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 43,811,421 and 43,905,631 shares, Outstanding 43,547,942 and 43,880,562 shares — — Additional paid-in capital 352,122 362,945 Retained earnings 363,742 301,419 Accumulated other comprehensive income 7,345 27,852 Total stockholders’ equity 723,209 692,216 Total liabilities and stockholders’ equity $ 7,374,903 $ 5,886,614 See notes to consolidated financial statements 67 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollar Amounts in Thousands, Except Per Share Data) Year Ended December 31 2021 2020 2019 Interest Income Loans receivable $ 161,617 $ 179,672 $ 183,631 Investment securities – taxable 15,132 8,493 12,606 Investment securities – tax exempt 23,246 17,213 12,095 Total interest income 199,995 205,378 208,332 Interest Expense Deposits 7,867 18,556 33,690 Borrowed funds 4,701 11,430 10,672 Subordinated notes 3,522 1,824 — Junior subordinated debentures issued to capital trusts 2,215 2,628 3,179 Total interest expense 18,305 34,438 47,541 Net Interest Income 181,690 170,940 160,791 Credit loss expense (recovery) ( 2,084 ) 20,751 1,976 Net Interest Income after Credit Loss Expense 183,774 150,189 158,815 Non–interest Income Service charges on deposit accounts 9,192 8,848 9,959 Wire transfer fees 892 1,000 653 Interchange fees 10,901 9,306 7,655 Fiduciary activities 7,419 9,145 8,580 Gains (losses) on sale of investment securities (includes $ 914 , $ 4,297 and $( 75 ) for the years ended December 31, 2021, 2020 and 2019, respectively, related to accumulated other comprehensive earnings reclassifications) 914 4,297 ( 75 ) Gain on sale of mortgage loans 19,163 26,721 9,208 Mortgage servicing income net of impairment 2,352 ( 3,716 ) 1,914 Increase in cash value of bank owned life insurance 2,094 2,243 2,190 Death benefit on bank owned life insurance 783 264 580 Other income 4,242 1,513 2,394 Total non–interest income 57,952 59,621 43,058 Non–interest Expense Salaries and employee benefits 74,051 71,082 65,206 Net occupancy expenses 12,541 12,811 12,157 Data processing 9,962 9,200 8,480 Professional fees 2,216 2,433 1,946 Outside services and consultants 8,449 7,318 8,152 Loan expense 11,377 10,628 8,633 FDIC insurance expense 2,377 1,855 252 Other losses 2,283 1,162 740 Other expense 16,023 14,952 16,466 Total non–interest expense 139,279 131,441 122,032 Income Before Income Taxes 102,447 78,369 79,841 Income tax expense (includes $ 192 , $ 902 and $( 16 ) for the years ended December 31, 2021, 2020 and 2019, respectively, related to income tax expense (benefit) from reclassification items) 15,356 9,870 13,303 Net Income Available to Common Shareholders $ 87,091 $ 68,499 $ 66,538 Basic Earnings Per Share $ 1.99 $ 1.56 $ 1.53 Diluted Earnings Per Share 1.98 1.55 1.53 See notes to consolidated financial statements 68 Table of Contents Horizon Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Dollar Amounts in Thousands) Year Ended December 31 2021 2020 2019 Net Income $ 87,091 $ 68,499 $ 66,538 Other Comprehensive Income (Loss) Change in fair value of derivative instruments: Change in fair value of derivative instruments for the period 4,570 ( 3,803 ) ( 2,680 ) Income tax effect ( 960 ) 799 563 Changes from derivative instruments 3,610 ( 3,004 ) ( 2,117 ) Change in securities: Unrealized appreciation (depreciation) for the period on AFS securities ( 35,547 ) 35,272 21,173 Amortization from transfer of securities from available for sale to held to maturity securities 5,935 ( 58 ) ( 117 ) Reclassification adjustment for securities (gains) losses realized in income ( 914 ) ( 4,297 ) 75 Income tax effect 6,409 ( 6,493 ) ( 4,438 ) Unrealized gains (losses) on securities ( 24,117 ) 24,424 16,693 Other Comprehensive Income (Loss), Net of Tax ( 20,507 ) 21,420 14,576 Comprehensive Income $ 66,584 $ 89,919 $ 81,114 See notes to consolidated financial statements 69 Table of Contents Horizon Bancorp, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (Dollar Amounts in Thousands, Except Per Share Data) Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balances, January 1, 2019 $ — $ — $ 276,101 $ 224,035 $ ( 8,144 ) $ 491,992 Net income — — — 66,538 — 66,538 Other comprehensive loss, net of tax — — — — 14,576 14,576 Amortization of unearned compensation — — 705 — — 705 Exercise of stock options — — 236 — — 236 Stock option expense — — 215 — — 215 Stock issued stock plans — — 1,469 — — 1,469 Stock issued in Salin acquisition — — 102,722 — — 102,722 Repurchase of outstanding common stock — — ( 1,595 ) — — ( 1,595 ) Cash dividends on common stock ($ 0.46 per share) — — — ( 20,835 ) — ( 20,835 ) Balances, December 31, 2019 $ — $ — $ 379,853 $ 269,738 $ 6,432 $ 656,023 Net income — — — 68,499 — 68,499 Other comprehensive income, net of tax — — — — 21,420 21,420 Impact of adoption of ASU No. 2016–13 — — — ( 15,635 ) — ( 15,635 ) Amortization of unearned compensation — — 1,206 — — 1,206 Exercise of stock options — — 157 — — 157 Stock option expense — — 132 — — 132 Stock issued stock plans — — 1,233 — — 1,233 Repurchase of outstanding stock — — ( 19,636 ) — — ( 19,636 ) Cash dividends on common stock ($ 0.48 per share) — — — ( 21,183 ) — ( 21,183 ) Balances, December 31, 2020 $ — $ — $ 362,945 $ 301,419 $ 27,852 $ 692,216 Net income — — — 87,091 — 87,091 Other comprehensive income, net of tax — — — — ( 20,507 ) ( 20,507 ) Amortization of unearned compensation — — 1,751 — — 1,751 Exercise of stock options — — 1,062 — — 1,062 Stock option expense — — 68 — — 68 Stock awards vested — — ( 1,355 ) — — ( 1,355 ) Repurchase of outstanding stock — — ( 7,607 ) — — ( 7,607 ) Stock retirement plans — — ( 4,742 ) — — ( 4,742 ) Cash dividends on common stock ($ 0.56 per share) — — — ( 24,768 ) — ( 24,768 ) Balances, December 31, 2021 $ — $ — $ 352,122 $ 363,742 $ 7,345 $ 723,209 See notes to consolidated financial statements 70 Table of Contents Horizon Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollar Amounts in Thousands) Year Ended December 31 2021 2020 2019 Operating Activities Net income $ 87,091 $ 68,499 $ 66,538 Items not requiring (providing) cash Credit loss expense (recovery) ( 2,084 ) 20,751 1,976 Depreciation and amortization 11,169 10,589 9,688 Share based compensation 68 132 215 Mortgage servicing rights income 226 ( 737 ) ( 2,106 ) Mortgage servicing rights, net impairment ( 2,578 ) 4,453 192 Premium amortization on securities, net 10,289 9,067 5,929 Loss (gain) on sale of investment securities ( 914 ) ( 4,297 ) 75 Gain on sale of mortgage loans ( 19,163 ) ( 26,721 ) ( 9,208 ) Proceeds from sales of loans 458,255 601,336 275,809 Loans originated for sale ( 438,133 ) ( 584,065 ) ( 269,651 ) Change in cash value life insurance ( 2,094 ) ( 2,243 ) ( 2,190 ) Loss (gain) on other real estate owned ( 85 ) ( 197 ) ( 126 ) Net change in: Interest receivable ( 4,222 ) ( 2,568 ) ( 2,101 ) Interest payable ( 493 ) ( 350 ) 205 Other assets 10,964 ( 13,987 ) 99,735 Other liabilities ( 2,948 ) ( 897 ) ( 608 ) Net cash provided by operating activities 105,348 78,765 174,372 Investing Activities Purchases of securities available for sale ( 837,684 ) ( 590,305 ) ( 425,879 ) Proceeds from sales, maturities, calls and principal repayments of securities available for sale 287,714 318,897 248,422 Purchases of securities held to maturity ( 931,029 ) — — Proceeds from maturities of securities held to maturity 30,544 37,529 8,384 Net change in interest–earning time deposits 4,183 ( 510 ) 7,289 Change in Federal Reserve and FHLB stock ( 1,417 ) ( 576 ) ( 803 ) Net change in loans 469,412 ( 234,166 ) ( 59,420 ) Proceeds on the sale of OREO and repossessed assets 1,286 2,047 4,744 Change in premises and equipment, net ( 1,440 ) ( 5,866 ) ( 4,612 ) Death benefit on bank owned life insurance 783 264 580 Net cash received in acquisition of branch 622,179 — — Net cash received in acquisition, Salin — — 128,745 Repurchase of outstanding stock ( 7,607 ) ( 19,636 ) ( 1,595 ) Net cash used in investing activities ( 363,076 ) ( 492,322 ) ( 94,145 ) Financing Activities Net change in: Deposits 425,449 600,131 50,282 Borrowings 201,137 ( 74,725 ) ( 71,040 ) Proceeds from issuance of stock ( 293 ) 1,390 1,705 Net proceeds from issuance of subordinated notes — 58,824 — Dividends paid on common stock ( 24,768 ) ( 21,183 ) ( 20,835 ) Net cash provided by (used in) financing activities 601,525 564,437 ( 39,888 ) 71 Table of Contents Net Change in Cash and Cash Equivalents 343,797 150,880 40,339 Cash and Cash Equivalents, Beginning of Period 249,711 98,831 58,492 Cash and Cash Equivalents, End of Period $ 593,508 $ 249,711 $ 98,831 Additional Supplemental Information Interest paid $ 18,782 $ 34,788 $ 46,510 Income taxes paid 1,650 10,588 13,219 Transfer of loans to other real estate and repossessed assets 1,721 2,442 2,700 Transfer of premises to other real estate 1,753 — 1,705 Right-of-use assets exchanged for lease obligations — — 3,411 Sale of securities available for sale not yet settled — — 6,303 See notes to consolidated financial statements 72 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 1 – Nature of Operations and Summary of Significant Accounting Policies Nature of Business — The consolidated financial statements of Horizon Bancorp, Inc. (“Horizon”) and its wholly owned subsidiaries, Horizon Bank (“Bank”) and Horizon Risk Management, Inc., together referred to as “Horizon,” conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly owned subsidiary of Horizon. The Bank is a full–service commercial bank offering a broad range of commercial and retail banking and other services incident to banking along with a trust department that offers corporate and individual trust and agency services and investment management services. The Bank maintains 78 full service offices. The Bank has wholly owned direct and indirect subsidiaries: Horizon Investments, Inc. (“Horizon Investments”), Horizon Properties, Inc. (“Horizon Properties”), Horizon Insurance Services, Inc. (“Horizon Insurance”) and Horizon Grantor Trust. Horizon Investments manages the investment portfolio of the Bank. Horizon Properties manages the real estate investment trust. Horizon Insurance is used by the Company’s Wealth Management to sell certain insurance products. Horizon Grantor Trust holds title to certain company owned life insurance policies. Horizon conducts no business except that incident to its ownership of the subsidiaries. Horizon formed Horizon Bancorp Capital Trust II in 2004 (“Trust II”) and Horizon Bancorp Capital Trust III in 2006 (“Trust III”) for the purpose of participating in pooled trust preferred securities offerings. The Company assumed additional debentures as the result of the following acquisitions: Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I (“Alliance Trust”); American Trust & Savings Bank in 2010, which formed Am Tru Statutory Trust I (“Am Tru Trust”); Heartland Bancshares, Inc. in 2013, which formed Heartland (IN) Statutory Trust II (“Heartland Trust”); LaPorte Bancorp, Inc. in 2016, which had acquired City Savings Statutory Trust I (“City Savings Trust”); and Salin Bancshares, Inc. in 2019, which formed Salin Statutory Trust I (“Salin Trust”). See Note 15 of the Consolidated Financial Statements for further discussion regarding these previously consolidated entities that are now reported separately. The business of Horizon is not seasonal to any material degree. Basis of Reporting — The consolidated financial statements include the accounts of Horizon and subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, valuation of other real estate owned, goodwill and intangible assets, mortgage servicing rights, other than temporary impairments and fair values of financial instruments. Business Combinations — Business combinations are accounted for using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. Horizon typically issues Common Stock and/or pays cash for an acquisition, depending on the terms of the acquisition agreement. The value of Common Stock issued is determined based on the market price of the stock as of the closing of the acquisition. Acquisition costs are expensed when incurred. Cash and Cash Equivalents — Cash and cash equivalents includes cash, deposits with other financial institutions with original maturities under 90 days, and federal funds sold. Fair Value Measurements — Horizon uses fair value measurements to record fair value adjustments, to certain assets, and liabilities and to determine fair value disclosures. Horizon has adopted Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures for all applicable financial and nonfinancial 73 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) assets and liabilities. This accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances. As defined in codification, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. Horizon values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability). In measuring the fair value of an asset, Horizon assumes the highest and best use of the asset by a market participant to maximize the value of the asset, and does not consider the intended use of the asset. When measuring the fair value of a liability, Horizon assumes that the nonperformance risk associated with the liability is the same before and after the transfer. Nonperformance risk is the risk that an obligation will not be satisfied and encompasses not only Horizon’s own credit risk (i.e., the risk that Horizon will fail to meet its obligation), but also other risks such as settlement risk. Horizon considers the effect of its own credit risk on the fair value for any period in which fair value is measured. There are three acceptable valuation techniques that can be used to measure fair value: the market approach, the income approach and the cost approach. Selection of the appropriate technique for valuing a particular asset or liability takes into consideration the exit market, the nature of the asset or liability being valued, and how a market participant would value the same asset or liability. Ultimately, determination of the appropriate valuation method requires significant judgment, and sufficient knowledge and expertise are required to apply the valuation techniques. Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of Horizon. Unobservable inputs are assumptions based on Horizon’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an input to be significant if it drives 10 % or more of the total fair value of a particular asset or liability. Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses. 74 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Investment Securities Available for Sale — Horizon designates the majority of its investment portfolio as available for sale based on management’s plans to use such securities for asset and liability management, liquidity and not to hold such securities as long-term investments. Management repositions the portfolio to take advantage of future expected interest rate trends when Horizon’s long-term profitability can be enhanced. Investment securities available for sale and marketable equity securities are carried at estimated fair value and any net unrealized gains/losses (after tax) on these securities are included in accumulated other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Gains/losses on the disposition of securities available for sale are recognized at the time of the transaction and are determined by the specific identification method. Investment Securities Held to Maturity — Includes any security for which Horizon has the positive intent and ability to hold until maturity. These securities are carried at amortized cost. Loans — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaling $ 11.5 million and $ 13.3 million at December 31, 2021 and 2020 was excluded from the Allowance for Credit Losses (“ACL”) calculation and was reported in accrued interest receivable on the consolidated balance sheet. