HORIZON BANCORP INC /IN/ 10-Q

ITEM 1 – FINANCIAL STATEMENTS HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollar Amounts in Thousands) September 30, 2022 December 31, 2021 (Unaudited) Assets Cash and due from banks $ 109,659 $ 593,508 Interest earning time deposits 2,814 4,782 Investment securities, available for sale 985,655 1,160,812 Investment securities, held to maturity (fair value of $ 1,640,589 and $ 1,559,991 ) 2,031,536 1,552,443 Loans held for sale 1,852 12,579 Loans, net of allowance for credit losses of $ 51,369 and $ 54,286 3,960,846 3,590,331 Premises and equipment, net 92,356 93,441 Federal Home Loan Bank stock 26,677 24,440 Goodwill 155,211 154,572 Other intangible assets 18,164 20,941 Interest receivable 30,096 26,137 Cash value of life insurance 145,439 97,150 Other assets 158,390 80,753 Total assets $ 7,718,695 $ 7,411,889 Liabilities Deposits Non–interest bearing $ 1,315,155 $ 1,360,338 Interest bearing 4,515,683 4,442,653 Total deposits 5,830,838 5,802,991 Borrowings 1,048,091 712,739 Subordinated notes 58,860 58,750 Junior subordinated debentures issued to capital trusts 56,966 56,785 Interest payable 1,961 2,235 Other liabilities 76,986 55,180 Total liabilities 7,073,702 6,688,680 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 and Outstanding 43,932,389 and 43,766,931 shares — — Additional paid-in capital 352,837 352,122 Retained earnings 415,277 363,742 Accumulated other comprehensive income (loss) ( 123,121 ) 7,345 Total stockholders’ equity 644,993 723,209 Total liabilities and stockholders’ equity $ 7,718,695 $ 7,411,889 See notes to condensed consolidated financial statements 3 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Interest Income Loans receivable $ 47,051 $ 40,392 $ 126,479 $ 120,446 Investment securities – taxable 8,501 4,565 24,723 8,641 Investment securities – tax exempt 7,478 5,911 21,482 16,790 Total interest income 63,030 50,868 172,684 145,877 Interest Expense Deposits 4,116 1,808 7,289 6,204 Borrowed funds 3,895 1,075 6,425 3,640 Subordinated notes 880 880 2,641 2,641 Junior subordinated debentures issued to capital trusts 744 561 1,755 1,678 Total interest expense 9,635 4,324 18,110 14,163 Net Interest Income 53,395 46,544 154,574 131,714 Credit loss expense (recovery) ( 601 ) 1,112 ( 1,747 ) ( 13 ) Net Interest Income after Credit Loss Expense (Recovery) 53,996 45,432 156,321 131,727 Non–interest Income Service charges on deposit accounts 3,023 2,291 8,651 6,682 Wire transfer fees 148 210 477 687 Interchange fees 3,089 2,587 9,451 7,819 Fiduciary activities 1,203 2,124 4,111 5,828 Gains on sale of investment securities (includes $ 0 and $ 0 for the three months ended September 30, 2022 and 2021, respectively, and $ 0 and $ 914 for the nine months ended September 30, 2022 and 2021, respectively, related to accumulated other comprehensive earnings reclassifications) — — — 914 Gain on sale of mortgage loans 1,441 4,088 5,969 14,996 Mortgage servicing income, net 355 336 4,163 2,052 Increase in cash value of bank owned life insurance 814 534 1,843 1,547 Death benefit on bank owned life insurance — 517 644 783 Other income 115 3,357 1,468 3,816 Total non–interest income 10,188 16,044 36,777 45,124 Non–interest Expense Salaries and employee benefits 20,613 18,901 60,305 53,502 Net occupancy expenses 3,293 2,935 10,044 9,337 Data processing 2,539 2,526 7,683 7,290 Professional fees 552 522 1,149 1,654 Outside services and consultants 2,855 2,330 7,865 6,252 Loan expense 2,926 2,645 7,968 8,574 FDIC insurance expense 670 279 2,170 1,579 Other losses 398 69 928 358 Other expense 4,504 4,142 13,216 11,363 Total non–interest expense 38,350 34,349 111,328 99,909 Income Before Income Taxes 25,834 27,127 81,770 76,942 Income tax expense (includes $ 0 and $ 0 for the three months ended September 30, 2022 and 2021, respectively, and $ 0 and $ 192 for the nine months ended September 30, 2022 and 2021, respectively, related to income tax expense from reclassification items) 2,013 4,056 9,527 11,276 Net Income $ 23,821 $ 23,071 $ 72,243 $ 65,666 Basic Earnings Per Share $ 0.55 $ 0.53 $ 1.66 $ 1.50 Diluted Earnings Per Share 0.55 0.52 1.65 1.49 See notes to condensed consolidated financial statements 4 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Dollar Amounts in Thousands) Three Months Ended Nine Months Ended September 30 September 30 2022 2021 2022 2021 Net Income $ 23,821 $ 23,071 $ 72,243 $ 65,666 Other Comprehensive Income (Loss) Change in fair value of derivative instruments: Change in fair value of derivative instruments for the period 1,952 555 5,741 3,590 Income tax effect ( 410 ) ( 117 ) ( 1,206 ) ( 754 ) Changes from derivative instruments 1,542 438 4,535 2,836 Change in securities: Unrealized depreciation for the period on AFS securities ( 39,856 ) ( 14,488 ) ( 169,013 ) ( 28,304 ) Accretion (amortization) from transfer of securities from available for sale to held to maturity securities ( 143 ) 19 ( 1,875 ) 50 Reclassification adjustment for securities gains realized in income — — — ( 914 ) Income tax effect 8,400 3,038 35,887 6,125 Unrealized losses on securities ( 31,599 ) ( 11,431 ) ( 135,001 ) ( 23,043 ) Other Comprehensive Loss, Net of Tax ( 30,057 ) ( 10,993 ) ( 130,466 ) ( 20,207 ) Comprehensive Income (Loss) $ ( 6,236 ) $ 12,078 $ ( 58,223 ) $ 45,459 See notes to condensed consolidated financial statements 5 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balances, July 1, 2021 $ — $ — $ 359,227 $ 332,509 $ 18,638 $ 710,374 Net income — — — 23,071 — 23,071 Other comprehensive loss, net of tax — — — — ( 10,993 ) ( 10,993 ) Amortization of unearned compensation — — 449 — — 449 Stock option expense — — 13 — — 13 Repurchase of outstanding stock — — ( 7,607 ) — — ( 7,607 ) Stock retirement plans — — ( 128 ) — — ( 128 ) Cash dividends on common stock ($ 0.15 per share) — — — ( 6,637 ) — ( 6,637 ) Balances, September 30, 2021 $ — $ — $ 351,954 $ 348,943 $ 7,645 $ 708,542 Balances, July 1, 2022 $ — $ — $ 352,412 $ 398,517 $ ( 93,064 ) $ 657,865 Net income — — — 23,821 — 23,821 Other comprehensive loss, net of tax — — — — ( 30,057 ) ( 30,057 ) Amortization of unearned compensation — — 627 — — 627 Exercise of stock options — — 14 — — 14 Net settlement of share awards — — ( 89 ) — — ( 89 ) Stock retirement plans — — ( 127 ) — — ( 127 ) Cash dividends on common stock ($ 0.16 per share) — — — ( 7,061 ) — ( 7,061 ) Balances, September 30, 2022 $ — $ — $ 352,837 $ 415,277 $ ( 123,121 ) $ 644,993 See notes to condensed consolidated financial statements 6 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Nine Months Ended Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balances, January 1, 2021 $ — $ — $ 362,945 $ 301,419 $ 27,852 $ 692,216 Net income — — — 65,666 — 65,666 Other comprehensive loss, net of tax — — — — ( 20,207 ) ( 20,207 ) Amortization of unearned compensation — — 1,233 — — 1,233 Exercise of stock options — — 769 — — 769 Stock option expense — — 55 — — 55 Net settlement of share awards — — ( 1,347 ) — — ( 1,347 ) Repurchase of outstanding stock — — ( 7,607 ) — — ( 7,607 ) Stock retirement plans — — ( 4,094 ) — — ( 4,094 ) Cash dividends on common stock ($ 0.41 per share) — — — ( 18,142 ) — ( 18,142 ) Balances, September 30, 2021 $ — $ — $ 351,954 $ 348,943 $ 7,645 $ 708,542 Balances, January 1, 2022 $ — $ — $ 352,122 $ 363,742 $ 7,345 $ 723,209 Net income — — — 72,243 — 72,243 Other comprehensive loss, net of tax — — — — ( 130,466 ) ( 130,466 ) Amortization of unearned compensation — — 1,770 — — 1,770 Exercise of stock options — — 108 — — 108 Stock option expense — — 13 — — 13 Net settlement of share awards — — ( 1,785 ) — — ( 1,785 ) Stock retirement plans — — 609 — — 609 Cash dividends on common stock ($ 0.47 per share) — — — ( 20,708 ) — ( 20,708 ) Balances, September 30, 2022 $ — $ — $ 352,837 $ 415,277 $ ( 123,121 ) $ 644,993 See notes to condensed consolidated financial statements 7 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Nine Months Ended September 30 2022 2021 Operating Activities Net income $ 72,243 $ 65,666 Items not requiring (providing) cash Provision for (recovery of) credit losses ( 1,747 ) ( 13 ) Depreciation and amortization 8,027 6,852 Share based compensation 1,783 1,288 Amortization of mortgage servicing rights 2,018 2,960 Mortgage servicing rights net impairment ( 2,942 ) ( 2,142 ) Premium amortization on securities, net 9,391 7,279 Gain on sale of investment securities — ( 914 ) Gain on sale of mortgage loans ( 5,969 ) ( 14,996 ) Proceeds from sales of loans ( 182,218 ) 366,004 Loans originated for sale 198,914 ( 342,281 ) Gain on cash value life insurance ( 1,843 ) ( 1,547 ) Gain on sale of other real estate owned ( 618 ) ( 76 ) Net change in: Interest receivable ( 3,959 ) ( 2,847 ) Interest payable ( 274 ) ( 1,301 ) Other assets ( 12,865 ) 8,330 Other liabilities ( 2,277 ) ( 3,443 ) Net cash provided by operating activities 77,664 88,819 Investing Activities Purchases of securities available for sale ( 180,464 ) ( 820,485 ) Proceeds from sales, maturities, calls and principal repayments of securities available for sale 54,022 250,808 Purchases of securities held to maturity ( 423,493 ) ( 625,397 ) Proceeds from maturities of securities held to maturity 65,720 23,368 Net change in interest earning time deposits 1,968 3,198 Purchase of FHLB stock ( 2,435 ) ( 1,417 ) Redemption of FHLB stock 198 — Net change in loans ( 370,251 ) 410,717 Proceeds on the sale of OREO and repossessed assets 3,555 1,119 Premises and equipment expenditures ( 4,701 ) ( 462 ) Purchases of bank owned life insurance ( 50,000 ) — Proceeds from bank owned life insurance 2,910 — Death benefit on bank owned life insurance 644 783 Net cash received in branch acquisition — 616,832 Net cash used in investing activities ( 902,327 ) ( 140,936 ) Financing Activities Net change in deposits 27,847 602,357 Proceeds from borrowings 668,276 227,531 Repayment of borrowings ( 350,000 ) ( 65,040 ) Net change in repurchase agreements 17,076 35,702 Net settlement of share awards ( 1,785 ) ( 1,347 ) Exercise of stock options 108 769 Repurchase of outstanding stock — ( 7,607 ) Dividends paid on common stock ( 20,708 ) ( 18,142 ) Net cash provided by financing activities 340,814 774,223 Net Change in Cash and Cash Equivalents ( 483,849 ) 722,106 Cash and Cash Equivalents, Beginning of Period 593,508 249,711 8 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Cash and Cash Equivalents, End of Period $ 109,659 $ 971,817 Additional Supplemental Information Interest paid $ 18,384 $ 15,448 Income taxes paid 936 1,225 Transfer of loans to other real estate and repossessed assets 1,483 964 Transfer of premises to other real estate 1,479 1,753 See notes to condensed consolidated financial statements 9 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 1 - Accounting Policies The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp, Inc. (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”), which is an Indiana commercial bank. All inter–company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2022 and September 30, 2021 are not necessarily indicative of the operating results for the full year of 2022 or 2021. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments. Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10–K for 2021 filed with the Securities and Exchange Commission on March 9, 2022. The condensed consolidated balance sheet of Horizon as of December 31, 2021 has been derived from the audited balance sheet as of that date. On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of September 30, 2022, Horizon had repurchased a total of 803,349 shares at an average price per share of $ 16.89 . Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted–average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share. Three Months Ended Nine Months Ended September 30 September 30 2022 2021 2022 2021 Basic earnings per share Net income $ 23,821 $ 23,071 $ 72,243 $ 65,666 Weighted average common shares outstanding 43,573,370 43,810,729 43,567,028 43,893,194 Basic earnings per share $ 0.55 $ 0.53 $ 1.66 $ 1.50 Diluted earnings per share Net income $ 23,821 $ 23,071 $ 72,243 $ 65,666 Weighted average common shares outstanding 43,573,370 43,810,729 43,567,028 43,893,194 Effect of dilutive securities: Restricted stock 92,405 99,666 92,718 102,446 Stock options 38,018 48,475 39,289 51,403 Weighted average common shares outstanding 43,703,793 43,958,870 43,699,035 44,047,043 Diluted earnings per share $ 0.55 $ 0.52 $ 1.65 $ 1.49 10 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) There were 316,760 shares for the three and nine months ended September 30, 2022 which were not included in the computation of diluted earnings per share because they were non–dilutive. There were 142,705 and 153,582 shares for the three and nine months ended September 30, 2021, respectively, which were not included in the computation of diluted earnings per share because they were non–dilutive. Horizon has share–based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2021 Annual Report on Form 10–K. Also, the Company's shareholders approved the 2021 Omnibus Equity Incentive Plan at its Annual Meeting on May 6, 2021, adding 1.4 million additional shares to the plan and with no other significant changes from the Company's previous plan. Revision of Previously Issued Financial Statements We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10–Q related to immaterial errors. The errors relate to sold commercial loan participation balances which do not qualify under accounting guidance as sales transactions under Accounting Standards Codification Topic 860 – Transfers and Servicing . The correction of this error resulted in an increase in loans, net of allowance for credit losses and borrowings on the Company's condensed consolidated balance sheet. We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Report on Form 10–K for the year ended December 31, 2021, or for any quarterly periods included therein. The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of the errors: Consolidated Balance Sheet As of December 31, 2021 As Reported Adjustment As Revised Loans, net of allowance for credit losses $ 3,553,345 $ 36,986 $ 3,590,331 Total assets 7,374,903 36,986 7,411,889 Borrowings 675,753 36,986 712,739 Total liabilities 6,651,694 36,986 6,688,680 Total liabilities and stockholders' equity 7,374,903 36,986 7,411,889 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2021 As Reported Adjustment As Revised Net change in loans $ 412,873 $ ( 2,156 ) $ 410,717 Net cash provided by investing activities ( 138,780 ) ( 2,156 ) ( 140,936 ) Proceeds from borrowings 225,375 2,156 227,531 Net cash provided by financing activities 772,067 2,156 774,223 Net Change in Cash and Cash Equivalents 54,460 — 54,460 11 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10–Q related to immaterial errors. The errors relate to the classification of certain available for sale (“AFS“) and held to maturity (“HTM”) securities. The correction of this error resulted in an increase in AFS and HTM federal agency mortgage–backed pool securities and a decrease in AFS and HTM private labeled mortgage–backed pool securities in Note 3 – Securities. We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Report on Form 10–K for the year ended December 31, 2021, or for any quarterly periods included therein. 