HORIZON BANCORP INC /IN/ 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HORIZON BANCORP, INC. AND SUBSIDIARIES Consolidated Financial Statements Table of Contents Page Consolidated Financial Statements Consolidated Balance Sheets 67 Consolidated Statements of Income 68 Consolidated Statements of Comprehensive Income (Loss) 69 Consolidated Statements of Stockholders’ Equity 70 Consolidated Statements of Cash Flows 71 Notes to Consolidated Financial Statements 73 Reports of Independent Registered Public Accounting Firm (PCAOB ID: 686 ) 135 Management’s Report on Financial Statements 139 66 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar Amounts in Thousands) December 31 2022 December 31 2021 Assets Cash and due from banks $ 123,505 $ 593,508 Interest-earning time deposits 2,812 4,782 Investment securities, available for sale 997,558 1,160,812 Investment securities, held to maturity (fair value of $ 1,681,309 and $ 1,559,991 ) 2,022,748 1,552,443 Loans held for sale 5,807 12,579 Loans, net of allowance for credit losses of $ 50,464 and $ 54,286 4,107,534 3,604,248 Premises and equipment, net 92,677 93,441 Federal Home Loan Bank stock 26,677 24,440 Goodwill 155,211 154,572 Other intangible assets 17,239 20,941 Interest receivable 35,294 26,137 Cash value of life insurance 146,175 97,150 Other assets 139,281 66,836 Total assets $ 7,872,518 $ 7,411,889 Liabilities Deposits Non–interest bearing $ 1,277,768 $ 1,360,338 Interest bearing 4,580,006 4,442,653 Total deposits 5,857,774 5,802,991 Borrowings 1,142,949 712,739 Subordinated notes 58,896 58,750 Junior subordinated debentures issued to capital trusts 57,027 56,785 Interest payable 5,380 2,235 Other liabilities 73,117 55,180 Total liabilities 7,195,143 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 43,937,889 and 43,811,421 shares — — Additional paid-in capital 354,188 352,122 Retained earnings 429,385 363,742 Accumulated other comprehensive income (loss) ( 106,198 ) 7,345 Total stockholders’ equity 677,375 723,209 Total liabilities and stockholders’ equity $ 7,872,518 $ 7,411,889 See notes to consolidated financial statements 67 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollar Amounts in Thousands, Except Per Share Data) Year Ended December 31 2022 2021 2020 Interest Income Loans receivable $ 173,500 $ 155,732 $ 174,262 Investment securities – taxable 33,202 14,437 8,071 Investment securities – tax exempt 29,025 23,246 17,213 Other 306 695 422 Total interest income 236,033 194,110 199,968 Interest Expense Deposits 17,809 7,867 18,556 Borrowed funds 12,465 4,701 11,430 Subordinated notes 3,522 3,522 1,824 Junior subordinated debentures issued to capital trusts 2,719 2,215 2,628 Total interest expense 36,515 18,305 34,438 Net Interest Income 199,518 175,805 165,530 Credit loss expense (recovery) ( 1,816 ) ( 2,084 ) 20,751 Net Interest Income after Credit Loss Expense (Recovery) 201,334 177,889 144,779 Non–interest Income Service charges on deposit accounts 11,598 9,192 8,848 Wire transfer fees 595 892 1,000 Interchange fees 12,402 10,901 9,306 Fiduciary activities 5,381 7,419 9,145 Gains (losses) on sale of investment securities — 914 4,297 Gain on sale of mortgage loans 7,165 19,163 26,721 Mortgage servicing income net of impairment 4,800 2,352 ( 3,716 ) Increase in cash value of bank owned life insurance 2,594 2,094 2,243 Death benefit on bank owned life insurance 644 783 264 Other income 2,272 4,242 1,513 Total non–interest income 47,451 57,952 59,621 Non–interest Expense Salaries and employee benefits 80,283 74,051 71,082 Net occupancy expenses 13,323 12,541 12,811 Data processing 10,567 9,962 9,200 Professional fees 1,843 2,216 2,433 Outside services and consultants 10,850 8,449 7,318 Loan expense 5,411 5,492 5,218 FDIC insurance expense 2,558 2,377 1,855 Core deposit intangible amortization 3,702 3,644 3,723 Other losses 1,046 2,283 1,162 Other expense 13,618 12,379 11,229 Total non–interest expense 143,201 133,394 126,031 Income Before Income Taxes 105,584 102,447 78,369 Income tax expense 12,176 15,356 9,870 Net Income Available to Common Shareholders $ 93,408 $ 87,091 $ 68,499 Basic Earnings Per Share $ 2.14 $ 1.99 $ 1.56 Diluted Earnings Per Share 2.14 1.98 1.55 See notes to consolidated financial statements 68 Table of Contents Horizon Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (Dollar Amounts in Thousands) Year Ended December 31 2022 2021 2020 Net Income $ 93,408 $ 87,091 $ 68,499 Other Comprehensive Income (Loss) Change in fair value of derivative instruments: Change in fair value of derivative instruments for the period 5,649 4,570 ( 3,803 ) Income tax effect ( 1,186 ) ( 960 ) 799 Changes from derivative instruments 4,463 3,610 ( 3,004 ) Change in securities: Unrealized gain (loss) for the period on available for sale securities ( 147,345 ) ( 35,547 ) 35,272 Reclassification of securities from available for sale to held to maturity ( 794 ) 5,869 — Accretion (amortization) from transfer of securities from available for sale to held to maturity securities ( 1,236 ) 66 ( 58 ) Reclassification adjustment for securities (gains) losses realized in income — ( 914 ) ( 4,297 ) Income tax effect 31,369 6,409 ( 6,493 ) Unrealized gains (losses) on securities ( 118,006 ) ( 24,117 ) 24,424 Other Comprehensive Income (Loss), Net of Tax ( 113,543 ) ( 20,507 ) 21,420 Comprehensive Income (Loss) $ ( 20,135 ) $ 66,584 $ 89,919 See notes to consolidated financial statements 69 Table of Contents Horizon Bancorp, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (Dollar Amounts in Thousands, Except Per Share Data) Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balances, January 1, 2020 $ — $ — $ 379,853 $ 269,738 $ 6,432 $ 656,023 Net income — — — 68,499 — 68,499 Other comprehensive income, net of tax — — — — 21,420 21,420 Impact of adoption of ASU No. 2016–13 — — — ( 15,635 ) — ( 15,635 ) Amortization of unearned compensation — — 1,206 — — 1,206 Exercise of stock options — — 157 — — 157 Stock option expense — — 132 — — 132 Stock issued stock plans — — 1,233 — — 1,233 Repurchase of outstanding common stock — — ( 19,636 ) — — ( 19,636 ) Cash dividends on common stock ($ 0.48 per share) — — — ( 21,183 ) — ( 21,183 ) Balances, December 31, 2020 $ — $ — $ 362,945 $ 301,419 $ 27,852 $ 692,216 Net income — — — 87,091 — 87,091 Other comprehensive loss, net of tax — — — — ( 20,507 ) ( 20,507 ) Amortization of unearned compensation — — 1,751 — — 1,751 Exercise of stock options — — 1,062 — — 1,062 Stock option expense — — 68 — — 68 Stock awards vested — — ( 1,355 ) — — ( 1,355 ) Repurchase of outstanding stock — — ( 7,607 ) — — ( 7,607 ) Stock retirement plans — — ( 4,742 ) — — ( 4,742 ) Cash dividends on common stock ($ 0.56 per share) — — — ( 24,768 ) — ( 24,768 ) Balances, December 31, 2021 $ — $ — $ 352,122 $ 363,742 $ 7,345 $ 723,209 Net income — — — 93,408 — 93,408 Other comprehensive loss, net of tax — — — — ( 113,543 ) ( 113,543 ) Amortization of unearned compensation — — 