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the effective yield method without anticipating prepayments. Interest on commercial, mortgage and installment loans is recognized over the term of the loans based on the principal amount outstanding. When principal or interest is past due 90 days or more, and the loan is not well secured or in the process of collection, or when serious doubt exists as to the collectability of a loan, the accrual of interest is discontinued. Loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as a yield adjustment. Discounts and premiums on purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management's policy to convert the loan from an “earning asset” to a non–accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management's policy to generally place a loan on non–accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Commercial Banking and/or the Chief Operations Officer must review all loans placed on non–accrual status. Subsequent payments on non–accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non–accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non–accrual loan to accrual status. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Consistent with regulatory guidance, charge–offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company's policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined. For all loan portfolio segments except 1–4 family residential properties and consumer, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower's ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial 75 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) charge–off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral. The Company charges off 1–4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge–down or specific allocation of family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges off unsecured open–end loans when the loan is contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well–secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off. A loan is individually evaluated when, based on current information, a creditor may be experiencing financial difficulty and repayment is substantially expected through operation or sale of collateral. For collateral–dependent assets individually evaluated, the Company utilizes, as a practical expedient, the fair value of collateral, adjusted for estimated costs to sell, when determining the allowance for credit losses. Smaller–balance, homogeneous loans are evaluated in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually. Purchased Credit Deteriorated (“PCD”) Loans — The Company has purchased loans, some of which have experienced credit deterioration since origination. PCD loans are recorded at the amount paid. An ACL on loans is determined using the same methodology as other loans held for investment. The initial ACL on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACL on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized or accreted into interest income over the remaining life of the loan. Subsequent changes to the ACL on loans are recorded through credit loss expense. As discussed in Adoption of New Accounting Standards later in Note 1, the Company adopted ASU 326 using the prospective transition approach for PCD loans previously accounted for under ASC 310–30. In accordance with the standard, we did not assess whether Purchase Credit Impaired (“PCI”) loans met the criteria of PCD as of the date of adoption and all loans previously classified as PCI were updated to the PCD classification. Pools utilized for PCI accounting under ASC 310–30 were not considered since the Company did not have PCI pools at the time of adoption. PCD loans were assessed using prior specific loan reviews for the initial PCD loan ACL. Loans Held for Sale — Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to non–interest income. Gains and losses on loan sales are recorded in non–interest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in non–interest income upon sale of the loan. Concentrations of Credit Risk — The Bank grants commercial, real estate, and consumer loans to customers located primarily in the northern and central regions of Indiana and the southern and central regions of Michigan and provides mortgage warehouse lines to mortgage companies in the United States. Commercial loans make up approximately 60 % of the loan portfolio and are secured by both real estate and business assets. These loans are expected to be repaid from cash flows from operations of the businesses. The Bank does not have a concentration in speculative commercial real estate loans. Residential real estate loans make up approximately 17 % of the loan portfolio and are secured by residential real estate. Installment loans make up approximately 20 % of the loan portfolio and are primarily secured by consumer assets. Mortgage warehouse loans make up approximately 3 % of the loan portfolio and are secured by residential real estate. Allowance for Credit Losses (“ACL”) on Loans — The ACL on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the loan balance is confirmed to be no longer collectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. 76 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Management estimates the ACL balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan–specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, changes in economic conditions, or other relevant factors. The Company considers the following when estimating credit losses: 1) available information relevant to assessing the collectibility of cash flows including internal information, external information or a combination of both relating to past events, current conditions and reasonable and supportable forecasts; 2) relevant qualitative and quantitative factors relating to the environment in which the Company operates and factors specific to the borrower; 3) off–balance sheet credit exposures; and credit support. ACL on loans is measured on a collective basis and reflects impairment in groups of loans aggregated on the basis of similar risk characteristics which may include any one or a combination of the following: internal credit ratings, risk ratings or classification, financial asset type, collateral type, size, industry of the borrower, historical or expected credit loss patterns, and reasonable and supportable forecast periods. The ACL for a specific portfolio segment is computed by multiplying the loss rate by the amortized cost balance of the segment with adjustments for other qualitative factors as described above. As appropriate, newer credit products or portfolios with limited historical loss may use applicable external data for determining the ACL until experience justifies that sufficient product maturity supports the estimate of expected credit losses. Pursuant to ASC 326–20–30–9, an entity shall not rely solely on past events to estimate expected credit losses, and should consider adjustments to historical information to reflect the extent to which management expects current conditions and forecasted conditions to differ from the periods utilized for the historical loss rate calculation. Management has incorporated an adjustment of the historical loss rate calculated within the model to reflect current and forecasted condition and has applied this adjustment on a qualitative factor basis to the aggregate pool loss rate. The qualitative adjustment is based on a combination of external econometric data and internal factors such as portfolio composition, changes in management, changes in loan policy and other factors. The economic forecast is based in part on economic indexes and quantitative matrices with a six to twelve month forecast. The qualitative adjustment is calculated based on current and forecasted conditions and evaluated each quarter by management, and therefore is dynamic in nature. As a result of the forecast being applied as a qualitative factor and adjusted quarterly, no reversion to the historical loss rate is necessary, as the historical base loss rate is preserved in the calculation of “all in” loss rate. Specific reserves reflect collateral shortfalls on loans identified for evaluation or individually considered non–performing, including troubled debt restructurings and receivables where the Company has determined foreclosure is probable. These loans no longer have similar risk characteristics to collectively evaluated loans due to changes in credit risk, borrower circumstances, recognition of write–offs, or cash collections that have been fully applied to principal on the basis of non–accrual policies. At a minimum, the population of loans subject to individual evaluation include individual loans and leases where it is probable we will be unable to collect all amounts due, according to the original contractual terms. These include commercial impaired loans, jumbo residential mortgages (as defined), and jumbo home equity loans with a balance exceeding $250,000, and other loans as determined by management. ACL for residential and consumer loans are, primarily, determined by pools of similar loans and are evaluated on a quarterly basis. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. 77 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Allowance for Loan Losses (Prior to January 1, 2020) — An allowance for loan losses was maintained to absorb probable incurred losses inherent in the loan portfolio. The allowance was based on ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. The allowance was increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. Horizon's methodology for assessing the appropriateness of the allowance consisted of several key elements, which included the general allowance, specific allowances for identified problem loans and the qualitative allowance. The general allowance was calculated by applying loss factors to pools of outstanding loans. Loss factors were based on historical loss experience and may have been adjusted for significant factors that, in management's judgment, affected the collectibility of the portfolio as of the evaluation date. Specific allowances were established in cases where management had identified conditions or circumstances related to a credit that management believed indicated the probability that a loss would have been incurred in excess of the amount determined by the application of the formula allowance. The qualitative allowance was based upon management's evaluation of various conditions, the effects of which were not directly measured in the determination of the general and specific allowances. The evaluation of the inherent loss with respect to these conditions was subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the qualitative allowance may have included factors such as local, regional and national economic conditions and forecasts, concentrations of credit and changes in the composition of the portfolio. Troubled Debt Restructurings (“TDR”) — A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The ACL on loans on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provides all banks with the option to elect either or both of the following from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after termination of the national emergency. Section 4013 of the CARES Act was amended on December 27, 2020 to extend this relief period until January 1, 2022. Specific applicable provisions of the CARES Act allow: i. suspension of the requirements under Generally Accepted Accounting Principles (“GAAP”) for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or ii. suspension of any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes. If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. Allowance for Credit Losses on Off–Balance Sheet (“OBS”) Credit Exposures — The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The Company determines the estimated amount of expected credit extensions based on historical usage to calculate the amount of exposure for a loss estimate. After review of the expected credit losses on OBS, the Company determined the amount not being recorded as immaterial at this time. Allowance for Credit Losses on Available for Sale Securities — For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the 78 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recorded in other comprehensive income. Changes in the ACL are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Allowance for Credit Losses on Held to Maturity Securities — For held to maturity securities, the Company conducts an assessment of its held to maturity securities at the time of purchase and on at least an annual basis to ensure such investment securities remain within appropriate levels of risk and continue to perform satisfactorily in fulfilling its obligations. The Company considers, among other factors, the nature of the securities and credit ratings or financial condition of the issuer. If available, the Company obtains a credit rating for issuers from the Nationally Recognized Statistical Rating Organization (“NRSRO”) for consideration. If this assessment indicates that a material credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss. After completing this assessment, management determined any credit losses as of December 31, 2021 and 2020 were not material to the consolidated financial statements. Premises and Equipment — Buildings and major improvements are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 3 to 40 years. Furniture and equipment are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 2 to 20 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations. Federal Reserve and Federal Home Loan Bank of Indianapolis (FHLBI) Stock — The stock is a required investment for institutions that are members of the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) systems. The required investment in the common stock is based on a predetermined formula. Partnership Investments — The partnerships have elected to account for certain partnership investments in qualified affordable housing and solar tax credits using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized to income tax expense in proportion to the tax credits and other tax benefits received. This net investment performance is recognized in the income statement as a component of income tax expense. The investment in the limited partnerships totaling $ 2.3 million and $ 2.3 million at December 31, 2021 and 2020, respectively is included in other assets in the consolidated balance sheets. in which the Company has investments account for their investments at fair value. Mortgage Servicing Rights —Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. Amortized mortgage servicing rights include commercial mortgage servicing rights. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market 79 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to non–interest income. Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with mortgage servicing income net of impairment on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Goodwill and Intangible Assets — Goodwill is tested annually for impairment or more frequently should potential triggering events be identified that may indicate potential impairment. At December 31, 2021, Horizon had core deposit intangibles of $ 20.9 million subject to amortization and $ 154.6 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. A large majority of the goodwill relates to the acquisitions of Heartland, Summit, Peoples, Kosciusko, LaPorte, Lafayette, Wolverine and Salin. Bank Owned Life Insurance (“BOLI”) – BOLI has been purchased on certain employees and directors of the Company. The Company records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase and Other Secured Borrowings — The Company purchases certain securities, generally U.S. government–sponsored entity and agency securities, under agreements to resell. The amounts advanced under these agreements represent short–term secured loans and are reflected as assets in the accompanying consolidated balance sheets. We also sell certain securities under agreements to repurchase. These agreements are treated as collateralized financing transactions. These and other secured borrowings such as loans sold not qualifying for sale accounting treatment, are reflected as liabilities in the accompanying consolidated balance sheets and are recorded at the amount of cash received in connection with the transaction. Short–term securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Securities, generally U.S. government and federal agency securities, pledged as collateral under these financing arrangements can be repledged by the secured party. Additional collateral may be required based on the fair value of the underlying securities. Income Taxes —The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes ). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. 80 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. Trust Assets and Income — Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by Horizon. Transfer of Financial Assets — The transfer of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1)the assets have been isolated from the Company and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2)the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3)the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Earnings per Common Share — 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. Years Ended December 31 2021 2020 2019 Basic earnings per share Net income $ 87,091 $ 68,499 $ 66,538 Weighted average common shares outstanding 43,802,733 44,044,737 43,493,316 Basic earnings per share $ 1.99 $ 1.56 $ 1.53 Diluted earnings per share Net income available to common shareholders $ 87,091 $ 68,499 $ 66,538 Weighted average common shares outstanding 43,802,733 44,044,737 43,493,316 Effect of dilutive securities: Restricted stock 107,988 41,817 23,006 Stock options 44,559 36,522 81,273 Weighted average common shares outstanding 43,955,280 44,123,076 43,597,595 Diluted earnings per share $ 1.98 $ 1.55 $ 1.53 There were 140,955 , 278,776 and 120,341 shares for the twelve months ended December 31, 2021, 2020 and 2019, respectively, which were not included in the computation of diluted earnings per share because they were non-dilutive. 81 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) 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 December 31, 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. Dividend Restrictions — Horizon’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits combined with the retained net profits of the preceding two years, subject to the capital requirements described in Note 21. At December 31, 2021, the Bank could, without prior approval, declare dividends of approximately $ 108.5 million to Horizon. Additionally, the Federal Reserve Board limits the amount of dividends that may be paid by Horizon to its stockholders under its capital adequacy guidelines. Consolidated Statements of Cash Flows — For purposes of reporting cash flows, cash and cash equivalents are defined to include cash and due from banks, money market investments and federal funds sold with maturities of one day or less. Horizon reports net cash flows for customer loan transactions, deposit transactions, short–term investments and borrowings. Comprehensive Income — Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available for sale securities, unrealized and realized gains and losses in cash flow derivative financial instruments and amortization of available for sale securities transferred to held to maturity. Share–Based Compensation — At December 31, 2021, Horizon had share–based compensation plans, which are described more fully in Note 22. All share–based payments are to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. Horizon has recorded approximately $ 1.8 million, $ 1.3 million, and $ 920,000 in compensation expense relating to vesting of stock options less estimated forfeitures for the 12–month periods ended December 31, 2021, 2020 and 2019, respectively. Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Statements of Financial Condition, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss of the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in non–interest income or non–interest expense. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability. 82 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Revenue Recognition — Accounting Standards Codification 606, “Revenue from Contracts with Customers” (ASC 606) provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result in a change to the accounting of any of the Company’s revenue streams that are within the scope of the amendments. Revenue–gathering activities that are within the scope of ASC 606 and that are presented as non-interest income in the Company’s consolidated statements of income include: • Service charges and fees on deposit accounts – these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer and overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services. • Fiduciary activities – this includes periodic fees due from trust and wealth management customers for managing the customers’ financial assets. Fees are charged based on a standard agreement and are recognized as they are earned. Segments — Horizon has one principal business segment, commercial banking. While our chief decision makers monitor the revenue streams of various products and services, the identifiable segments' operations are managed and financial performance is evaluated on a company–wide basis. Accordingly, all of the Company's financial service operations are considered to be aggregated in one reportable operating segment. Reclassifications — Certain reclassifications have been made to the 2020 and 2019 consolidated financial statements to be comparable to 2021. These reclassifications had no effect on net income. Adoption of New Accounting Standards Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016–13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments On January 1, 2020, the Company adopted ASU No. 2016–13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“CECL”). The measurement of expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held to maturity securities. It also applies to off–balance sheet (“OBS”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar agreements). In addition ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance, rather than as a write–down, on available for sale debt securities management does not intend to sell or believe that it is not more likely than not they will be required to sell. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after December 31, 2019, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $ 15.6 million as of January 1, 2020 for the cumulative effect of adopting ASC 326. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”), previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310–30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $ 2.8 million of allowance for credit losses (“ACL”) on loans. 83 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table illustrates the impact of ASC 326. January 1, 2020 As Reported Under ASC 326 Pre–ASC 326 Adoption Impact of ASC 326 Adoption Loans Commercial $ 25,614 $ 11,996 $ 13,618 Real estate 4,971 923 4,048 Mortgage warehouse 1,077 1,077 — Consumer 8,582 3,671 4,911 Allowance for credit losses on loans $ 40,244 $ 17,667 $ 22,577 Accounting policies stated in Note 1 reflect the adoption of Topic 326 as it relates to investment securities, loans and off–balance sheet credit exposures as of January 1, 2020. Disclosures related to the accounting guidance prior to the adoption of Topic 326 can be found in Form 10–K for the year ended December 31, 2019. FASB ASU No. 2017–04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment On January 1, 2020, the Company adopted the provision of ASU No. 2017–04, which eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test. The adoption of this new guidance did not have a material impact on our consolidated financial statements. FASB ASU No. 2018–13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement On January 1, 2020, the Company adopted the provision of ASU 2018–13, which modifies the disclosure requirements on fair value measurements. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, the Company may disclose other quantitative information in lieu of the weighted average if we determine that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The adoption of this new guidance did not have a material impact on our consolidated financial statements. 84 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Accounting Guidance Issued But Not Yet Adopted FASB ASU No. 2019–12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes The FASB has issued ASU 2019–12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . The new guidance is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740. The guidance also improves consistent application by clarifying and amending existing guidance from ASC 740. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods therein and is to be applied on a retrospective, modified retrospective or prospective approach, depending on the specific amendment. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact. 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 rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: • A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria. • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform. The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements. Note 2 – Acquisitions Branch Acquisition 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 $ 212.0 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 $ 1.6 million was recorded in the transaction, which will be amortized over 10 years on a straight line basis. Goodwill of $ 3.3 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 85 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) assumptions that are subject to change, the purchase price for the TCF branches is detailed in the following table. 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. Assets Liabilities Cash and due from banks $ 4,012 Deposits Loans Non–interest bearing $ 181,403 Commercial 101,327 NOW accounts 303,050 Residential mortgage 56,499 Savings and money market 262,488 Consumer 54,212 Certificates of deposit 99,468 Total loans 212,038 Total deposits 846,409 Premises and equipment, net 6,901 Interest payable 16 Goodwill 3,334 Other liabilities 1,278 Core deposit intangible 1,630 Interest receivable 519 Other assets 1,102 Total assets purchased $ 229,536 Total liabilities assumed $ 847,703 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. Salin Bancshares, Inc. On March 26, 2019, Horizon completed the acquisition of Salin Bancshares, Inc. (“Salin”), an Indiana corporation, and Horizon Bank’s acquisition of Salin Bank and Trust Company (“Salin Bank”), an Indiana commercial bank and wholly–owned subsidiary of Salin, through mergers effective March 26, 2019. Under the terms of the Merger Agreement, shareholders of Salin received 23,907.5 shares of Horizon common stock and $ 87,417.17 in cash for each outstanding share of Salin common stock. Salin shares outstanding at the closing to be exchanged were 275 , and the shares of Horizon common stock issued to Salin shareholders totaled 6,563,697 . The Salin shareholders received cash in lieu of fractional shares. Based upon the March 25, 2019 closing price of $ 15.65 per share of Horizon common stock immediately prior to the effectiveness of the merger the transaction has an implied valuation of approximately $ 126.7 million. The Company incurred approximately $ 5.6 million in costs related to the acquisition. These expenses are classified in the non–interest expense section of the income statement and are primarily located in the data processing, professional fees, outside services and consultants and other expense line items. As a result of the acquisition, the Company was able to increase its loan and deposit base and expects to reduce costs through economies of scale. 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 final purchase price for the Salin acquisition is detailed in the following table. 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 86 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) adjustments will be included in the purchase price allocation prospectively. The measurement period adjustments will be calculated as if the accounting had been completed as of the acquisition date. Assets Liabilities Cash and due from banks $ 152,745 Deposits Investment securities, available for sale 54,319 Non–interest bearing $ 188,744 NOW accounts 207,567 Loans Savings and money market 274,504 Commercial 352,798 Certificates of deposit 70,529 Residential mortgage 131,008 Total deposits 741,344 Consumer 85,112 Total loans 568,918 Borrowings 70,495 Premises and equipment, net 20,425 Subordinated debentures 18,376 FRB and FHLB stock 3,571 Interest payable 826 Goodwill 31,358 Other liabilities 8,759 Core deposit intangible 19,818 Interest receivable 2,488 Other assets 112,880 Total liabilities assumed $ 839,800 Total assets purchased $ 966,522 Common shares issued $ 102,722 Cash paid 24,000 Total purchase price $ 126,722 Of the total purchase price of $ 126.7 million, $ 19.8 million has been allocated to core deposit intangible. Additionally, $ 31.4 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible is being amortized over 10 years on straight line basis. The Company acquired various loans in the acquisition that had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan–to–value percentages. Purchased credit–impaired loans are accounted for the under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310–30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current assumptions, such as a default rates, severity and prepayment speeds. 