12 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of the errors: Note 3 – Securities As of December 31, 2021 Amortized Cost As Reported Adjustment As Revised Federal agency mortgage–backed pools $ 225,329 31,856 257,185 Private labeled mortgage–backed pools 31,856 ( 31,856 ) — Total available for sale investment securities $ 257,185 — 257,185 Federal agency mortgage–backed pools $ 188,426 59,511 247,937 Private labeled mortgage–backed pools 99,958 ( 59,511 ) 40,447 Total held to maturity investment securities $ 288,384 — 288,384 Gross Unrealized Gains As Reported Adjustment As Revised Federal agency mortgage–backed pools $ 1,777 137 1,914 Private labeled mortgage–backed pools 137 ( 137 ) — Total available for sale investment securities $ 1,914 — 1,914 Federal agency mortgage–backed pools $ 151 58 209 Private labeled mortgage–backed pools 58 ( 58 ) — Total held to maturity investment securities $ 209 — 209 Gross Unrealized Losses As Reported Adjustment As Revised Federal agency mortgage–backed pools $ ( 1,032 ) ( 376 ) ( 1,408 ) Private labeled mortgage–backed pools ( 376 ) 376 — Total available for sale investment securities $ ( 1,408 ) — ( 1,408 ) Federal agency mortgage–backed pools $ ( 2,612 ) ( 1,398 ) ( 4,010 ) Private labeled mortgage–backed pools ( 1,840 ) 1,398 ( 442 ) Total held to maturity investment securities $ ( 4,452 ) — ( 4,452 ) Fair Value As Reported Adjustment As Revised Federal agency mortgage–backed pools $ 226,074 31,617 257,691 Private labeled mortgage–backed pools 31,617 ( 31,617 ) — Total available for sale investment securities $ 257,691 — 257,691 Federal agency mortgage–backed pools $ 185,965 58,171 244,136 Private labeled mortgage–backed pools 98,176 ( 58,171 ) 40,005 Total held to maturity investment securities $ 284,141 — 284,141 13 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Accounting Guidance Issued But Not Yet Adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures The FASB has issued ASU 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , in March 2022. These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, these amendments require that an entity disclose current–period gross write–offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326–20. The guidance is effective for entities that have adopted ASU 2016–13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. If an entity elects to early adopt ASU 2022–02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is assessing ASU 2022–02 and its impact on its accounting and disclosures. FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rates on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: • A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria. • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform. The Company conducted monthly meetings to address contracts and hedge accounting relationships that reference LIBOR. All contracts referencing LIBOR as an interest rate have been identified and have been rewritten or refinanced as of March 31, 2022, except for commercial loan interest rate swaps. Hedge accounting relationships referencing LIBOR will be modified by the counter parties. The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements. 14 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 2 – Acquisitions On September 17, 2021, Horizon Bank completed the purchase and assumption of certain assets and liabilities of 14 former TCF National Bank (“TCF”) branches in 11 Michigan counties. Net cash of $ 618.2 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans of $ 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 $ 4.0 million was generated in the transaction. Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the purchase price for the TCF branches is detailed in the following table. Prior to the end of the one year measurement period Horizon Bank recorded an adjustment of $ 639,000 which increased goodwill and decreased other assets acquired in the transaction. 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 3,973 Other liabilities 1,278 Core deposit intangible 1,630 Interest receivable 519 Other assets 463 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. 15 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 3 – Securities The fair value of securities is as follows: September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 293,974 $ — $ ( 27,720 ) $ 266,254 State and municipal 505,975 — ( 90,729 ) 415,246 Federal agency collateralized mortgage obligations 36,269 — ( 1,645 ) 34,624 Federal agency mortgage-backed pools 226,785 — ( 32,144 ) 194,641 Corporate notes 84,464 209 ( 9,783 ) 74,890 Total available for sale investment securities $ 1,147,467 $ 209 $ ( 162,021 ) $ 985,655 Held to maturity U.S. Treasury and federal agencies $ 295,363 $ — $ ( 47,355 ) $ 248,008 State and municipal 1,128,034 10 ( 242,141 ) 885,903 Federal agency collateralized mortgage obligations 57,972 — ( 8,292 ) 49,680 Federal agency mortgage-backed pools 349,875 — ( 57,359 ) 292,516 Private labeled mortgage-backed pools 36,171 — ( 5,404 ) 30,767 Corporate notes 164,121 — ( 30,406 ) 133,715 Total held to maturity investment securities $ 2,031,536 $ 10 $ ( 390,957 ) $ 1,640,589 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 257,185 1,914 ( 1,408 ) 257,691 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 247,937 209 ( 4,010 ) 244,136 Private labeled mortgage-backed pools 40,447 — ( 442 ) 40,005 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 16 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2022 and December 31, 2021, 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. September 30, 2022 December 31, 2021 Amortized Cost Fair Value Amortized Cost Fair Value Available for sale Within one year $ 1,043 $ 1,030 $ 22,980 $ 22,984 One to five years 313,400 287,251 156,677 156,397 Five to ten years 261,596 224,407 315,630 316,125 After ten years 308,374 243,702 340,539 346,038 884,413 756,390 835,826 841,544 Federal agency collateralized mortgage obligations 36,269 34,624 60,600 61,577 Federal agency mortgage–backed pools 226,785 194,641 257,185 257,691 Total available for sale investment securities $ 1,147,467 $ 985,655 $ 1,153,611 $ 1,160,812 Held to maturity Within one year $ 32,861 $ 32,489 $ 5,222 $ 5,265 One to five years 209,055 195,644 65,739 66,982 Five to ten years 339,857 290,173 273,720 275,308 After ten years 1,005,745 749,320 870,896 880,830 1,587,518 1,267,626 1,215,577 1,228,385 Federal agency collateralized mortgage obligations 57,972 49,680 48,482 47,465 Federal agency mortgage–backed pools 349,875 292,516 247,937 244,136 Private labeled mortgage–backed pools 36,171 30,767 40,447 40,005 Total held to maturity investment securities $ 2,031,536 $ 1,640,589 $ 1,552,443 $ 1,559,991 The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. September 30, 2022 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 $ 326,455 $ ( 34,174 ) $ 187,559 $ ( 40,901 ) $ 514,014 $ ( 75,075 ) State and municipal 924,192 ( 198,105 ) 369,729 ( 134,765 ) 1,293,921 ( 332,870 ) Federal agency collateralized mortgage obligations 47,014 ( 2,897 ) 37,291 ( 7,040 ) 84,305 ( 9,937 ) Federal agency mortgage–backed pools 275,203 ( 42,992 ) 211,935 ( 46,511 ) 487,138 ( 89,503 ) Private labeled mortgage–backed pools 4,398 ( 730 ) 26,369 ( 4,674 ) 30,767 ( 5,404 ) Corporate notes 64,091 ( 11,425 ) 143,638 ( 28,764 ) 207,729 ( 40,189 ) Total temporarily impaired securities $ 1,641,353 $ ( 290,323 ) $ 976,521 $ ( 262,655 ) $ 2,617,874 $ ( 552,978 ) 17 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 406,540 ( 5,418 ) — — 406,540 ( 5,418 ) Private labeled mortgage–backed pools 40,005 ( 442 ) — — 40,005 ( 442 ) Corporate notes 189,500 ( 3,229 ) — — 189,500 ( 3,229 ) Total temporarily impaired securities $ 1,500,686 $ ( 21,993 ) $ 35,281 $ ( 1,012 ) $ 1,535,967 $ ( 23,005 ) No allowance for credit losses for available for sale debt securities or held to maturity securities was needed at September 30, 2022 or December 31, 2021. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $ 17.4 million at September 30, 2022 and $ 14.6 million at December 31, 2021 and is excluded from the estimate of credit losses. The U.S. government sponsored entities and agencies and mortgage–backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities, private labeled mortgage–backed pools and corporate notes were due to changes in interest rates. Due to the contractual terms, the issuers of state and municipal securities are not allowed to settle for less than the amortized cost of the security. In addition, the Company does not intend to sell these securities prior to the recovery of the amortized cost, which may not occur until maturity. Information regarding security proceeds, gross gains and gross losses are presented below. Three Months Ended Nine Months Ended September 30 September 30 2022 2021 2022 2021 Sales of securities available for sale Proceeds $ — $ — $ — $ 27,514 Gross gains — — — 914 Gross losses — — — — 18 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 4 – Loans The table below identifies the Company’s loan portfolio segments and classes. Portfolio Segment Class of Financing Receivable Commercial Owner occupied real estate Non-owner occupied real estate Residential spec homes Development & spec land Commercial and industrial Real estate Residential mortgage Residential construction Mortgage warehouse Mortgage warehouse Consumer Direct installment Indirect installment Home equity Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Class of financing receivable is defined as a group of financing receivables determined on the basis of both of the following, 1) risk characteristics of the financing receivable, and 2) an entity’s method for monitoring and assessing credit risk. Generally, the Bank does not move loans from a revolving loan to a term loan other than residential construction loans. Residential construction loans are reviewed and rewritten prior to being originated as a term loan. The following table presents total loans outstanding by portfolio class, as of September 30, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 Commercial Owner occupied real estate $ 587,075 $ 560,887 Non–owner occupied real estate 1,194,898 1,088,470 Residential spec homes 10,708 9,907 Development & spec land 23,679 24,473 Commercial and industrial 587,383 530,208 Total commercial 2,403,743 2,213,945 Real estate Residential mortgage 598,250 563,811 Residential construction 36,651 30,571 Mortgage warehouse 73,690 109,031 Total real estate 708,591 703,413 Consumer Direct installment 58,673 63,714 Indirect installment 499,080 372,575 Home equity 342,128 290,970 Total consumer 899,881 727,259 Total loans 4,012,215 3,644,617 Allowance for credit losses ( 51,369 ) ( 54,286 ) Net loans $ 3,960,846 $ 3,590,331 19 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) As of September 30, 2022 and December 31, 2021, Federal Paycheck Protection Program (“PPP”) loans totaled approximately $ 315,000 and $ 25.8 million, respectively, and are included with commercial loans. Total loans include net deferred loan costs of $ 2.6 million at September 30, 2022 and $ 1.9 million at December 31, 2021, respectively. The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short–term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company's commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner–occupied commercial real estate loans versus non–owner occupied loans. Real Estate and Consumer With respect to residential loans that are secured by 1–4 family residences and are generally owner occupied, the Company generally establishes a maximum loan–to–value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1–4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Mortgage Warehousing Horizon's mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon's agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days. 20 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Based on these agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement. Non–performing Loans The following table presents non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructurings (“TDRs”) by class of loans: September 30, 2022 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–performing with no Allowance for Credit Losses Commercial Owner occupied real estate $ 4,145 $ — $ — $ 568 $ 4,713 $ 4,527 Non–owner occupied real estate 607 — — 273 880 880 Residential spec homes 101 — — — 101 101 Development & spec land 815 — — — 815 65 Commercial and industrial 690 — — — 690 333 Total commercial 6,358 — — 841 7,199 5,906 Real estate Residential mortgage 5,331 52 1,305 1,359 8,047 8,047 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 5,331 52 1,305 1,359 8,047 8,047 Consumer Direct installment 148 — — — 148 148 Indirect installment 564 57 — — 621 621 Home equity 2,370 84 360 329 3,143 3,143 Total consumer 3,082 141 360 329 3,912 3,912 Total $ 14,771 $ 193 $ 1,665 $ 2,529 $ 19,158 $ 17,865 21 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) December 31, 2021 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–performing 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 There was no interest income recognized on non–accrual loans during the nine months ended September 30, 2022 and 2021, respectively, while the loans were in non–accrual status. Included in the $ 14.8 million of non–accrual loans and the $ 1.7 million of non–performing TDRs at September 30, 2022 were $ 1.7 million and $ 157,000 , respectively, of loans acquired for which there were accretable yields recognized. 22 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents the payment status by class of loan, excluding non–accrual loans of $ 14.8 million and non–performing TDRs of $ 1.7 million at September 30, 2022: September 30, 2022 Current 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Total Loans Commercial Owner occupied real estate $ 582,469 $ 402 $ 59 $ — $ 461 $ 582,930 Non–owner occupied real estate 1,194,183 108 — — 108 1,194,291 Residential spec homes 10,607 — — — — 10,607 Development & spec land 22,864 — — — — 22,864 Commercial and industrial 586,478 156 59 — 215 586,693 Total commercial 2,396,601 666 118 — 784 2,397,385 Real estate Residential mortgage 590,223 456 883 52 1,391 591,614 Residential construction 36,651 — — — — 36,651 Mortgage warehouse 73,690 — — — — 73,690 Total real estate 700,564 456 883 52 1,391 701,955 Consumer Direct installment 58,427 65 33 — 98 58,525 Indirect installment 495,537 2,610 312 57 2,979 498,516 Home equity 337,487 1,713 114 84 1,911 339,398 Total consumer 891,451 4,388 459 141 4,988 896,439 Total $ 3,988,616 $ 5,510 $ 1,460 $ 193 $ 7,163 $ 3,995,779 23 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The 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 Loans Total Commercial Owner occupied real estate $ 555,851 $ 789 $ — $ — $ 789 $ 556,640 Non–owner occupied real estate 1,085,716 1,708 — — 1,708 1,087,424 Residential spec homes 9,907 — — — — 9,907 Development & spec land 23,496 58 — — 58 23,554 Commercial and industrial 528,461 974 79 — 1,053 529,514 Total commercial 2,203,431 3,529 79 — 3,608 2,207,039 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 $ 3,619,453 $ 7,892 $ 644 $ 145 $ 8,681 $ 3,628,134 The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Troubled Debt Restructurings Loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans' contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default. At September 30, 2022, the types of concessions the Company has made on restructured loans have been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of September 30, 2022, the Company had $ 4.2 million in TDRs and $ 2.5 million were performing according to the restructured terms and two TDRs were returned to accrual status during 2022. There were no specific reserves allocated to TDRs at September 30, 2022 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). 