2,462 — — 2,462 Exercise of stock options — — 145 — — 145 Stock option expense — — 13 — — 13 Net settlement of share awards — — ( 1,824 ) — — ( 1,824 ) Stock retirement plans — — 1,270 — — 1,270 Cash dividends on common stock ($ 0.63 per share) — — — ( 27,765 ) — ( 27,765 ) Balances, December 31, 2022 $ — $ — $ 354,188 $ 429,385 $ ( 106,198 ) $ 677,375 See notes to consolidated financial statements 70 Table of Contents Horizon Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollar Amounts in Thousands) Year Ended December 31 2022 2021 2020 Operating Activities Net income $ 93,408 $ 87,091 $ 68,499 Items not requiring (providing) cash Provision for (recovery of) credit losses ( 1,816 ) ( 2,084 ) 20,751 Depreciation and amortization 10,754 9,802 9,399 Share based compensation 2,475 1,819 1,338 Amortization of mortgage servicing rights 2,345 4,073 2,932 Impairment (recovery) of mortgage servicing rights ( 2,594 ) ( 2,578 ) 4,453 Premium amortization on securities, net 12,148 10,289 9,067 Deferred income taxes 2,177 2,311 ( 9,421 ) Gain on sale of investment securities — ( 914 ) ( 4,297 ) Gain on sale of mortgage loans ( 7,165 ) ( 19,163 ) ( 26,721 ) Proceeds from sales of loans 225,928 453,087 605,256 Loans originated for sale ( 215,174 ) ( 437,174 ) ( 593,515 ) Gain on cash value life insurance ( 2,594 ) ( 2,094 ) ( 2,243 ) Gain on other real estate owned ( 722 ) ( 85 ) ( 197 ) Net change in: Interest receivable ( 9,157 ) ( 4,222 ) ( 2,568 ) Interest payable 3,145 ( 493 ) ( 350 ) Other assets ( 13,964 ) 9,633 ( 4,456 ) Other liabilities ( 4,814 ) ( 2,948 ) 931 Net cash provided by operating activities 94,380 106,350 78,858 Investing Activities Purchases of securities available for sale ( 180,198 ) ( 837,684 ) ( 590,305 ) Proceeds from sales, maturities, calls and principal repayments of securities available for sale 69,113 287,714 318,897 Purchases of securities held to maturity ( 430,457 ) ( 931,029 ) — Proceeds from maturities of securities held to maturity 72,968 30,544 37,529 Net change in interest earning time deposits 1,970 4,183 ( 510 ) Purchase of FHLB stock ( 2,435 ) ( 1,417 ) ( 1,161 ) Redemption of FHLB stock 198 — 585 Purchase of loans ( 55,195 ) — — Net change in loans ( 448,284 ) 480,028 ( 239,938 ) Proceeds on the sale of OREO and repossessed assets 5,263 1,286 2,047 Premises and equipment expenditures ( 6,429 ) ( 1,440 ) ( 5,866 ) Purchases of bank owned life insurance ( 50,000 ) — — Proceeds from bank owned life insurance 3,554 783 264 Net cash received in branch acquisition — 622,179 — Net cash used in investing activities ( 1,019,932 ) ( 344,853 ) ( 478,458 ) Financing Activities Net change in deposits 54,783 425,449 600,131 Proceeds from long–term borrowings 675,000 244,554 133,810 Repayment of long–term borrowings ( 755,608 ) ( 76,371 ) ( 123,377 ) Net change in short–term borrowings 503,746 — ( 98,000 ) Net change in repurchase agreements 7,072 21,336 18,521 71 Table of Contents Net settlement of share awards ( 1,824 ) ( 1,355 ) — Exercise of stock options 145 1,062 157 Repurchase of outstanding stock — ( 7,607 ) ( 19,636 ) Proceeds from issuance of stock — — 1,233 Net proceeds from issuance of subordinated notes — — 58,824 Dividends paid on common stock ( 27,765 ) ( 24,768 ) ( 21,183 ) Net cash provided by (used in) financing activities 455,549 582,300 550,480 Net Change in Cash and Cash Equivalents ( 470,003 ) 343,797 150,880 Cash and Cash Equivalents, Beginning of Period 593,508 249,711 98,831 Cash and Cash Equivalents, End of Period $ 123,505 $ 593,508 $ 249,711 Additional Supplemental Information Interest paid $ 33,370 $ 18,782 $ 34,788 Income taxes paid 802 1,650 10,588 Transfer of loans to other real estate and repossessed assets 2,009 1,721 2,442 Transfer of premises to other real estate 1,479 1,753 — Transfer of available for sale securities to held to maturity securities 120,881 490,200 — See notes to consolidated financial statements 72 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 1 – Nature of Operations and Summary of Significant Accounting Policies Nature of Business — The consolidated financial statements of Horizon Bancorp, Inc. (“Horizon”) and its wholly owned subsidiaries, Horizon Bank (“Bank”) and Horizon Risk Management, Inc., together referred to as “Horizon,” conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly owned subsidiary of Horizon. The Bank is a full–service commercial bank offering a broad range of commercial and retail banking and other services incident to banking along with a trust department that offers corporate and individual trust and agency services and investment management services. The Bank maintains 71 full service offices. The Bank has wholly owned direct and indirect subsidiaries: Horizon Investments, Inc. (“Horizon Investments”), Horizon Properties, Inc. (“Horizon Properties”), Horizon Insurance Services, Inc. (“Horizon Insurance”) and Horizon Grantor Trust. Horizon Investments manages the investment portfolio of the Bank. Horizon Properties manages the real estate investment trust. Horizon Insurance is used by the Company’s Wealth Management to sell certain insurance products. Horizon Grantor Trust holds title to certain company owned life insurance policies. Horizon conducts no business except that incident to its ownership of the subsidiaries. Horizon formed Horizon Bancorp Capital Trust II in 2004 (“Trust II”) and Horizon Bancorp Capital Trust III in 2006 (“Trust III”) for the purpose of participating in pooled trust preferred securities offerings. The Company assumed additional debentures as the result of the following acquisitions: Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I (“Alliance Trust”); American Trust & Savings Bank in 2010, which formed Am Tru Statutory Trust I (“Am Tru Trust”); Heartland Bancshares, Inc. in 2013, which formed Heartland (IN) Statutory Trust II (“Heartland Trust”); LaPorte Bancorp, Inc. in 2016, which had acquired City Savings Statutory Trust I (“City Savings Trust”); and Salin Bancshares, Inc. in 2019, which formed Salin Statutory Trust I (“Salin Trust”). See Note 15 of the Consolidated Financial Statements for further discussion regarding these previously consolidated entities that are now reported separately. The business of Horizon is not seasonal to any material degree. Basis of Reporting — The consolidated financial statements include the accounts of Horizon and subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, valuation of other real estate owned, goodwill and intangible assets, mortgage servicing rights and fair values of financial instruments. Business Combinations — Business combinations are accounted for using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. Horizon typically issues Common Stock and/or pays cash for an acquisition, depending on the terms of the acquisition agreement. The value of Common Stock issued is determined based on the market price of the stock as of the closing of the acquisition. Acquisition