87 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table details an estimate of the acquired loans that are accounted for in accordance with ASC 310–30 as of March 26, 2019. Contractually required principal and interest at acquisition $ 22,672 Contractual cash flows not expected to be collected (nonaccretable differences) 6,694 Expected cash flows at acquisition 15,978 Interest component of expected cash flows (accretable discount) 735 Fair value of acquired loans accounted for under ASC310–30 $ 15,243 Estimates of certain loans, those for which specific credit–related deterioration has occurred since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. The results of operations of Salin have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro–forma results for the periods ended December 31, 2020 and 2019 as if the Salin acquisition had occurred as of the beginning of the comparable prior reporting periods. For the Year Ended December 31 2019 Summary of Operations: Net Interest Income $ 168,693 Provision for Loan Losses 2,276 Net Interest Income after Provision for Loan Losses 166,417 Non-interest Income 43,472 Non-interest Expense 134,446 Income before Income Taxes 75,443 Income Tax Expense 13,246 Net Income $ 62,197 Basic Earnings per Share $ 1.43 Diluted Earnings per Share $ 1.43 The pro–forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro–forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results. Note 3 – Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2021 and 2020, cash equivalents consisted primarily of money market accounts with brokers and certificates of deposit. At December 31, 2021, the Company’s cash accounts exceeded federally insured limits by approximately $ 514.9 million. Approximately $ 485.7 million of this amount was held by either the Federal Reserve Bank or the Federal Home Loan Bank of Indianapolis, which is not federally insured. 88 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 4 – Securities The fair value of securities is as follows: December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 118,595 82 $ ( 1,698 ) $ 116,979 State and municipal 632,652 12,802 ( 5,708 ) 639,746 Federal agency collateralized mortgage obligations 60,600 989 ( 12 ) 61,577 Federal agency mortgage–backed pools 225,329 1,777 ( 1,032 ) 226,074 Private labeled mortgage–backed pools 31,856 137 ( 376 ) 31,617 Corporate notes 84,579 1,013 ( 773 ) 84,819 Total available for sale investment securities $ 1,153,611 $ 16,800 $ ( 9,599 ) $ 1,160,812 Held to maturity U.S. Treasury and federal agencies $ 195,429 $ 12 $ ( 1,215 ) $ 194,226 State and municipal 862,461 20,719 ( 4,263 ) 878,917 Federal agency collateralized mortgage obligations 48,482 3 ( 1,020 ) 47,465 Federal agency mortgage–backed pools 188,426 151 ( 2,612 ) 185,965 Private labeled mortgage–backed pools 99,958 58 ( 1,840 ) 98,176 Corporate notes 157,687 11 ( 2,456 ) 155,242 Total held to maturity investment securities $ 1,552,443 $ 20,954 $ ( 13,406 ) $ 1,559,991 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 Company elected to transfer 475 AFS securities with an aggregate fair value of $ 490.2 million to a classification of HTM on December 31, 2021. IN accordance with FASB ASC 320–10–55–24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $ 6.0 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income (loss), with the associated pre–tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities 89 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) became the book value of the HTM securities at December 31, 2021, with no securities, would likely record an unrealized gain or loss for disclosure purposes. The Company elected to transfer 319 available for sale (“AFS”) securities with an aggregate fair value of $ 167.1 million to a classification of held to maturity (“HTM”) on April 1, 2014. In accordance with FASB ASC 320–10–55–24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $ 1.3 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income (loss), with the associated pre–tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at April 1, 2014, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes. The amortized cost and fair value of securities available for sale and held to maturity at December 31, 2021 and December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2021 December 31, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Available for sale Within one year $ 22,980 $ 22,984 $ 44,206 $ 44,192 One to five years 156,677 156,397 61,594 63,006 Five to ten years 315,630 316,125 136,857 145,102 After ten years 340,539 346,038 589,200 615,473 835,826 841,544 831,857 867,773 Federal agency collateralized mortgage obligations 60,600 61,577 144,022 147,453 Federal agency mortgage–backed pools 225,329 226,074 114,484 118,799 Private labeled mortgage–backed pools 31,856 31,617 — — Total available for sale investment securities $ 1,153,611 $ 1,160,812 $ 1,090,363 $ 1,134,025 Held to maturity Within one year $ 5,222 $ 5,265 $ 7,302 $ 7,327 One to five years 65,739 66,982 42,742 44,358 Five to ten years 273,720 275,308 82,087 88,300 After ten years 870,896 880,830 25,290 28,471 1,215,577 1,228,385 157,421 168,456 Federal agency collateralized mortgage obligations 48,482 47,465 2,661 2,697 Federal agency mortgage–backed pools 188,426 185,965 8,594 8,837 Private labeled mortgage–backed pools 99,958 98,176 — — Total held to maturity investment securities $ 1,552,443 $ 1,559,991 $ 168,676 $ 179,990 90 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) 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. December 31, 2021 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Investment Securities U.S. Treasury and federal agencies $ 268,732 $ ( 2,483 ) $ 15,820 $ ( 430 ) $ 284,552 $ ( 2,913 ) State and municipal 539,882 ( 9,389 ) 19,461 ( 582 ) 559,343 ( 9,971 ) Federal agency collateralized mortgage obligations 56,027 ( 1,032 ) — — 56,027 ( 1,032 ) Federal agency mortgage–backed pools 333,489 ( 3,644 ) — — 333,489 ( 3,644 ) Private labeled mortgage–backed pools 113,057 ( 2,216 ) — — 113,057 ( 2,216 ) Corporate notes 189,500 ( 3,229 ) — — 189,500 ( 3,229 ) Total securities $ 1,500,687 $ ( 21,993 ) $ 35,281 $ ( 1,012 ) $ 1,535,968 $ ( 23,005 ) 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 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 December 31, 2021 and December 31, 2020. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $ 14.6 million and $ 8.1 million at December 31, 2021 and December 31, 2020, respectively, 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. Information regarding security proceeds, gross gains and gross losses are presented below. Year Ended December 31 2021 2020 2019 Sales of securities available for sale Proceeds $ 27,514 $ 77,213 $ 98,425 Gross gains 914 4,372 168 Gross losses — ( 75 ) ( 243 ) The tax effect of the proceeds from the sale of securities available for sale was $ 192,000 , $ 902,000 and $( 16,000 ) for the years ended December 31, 2021, 2020 and 2019, respectively. The Company pledges securities to secure retail and corporate repurchase agreements to the Federal Reserve for borrowing availability and as settlements for the fair value of swap agreements. At December 31, 2021, the Company had pledged $ 146.5 million of fair value or $ 145.0 million of amortized cost, in securities as collateral for 91 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) $ 130.8 million in repurchase agreements, $ 479.5 million of fair value or $ 453.6 million of amortized cost, in securities as collateral for borrowing availability at the Federal Reserve with no current outstanding borrowings and $ 37.2 million of fair value or $ 36.6 million of amortized cost, in securities as collateral for $ 7.2 million in settlements on the fair value of swap agreements. Other than Temporary Impairment (“OTTI”) (Prior to January 1, 2020) Prior to the adoption of ASC 326 as of January 1, 2020, the Company used OTTI guidance in ASC 320 for impairment analysis and recognition. Under the OTTI model, impairment losses were recognized as a reduction of the cost basis of the investment with recovery of impairment losses recognized prospectively over time as interest income. Note 5 – 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 & 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. 92 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents total loans outstanding by portfolio class, as of December 31, 2021 and 2020. December 31, 2021 December 31, 2020 Commercial Owner occupied real estate $ 549,014 $ 496,306 Non–owner occupied real estate 1,066,131 999,636 Residential spec homes 9,907 10,070 Development & spec land 22,712 26,372 Commercial and industrial 529,195 659,887 Total commercial 2,176,959 2,192,271 Real estate Residential mortgage 563,811 598,700 Residential construction 30,571 25,586 Mortgage warehouse 109,031 395,626 Total real estate 703,413 1,019,912 Consumer Direct installment 63,714 38,046 Indirect installment 372,575 357,511 Home equity 290,970 259,643 Total consumer 727,259 655,200 Total loans 3,607,631 3,867,383 Allowance for credit losses ( 54,286 ) ( 57,027 ) Net loans $ 3,553,345 $ 3,810,356 As of December 31, 2021 and 2020, loans originated under the Federal Paycheck Protection Program (“PPP”) totaled approximately $ 25.8 million and $ 208.9 million, respectively. Total loans include net deferred loan costs of $ 1.9 million at December 31, 2021 and net deferred loan fees of $ 1.7 million at December 31, 2020, respectively. 93 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Real Estate and Consumer With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Mortgage Warehousing Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days. Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon 94 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) 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 restructured loans by class of loans: December 31, 2021 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–performing Loans with no Allowance for Credit Losses Commercial Owner occupied real estate $ 4,247 $ — $ — $ 603 $ 4,850 $ 2,796 Non–owner occupied real estate 761 — 285 — 1,046 1,046 Residential spec homes — — — — — — Development & spec land 919 — — — 919 919 Commercial and industrial 694 — — — 694 456 Total commercial 6,621 — 285 603 7,509 5,217 Real estate Residential mortgage 5,626 66 892 1,421 8,005 8,005 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 5,626 66 892 1,421 8,005 8,005 Consumer Direct installment 7 — — — 7 7 Indirect installment 538 15 — — 553 553 Home equity 2,170 64 344 367 2,945 2,945 Total consumer 2,715 79 344 367 3,505 3,505 Total $ 14,962 $ 145 $ 1,521 $ 2,391 $ 19,019 $ 16,727 95 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for 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–performing Loans 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 twelve months ended December 31, 2021 and 2020 while the loans were in non–accrual status. Included in the $ 15.0 million of non–accrual loans and the $ 1.5 million of non–performing TDRs at December 31, 2021 were $ 2.2 million and $ 290,000 , respectively, of loans acquired for which there were accretable yields recognized. 96 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents the payment status by class of loan, excluding non–accrual loans of $ 15.0 million and non–performing TDRs of $ 1.5 million at December 31, 2021: December 31, 2021 Current 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Total Loans Commercial Owner occupied real estate $ 543,978 $ 789 — — $ 789 $ 544,767 Non–owner occupied real estate 1,063,377 1,708 — — 1,708 1,065,085 Residential spec homes 9,907 — — — — 9,907 Development & spec land 21,735 58 — — 58 21,793 Commercial and industrial 527,448 974 79 — 1,053 528,501 Total commercial 2,166,445 3,529 79 — 3,608 2,170,053 Real estate Residential mortgage 556,128 834 265 66 1,165 557,293 Residential construction 30,571 — — — — 30,571 Mortgage warehouse 109,031 — — — — 109,031 Total real estate 695,730 834 265 66 1,165 696,895 Consumer Direct installment 63,295 409 3 — 412 63,707 Indirect installment 369,615 2,271 136 15 2,422 372,037 Home equity 287,382 849 161 64 1,074 288,456 Total consumer 720,292 3,529 300 79 3,908 724,200 Total $ 3,582,467 $ 7,892 $ 644 $ 145 $ 8,681 $ 3,591,148 97 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents the payment status by class of loans, excluding non–accrual loans of $ 22.1 million and non–performing TDRs $ 2.6 million of 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 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 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 troubled debt restructurings (“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 December 31, 2021 and 2020, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of December 31, 2021, the Company had $ 3.9 million in TDRs and $ 2.4 million were performing according to the restructured terms and five TDRs were returned to accrual status during 2021. As of December 31, 2020, the Company had $ 4.4 million in TDRs and $ 1.8 million were performing according to the restructured terms and one TDR was returned to accrual status during 2020. There were no specific reserves allocated to TDRs at December 31, 2021 or 2020 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the CARES Act during 2021. 98 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents TDRs by loan portfolio: December 31, 2021 December 31, 2020 Non–accrual Accruing Total Non-accrual Accruing Total Commercial Owner occupied real estate $ — $ 603 $ 603 $ 630 $ 168 $ 798 Non–owner occupied real estate 285 — 285 330 — 330 Residential spec homes — — — — — — Development & spec land — — — — — — Commercial and industrial — — — 506 — 506 Total commercial 285 603 888 1,466 168 1,634 Real estate Residential mortgage 892 1,421 2,313 922 1,381 2,303 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 892 1,421 2,313 922 1,381 2,303 Consumer Direct installment — — — — — — Indirect installment — — — — — — Home equity 344 367 711 222 244 466 Total consumer 344 367 711 222 244 466 Total $ 1,521 $ 2,391 $ 3,912 $ 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 December 31, 2021 and 2020, the Bank modified loans totaling $ 10.9 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. 99 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The tables below present the amortized cost basis and ACL allocated for collateral dependent loans in accordance with ASC326, which are individually evaluated to determine expected credit losses, at December 31, 2021 and 2020. December 31, 2021 Real Estate Accounts Receivable/Equipment Other Total ACL Allocation Commercial Owner occupied real estate $ 11,201 $ 103 $ — $ 11,304 $ 632 Non–owner occupied real estate 2,068 — — 2,068 — Development & spec land 919 — — 919 — Commercial and industrial 427 1,218 — 1,645 128 Total commercial 14,615 1,321 — 15,936 760 Total collateral dependent loans $ 14,615 $ 1,321 $ — $ 15,936 $ 760 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 — Development & spec land 70 — — 70 — Commercial and industrial 2,245 210 — 2,455 252 Total commercial 14,656 324 — 14,980 1,857 Total collateral dependent loans $ 14,656 $ 324 $ — $ 14,980 $ 1,857 Credit Quality Indicators Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade. • For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective 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 or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO when recommending an upgrade. • The CCBO, or a designee, meets periodically with loan officers to discuss the status of past–due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. • Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a 100 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) precursor for developing management’s analysis of the adequacy of the Allowance for Loan and Lease 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 most recent review and approval of the loan policy was in October 2020. 