24 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents TDRs by class of loan: September 30, 2022 December 31, 2021 Non–accrual Accruing Total Non–accrual Accruing Total Commercial Owner occupied real estate $ — $ 568 $ 568 $ — $ 603 $ 603 Non–owner occupied real estate — 273 273 285 — 285 Residential spec homes — — — — — — Development & spec land — — — — — — Commercial and industrial — — — — — — Total commercial — 841 841 285 603 888 Real estate Residential mortgage 1,305 1,359 2,664 892 1,421 2,313 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 1,305 1,359 2,664 892 1,421 2,313 Consumer Direct installment — — — — — — Indirect installment — — — — — — Home equity 360 329 689 344 367 711 Total consumer 360 329 689 344 367 711 Total $ 1,665 $ 2,529 $ 4,194 $ 1,521 $ 2,391 $ 3,912 Loans Modified under the CARES Act The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At September 30, 2022 and December 31, 2021, the Bank modified loans totaling $ 1,000 and $ 10.9 million, respectively, which qualified 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. 25 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses. September 30, 2022 Real Estate Accounts Receivable/Equipment Other Total ACL Allocation Commercial Owner occupied real estate $ 4,806 $ 508 $ — $ 5,314 $ 215 Non–owner occupied real estate 2,613 — — 2,613 — Residential spec homes 101 — — 101 — Development & spec land 815 — — 815 55 Commercial and industrial 224 862 31 1,117 235 Total commercial 8,559 1,370 31 9,960 505 Total collateral dependent loans $ 8,559 $ 1,370 $ 31 $ 9,960 $ 505 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 — Residential spec homes — — — — — 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 Credit Quality Indicators Horizon Bank's processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re–evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade. • For new and renewed commercial loans, the Bank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade of the loans. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective regions (ranging from $ 3,000,000 to $ 6,000,000 ) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (“CCBO”). • Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO 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. 26 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) • Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management's analysis of the adequacy of the Allowance for Credit Losses. For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non–accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non–accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass. Horizon Bank employs a nine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below. Risk Grade 1: Excellent (Pass) Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges. Risk Grade 2: Good (Pass) Loans to businesses that have strong financial statements containing an unmodified opinion from a CPA firm and at least three years consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five years satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long–term debt ratings of Baa or better and meeting defined key financial metric ranges. Risk Grade 3: Satisfactory (Pass) Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered and meeting defined key financial metric ranges. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply: • At inception, the loan was properly underwritten, did not possess an unwanted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory. • At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss. • The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. • During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. 27 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Risk Grade 4: Satisfactory/Monitored (Pass) Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory rated loans and meet defined key financial metric ranges. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank's minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization. Risk Grade 4W: Management Watch (Pass) Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion. Commercial construction loans are graded as 4W Management Watch until the projects are completed and stabilized. Risk Grade 5: Special Mention Loans which possess some temporary (normally less than one year) credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,“ impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength and must meet defined key financial metric ranges. Risk Grade 6: Substandard One or more of the following characteristics may be exhibited in loans classified Substandard: • Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. • Loans are inadequately protected by the current net worth and paying capacity of the obligor. • The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. • Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. • Unusual courses of action are need to maintain a high probability of repayment. • The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments. • The lender is forced into a subordinated or unsecured position due to flaws in documentation. • Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms. • The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. • There is a significant deterioration in market conditions to which the borrower is highly vulnerable. • The borrower meets defined key financial metric ranges. 28 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Risk Grade 7: Doubtful One or more of the following characteristics may be present in loans classified Doubtful: • Loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of principal highly improbable. • The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. • The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known. • The borrower meets defined key financial metric ranges. Risk Grade 8: Loss Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all of a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 29 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables present loans by credit grades and origination year at September 30, 2022. September 30, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Total Commercial Owner occupied real estate Pass $ 80,017 $ 83,784 $ 52,008 $ 49,284 $ 39,449 $ 174,687 $ 73,017 $ 552,246 Special Mention — 6,722 — 1,922 596 3,464 — 12,704 Substandard 500 255 988 1,008 3,094 10,373 5,907 22,125 Doubtful — — — — — — — — Total owner occupied real estate $ 80,517 $ 90,761 $ 52,996 $ 52,214 $ 43,139 $ 188,524 $ 78,924 $ 587,075 Non–owner occupied real estate Pass $ 173,753 $ 176,098 $ 129,192 $ 103,011 $ 55,666 $ 315,357 $ 176,622 $ 1,129,699 Special Mention 798 — 268 6,788 39,530 7,130 4,026 58,540 Substandard — 703 — — 3,564 2,392 — 6,659 Doubtful — — — — — — — — Total non–owner occupied real estate $ 174,551 $ 176,801 $ 129,460 $ 109,799 $ 98,760 $ 324,879 $ 180,648 $ 1,194,898 Residential spec homes Pass $ 334 $ 3,725 $ 251 $ — $ — $ 1,784 $ 4,514 $ 10,608 Special Mention — — — — — — — — Substandard — — — — — — 100 100 Doubtful — — — — — — — — Total residential spec homes $ 334 $ 3,725 $ 251 $ — $ — $ 1,784 $ 4,614 $ 10,708 Development & spec land Pass $ 363 $ 1,421 $ 493 $ 275 $ 6 $ 9,948 $ 10,092 $ 22,598 Special Mention — — — — — 153 — 153 Substandard — — — — — 180 748 928 Doubtful — — — — — — — — Total development & spec land $ 363 $ 1,421 $ 493 $ 275 $ 6 $ 10,281 $ 10,840 $ 23,679 Commercial & industrial Pass $ 128,945 $ 142,316 $ 36,543 $ 35,630 $ 53,819 $ 121,021 $ 46,813 $ 565,087 Special Mention 184 440 44 854 1,012 3,167 434 6,135 Substandard 89 2,568 2,701 517 3,113 4,813 2,360 16,161 Doubtful — — — — — — — — Total commercial & industrial $ 129,218 $ 145,324 $ 39,288 $ 37,001 $ 57,944 $ 129,001 $ 49,607 $ 587,383 Total commercial $ 384,983 $ 418,032 $ 222,488 $ 199,289 $ 199,849 $ 654,469 $ 324,633 $ 2,403,743 30 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) September 30, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 85,899 $ 151,237 $ 94,838 $ 34,339 $ 37,898 $ 185,992 $ — $ 590,203 Non–performing — 132 286 626 633 6,370 — 8,047 Total residential mortgage $ 85,899 $ 151,369 $ 95,124 $ 34,965 $ 38,531 $ 192,362 $ — $ 598,250 Residential construction Performing $ 8 $ — $ — $ — $ — $ — $ 36,643 $ 36,651 Non–performing — — — — — — — — Total residential construction $ 8 $ — $ — $ — $ — $ — $ 36,643 $ 36,651 Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 73,690 $ 73,690 Non–performing — — — — — — — — Total mortgage warehouse $ — $ — $ — $ — $ — $ — $ 73,690 $ 73,690 Total real estate $ 85,907 $ 151,369 $ 95,124 $ 34,965 $ 38,531 $ 192,362 $ 110,333 $ 708,591 September 30, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Total Consumer Direct installment Performing $ 17,674 $ 13,804 $ 8,024 $ 8,632 $ 4,563 $ 5,816 $ 12 $ 58,525 Non–performing — 38 — 56 — 54 — 148 Total direct installment $ 17,674 $ 13,842 $ 8,024 $ 8,688 $ 4,563 $ 5,870 $ 12 $ 58,673 Indirect installment Performing $ 238,812 $ 124,338 $ 64,265 $ 38,635 $ 22,666 $ 9,743 $ — $ 498,459 Non–performing 22 100 99 181 113 106 — 621 Total indirect installment $ 238,834 $ 124,438 $ 64,364 $ 38,816 $ 22,779 $ 9,849 $ — $ 499,080 Home equity Performing $ 89,484 $ 80,222 $ 43,032 $ 28,233 $ 23,127 $ 68,301 $ 6,586 $ 338,985 Non–performing 19 16 105 160 154 1,132 1,557 3,143 Total home equity $ 89,503 $ 80,238 $ 43,137 $ 28,393 $ 23,281 $ 69,433 $ 8,143 $ 342,128 Total consumer $ 346,011 $ 218,518 $ 115,525 $ 75,897 $ 50,623 $ 85,152 $ 8,155 $ 899,881 31 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 $ 43,903 $ 46,530 $ 159,351 $ 60,539 $ 517,044 Special Mention — 72 2,685 3,194 7,279 11,451 1,345 26,026 Substandard — 1,003 1,312 3,192 1,957 9,579 774 17,817 Doubtful — — — — — — — — Total owner occupied real estate $ 86,798 $ 59,864 $ 65,131 $ 50,289 $ 55,766 $ 180,381 $ 62,658 $ 560,887 Non–owner occupied real estate Pass $ 175,538 $ 108,465 $ 120,561 $ 59,596 $ 126,334 $ 260,362 $ 178,928 $ 1,029,784 Special Mention — 839 1,192 34,412 999 3,850 515 41,807 Substandard 720 — 6,045 1,096 425 7,793 800 16,879 Doubtful — — — — — — — — Total non–owner occupied real estate $ 176,258 $ 109,304 $ 127,798 $ 95,104 $ 127,758 $ 272,005 $ 180,243 $ 1,088,470 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 $ 3,583 $ 8,496 $ 7,837 $ 23,248 Special Mention — — — — — 177 — 177 Substandard — — — — 11 289 748 1,048 Doubtful — — — — — — — — Total development & spec land $ 2,282 $ 536 $ 503 $ 11 $ 3,594 $ 8,962 $ 8,585 $ 24,473 Commercial & industrial Pass $ 198,482 $ 48,245 $ 43,003 $ 47,986 $ 64,292 $ 69,589 $ 23,647 $ 495,244 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 1,847 1,352 9,913 Doubtful — — — — — — — — Total commercial & industrial $ 199,185 $ 51,666 $ 46,304 $ 56,510 $ 69,386 $ 78,863 $ 28,294 $ 530,208 Total commercial $ 465,638 $ 221,624 $ 239,891 $ 201,914 $ 256,504 $ 541,557 $ 286,817 $ 2,213,945 32 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 33 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 5 – Allowance for Credit and Loan Losses The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the nine months ended September 30, 2022 and 2021: Three Months Ended September 30, 2022 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 34,802 $ 4,422 $ 1,067 $ 12,059 $ 52,350 Provision for credit losses on loans ( 703 ) 640 ( 43 ) ( 495 ) ( 601 ) PCD loan charge–offs ( 242 ) — — — ( 242 ) Charge–offs ( 103 ) ( 27 ) — ( 592 ) ( 722 ) Recoveries 52 102 — 430 584 Balance, end of period $ 33,806 $ 5,137 $ 1,024 $ 11,402 $ 51,369 Three Months Ended September 30, 2021 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 41,766 $ 4,108 $ 1,155 $ 8,620 $ 55,649 Provision for credit losses on loans 1,330 ( 400 ) ( 101 ) 283 1,112 Charge–offs ( 10 ) — — ( 189 ) ( 199 ) Recoveries 35 29 — 153 217 Balance, end of period $ 43,121 $ 3,737 $ 1,054 $ 8,867 $ 56,779 Nine Months Ended September 30, 2022 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 40,775 $ 3,856 $ 1,059 $ 8,596 $ 54,286 Provision for credit losses on loans ( 6,343 ) 1,236 ( 35 ) 3,395 ( 1,747 ) PCD loan charge–offs ( 612 ) — — — ( 612 ) Charge–offs ( 240 ) ( 85 ) — ( 1,605 ) ( 1,930 ) Recoveries 226 130 — 1,016 1,372 Balance, end of period $ 33,806 $ 5,137 $ 1,024 $ 11,402 $ 51,369 Nine Months Ended September 30, 2021 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 42,210 $ 4,620 $ 1,267 $ 8,930 $ 57,027 Provision for credit losses on loans 1,090 ( 1,000 ) ( 213 ) 110 ( 13 ) PCD loan charge–offs ( 6 ) — — — ( 6 ) Charge–offs ( 273 ) — — ( 661 ) ( 934 ) Recoveries 100 117 — 488 705 Balance, end of period $ 43,121 $ 3,737 $ 1,054 $ 8,867 $ 56,779 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”). 34 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look–back period includes January 2012 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit–related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible. The Company’s CECL estimate applies to a forecast that incorporates macroeconomic trends and other environmental factors. Management utilized National, Regional and Local Leading Economic Indexes, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and qualitative adjustments were utilized to reflect the forecast and other relevant factors. The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, loan purpose, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of the borrower and concentrations, and historical or expected credit loss patterns. Note 6 – Loan Servicing Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $ 1.6 billion and $ 1.5 billion at September 30, 2022 and December 31, 2021. The aggregate fair value and carrying value of capitalized mortgage servicing rights was approximately $ 18.7 million and $ 15.2 million at September 30, 2022 and December 31, 2021, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights. 