costs are expensed when incurred. Cash and Cash Equivalents — Cash and cash equivalents includes cash, deposits with other financial institutions with original maturities under 90 days, and federal funds sold. Fair Value Measurements — Horizon uses fair value measurements to record fair value adjustments, to certain assets, and liabilities and to determine fair value disclosures. Horizon has adopted Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures for all applicable financial and nonfinancial 73 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) assets and liabilities. This accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances. As defined in codification, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. Horizon values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability). In measuring the fair value of an asset, Horizon assumes the highest and best use of the asset by a market participant to maximize the value of the asset, and does not consider the intended use of the asset. When measuring the fair value of a liability, Horizon assumes that the nonperformance risk associated with the liability is the same before and after the transfer. Nonperformance risk is the risk that an obligation will not be satisfied and encompasses not only Horizon’s own credit risk (i.e., the risk that Horizon will fail to meet its obligation), but also other risks such as settlement risk. Horizon considers the effect of its own credit risk on the fair value for any period in which fair value is measured. There are three acceptable valuation techniques that can be used to measure fair value: the market approach, the income approach and the cost approach. Selection of the appropriate technique for valuing a particular asset or liability takes into consideration the exit market, the nature of the asset or liability being valued, and how a market participant would value the same asset or liability. Ultimately, determination of the appropriate valuation method requires significant judgment, and sufficient knowledge and expertise are required to apply the valuation techniques. Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of Horizon. Unobservable inputs are assumptions based on Horizon’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an input to be significant if it drives 10 % or more of the total fair value of a particular asset or liability. Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses. 74 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Investment Securities Available for Sale — Horizon designates the majority of its investment portfolio as available for sale based on management’s plans to use such securities for asset and liability management, liquidity and not to hold such securities as long-term investments. Management repositions the portfolio to take advantage of future expected interest rate trends when Horizon’s long-term profitability can be enhanced. Investment securities available for sale and marketable equity securities are carried at estimated fair value and any net unrealized gains/losses (after tax) on these securities are included in accumulated other comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Gains/losses on the disposition of securities available for sale are recognized at the time of the transaction and are determined by the specific identification method. Investment Securities Held to Maturity — Includes any security for which Horizon has the positive intent and ability to hold until maturity. These securities are carried at amortized cost. Loans — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaling $ 17.5 million and $ 11.5 million at December 31, 2022 and 2021 was excluded from the Allowance for Credit Losses (“ACL”) calculation and was reported in accrued interest receivable on the consolidated balance sheet. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the effective yield method without anticipating prepayments. Interest on commercial, mortgage and installment loans is recognized over the term of the loans based on the principal amount outstanding. When principal or interest is past due 90 days or more, and the loan is not well secured or in the process of collection, or when serious doubt exists as to the collectability of a loan, the accrual of interest is discontinued. Loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as a yield adjustment. Discounts and premiums on purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management's policy to convert the loan from an “earning asset” to a non–accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management's policy to generally place a loan on non–accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Commercial Banking and/or the Chief Operations Officer must review all loans placed on non–accrual status. Subsequent payments on non–accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non–accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non–accrual loan to accrual status. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Consistent with regulatory guidance, charge–offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company's policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined. For all loan portfolio segments except 1–4 family residential properties and consumer, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower's ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial 75 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) charge–off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral. The Company charges off 1–4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge–down or specific allocation of family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges off unsecured open–end loans when the loan is contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well–secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off. A loan is individually evaluated when, based on current information, a creditor may be experiencing financial difficulty and repayment is substantially expected through operation or sale of collateral. For collateral–dependent assets individually evaluated, the Company utilizes, as a practical expedient, the fair value of collateral, adjusted for estimated costs to sell, when determining the allowance for credit losses. Smaller–balance, homogeneous loans are evaluated in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually. Purchased Credit Deteriorated (“PCD”) Loans — The Company has purchased loans, some of which have experienced credit deterioration since origination. PCD loans are recorded at the amount paid. An ACL on loans is determined using the same methodology as other loans held for investment. The initial ACL on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACL on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized or accreted into interest income over the remaining life of the loan. Subsequent changes to the ACL on loans