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 unqualified 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 year 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 unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory; • At inception, the loan was 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. 101 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Risk Grade 4 Satisfactory/Monitored: 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: 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 needed 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. 102 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for 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 or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 103 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following tables present loans by credit grades and origination year at December 31, 2021. December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Commercial Owner occupied real estate Pass $ 86,798 $ 58,789 $ 61,134 $ 43,467 $ 46,327 $ 148,940 $ 60,539 $ 505,994 Special Mention — 72 2,685 3,194 7,279 10,806 1,345 25,381 Substandard — 1,003 1,312 3,192 1,957 9,401 774 17,639 Doubtful — — — — — — — — Total owner occupied real estate $ 86,798 $ 59,864 $ 65,131 $ 49,853 $ 55,563 $ 169,147 $ 62,658 $ 549,014 Non–owner occupied real estate Pass $ 175,538 $ 127,936 $ 113,907 $ 59,596 $ 126,334 $ 260,224 $ 148,876 $ 1,012,411 Special Mention — 839 1,192 29,446 999 3,850 515 36,841 Substandard 720 — 6,045 1,096 425 7,793 800 16,879 Doubtful — — — — — — — — Total non–owner occupied real estate $ 176,258 $ 128,775 $ 121,144 $ 90,138 $ 127,758 $ 271,867 $ 150,191 $ 1,066,131 Residential spec homes Pass $ 1,115 $ 254 $ 155 $ — $ — $ 1,346 $ 7,037 $ 9,907 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total residential spec homes $ 1,115 $ 254 $ 155 $ — $ — $ 1,346 $ 7,037 $ 9,907 Development & spec land Pass $ 2,282 $ 536 $ 503 $ 11 $ 1,822 $ 8,496 $ 7,837 $ 21,487 Special Mention — — — — — 177 — 177 Substandard — — — — 11 289 748 1,048 Doubtful — — — — — — — — Total development & spec land $ 2,282 $ 536 $ 503 $ 11 $ 1,833 $ 8,962 $ 8,585 $ 22,712 Commercial & industrial Pass $ 198,482 $ 48,245 $ 43,003 $ 47,975 $ 63,516 $ 69,384 $ 23,647 $ 494,252 Special Mention 592 3,278 2,090 4,588 3,781 7,427 3,295 25,051 Substandard 111 143 1,211 3,936 1,313 1,826 1,352 9,892 Doubtful — — — — — — — — Total commercial & industrial 199,185 51,666 46,304 56,499 68,610 78,637 28,294 529,195 Total commercial $ 465,638 $ 241,095 $ 233,237 $ 196,501 $ 253,764 $ 529,959 $ 256,765 $ 2,176,959 104 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 116,118 $ 105,051 $ 44,691 $ 50,778 $ 56,330 $ 182,838 $ — $ 555,806 Non–performing — 78 448 854 66 6,559 — 8,005 Total residential mortgage $ 116,118 $ 105,129 $ 45,139 $ 51,632 $ 56,396 $ 189,397 $ — $ 563,811 Residential construction Performing $ — $ — $ — $ — $ — $ — $ 30,571 $ 30,571 Non–performing — — — — — — — — Total residential construction $ — $ — $ — $ — $ — $ — $ 30,571 $ 30,571 Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 109,031 $ 109,031 Non–performing — — — — — — — — Total mortgage warehouse — — — — — — 109,031 109,031 Total real estate $ 116,118 $ 105,129 $ 45,139 $ 51,632 $ 56,396 $ 189,397 $ 139,602 $ 703,413 December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Consumer Direct installment Performing $ 18,826 $ 12,756 $ 13,390 $ 7,027 $ 6,036 $ 5,577 $ 95 $ 63,707 Non–performing — — — — 1 6 — 7 Total direct installment $ 18,826 $ 12,756 $ 13,390 $ 7,027 $ 6,037 $ 5,583 $ 95 $ 63,714 Indirect installment Performing $ 160,194 $ 91,416 $ 58,907 $ 39,956 $ 17,014 $ 4,535 $ — $ 372,022 Non–performing 46 93 162 92 88 72 — 553 Total indirect installment $ 160,240 $ 91,509 $ 59,069 $ 40,048 $ 17,102 $ 4,607 $ — $ 372,575 Home equity Performing $ 80,389 $ 51,856 $ 34,603 $ 26,924 $ 22,495 $ 65,059 $ 6,699 $ 288,025 Non–performing 9 114 37 90 166 1,321 1,208 2,945 Total home equity 80,398 51,970 34,640 27,014 22,661 66,380 7,907 290,970 Total consumer $ 259,464 $ 156,235 $ 107,099 $ 74,089 $ 45,800 $ 76,570 $ 8,002 $ 727,259 105 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents loans by credit grades 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 $ 2,192,271 106 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for 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 Accounting for Certain Loans Acquired in a Transfer (Prior to January 1, 2020) As indicated in Note 1, the Company adopted ASC 326 using the prospective transition approach for PCD loans previously classified as PCI and accounted for under ASC 310–30. Accordingly, upon reassessment at January 1, 2020, the disclosures as previously required under ASC 310–30 are no longer applicable for the year ended December 31, 2020. 107 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The Company acquired loans in acquisitions with evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Prior to January 1, 2020, the Company purchased loans with evidence of credit deterioration since origination and for which it was probable that all contractually required payments will not be collected were 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. Purchase credit–impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310–30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds. Interest marks are accreted to income over the remaining life of the loan. Credit marks are evaluated using the practical expedient method. Accretable yield, or income expected to be collected for the year ended December 31, 2019 are as follows: Twelve Months Ended December 31, 2019 Beginning balance Additions Accretion Reclassification from nonaccretable difference Disposals Ending balance Heartland $ 174 — $ ( 32 ) — $ — $ 142 Summit 42 — ( 9 ) — ( 11 ) 22 Kosciusko 300 — ( 63 ) — ( 2 ) 235 LaPorte 829 — ( 111 ) — 4 722 Lafayette 609 — ( 126 ) — ( 193 ) 290 Wolverine 698 — ( 272 ) — ( 306 ) 120 Salin — 2,002 ( 590 ) — ( 37 ) 1,375 Total $ 2,652 $ 2,002 $ ( 1,203 ) $ — $ ( 545 ) $ 2,906 During the year ended December 31, 2019, the Company increased the allowance for loan losses by a charge to the income statement of $ 133,000 . No allowance for loan losses were reversed for the year ended December 31, 2019. 108 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 6 – Allowance for Credit and Loan Losses The following table represents, by loan portfolio segment, a summary of changes in the ACL on loans for the twelve months ended December 31, 2021 and 2020. Twelve Months Ended December 31, 2021 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 42,210 $ 4,620 $ 1,267 $ 8,930 $ 57,027 Credit loss expense (recovery) ( 1,320 ) ( 755 ) ( 208 ) 199 ( 2,084 ) PCD loans charge–offs 984 — — — 984 Charge–offs ( 1,368 ) ( 159 ) — ( 1,272 ) ( 2,799 ) Recoveries 269 150 — 739 1,158 Balance, end of period $ 40,775 $ 3,856 $ 1,059 $ 8,596 $ 54,286 Twelve Months Ended December 31, 2020 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 11,996 $ 923 $ 1,077 $ 3,671 $ 17,667 Impact of adopting ASC 326 10,832 4,048 — 4,911 19,791 Initial PCD allowance 2,786 — — — 2,786 Credit loss expense (recovery) 19,198 ( 184 ) 190 1,547 20,751 PCD loan charge–offs ( 2,105 ) — — — ( 2,105 ) Charge–offs ( 653 ) ( 204 ) — ( 2,169 ) ( 3,026 ) Recoveries 156 37 — 970 1,163 Balance, end of period $ 42,210 $ 4,620 $ 1,267 $ 8,930 $ 57,027 The Company utilized the Cumulative Loss Rate method in determining expected future credit losses. The loss rate method measures the amount of loan charge–offs, net of recoveries, (“loan losses”) recognized over the life of a pool and compares those loan losses to the outstanding loan balance of that pool as of a specific point in time (“pool date”). To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look–back period includes January 2013 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 109 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) 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 7 – Premises and Equipment December 31 2021 December 31 2020 Land $ 28,079 $ 27,224 Buildings and improvements 86,507 86,004 Furniture and equipment 33,136 29,940 Total cost 147,722 143,168 Accumulated depreciation ( 54,281 ) ( 50,752 ) Net premises and equipment $ 93,441 $ 92,416 Note 8 – Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $ 1.540 billion and $ 1.527 billion at December 31, 2021 and 2020. The aggregate fair value of capitalized mortgage servicing rights was approximately $ 15.2 million, $ 12.4 million and $ 14.4 million at December 31, 2021, 2020 and 2019, compared to the carrying values of $ 15.2 million, $ 12.5 million and $ 14.3 million, respectively. The fair value of capitalized mortgage servicing rights was approximately $ 13.9 million on January 1, 2019. 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. Mortgage servicing rights are included in other assets on the balance sheets as of December 31, 2021 and 2020. December 31 2021 December 31 2020 December 31 2019 Mortgage servicing rights Balances, January 1 $ 17,644 $ 15,046 $ 12,876 Servicing rights capitalized 4,209 5,530 3,547 Amortization of servicing rights ( 4,073 ) ( 2,932 ) ( 1,377 ) Balances, December 31 17,780 17,644 15,046 Impairment allowance Balances, January 1 ( 5,172 ) ( 719 ) ( 527 ) Additions — ( 5,106 ) ( 234 ) Reductions 2,578 653 42 Balances, December 31 ( 2,594 ) ( 5,172 ) ( 719 ) Mortgage servicing rights, net $ 15,186 $ 12,472 $ 14,327 During 2021 the Bank recorded a recovery of impairment of approximately $ 2.6 million. During 2020 and 2019 the Bank recorded additional impairment of approximately $ 4.5 million and $ 192,000 , respectively. 110 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 9 – Goodwill and Intangible Assets December 31 2021 December 31 2020 Balance, January 1 $ 151,238 $ 151,238 Goodwill acquired 3,334 — Balances, December 31 $ 154,572 $ 151,238 At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID–19, Horizon assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised of the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock and other relevant events. Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and sensitivities performed. At the conclusion of the assessment, the Company determined that as of December 31, 2020 it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the COVID–19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future. No impairment loss was recorded in 2021 or 2020. The Company tested goodwill for impairment during 2021 and 2020. In both valuations, the fair value exceeded the Company’s carrying value, therefore, it was concluded goodwill is not impaired. For additional details related to impairment testing, see the “Goodwill and Intangible Assets” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Item 7 of this Annual Report on Form 10–K. On September 17, 2021, the TCF branch acquisition resulted in goodwill of $ 3.3 million. As a result of the acquisition of American Trust & Savings Bank in 2010; Heartland in 2012; Summit in 2014; Peoples in 2015; Kosciusko, LaPorte and CNB in 2016; Lafayette and Wolverine in 2017; Salin in 2019; and TCF in 2021; the Company has recorded certain amortizable intangible assets related to core deposit intangibles. These core deposit intangibles are being amortized over seven years to ten years using an accelerated method. Amortizable intangible assets are summarized as follows: December 31, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortizable intangible assets Core deposit intangible $ 42,220 $ ( 21,279 ) $ 40,590 $ ( 17,635 ) 111 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Amortization expense for intangible assets totaled $ 3.9 million, $ 3.8 million, and $ 3.5 million for the years ended December 31, 2021, 2020 and 2019. Estimated amortization for the years ending December 31 is as follows: Year Amount 2022 $ 3,702 2023 3,612 2024 3,403 2025 3,044 2026 2,566 Thereafter 4,614 $ 20,941 Note 10 – Leases As of January 1, 2019, when the Company adopted ASU 2016–02 prospectively, the Company began recording operating leases as a right–of–use (“ROU”) asset in other assets and operating lease liability in other liabilities on the consolidated balance sheet. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating liability, is recognized on a straight–line basis over the lease term, and is recorded primarily in net occupancy expense in the consolidated statements of income. When the Company adopted the guidance on January 1, 2019, it elected the optional alternative transition method permitted by ASU 2018–11 allowing for recognition of applicable leases as of January 1, 2019. Additionally, the Company elected the following accounting policies: • The practical expedient package that forgoes: • Reassessment of any expired or existing contracts for a lease • Reassessment of lease classification for expired or existing leases • Reassessment of initial direct costs for existing leases • The hindsight practical expedient to determine lease term and impairment of ROU assets • Other practical expedients regarding combination of lease and non–lease components and the exclusion of short–term leases • The Company did not elect to follow the practical expedients for land easements and the portfolio approach Operating leases relate primarily to bank branches and office space with remaining average lease terms of seven years . The weighted average discount rate utilized to calculate the ROU asset and operating lease liability was approximately 2.57 %, which represents the incremental borrowing rate. At inception, the Company recorded a ROU asset and operating lease liability of $ 3.5 million. At December 31, 2021, a ROU asset of $ 2.0 million is included in other assets and an operating lease liability of $ 2.0 million is included in other liabilities . Options to extend a lease were considered in the remaining lease term determination. The lease expense for operating leases was $ 484,000 for the year ended December 31, 2021. The weighted average remaining life of leases was 4.5 years at December 31, 2021. 