35 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 36 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2022 2021 2022 2021 Mortgage servicing rights Balance, beginning of period $ 18,761 $ 17,791 $ 17,780 $ 17,644 Servicing rights capitalized 567 1,048 2,942 3,209 Amortization of servicing rights ( 624 ) ( 946 ) ( 2,018 ) ( 2,960 ) Balance, end of period 18,704 17,893 18,704 17,893 Impairment allowance Balance, beginning of period — ( 3,329 ) ( 2,594 ) ( 5,172 ) Additions — — — — Reductions — 299 2,594 2,142 Balance, end of period — ( 3,030 ) — ( 3,030 ) Mortgage servicing rights, net $ 18,704 $ 14,863 $ 18,704 $ 14,863 The Bank reduced impairment by approximately $ 299,000 for the three months ended September 30, 2021, $ 2.6 million for the nine months ended September 30, 2022 and $ 2.1 million for the nine months ended September 30, 2021. Note 7 – Goodwill The carrying amount of goodwill was $ 155.2 million as of September 30, 2022 and $ 154.6 million as of December 31, 2021. During the three and nine months ended September 30, 2022 and prior to the end of the one year measurement period related to the purchase and assumption of certain assets and liabilities from TCF, Horizon Bank recorded an adjustment of $ 639,000 which increased goodwill and decreased other assets acquired in the transaction. There were no changes in the carrying amount of goodwill for the three and nine months ended September 30, 2021. Goodwill is assessed for impairment annually, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. Goodwill was assessed for impairment using a qualitative analysis as of September 30, 2022 which resulted in no goodwill impairment charges for the nine months ended September 30, 2022. Note 8 – Repurchase Agreements The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Company’s control. 37 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables show repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements: September 30, 2022 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 $ 147,875 $ — $ — $ — $ — $ — $ 147,875 Securities pledged for Repurchase Agreements Federal agency collateralized mortgage obligations $ 15,532 $ — $ — $ — $ — $ — $ 15,532 Federal agency mortgage–backed pools 132,569 — — — — — 132,569 Private labeled mortgage–backed pools 9,048 — — — — — 9,048 Total $ 157,149 $ — $ — $ — $ — $ — $ 157,149 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 9 – Subordinated Notes On June 24, 2020, Horizon issued $ 60.0 million in aggregate principal amount of 5.625 % fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625 % per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the benchmark rate, which is expected to be Three–Month Term SOFR (the “Benchmark Rate”), plus 549 basis 38 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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. Note 10 – Derivative Financial Instruments Cash Flow Hedges – As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into 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 fixed rate of 4.20 % on a notional amount of $ 12.0 million. 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 fixed rate of 2.62 % on a notional amount of $ 10.0 million. 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 counterparty at a fixed rate of 2.81 % on a notional amount of $ 50.0 million at September 30, 2022 and December 31, 2021. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. This interest rate swap agreement matures on July 19, 2026. Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At September 30, 2022, 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. 39 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Fair Value Hedges – Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At September 30, 2022, 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 non–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 $ 524.4 million at September 30, 2022 and $ 489.0 million at December 31, 2021. Other Derivative Instruments – The Company enters into non–hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At September 30, 2022, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income. The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans. 40 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables summarize the fair value of derivative financial instruments utilized by Horizon: Asset Derivatives Liability Derivatives September 30, 2022 September 30, 2022 Notional Amount Fair Value Notional Amount Fair Value Derivatives designated as hedging instruments Interest rate contracts – cash flow hedges $ 50,000 $ 2,067 $ — $ — Total derivatives designated as hedging instruments 50,000 2,067 — — Derivatives not designated as hedging instruments Interest rate contracts – fair value hedges 524,358 45,379 524,358 45,379 Mortgage loan contracts — — 11,530 330 Commitments to originate mortgage loans 5,489 140 — — Total derivatives not designated as hedging instruments 529,847 45,519 535,888 45,709 Total derivatives $ 529,847 $ 47,586 $ 535,888 $ 45,709 Asset Derivatives Liability Derivatives December 31, 2021 December 31, 2021 Notional Amount Fair Value Notional Amount Fair Value Derivatives designated as hedging instruments Interest rate contracts – cash flow hedges $ — $ — $ 50,000 $ 3,673 Total derivatives designated as hedging instruments — — 50,000 3,673 Derivatives not designated as hedging instruments Interest rate contracts – fair value hedges 488,967 14,419 488,967 14,419 Mortgage loan contracts — — 43,630 238 Commitments to originate mortgage loans 32,584 1,037 — — Total derivatives not designated as hedging instruments 521,551 15,456 532,597 14,657 Total derivatives $ 521,551 $ 15,456 $ 532,597 $ 18,330 The effect of the derivative instruments on the condensed consolidated statements of comprehensive income for the nine–month periods ended September 30 is as follows: Amount of Gain Recognized in Other Comprehensive Income on Derivative Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Derivatives in cash flow hedging relationship Interest rate contracts $ 1,542 $ 438 $ 4,535 $ 2,836 41 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The effect of the derivative instruments on the condensed consolidated statements of income for the nine–month periods ended September 30 is as follows: Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Derivative designated as hedging instruments Interest rate contracts – cash flow hedges Interest expense – Borrowings $ 95 $ 469 $ 710 $ 1,453 Total $ 95 $ 469 $ 710 $ 1,453 Location of loss recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Derivative not designated as hedging instruments Mortgage loan contracts Non–interest income – Gain on sale of loans $ ( 178 ) $ ( 333 ) $ ( 92 ) $ ( 333 ) Commitments to originate mortgage loans Non–interest income – Gain on sale of loans ( 141 ) 167 ( 897 ) ( 379 ) Total $ ( 319 ) $ ( 166 ) $ ( 989 ) $ ( 712 ) Note 11 – Disclosures about Fair Value of Assets and Liabilities The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices in active markets for identical assets or liabilities Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2022. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. 42 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Available for sale securities When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features. Hedged loans Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used. Interest rate swap agreements The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following: September 30, 2022 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 $ 266,254 $ — $ 266,254 $ — State and municipal 415,246 — 415,246 — Federal agency collateralized mortgage obligations 34,624 — 34,624 — Federal agency mortgage–backed pools 194,641 — 194,641 — Corporate notes 74,890 — 74,890 — Total available for sale securities 985,655 — 985,655 — Interest rate swap agreements asset 47,446 — 47,446 — Commitments to originate mortgage loans 140 — 140 — Interest rate swap agreements liability ( 45,379 ) — ( 45,379 ) — Mortgage loan contracts ( 330 ) — ( 330 ) — 43 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 257,691 — 257,691 — 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 — Commitments to originate mortgage loans 1,037 — 1,037 — Interest rate swap agreements liability ( 18,092 ) — ( 18,092 ) — Mortgage loan contracts ( 238 ) — ( 238 ) — Certain other assets are measured at fair value on a non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment): Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2022 Collateral dependent loans $ 9,455 $ — $ — $ 9,455 Mortgage servicing rights 18,704 — — 18,704 December 31, 2021 Collateral dependent loans $ 15,176 $ — $ — $ 15,176 Mortgage servicing rights 15,186 — — 15,186 Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month–end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment increased by $ 2.6 million during the first nine months of 2022 and increased by $ 2.1 million during the first nine months of 2021. 