are recorded through credit loss expense. Loans Held for Sale — Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to non–interest income. Gains and losses on loan sales are recorded in non–interest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in non–interest income upon sale of the loan. Concentrations of Credit Risk — The Bank grants commercial, real estate, and consumer loans to customers located primarily in the northern and central regions of Indiana and the southern and central regions of Michigan and provides mortgage warehouse lines to mortgage companies in the United States. Commercial loans make up approximately 59 % of the loan portfolio and are secured by both real estate and business assets. These loans are expected to be repaid from cash flows from operations of the businesses. The Bank does not have a concentration in speculative commercial real estate loans. Residential real estate loans make up approximately 16 % of the loan portfolio and are secured by residential real estate. Installment loans make up approximately 23 % of the loan portfolio and are primarily secured by consumer assets. Mortgage warehouse loans make up approximately 2 % of the loan portfolio and are secured by residential real estate. Allowance for Credit Losses (“ACL”) on Loans — The ACL on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the loan balance is confirmed to be no longer collectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Management estimates the ACL balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan–specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, changes in economic conditions, or other relevant factors. 76 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The Company considers the following when estimating credit losses: 1) available information relevant to assessing the collectibility of cash flows including internal information, external information or a combination of both relating to past events, current conditions and reasonable and supportable forecasts; 2) relevant qualitative and quantitative factors relating to the environment in which the Company operates and factors specific to the borrower; 3) off–balance sheet credit exposures; and credit support. ACL on loans is measured on a collective basis and reflects impairment in groups of loans aggregated on the basis of similar risk characteristics which may include any one or a combination of the following: internal credit ratings, risk ratings or classification, financial asset type, collateral type, size, industry of the borrower, historical or expected credit loss patterns, and reasonable and supportable forecast periods. The ACL for a specific portfolio segment is computed by multiplying the loss rate by the amortized cost balance of the segment with adjustments for other qualitative factors as described above. As appropriate, newer credit products or portfolios with limited historical loss may use applicable external data for determining the ACL until experience justifies that sufficient product maturity supports the estimate of expected credit losses. Pursuant to ASC 326–20–30–9, an entity shall not rely solely on past events to estimate expected credit losses, and should consider adjustments to historical information to reflect the extent to which management expects current conditions and forecasted conditions to differ from the periods utilized for the historical loss rate calculation. Management has incorporated an adjustment of the historical loss rate calculated within the model to reflect current and forecasted condition and has applied this adjustment on a qualitative factor basis to the aggregate pool loss rate. The qualitative adjustment is based on a combination of external econometric data and internal factors such as portfolio composition, changes in management, changes in loan policy and other factors. The economic forecast is based in part on economic indexes and quantitative matrices with a six to twelve month forecast. The qualitative adjustment is calculated based on current and forecasted conditions and evaluated each quarter by management, and therefore is dynamic in nature. As a result of the forecast being applied as a qualitative factor and adjusted quarterly, no reversion to the historical loss rate is necessary, as the historical base loss rate is preserved in the calculation of “all in” loss rate. Specific reserves reflect collateral shortfalls on loans identified for evaluation or individually considered non–performing, including troubled debt restructurings and receivables where the Company has determined foreclosure is probable. These loans no longer have similar risk characteristics to collectively evaluated loans due to changes in credit risk, borrower circumstances, recognition of write–offs, or cash collections that have been fully applied to principal on the basis of non–accrual policies. At a minimum, the population of loans subject to individual evaluation include individual loans and leases where it is probable we will be unable to collect all amounts due, according to the original contractual terms. These include commercial impaired loans, jumbo residential mortgages (as defined), and jumbo home equity loans with a balance exceeding $250,000, and other loans as determined by management. ACL for residential and consumer loans are, primarily, determined by pools of similar loans and are evaluated on a quarterly basis. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. 77 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Troubled Debt Restructurings (“TDR”) — A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The ACL on loans on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provides all banks with the option to elect either or both of the following from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after termination of the national emergency. Section 4013 of the CARES Act was amended on December 27, 2020 to extend this relief period until January 1, 2022. Specific applicable provisions of the CARES Act allow: i. suspension of the requirements under Generally Accepted Accounting Principles (“GAAP”) for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or ii. suspension of any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes. If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. Allowance for Credit Losses on Off–Balance Sheet (“OBS”) Credit Exposures — The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The Company determines the estimated amount of expected credit extensions based on historical usage to calculate the amount of exposure for a loss estimate. Allowance for Credit Losses on Available for Sale Securities — For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recorded in other comprehensive income. Changes in the ACL are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Allowance for Credit Losses on Held to Maturity Securities — For held to maturity securities, the