112 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Future minimum operating lease payments under non-cancellable leases with initial or remaining lease terms at December 31, 2021 were as follows: Year Amount 2022 $ 504 2023 504 2024 459 2025 323 2026 and thereafter 323 Total lease payments $ 2,113 Less: Interest ( 365 ) Present value of lease liabilities $ 1,748 Note 11 – Deposits December 31 2021 December 31 2020 Non–interest bearing demand deposits $ 1,360,338 $ 1,053,242 Interest bearing demand deposits 1,947,973 1,420,359 Money market (variable rate) 826,317 702,227 Savings deposits 937,477 680,087 Certificates of deposit of $250,000 or more 299,537 242,417 Other certificates and time deposits 431,349 432,801 Total deposits $ 5,802,991 $ 4,531,133 Certificates and other time deposits for both retail and brokered maturing in years ending December 31 are as follows: Retail Brokered Total 2022 $ 496,468 $ 15,256 $ 511,724 2023 132,823 16,648 149,471 2024 43,875 — 43,875 2025 13,344 — 13,344 2026 12,269 — 12,269 Thereafter 203 — 203 $ 698,982 $ 31,904 $ 730,886 113 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 12 – Borrowings December 31 2021 December 31 2020 Federal Home Loan Bank advances, variable and fixed rates ranging from 0.01 % to 4.90 %, due at various dates through July 23, 2031 $ 525,484 $ 365,538 Securities sold under agreements to repurchase 130,798 109,462 Secured borrowings 19,471 — Total borrowings $ 675,753 $ 475,000 The Federal Home Loan Bank advances are secured by first and second mortgage loans, commercial real estate loans and mortgage warehouse loans totaling approximately $ 830.8 million. Advances are subject to restrictions or penalties in the event of prepayment. At December 31, 2021, the Bank had a total of $ 425.0 million in putable advances. The call dates for these advances range from January 24, 2022 to October 24, 2022 even though maturity dates extend beyond those dates. At December 31, 2021, the Bank had available approximately $ 672.7 million in credit lines with various money center banks, including the FHLB. Contractual maturities in years ending December 31 are as follows: Year Amount 2022 $ 200,377 2023 112 2024 50,117 2025 73 2026 75,074 Thereafter 350,000 $ 675,753 Note 13 – Repurchase Agreements Securities sold under agreements to repurchase consist of obligations of the Bank to other parties. The obligations are secured by federal agency collateralized mortgage obligations and federal agency mortgage-backed pools and such collateral is held in safekeeping by third parties. The maximum amount of outstanding agreements at any month end during 2021 and 2020 totaled $ 145.2 million and $ 109.5 million and the daily average of such agreements totaled $ 123.7 million and $ 100.2 million. The agreements at December 31, 2021 are overnight agreements. 114 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table shows repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements: December 31, 2021 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to one year One to three years Three to five years Five to ten years Beyond ten years Total Repurchase Agreements and repurchase–to–maturity transactions Repurchase Agreements $ 130,798 $ — $ — $ — $ — $ — $ 130,798 Securities pledged for Repurchase Agreements Federal agency collateralized mortgage obligations $ 31,372 $ — $ — $ — $ — $ — $ 31,372 Federal agency mortgage–backed pools 98,474 — — — — — 98,474 Private labeled mortgage–backed pools 16,639 — — — — — 16,639 Total $ 146,485 $ — $ — $ — $ — $ — $ 146,485 Note 14 – Subordinated Notes On June 24, 2020, Horizon issued $ 60.0 million in aggregate principal amount, $ 58.5 million proceeds, net of related issuance costs of $ 1.5 million, of 5.625 % fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625 % per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three–Month Term SOFR), plus 549 basis points, payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, commencing on October 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero. 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. 115 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 15 – Junior Subordinated Debentures Issued to Capital Trusts In October of 2004, Horizon formed Horizon Statutory Trust II (“Trust II”), a wholly owned statutory business trust. Trust II sold $ 10.3 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 1.95 % ( 2.16 % at December 31, 2021) and mature on November 23, 2034, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $ 17,500 were capitalized and were amortized to October 31, 2009, the first call date of the securities. In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (“Trust III”), a wholly owned statutory business trust. Trust III sold $ 12.4 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 1.65 % ( 1.86 % at December 31, 2021) and mature on January 30, 2037, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $ 12,647 were capitalized and are being amortized to the first call date of the securities. The Company assumed additional debentures as the result of the acquisition of Alliance Bank Corporation in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I a wholly owned business trust (“Alliance Trust”), to sell $ 5.2 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Alliance. The junior subordinated debentures are the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 2.65 % ( 2.86 % at December 31, 2021) and mature in June 2034, and securities may be called at any quarterly interest payment date at par. The Company assumed additional debentures as the result of the American Trust & Savings Bank purchase and assumption in 2010. In March 2004, Am Tru Inc., the holding company for American Trust & Savings Bank, formed Am Tru Statutory Trust I a wholly owned business trust (“Am Tru Trust”), to sell $ 3.5 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Am Tru Inc. The junior subordinated debentures are the sole assets of Am Tru Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 2.85 % ( 3.06 % at December 31, 2021) and mature in December 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 3.5 million, net of the remaining purchase discount, at December 31, 2021. The Company assumed additional debentures as the result of the Heartland merger in July 2012. In December 2006, Heartland formed Heartland (IN) Statutory Trust II a wholly owned business trust (“Heartland Trust”), to sell $ 3.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Heartland. The junior subordinated debentures are the sole assets of Heartland Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 1.67 % ( 1.88 % at December 31, 2021) and mature in December 2036, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 2.0 million, net of the remaining purchase discount, at December 31, 2021. 116 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The Company assumed additional debentures as the result of the LaPorte merger in July 2016. In October 2007, LaPorte assumed debentures as the result of its acquisition of City Savings Financial Corporation (“City Savings”). In June 2003, City Savings formed City Savings Statutory Trust I a wholly owned business trust (“City Savings Trust”), to sell $ 5.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from City Savings. The junior subordinated debentures are the sole assets of City Savings Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 3.10 % ( 3.31 % at December 31, 2021) and mature in June 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 4.5 million, net of the remaining purchase discount, at December 31, 2021. The Company assumed additional debentures as the result of the Salin merger in March 2019. In October 2003, Salin Bancshares, Inc. (“Salin”) formed Salin Statutory Trust I (“Salin Trust”), to sell $ 20.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Salin. The junior subordinated debentures are the sole assets of Salin Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 2.95 % ( 3.16 % at December 31, 2021) and mature in October 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 17.9 million, net of the remaining purchase discount, at December 31, 2021. The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1 Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded as interest expense. Note 16 – Employee Stock Ownership Plan Effective January 1, 2007, Horizon converted its stock bonus plan to an employee stock ownership plan (“ESOP”). Prior to that date, Horizon maintained an employee stock bonus plan that covered substantially all employees. The stock bonus plan was noncontributory, and Horizon made matching contributions of amounts contributed by the employees to the Employee Thrift Plan and discretionary contributions. Prior to the establishment of the employee stock bonus plan, Horizon maintained an ESOP that was terminated in 1999. The prior ESOP accounts of active employees and the discretionary accounts of active employees remain in the new ESOP. The Matching contribution accounts under the stock bonus plan were transferred to the Employee Thrift Plan. The ESOP exists for the benefit of substantially all employees. Contributions to the ESOP are by Horizon and are determined by the Board of Directors at its discretion. The contributions may be made in the form of cash or common stock. Shares are allocated among participants each December 31 on the basis of each participant’s eligible compensation to total eligible compensation. Eligible compensation is limited to $ 290,000 for each participant. Dividends on shares held by the plan, at the discretion of each participant, may be distributed to an individual participant or left in the plan to purchase additional shares. Total cash contributions and expense recorded for the ESOP was $ 0 in 2021, $ 591,000 in 2020 and $ 719,000 in 2019. The ESOP, which is not leveraged, owned a total of 740,113 shares of Horizon’s stock or 1.7 % of the outstanding shares as of December 31, 2021. Horizon's ESOP was terminated on July 1, 2021. The Internal Revenue Service issued a favorable determination letter on October 29, 2021, and the Plan is in the process of distributing the assets to participants which is expected to be completed by the second quarter of 2022. 117 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 17 – Employee Benefit Plans The Employee Thrift Plan (“Plan”) provides that all employees of Horizon with the requisite hours of service are eligible for the Plan. The Plan permits voluntary employee contributions and Horizon may make discretionary matching and profit sharing contributions. Each eligible employee is vested according to a schedule based upon years of service. Employee voluntary contributions are vested at all times. The Bank’s expense related to the Plan totaled approximately $ 1.5 million in 2021, $ 1.4 million in 2020 and $ 1,200,000 in 2019. The Plan owned a total of 842,396 shares of Horizon’s stock or 1.9 % of the outstanding shares as of December 31, 2021. The Pentegra Defined Benefit Plan (“Pentegra Plan”), acquired from the Peoples acquisition, was terminated in April of 2020. The Pentegra Plan was transferred into annuity contracts and will no longer be administered by the Company. The termination liability was $ 3.4 million, which the Company recorded a $ 2.9 million withdrawal liability resulting in an additional termination expense in 2020 of $ 460,000 . 118 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 18 – Income Tax December 31 2021 December 31 2020 December 31 2019 Income tax expense Currently payable Federal $ 11,742 $ 16,914 $ 11,143 State 1,303 2,377 140 Deferred Federal 2,056 ( 7,970 ) 1,787 State 255 ( 1,451 ) 233 Total income tax expense $ 15,356 $ 9,870 $ 13,303 Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 21% $ 21,514 $ 16,457 $ 16,767 Tax exempt interest ( 5,362 ) ( 4,090 ) ( 2,977 ) Tax exempt income ( 604 ) ( 531 ) ( 587 ) Stock compensation ( 250 ) ( 160 ) ( 324 ) Other tax exempt income ( 404 ) ( 334 ) ( 313 ) State tax 1,231 733 295 Tax credit investments ( 981 ) ( 2,284 ) — Nondeductible and other 212 79 442 Actual tax expense $ 15,356 $ 9,870 $ 13,303 December 31 2021 December 31 2020 Assets Allowance for loan losses $ 13,707 $ 13,966 Net operating loss and tax credits (from acquisitions) — 3 Director and employee benefits 2,094 2,035 Other 1,785 3,139 Total assets 17,586 19,143 Liabilities Depreciation ( 4,540 ) ( 4,374 ) State tax ( 261 ) ( 315 ) Federal Home Loan Bank stock dividends ( 371 ) ( 363 ) Difference in basis of intangible assets ( 3,476 ) ( 2,921 ) Fair value adjustment on acquisitions ( 3,435 ) ( 3,284 ) Unrealized gain on AFS securities and fair value hedge ( 1,953 ) ( 7,404 ) Other ( 222 ) ( 294 ) Total liabilities ( 14,258 ) ( 18,955 ) Net deferred tax asset/(liability) $ 3,328 $ 188 Retained earnings of the Bank include approximately $ 12.8 million for which no deferred income tax liability has been recognized. This amount represents an allocation of previously acquired institutions income to bad debt deductions as of December 31, 1987 for tax purposes only. Reductions of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of “bank” status would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The 119 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) unrecorded deferred income tax liability on the above amount for the Company was approximately $ 2.7 million at December 31, 2021. The Company files income tax returns in the U.S. federal jurisdiction. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2018. Note 19 – Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss included in capital are as follows: December 31 2021 December 31 2020 Unrealized gain on securities available for sale $ 7,201 $ 43,662 Unamortized loss on securities held to maturity, previously transferred from AFS 5,770 ( 165 ) Unrealized loss on derivative instruments ( 3,673 ) ( 8,243 ) Tax effect ( 1,953 ) ( 7,402 ) Total accumulated other comprehensive income $ 7,345 $ 27,852 Note 20 – Commitments, Off–Balance Sheet Risk and Contingencies The Bank was not required to have any cash on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 2021. These balances would be included in cash and cash equivalents and would not earn interest. The Bank is a party to financial instruments with off-balance sheet risk in the ordinary course of business to meet financing needs of its customers. These financial instruments include commitments to make loans and standby letters of credit. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements. At December 31, 2021 and 2020, commitments to make loans amounted to approximately $ 1.3 billion and $ 917.4 million and commitments under outstanding standby letters of credit amounted to approximately $ 12.7 million and $ 12.4 million. Since many commitments to make loans and standby letters of credit expire without being used, the amount does not necessarily represent future cash advances. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The Company determines the estimated amount of expected credit extensions based on historical usage to calculate the amount of exposure for a loss estimate. After review of the expected credit losses on off–balance sheet exposures, the Company determined the amount not being recorded as immaterial at this time. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation. 120 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 21 – Regulatory Capital Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. 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. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, or leverage ratio. For December 31, 2021 and 2020, Basel III rules require the Company and Bank to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. To be categorized as well capitalized, the Company and Bank must maintain minimum 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 December 31, 2021 and December 31, 2020, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the year ending December 31, 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. As indicated in Note 1, the Company adopted ASC 326 and has elected to apply the CECL transition provisions. 121 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Horizon and the Bank’s actual and required capital ratios as of December 31, 2021 and 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 December 31, 2021 Total capital (to risk–weighted assets) (1) Consolidated $ 708,198 15.71 % $ 360,737 8.00 % $ 473,468 10.50 % N/A N/A Bank 664,061 14.72 % 361,015 8.00 % 473,832 10.50 % $ 451,269 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 661,729 14.68 % 270,553 6.00 % 383,284 8.50 % N/A N/A Bank 617,592 13.69 % 270,761 6.00 % 383,578 8.50 % 361,015 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 541,920 12.02 % 202,915 4.50 % 315,645 7.00 % N/A N/A Bank 617,592 13.69 % 203,071 4.50 % 315,888 7.00 % 293,325 6.50 % Tier 1 capital (to average assets) (1) Consolidated 661,729 9.05 % 292,335 4.00 % 292,335 4.00 % N/A N/A Bank 617,592 8.50 % 290,646 4.00 % 290,646 4.00 % 363,307 5.00 % December 31, 2020 Total capital (to risk–weighted assets) (1) Consolidated $ 548,364 13.95 % $ 314,395 8.00 % $ 412,644 10.500 % N/A N/A Bank 497,227 12.65 % 314,452 8.00 % 412,718 10.500 % $ 393,065 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 530,643 13.50 % 235,796 6.00 % 334,044 8.500 % N/A N/A Bank 479,506 12.20 % 235,823 6.00 % 334,082 8.500 % 314,430 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 473,150 12.04 % 176,846 4.50 % 275,094 7.500 % N/A N/A Bank 479,506 12.20 % 176,867 4.50 % 275,126 7.500 % 255,475 6.50 % Tier 1 capital (to average assets) (1) Consolidated 530,643 10.50 % 202,111 4.00 % 202,111 4.000 % N/A N/A Bank 479,506 9.49 % 202,110 4.00 % 202,110 4.000 % 252,638 5.00 % (1) As defined by regulatory agencies The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was phased in by increments starting in 2016 and was fully implemented by 2019 at 2.50 %. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. 122 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 22 – Share–Based Compensation On January 21, 2003, the Board of Directors adopted the Horizon Bancorp 2003 Omnibus Equity Incentive Plan (“2003 Plan”), which was approved by stockholders on May 8, 2003. Under the 2003 Plan, Horizon could issue up to 759,375 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2003 Plan limited the number of shares available to 759,375 for incentive stock options and to 379,687 for the grant of non-option awards. The shares available for issuance under the 2003 Plan could be divided among the various types of awards and among the participants as the Compensation Committee (“Committee”) determined. The Committee was authorized to grant any type of award to a participant that was consistent with the provisions of the 2003 Plan. Awards could consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determined the provisions, terms and conditions of each award. The restricted shares vest over a period of time established by the Committee at the time of each grant. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over the vesting period. The options shares granted under the 2003 Plan vest at a rate designated per the individual agreements. The restricted shares granted under the 2003 Plan vest at the end of each grant’s vesting period. On March 8, 2010, the Board of Directors adopted, and on May 6, 2010, the stockholders approved, an amendment to the 2003 Plan making an additional 885,937 common shares available for issuance. All share data has been adjusted for the 3:2 stock split on June 15, 2018 (and for four additional stock splits in 2003, 2011, 2012 and 2016 after the 2003 Plan was adopted). A summary of option activity under the 2003 Plan as of December 31, 2021, and changes during the year then ended, is presented below: Shares Weighted– Average Exercise Price Weighted– Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding, beginning of year 4,050 $ 7.49 Granted — — Exercised — — Forfeited — — Outstanding, end of year 4,050 7.49 0.45 $ 54,095 Exercisable, end of year 4,050 7.49 0.45 54,095 On June 18, 2013, the Board of Directors adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (“2013 Plan”), which was approved by the Company’s shareholders on May 8, 2014. Under the 2013 Plan, Horizon may issue up to 1,556,325 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2013 Plan limits the number of shares available to 225,000 for incentive stock options and to 900,000 for the grant of non–option awards. The shares available for issuance under the 2013 Plan may be divided among the various types of awards and among the participants as the Committee determines. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2013 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award. The 2013 Plan was amended on May 3, 2018, upon shareholder approval, primarily to allow grants of other types of stock–based awards, such as awards valued in whole or in part by reference to the value of shares of Horizon common stock. All share data has been adjusted for the 3:2 stock split on June 15, 2018 and November 14, 2016. 123 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The restricted shares can vest over a period of time established by the Committee at the time of each grant, but the restricted shares already granted under the 2013 Plan generally vest at the end of three, four or five years of continuous employment. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight–line method over the vesting period. The performance shares that are awarded become earned and vested based on the achievement of certain performance goals during a performance period as established by the Committee at the time of each grant. The performance goals under the presently–awarded grant agreements are based on a comparison of the Company’s average performance over the performance period for the return on common equity, compounded annual growth rate of total assets, and return on average assets, all as relative to the average performance for publicly traded banks with total assets between $ 1 billion and $ 5 billion on the SNL Bank Index. Holders of performance share awards receive pass–through dividends but do not have any voting rights before the performance shares are earned and vested. The options shares granted under the 2013 Plan vest at a rate designated per the individual agreements. The fair value of options granted is estimated on the date of the grant using an option–pricing model with the following weighted–average assumptions: For the Year Ended December 31 2019 Dividend yields 2.39 % Volatility factors of expected market price of common stock 28.67 % Risk-free interest rates 2.61 % Expected life of options 8 years A summary of option activity under the 2013 Plan as of December 31, 2021, and changes during the year then ended, is presented below: Shares Weighted– Average Exercise Price Weighted– Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding, beginning of year 305,362 $ 12.52 Granted — — Exercised ( 104,484 ) 10.45 Forfeited — — Outstanding, end of year 200,878 14.46 4.95 $ 1,283,614 Exercisable, end of year 188,888 14.32 4.81 1,234,355 The weighted average grant–date fair value of options granted during the years 2021, 2020 and 2019 was $ 0.00 , $ 0.00 and $ 4.44 . On January 19, 2021, the Board of Directors adopted the Horizon Bancorp 2021 Omnibus Equity Incentive Plan (“2021 Plan”), which was approved by the Company’s shareholders on May 6, 2021. Under the 2021 Plan, Horizon may issue up to 1,787,548 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2021 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award. 124 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The restricted shares can vest over a period of time established by the Committee at the time of each grant, but the restricted shares already granted under the 2021 Plan generally vest at the end of three, four or five years of continuous employment. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight–line method over the vesting period. The performance shares that are awarded become earned and vested based on the achievement of certain performance goals during a performance period as established by the Committee at the time of each grant. The performance goals under the presently–awarded grant agreements are based on a comparison of the Company’s average performance over the performance period for the return on common equity, compounded annual growth rate of total assets, and return on average assets, all as relative to the average performance for publicly traded banks with total assets between $ 3 billion and $ 7 billion on the SNL Bank Index. Holders of performance awards receive pass–through dividends but do not have any voting rights before the performance shares are earned and vested. The option shares granted under the 2021 Plan vest at a rate designated per the individual agreements. A summary of the status of Horizon’s non–vested restricted and performance shares as of December 31, 2021 are presented below: Shares Weighted Average Grant Date Fair Value Non–vested,beginning of year 334,890 $ 13.90 Vested ( 68,679 ) 20.21 Granted 161,823 18.91 Forfeited ( 4,725 ) 14.48 Non–vested,end of year 423,309 14.78 Total compensation cost recognized in the income statement for option–based payment arrangements during 2021 and was $ 68,000 and the related tax benefit recognized was approximately $ 14,000 . Total compensation cost recognized in the income statement for option–based payment arrangements during 2020 and 2019 was $ 132,000 and $ 215,000 and the related tax benefit recognized was $ 28,000 and $ 45,000 , respectively. No stock options were granted during 2021 or 2020. Total compensation cost recognized in the income statement for restricted share and performance share based payment arrangements during 2021, 2020 and 2019 was $ 1.8 million, $ 1.2 million, and $ 705,000 . The recognized tax benefit related thereto was approximately $ 368,000 , $ 253,000 , and $ 148,000 for the years ended December 31, 2021, 2020 and 2019. Cash received from option exercise under all share–based payment arrangements for the years ended December 31, 2021, 2020 and 2019 was $ 1.1 million, $ 255,000 , and $ 236,000 . The actual tax benefit realized for the tax deductions from option exercise of the share–based payment arrangements totaled $ 334,000 , $ 59,000 , and $ 104,000 , for the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021, there was $ 3.2 million of total unrecognized compensation cost related to all non–vested share–based compensation arrangements granted under all of the plans. That cost is expected to be recognized over a weighted–average period of 2.41 years. Under all plans, forfeitures of share–based compensation grants are recognized as they occur. 125 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 23 – 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 an interest rate swap agreement for a portion of its floating rate debt which matured on December 16, 2021. The agreement provided for the Company to receive interest from the counterparty at three months LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 4.20 % on a notional amount of $ 12.0 million at December 31, 2020. Under the agreement, the Company paid or received the net interest amount monthly, with the monthly settlements included in interest expense. The Company assumed an additional interest rate swap agreement as the result of the LaPorte acquisition in July 2016 which matured on March 15, 2021. The agreement provided for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average rate of 2.62 % on a notional amount of $ 10.0 million at December 31, 2020. Under the agreement, the Company paid or received 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 counter party at a rate of 2.81 % on a notional amount of $ 50.0 million at December 31, 2021 and 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 agreements as cash flow hedging instruments. 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. At December 31, 2021, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months. Fair Value Hedges Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. At December 31, 2021, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months. 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 $ 489.0 million at December 31, 2021 and $ 442.7 million at December 31, 2020. Other Derivative Instruments The Company enters into non–hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At December 31, 2021, the Company’s fair values 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. 126 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following tables summarize the fair value of derivative financial instruments utilized by Horizon: Asset Derivatives Liability Derivatives December 31, 2021 December 31, 2021 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments Interest rate contracts Other assets $ 14,419 Other liabilities $ 18,092 Total derivatives designated as hedging instruments 14,419 18,092 Derivatives not designated as hedging instruments Mortgage loan contracts Other assets 1,037 Other liabilities 238 Total derivatives not designated as hedging instruments 1,037 238 Total derivatives $ 15,456 $ 18,330 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 consolidated statement of income for the 12–month periods ended December 31 is as follows: Amount of (Gain) Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion) Years Ended December 31 2021 2020 2019 Derivatives in cash flow hedging relationship Interest rate contracts $ 3,610 $ ( 3,004 ) $ ( 2,117 ) 127 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) FASB ASC 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. ASC 820–10–55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Years Ended December 31 2021 2020 2019 Derivative in fair value hedging relationship Interest rate contracts Interest income–loans $ ( 19,588 ) $ ( 20,962 ) $ ( 11,380 ) Interest rate contracts Interest income–loans 19,588 20,962 11,380 Total $ — $ — $ — Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Years Ended December 31 2021 2020 2019 Derivative not designated as hedging relationship Mortgage contracts Other income – gain on sale of loans $ ( 246 ) $ 819 $ 91 Note 24 – 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 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 December 31, 2021. 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 mortgage obligations and mortgage–backed pools, private–label 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 128 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. Government–sponsored mortgage–backed securities and corporate securities. Level 3 fair value for securities was determined using grid pricing that incorporates market estimates based on interest rates, maturity dates, coupon rates and ratings. Level 3 fair value for securities that have little to no market activity can also be priced at book value for lack of another reasonable pricing source or methodology. 