44 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill. September 30, 2022 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 9,455 Collateral based measurement Discount to reflect current market conditions and ultimate collectibility 0.0 %- 100.0 % ( 5.1 %) Mortgage servicing rights 18,704 Discounted cash flows Discount rate, Constant prepayment rate, Probability of default 10.0 %- 10.0 % ( 10.0 %), 6.9 %- 13.3 % ( 7.8 %), 0.0 %- 0.7 %( 0.5 %) December 31, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 15,176 Collateral based measurement Discount to reflect current market conditions and ultimate collectibility 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 %) Note 12 – Fair Value of Financial Instruments The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts. The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at September 30, 2022 and December 31, 2021. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheets as well as certain off–balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Due from Banks – The carrying amounts approximate fair value. Interest-earning time deposits – The fair values of the Company’s interest–earning time deposits are estimated using discounted cash flow analyses based on current rates for similar types of interest–earning time deposits. Held–to–Maturity Securities – For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities. Loans Held for Sale – The carrying amounts approximate fair value. 45 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Net Loans – The fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. FHLB Stock – Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Interest Receivable/Payable – The carrying amounts approximate fair value. Deposits – The fair value of demand deposits, savings accounts, interest–bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity. Borrowings – Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings. Subordinated Notes – The fair value of subordinated notes is based on discounted cash flows based on current borrowing rates for similar types of instruments. Junior Subordinated Debentures Issued to Capital Trusts – Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures. Commitments to Extend Credit and Standby Letters of Credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed–rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short–term nature of these agreements, carrying amounts approximate fair value. 46 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables present estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall. September 30, 2022 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 $ 109,659 $ 109,659 $ — $ — Interest–earning time deposits 2,814 — 2,785 — Investment securities, held to maturity 2,031,536 — 1,640,589 — Loans held for sale 1,852 — — 1,852 Loans (excluding loan level hedges), net 3,960,846 — — 3,737,561 Stock in FHLB 26,677 — 26,677 — Interest receivable 30,096 — 30,096 — Mortgage servicing rights 18,704 — — 18,704 Liabilities Non–interest bearing deposits $ 1,315,155 $ 1,315,155 $ — $ — Interest bearing deposits 4,515,683 — 4,033,706 — Borrowings 1,048,091 — 1,044,117 — Subordinated notes 58,860 — 65,146 — Junior subordinated debentures issued to capital trusts 56,966 — 63,599 — Interest payable 1,961 — 1,961 — 47 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) December 31, 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 3,590,331 — — 3,479,958 Stock in FHLB 24,440 — 24,440 — Interest receivable 26,137 — 26,137 — Mortgage servicing rights 15,186 — — 15,186 Liabilities Non–interest bearing deposits $ 1,360,338 $ 1,360,338 $ — $ — Interest bearing deposits 4,442,653 — 4,369,011 — Borrowings 712,739 — 708,275 — Subordinated notes 58,750 — 57,906 — Junior subordinated debentures issued to capital trusts 56,785 — 53,420 — Interest payable 2,235 — 2,235 — Note 13 – Accumulated Other Comprehensive Income (Loss) September 30, 2022 December 31, 2021 Unrealized gain (loss) on securities available for sale $ ( 161,812 ) $ 7,201 Unamortized loss on securities held to maturity, previously transferred from AFS 3,895 5,770 Unrealized gain (loss) on derivative instruments 2,068 ( 3,673 ) Tax effect 32,728 ( 1,953 ) Total accumulated other comprehensive income (loss) $ ( 123,121 ) $ 7,345 Note 14 – Regulatory Capital Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital framework (known as “Basel III”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 48 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The Company and Bank are subject to minimum regulatory capital requirements as defined and calculated in accordance with the Basel III–based regulations. As allowed under Basel III rules, the Company made the decision to opt–out of including accumulated other comprehensive income in regulatory capital. The minimum regulatory capital requirements are set forth in the table below. In addition, to be categorized as well capitalized, the Company and Bank must maintain Total risk–based, Tier I risk–based, common equity Tier I risk–based and Tier I leverage ratios as set forth in the table below. As of September 30, 2022 and December 31, 2021, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the third quarter of 2022 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 of March 31, 2020, the Company and Bank elected the transition option of the 2019 CECL Rule which allows banking organizations to phase in over a three–year period the day–one adverse effects of CECL on their regulatory capital ratios. 49 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition And Results of Operations For the Three and Nine Months ended September 30, 2022 and 2021 Horizon and the Bank’s actual and required capital ratios as of September 30, 2022 and December 31, 2021 were as follows: Actual Required for Capital Adequacy Purposes (1) Required For Capital Adequacy Purposes with Capital Buffer (1) Well Capitalized Under Prompt Corrective Action Provisions (1) Amount Ratio Amount Ratio Amount Ratio Amount Ratio September 30, 2022 Total capital (to risk–weighted assets) (1) Consolidated $ 760,102 14.44 % $ 421,180 8.00 % $ 552,798 10.50 % N/A N/A Bank 711,478 13.65 % 416,859 8.00 % 547,127 10.50 % $ 521,073 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 712,642 13.54 % 315,885 6.00 % 447,503 8.50 % N/A N/A Bank 664,018 12.74 % 312,644 6.00 % 442,912 8.50 % 416,859 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 592,723 11.26 % 236,914 4.50 % 368,532 7.00 % N/A N/A Bank 664,018 12.74 % 234,483 4.50 % 364,751 7.00 % 338,698 6.50 % Tier 1 capital (to average assets) (1) Consolidated 712,642 9.56 % 298,240 4.00 % 298,240 4.00 % N/A N/A Bank 664,018 8.84 % 300,512 4.00 % 300,512 4.00 % 375,641 5.00 % 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 % (1) As defined by regulatory agencies Note 15 – General Litigation The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operation and cash flows of the Company. 50 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition And Results of Operations For the Three and Nine Months ended September 30, 2022 and 2021