Company conducts an assessment of its held to maturity securities at the time of purchase and on at least an annual basis to ensure such investment securities remain within appropriate levels of risk and continue to perform satisfactorily in fulfilling its obligations. The Company considers, among other factors, the nature of the securities and credit ratings or financial condition of the issuer. If available, the Company obtains a credit rating for issuers from the Nationally Recognized Statistical Rating Organization (“NRSRO”) for consideration. If this assessment indicates that a material credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss. 78 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Premises and Equipment — Buildings and major improvements are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 3 to 40 years. Furniture and equipment are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 2 to 20 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations. Federal Reserve and Federal Home Loan Bank of Indianapolis (FHLBI) Stock — The stock is a required investment for institutions that are members of the Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) systems. The required investment in the common stock is based on a predetermined formula. Partnership Investments — The Company invests in partnerships that generate qualified affordable housing and solar tax credits. The Company has elected to account for partnership investments in qualified affordable housing using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized to income tax expense in proportion to the tax credits and other tax benefits received. This net investment performance is recognized in the income statement as a component of income tax expense. The Company accounts for partnership investments that generate solar tax credits under the deferral method. The investment in the limited partnerships totaling $ 4.5 million and $ 2.3 million at December 31, 2022 and 2021, respectively is included in other assets in the consolidated balance sheets. Mortgage Servicing Rights —Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. Amortized mortgage servicing rights include commercial mortgage servicing rights. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to non–interest income. Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with mortgage servicing income net of impairment on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Goodwill and Intangible Assets — Goodwill is tested annually for impairment or more frequently should potential triggering events be identified that may indicate potential impairment. At December 31, 2022, Horizon had core deposit intangibles of $ 17.2 million subject to amortization and $ 155.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is 79 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) indicated and goodwill is written down to its implied fair value. A large majority of the goodwill relates to the acquisitions of Heartland, Summit, Peoples, Kosciusko, LaPorte, Lafayette, Wolverine and Salin. Bank Owned Life Insurance (“BOLI”) – BOLI has been purchased on certain employees and directors of the Company. The Company records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase and Other Secured Borrowings — The Company purchases certain securities, generally U.S. government–sponsored entity and agency securities, under agreements to resell. The amounts advanced under these agreements represent short–term secured loans and are reflected as assets in the accompanying consolidated balance sheets. We also sell certain securities under agreements to repurchase. These agreements are treated as collateralized financing transactions. These and other secured borrowings such as loans sold not qualifying for sale accounting treatment, are reflected as liabilities in the accompanying consolidated balance sheets and are recorded at the amount of cash received in connection with the transaction. Short–term securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Securities, generally U.S. government and federal agency securities, pledged as collateral under these financing arrangements can be repledged by the secured party. Additional collateral may be required based on the fair value of the underlying securities. Income Taxes —The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes ). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. Trust Assets and Income — Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by Horizon. Transfer of Financial Assets — The transfer of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1)the assets have been isolated from the Company and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2)the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3)the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. 80 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Earnings per Common Share — Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted–average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share. Years Ended December 31 2022 2021 2020 Basic earnings per share Net income $ 93,408 $ 87,091 $ 68,499 Weighted average common shares outstanding 43,568,823 43,802,733 44,044,737 Basic earnings per share $ 2.14 $ 1.99 $ 1.56 Diluted earnings per share Net income available to common shareholders $ 93,408 $ 87,091 $ 68,499 Weighted average common shares outstanding 43,568,823 43,802,733 44,044,737 Effect of dilutive securities: Restricted stock 92,381 107,988 41,817 Stock options 37,911 44,559 36,522 Weighted average common shares outstanding 43,699,115 43,955,280 44,123,076 Diluted earnings per share $ 2.14 $ 1.98 $ 1.55 There were 319,760 , 140,955 and 278,776 shares for the twelve months ended December 31, 2022, 2021 and 2020, respectively, which were not included in the computation of diluted earnings per share because they were non-dilutive. On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of December 31, 2022, Horizon had repurchased a total of 803,349 shares at an average price per share of $ 16.89 . In addition to the stock repurchase program, Horizon agreed to repurchase 1,000,000 shares at a price per share of $ 15.19 from an individual shareholder on March 6, 2020. Dividend Restrictions — Horizon’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits combined with the retained net profits of the preceding two years, subject to the capital requirements described in Note 21. At December 31, 2022, the Bank could, without prior approval, declare dividends of approximately $ 149.9 million to Horizon. Additionally, the Federal Reserve Board limits the amount of dividends that may be paid by Horizon to its stockholders under its capital adequacy guidelines. Consolidated Statements of Cash Flows — For purposes of reporting cash flows, cash and cash equivalents are defined to include cash and due from banks, money market investments and federal funds sold with maturities of one day or less. Horizon reports net cash flows for customer loan transactions, deposit transactions, short–term investments and borrowings. Comprehensive Income (Loss) — Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized gain (loss) on available for sale securities, unrealized and realized gains and losses in cash flow derivative financial instruments and accretion (amortization) of available for sale securities transferred to held to maturity. 