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 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: December 31, 2021 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Available for sale securities U.S. Treasury and federal agencies $ 116,979 $ — $ 116,979 $ — State and municipal 639,746 — 519,282 120,464 Federal agency collateralized mortgage obligations 61,577 — 61,577 — Federal agency mortgage–backed pools 226,074 — 226,074 — Private labeled mortgage–backed pools 31,617 — 31,617 — Corporate notes 84,819 — 79,787 5,032 Total available for sale securities 1,160,812 — 1,035,316 125,496 Interest rate swap agreements asset 14,419 — 14,419 — Forward sale commitments 1,037 — 1,037 — Interest rate swap agreements liability ( 18,092 ) — ( 18,092 ) — Commitments to originate loans ( 238 ) — ( 238 ) — 129 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for 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 ) — The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable Level 3 inputs for the year ended December 31, 2021. Available for Sale Securities Years Ended December 31 2021 Beginning balance $ — Included in other comprehensive income ( 134 ) Purchases, issuances and settlements 125,630 Principal payments — Ending balance $ 125,496 Realized gains and losses included in net income for the periods are reported in the consolidated statements of income as follows: Years Ended December 31 Non–interest Income 2021 2020 2019 Total gains and losses from: Hedged loans $ ( 19,588 ) $ ( 20,962 ) $ ( 11,380 ) Fair value interest rate swap agreements 19,588 20,962 11,380 Derivative loan commitments ( 246 ) 819 91 $ ( 246 ) $ 819 $ 91 Certain other assets are measured at fair value on a nonrecurring 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): 130 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2021 Collateral dependent loans $ 15,176 $ — $ — $ 15,176 Mortgage servicing rights 15,186 — — 15,186 December 31, 2020 Collateral dependent loans $ 13,123 $ — $ — $ 13,123 Mortgage servicing rights 12,472 — — 12,472 Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. 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 were reduced by $ 2.6 million in 2021 and $ 5.2 million in 2020 for the fair value. 131 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 2021 and 2020. December 31, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) State and municipal securities $ 120,464 Grid pricing Maturity date, Weighted average coupon 1 month– 16 years, 2.05 % Corporate securities 5,032 Grid pricing Maturity date, Weighted average coupon 9 years– 17 years, 3.97 % Collateral dependent loans 15,176 Collateral based measurement Discount to reflect current market conditions and ultimate collectability 0.0 %– 54.0 % ( 4.8 %) Mortgage servicing rights 15,186 Discounted cash flows Discount rate, Constant prepayment rate, Probability of default 8.0 %– 8.0 % ( 8.0 %), 8.4 %– 14.6 % ( 11.6 %), 0.0 %– 2.0 %( 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 collectability 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 25 – Fair Value of Financial Instruments The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts. The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at December 31, 2021 and December 31, 2020. These include financial instruments recognized as assets and liabilities on the 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. 132 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) 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. 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 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. 133 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for 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. December 31, 2021 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Cash and due from banks $ 593,508 $ 593,508 $ — $ — Interest–earning time deposits 4,782 — 4,861 — Investment securities, held to maturity 1,552,443 — 1,513,520 46,471 Loans held for sale 12,579 — — 12,579 Loans (excluding loan level hedges), net 3,553,345 — — 3,462,443 Stock in FHLB 24,440 — 24,440 — Interest receivable 26,137 — 26,137 — Liabilities Non–interest bearing deposits $ 1,360,338 $ 1,360,338 $ — $ — Interest bearing deposits 4,442,653 — 4,369,011 — Borrowings 675,753 — 671,289 — Subordinated notes 58,750 — 57,906 — Junior subordinated debentures issued to capital trusts 56,785 — 53,420 — Interest payable 2,235 — 2,235 — 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 — 134 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 26 – 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 operations and cash flows of the Company. Note 27 – Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of Horizon Bancorp, Inc.: Condensed Balance Sheets December 31 2021 December 31 2020 Assets Total cash and cash equivalents $ 53,907 $ 127,044 Investment in subsidiaries 796,054 685,966 Other assets 9,510 3,902 Total assets $ 859,471 $ 816,912 Liabilities Subordinated notes $ 58,750 $ 58,603 Junior subordinated debentures issued to capital trusts 56,785 56,548 Other liabilities 20,727 9,545 Stockholders’ Equity 723,209 692,216 Total liabilities and stockholders’ equity $ 859,471 $ 816,912 Condensed Statements of Income Years Ended December 31 2021 2020 2019 Operating Income (Expense) Dividend income from subsidiaries $ 22,500 $ 61,400 $ 46,150 Other income 25 106 — Interest expense ( 5,767 ) ( 4,483 ) ( 3,209 ) Employee benefit expense ( 1,890 ) ( 1,997 ) ( 1,687 ) Other expense ( 591 ) ( 517 ) ( 416 ) Income Before Undistributed Income of Subsidiaries 14,277 54,509 40,838 Undistributed Income of Subsidiaries 71,439 13,131 25,053 Income Before Tax 85,716 67,640 65,891 Income Tax Benefit 1,375 859 647 Net Income Available to Common Shareholders $ 87,091 $ 68,499 $ 66,538 135 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Condensed Statements of Comprehensive Income Years Ended December 31 2021 2020 2019 Net Income $ 87,091 $ 68,499 $ 66,538 Other Comprehensive Income (Loss) Change in fair value of derivative instruments, net of taxes 3,610 ( 3,004 ) ( 2,117 ) Unrealized appreciation for the period on held to maturity securities, net of taxes 4,687 ( 46 ) ( 92 ) Unrealized appreciation (depreciation) on available for sale securities, net of taxes ( 28,082 ) 27,865 16,726 Less: reclassification adjustment for realized (gains) losses included in net income, net of taxes ( 722 ) ( 3,395 ) 59 ( 20,507 ) 21,420 14,576 Comprehensive Income $ 66,584 $ 89,919 $ 81,114 Condensed Statements of Cash Flows Years Ended December 31 2021 2020 2019 Operating Activities Net income $ 87,091 $ 68,499 $ 66,538 Items not requiring (providing) cash Equity in undistributed net income of subsidiaries ( 71,439 ) ( 13,131 ) ( 25,053 ) Change in: Share based compensation 68 132 215 Amortization of unearned compensation 1,751 1,206 705 Other assets 730 ( 20 ) ( 5,449 ) Other liabilities 946 ( 14 ) 1,629 Net cash provided by operating activities 19,147 56,672 38,585 Investing Activities Repurchase of outstanding stock ( 7,607 ) ( 19,636 ) ( 1,595 ) Capital contribution to subsidiary ( 60,000 ) — — Acquisition of Salin — — 2,350 Net cash (used in) provided by investing activities ( 67,607 ) ( 19,636 ) 755 Financing Activities Net change in borrowings 384 16 98 Dividends paid on common shares ( 24,768 ) ( 21,183 ) ( 20,835 ) Proceeds from issuance of stock ( 1,355 ) 1,390 1,705 Stock option exercises 1,062 — — Net proceeds from issuance of subordinated notes — 58,824 — Net cash used in financing activities ( 24,677 ) 39,047 ( 19,032 ) Net Change in Cash and Cash Equivalents ( 73,137 ) 76,083 20,308 Cash and Cash Equivalents at Beginning of Year 127,044 50,961 30,653 Cash and Cash Equivalents at End of Year $ 53,907 $ 127,044 $ 50,961 136 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 28 – Quarterly Results of Operations (Unaudited) The following is a summary of the quarterly consolidated results of operations: Three Months Ended March 31, June 30, September 30, December 31, 2021 2021 2021 2021 Interest income $ 47,589 $ 47,420 $ 50,868 $ 54,118 Interest expense 5,051 4,788 4,324 4,142 Net interest income 42,538 42,632 46,544 49,976 Provision for loan losses 367 ( 1,492 ) 1,112 ( 2,071 ) Gain (loss) on sale of securities 914 — — — Net income $ 20,422 $ 22,173 $ 23,071 $ 21,425 Earnings per share: Basic $ 0.46 $ 0.50 $ 0.53 $ 0.49 Diluted 0.46 0.50 0.52 0.49 Average shares outstanding: Basic 43,919,549 43,950,501 43,810,729 43,534,298 Diluted 44,072,581 44,111,103 43,958,870 43,733,416 Three Months Ended March 31, June 30, September 30, December 31, 2020 2020 2020 2020 Interest income $ 51,654 $ 50,344 $ 50,146 $ 53,234 Interest expense 10,729 7,348 6,749 9,612 Net interest income 40,925 42,996 43,397 43,622 Provision for loan losses 8,600 7,057 2,052 3,042 Gain (loss) on sale of securities 339 248 1,088 2,622 Net income $ 11,655 $ 14,639 $ 20,312 $ 21,893 Earnings per share: Basic $ 0.26 $ 0.33 $ 0.46 $ 0.50 Diluted 0.26 0.33 0.46 0.50 Average shares outstanding: Basic 44,658,512 43,781,249 43,862,435 43,862,435 Diluted 44,756,716 43,802,794 43,903,881 43,903,881 137 Table of Contents Report of Independent Registered Public Accounting Firm Audit Committee, Board of Directors and Stockholders Horizon Bancorp, Inc. Michigan City, Indiana Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Horizon Bancorp, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021 and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 9, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting . Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses (“ACL”) The Company’s loan portfolio totaled $3.5 billion as of December 31, 2021 and the allowance for credit losses on loans was $54.0 million. As more fully described in Notes 1, 5 and 6 to the Company’s consolidated financial statements, the Company estimates its exposure to expected credit losses as of the balance sheet date, for existing financial instruments held at amortized cost, securities classified as available for sale and off-balance sheet exposures, such as unfunded loan commitments, letters of credit and other financial guarantees that are not unconditionally cancellable by the Company. 138 Table of Contents The determination of the ACL requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates, loan credit risk grading and identifying loans requiring individual evaluation among others. As disclosed by management, different assumptions and conditions could result in a materially different amount for the estimate of the ACL. We identified the ACL at December 31, 2021 as a critical audit matter. Auditing the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s identification of credit quality indicators, grouping of loans determined to be similar into pools, estimating the remaining life of loans in a pool, assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan credit risk grades. Our audit procedures related to the estimated allowance for credit losses at December 31, 2021 included: • Testing the design and operating effectiveness of internal controls, including those related to technology, over the ACL, the establishment of qualitative adjustments for current and expected conditions, grading and risk classification of loans and establishment of specific reserves on individually evaluated loans and management’s review controls over the ACL balance as a whole including attending internal CECL committee, commercial watch, and disclosure committee meetings. • Testing clerical and computational accuracy of the formulas within the calculation. • Testing of completeness and accuracy of the information and reports utilized in the ACL. • Evaluating the precision of management review of the adequacy of the ACL. • Evaluating the current and expected qualitative adjustments, including assessing the basis for the adjustments and the reasonableness of the significant assumptions. • Evaluating the forecast adjustment, including assessing that it is reasonable and supportable. • Evaluating the relevance and reliability of data and assumptions. • Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans. • Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years. • Evaluating credit quality indicators such as trends in delinquencies, nonaccruals, charge-offs, and loan grades. • Identifying fields in the various loan systems that defined the loan pools and tested the design and operating effectiveness of internal controls surrounding the input and maintenance of those fields. BKD, LLP We have served as the Company’s auditor since 1998. Indianapolis, Indiana March 9, 2022 139 Table of Contents Report of Independent Registered Public Accounting Firm Audit Committee, Board of Directors and Stockholders Horizon Bancorp, Inc. Michigan City, Indiana Opinion on the Internal Control over Financial Reporting We have audited Horizon Bancorp’s (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated March 9, 2022, expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Financial Statements. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definitions and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. 140 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. BKD, LLP Indianapolis, Indiana March 9, 2022 141 Table of Contents HORIZON BANCORP, INC. MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS Management is responsible for the preparation and presentation of the consolidated financial statements and related notes on the preceding pages. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and include amounts that are based on management’s best estimates and judgments. Financial information elsewhere in the Annual Report is consistent with that in the consolidated financial statements. In meeting its responsibility for the accuracy of the consolidated financial statements, management relies on Horizon’s system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded to permit the preparation of appropriate financial information. The system of internal controls is supplemented by a program of internal audits to independently evaluate the adequacy and application of financial and operating controls and compliance with Company policies and procedures. The Audit Committee of the Board of Directors meets periodically with management, the independent accountants and the internal auditors to ensure that each is properly discharging its responsibilities with regard to the consolidated financial statements and internal accounting controls. The independent accountants have full and free access to the Audit Committee and meet with it to discuss auditing and financial reporting matters. The consolidated financial statements in the Annual Report have been audited by BKD, LLP, an independent registered public accounting firm, for 2021, 2020 and 2019. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and included consideration of internal accounting controls, tests of accounting records and other audit procedures to the extent necessary to allow them to express their opinion on the fairness of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. 142 Table of Contents HORIZON BANCORP, INC. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None