81 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Share–Based Compensation — At December 31, 2022, Horizon had share–based compensation plans, which are described more fully in Note 22. All share–based payments are to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. Horizon has recorded approximately $ 2.5 million, $ 1.8 million, and $ 1.3 million in compensation expense relating to vesting of stock options and restricted stock awards less estimated forfeitures for the 12–month periods ended December 31, 2022, 2021 and 2020, respectively. Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Consolidated Balance Sheets, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss of the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of stockholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in non–interest income or non–interest expense. Revenue Recognition — Accounting Standards Codification 606, “Revenue from Contracts with Customers” (ASC 606) provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result in a change to the accounting of any of the Company’s revenue streams that are within the scope of the amendments. Revenue–gathering activities that are within the scope of ASC 606 and that are presented as non-interest income in the Company’s consolidated statements of income include: • Service charges and fees on deposit accounts – these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer and overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services. • Fiduciary activities – this includes periodic fees due from trust and wealth management customers for managing the customers’ financial assets. Fees are charged based on a standard agreement and are recognized as they are earned. Segments — Horizon has one principal business segment, commercial banking. While our chief decision makers monitor the revenue streams of various products and services, the identifiable segments' operations are managed and financial performance is evaluated on a company–wide basis. Accordingly, all of the Company's financial service operations are considered to be aggregated in one reportable operating segment. Reclassifications — Certain reclassifications have been made to the 2021 and 2020 consolidated financial statements to be comparable to 2022. These reclassifications had no effect on net income. 82 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Revision of Previously Issued Financial Statements We have revised amounts reported in previously issued financial statements for the periods presented in the Annual Report on Form 10–K related to the following immaterial errors. • Sold commercial loan participation balances which do not qualify under accounting guidance as sales transactions under Accounting Standards Codification Topic 860 – Transfers and Servicing were not recorded as an outstanding loan balance by the Company. The correction of this error resulted in an increase in loans, net of allowance for credit losses and borrowings on the Company's consolidated balance sheet. • Indirect loan dealer reserve asset balances and related amortization expense were not reported as part of the outstanding loan balances or a reduction in interest income on loans, respectively. The correction of this error resulted in an increase in loans, net of allowance for credit losses and a decrease in other assets on the Company's consolidated balance sheet and a reduction in interest income on loans receivable and a reduction in non–interest loan expense on the Company's consolidated income statement. This revision does not impact the Company's net income. • Repurchases of outstanding stock were disclosed as an investing activity rather than a financing activity in the Company's consolidated statement of cash flows. • The classification of certain available for sale (“AFS”) and held to maturity (“HTM”) securities were incorrectly disclosed. 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 4 – Securities. We evaluated the aggregate effects of these 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 years ended December 31, 2021 and 2020, 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 Sheets December 31, 2021 As Reported Sold Commercial Loan Participation Adjustment Indirect Loan Dealer Reserve Adjustment As Revised Loans, net of allowance for credit losses $ 3,553,345 $ 36,986 $ 13,917 $ 3,604,248 Other assets 80,753 — ( 13,917 ) 66,836 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 83 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Consolidated Statements of Income Year Ended December 31, 2021 As Reported Indirect Loan Dealer Reserve Adjustment As Revised Interest Income Loans receivable $ 161,617 $ ( 5,885 ) $ 155,732 Total interest income 199,995 ( 5,885 ) 194,110 Net Interest Income 181,690 ( 5,885 ) 175,805 Net Interest Income after Credit Loss Expense 183,774 ( 5,885 ) 177,889 Non–interest Expense Loan expense 11,377 ( 5,885 ) 5,492 Total non–interest expense 139,279 ( 5,885 ) 133,394 Net Income Available to Common Shareholders 87,091 — 87,091 Consolidated Statements of Income Year Ended December 31, 2020 As Reported Indirect Loan Dealer Reserve Adjustment As Revised Interest Income Loans receivable $ 179,672 $ ( 5,410 ) $ 174,262 Total interest income 205,378 ( 5,410 ) 199,968 Net Interest Income 170,940 ( 5,410 ) 165,530 Net Interest Income after Credit Loss Expense 150,189 ( 5,410 ) 144,779 Non–interest Expense Loan expense 10,628 ( 5,410 ) 5,218 Total non–interest expense 131,441 ( 5,410 ) 126,031 Net Income Available to Common Shareholders 68,499 — 68,499 84 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Consolidated Statements of Cash Flows Year Ended December 31, 2021 As Reported Sold Commercial Loan Participation Adjustment Indirect Loan Dealer Reserve Adjustment Repurchase of Outstanding Stock Adjustment As Revised Operating Activities Net change in other assets $ 10,964 $ — $ 618 $ — $ 11,582 Net cash provided by operating activities 105,348 — 618 — 105,966 Investing Activities Net change in loans 469,412 11,234 ( 618 ) — 480,028 Repurchase of outstanding stock ( 7,607 ) — — 7,607 — Net cash used in investing activities ( 363,076 ) 11,234 ( 618 ) 7,607 ( 344,853 ) Financing Activities Proceeds from borrowings 201,137 ( 11,234 ) — — 189,903 Repurchase of outstanding stock — — — ( 7,607 ) ( 7,607 ) Net cash provided by (used in) financing activities 601,525 ( 11,234 ) — ( 7,607 ) 582,684 Net Change in Cash and Cash Equivalents 343,797 — — — 343,797 Consolidated Statements of Cash Flows Year Ended December 31, 2020 As Reported Sold Commercial Loan Participation Adjustment Indirect Loan Dealer Reserve Adjustment Repurchase of Outstanding Stock Adjustment As Revised Operating Activities Net change in other assets $ ( 13,987 ) $ — $ 77 $ — $ ( 13,910 ) Net cash provided by operating activities 78,765 — 77 — 78,842 Investing Activities Net change in loans ( 234,166 ) ( 5,695 ) ( 77 ) — ( 239,938 ) Repurchase of outstanding stock ( 19,636 ) — — 19,636 — Net cash used in investing activities ( 492,322 ) ( 5,695 ) ( 77 ) 19,636 ( 478,458 ) Financing Activities Proceeds from borrowings ( 74,725 ) 5,695 — — ( 69,030 ) Repurchase of outstanding stock — — — ( 19,636 ) ( 19,636 ) Net cash provided by (used in) financing activities 564,437 5,695 — ( 19,636 ) 550,496 Net Change in Cash and Cash Equivalents 150,880 — — — 150,880 85 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 4 – Securities 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 86 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Adoption of New Accounting Standards Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016–13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments On January 1, 2020, the Company adopted ASU No. 2016–13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“CECL”). The measurement of expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held to maturity securities. It also applies to off–balance sheet (“OBS”) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar agreements). In addition ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance, rather than as a write–down, on available for sale debt securities management does not intend to sell or believe that it is not more likely than not they will be required to sell. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after December 31, 2019, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $ 15.6 million as of January 1, 2020 for the cumulative effect of adopting ASC 326. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”), previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310–30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $ 2.8 million of allowance for credit losses (“ACL”) on loans. The following table illustrates the impact of ASC 326. January 1, 2020 As Reported Under ASC 326 Pre–ASC 326 Adoption Impact of ASC 326 Adoption Loans Commercial $ 25,614 $ 11,996 $ 13,618 Real estate 4,971 923 4,048 Mortgage warehouse 1,077 1,077 — Consumer 8,582 3,671 4,911 Allowance for credit losses on loans $ 40,244 $ 17,667 $ 22,577 Accounting policies stated in Note 1 reflect the adoption of Topic 326 as it relates to investment securities, loans and off–balance sheet credit exposures as of January 1, 2020. FASB ASU No. 2017–04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment On January 1, 2020, the Company adopted the provision of ASU No. 2017–04, which eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of 87 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test. The adoption of this new guidance did not have a material impact on our consolidated financial statements. FASB ASU No. 2018–13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement On January 1, 2020, the Company adopted the provision of ASU 2018–13, which modifies the disclosure requirements on fair value measurements. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, the Company may disclose other quantitative information in lieu of the weighted average if we determine that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The adoption of this new guidance did not have a material impact on our consolidated financial statements. Accounting Guidance Issued But Not Yet Adopted FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: • A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria. • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform. The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements. 88 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) FASB 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, which 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. Note 2 – Acquisitions Branch Acquisition On September 17, 2021, Horizon Bank completed the purchase and assumption of certain assets and liabilities of 14 former TCF National Bank (“TCF”) branches in 11 Michigan counties. Net cash of $ 618.2 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans of $ 212.0 million, fixed assets of $ 6.9 million, cash of $ 4.0 million and a 1.75 % premium on deposits. Customer deposit balances were recorded at $ 846.4 million and a core deposit intangible of $ 1.6 million was recorded in the transaction, which will be amortized over 10 years on a straight line basis. Goodwill of $ 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 for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. 89 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) 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. Loans purchased with evidence of credit–related deterioration were recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. Note 3 – Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2022 and 2021, cash equivalents consisted primarily of money market accounts with brokers and certificates of deposit. At December 31, 2022, the Company’s cash accounts exceeded federally insured limits by approximately $ 25.7 million. Approximately $ 4.4 million of this amount was held by either the Federal Reserve Bank or the Federal Home Loan Bank of Indianapolis, which is not federally insured. 90 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 4 – Securities The fair value of securities is as follows: December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 294,329 — $ ( 27,150 ) $ 267,179 State and municipal 505,006 140 ( 71,602 ) 433,544 Federal agency collateralized mortgage obligations 33,011 — ( 1,796 ) 31,215 Federal agency mortgage–backed pools 220,963 — ( 30,307 ) 190,656 Corporate notes 84,393 195 ( 9,624 ) 74,964 Total available for sale investment securities $ 1,137,702 $ 335 $ ( 140,479 ) $ 997,558 Held to maturity U.S. Treasury and federal agencies $ 295,250 $ — $ ( 49,237 ) $ 246,013 State and municipal 1,127,669 374 ( 192,458 ) 935,585 Federal agency collateralized mortgage obligations 56,564 — ( 8,865 ) 47,699 Federal agency mortgage–backed pools 343,953 — ( 56,714 ) 287,239 Private labeled mortgage–backed pools 35,466 — ( 5,493 ) 29,973 Corporate notes 163,846 — ( 29,046 ) 134,800 Total held to maturity investment securities $ 2,022,748 $ 374 $ ( 341,813 ) $ 1,681,309 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 The Company elected to transfer 793 AFS securities with an aggregate fair value of $ 120.9 million to a classification of HTM on March 31, 2022. In accordance with FASB ASC 320–10–55–24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding loss of $ 814,000 , net of tax, at the date of transfer was retained in accumulated other comprehensive income (loss), with the associated pre–tax amount retained in the carrying value of the HTM securities. Such amounts will be accreted to 91 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at March 31, 2022. The Company elected to transfer 475 AFS securities with an aggregate fair value of $ 490.2 million to a classification of HTM on December 31, 2021. In accordance with FASB ASC 320–10–55–24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $ 5.9 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income (loss), with the associated pre–tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at December 31, 2021. The amortized cost and fair value of securities available for sale and held to maturity at December 31, 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. December 31, 2022 December 31, 2021 Amortized Cost Fair Value Amortized Cost Fair Value Available for sale Within one year $ 1,535 $ 1,512 $ 22,980 $ 22,984 One to five years 340,212 312,137 156,677 156,397 Five to ten years 238,045 204,282 315,630 316,125 After ten years 303,936 257,756 340,539 346,038 883,728 775,687 835,826 841,544 Federal agency collateralized mortgage obligations 33,011 31,215 60,600 61,577 Federal agency mortgage–backed pools 220,963 190,656 257,185 257,691 Total available for sale investment securities $ 1,137,702 $ 997,558 $ 1,153,611 $ 1,160,812 Held to maturity Within one year $ 32,610 $ 32,382 $ 5,222 $ 5,265 One to five years 222,443 209,854 65,739 66,982 Five to ten years 324,967 280,618 273,720 275,308 After ten years 1,006,745 793,544 870,896 880,830 1,586,765 1,316,398 1,215,577 1,228,385 Federal agency collateralized mortgage obligations 56,564 47,699 48,482 47,465 Federal agency mortgage–backed pools 343,953 287,239 247,937 244,136 Private labeled mortgage–backed pools 35,466 29,973 40,447 40,005 Total held to maturity investment securities $ 2,022,748 $ 1,681,309 $ 1,552,443 $ 1,559,991 92 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. December 31, 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 $ 217,357 $ ( 16,692 ) $ 295,585 $ ( 59,695 ) $ 512,942 $ ( 76,387 ) State and municipal 533,871 ( 45,881 ) 757,061 ( 218,179 ) 1,290,932 ( 264,060 ) Federal agency collateralized mortgage obligations 40,301 ( 2,881 ) 38,613 ( 7,780 ) 78,914 ( 10,661 ) Federal agency mortgage–backed pools 49,633 ( 3,211 ) 428,243 ( 83,810 ) 477,876 ( 87,021 ) Private labeled mortgage–backed pools — — 29,973 ( 5,493 ) 29,973 ( 5,493 ) Corporate notes 38,906 ( 6,787 ) 169,921 ( 31,883 ) 208,827 ( 38,670 ) Total securities $ 880,068 $ ( 75,452 ) $ 1,719,396 $ ( 406,840 ) $ 2,599,464 $ ( 482,292 ) 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 securities $ 1,500,686 $ ( 21,993 ) $ 35,281 $ ( 1,012 ) $ 1,535,967 $ ( 23,005 ) Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. As of December 31, 2022 and 2021, the Company had 2,828 and 1,129 securities, respectively, with market values below their cost basis. The total fair value of these investments at December 31, 2022 and 2021 was $ 2.6 billion and $ 1.5 billion, which is approximately 86 % and 57 %, respectively, of the Company's available for sale and held to maturity securities portfolio. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. No allowance for credit losses for available for sale debt securities or held to maturity securities was needed at December 31, 2022 and December 31, 2021. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $ 17.8 million and $ 14.6 million at December 31, 2022 and December 31, 2021, respectively, and is excluded from the estimate of credit losses. The U.S. government sponsored entities and agencies and mortgage–backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. 93 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Information regarding security proceeds, gross gains and gross losses are presented below. Year Ended December 31 2022 2021 2020 Sales of securities available for sale Proceeds $ — $ 27,514 $ 77,213 Gross gains — 914 4,372 Gross losses — — ( 75 ) The tax effect of the proceeds from the sale of securities available for sale was $ 0 , $ 192,000 and $ 902,000 for the years ended December 31, 2022, 2021 and 2020, respectively. The Company pledges securities to secure retail and corporate repurchase agreements to the Federal Reserve for borrowing availability and as settlements for the fair value of swap agreements. At December 31, 2022, the Company had pledged $ 160.5 million of fair value or $ 186.4 million of amortized cost, in securities as collateral for $ 137.9 million in repurchase agreements, $ 405.2 million of fair value or $ 439.2 million of amortized cost, in securities as collateral for borrowing availability at the Federal Reserve with $ 244.0 million current outstanding borrowings and $ 24.8 million of fair value or $ 27.1 million of amortized cost, in securities as collateral for $ 43.8 million in settlements on the fair value of swap agreements. Note 5 – Loans The table below identifies the Company's loan portfolio segments and classes. Portfolio Segment Class of Financing Receivable Commercial Owner occupied real estate Non–owner occupied real estate Residential spec homes Development & spec land Commercial & industrial Real estate Residential mortgage Residential construction Mortgage warehouse Mortgage warehouse Consumer Direct installment Indirect installment Home equity Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Class of financing receivable is defined as a group of financing receivables determined on the basis of both of the following, 1) risk characteristics of the financing receivable, and 2) an entity’s method for monitoring and assessing credit risk. Generally, the Bank does not move loans from a revolving loan to a term loan other than construction loans. Construction loans are reviewed and rewritten prior to being originated as a term loan. 94 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents total loans outstanding by portfolio class, as of December 31, 2022 and 2021. December 31, 2022 December 31, 2021 Commercial Owner occupied real estate $ 594,562 $ 560,887 Non–owner occupied real estate 1,187,077 1,088,470 Residential spec homes 10,838 9,907 Development & spec land 27,358 24,473 Commercial and industrial 647,587 530,208 Total commercial 2,467,422 2,213,945 Real estate Residential mortgage 612,551 563,811 Residential construction 40,741 30,571 Mortgage warehouse 69,529 109,031 Total real estate 722,821 703,413 Consumer Direct installment 56,614 63,714 Indirect installment 500,549 386,492 Home equity 410,592 290,970 Total consumer 967,755 741,176 Total loans 4,157,998 3,658,534 Allowance for credit losses ( 50,464 ) ( 54,286 ) Net loans $ 4,107,534 $ 3,604,248 As of December 31, 2022 and 2021, loans originated under the Federal Paycheck Protection Program (“PPP”) totaled approximately $ 217,000 and $ 25.8 million, respectively. Total loans include net deferred loan costs of $ 22.7 million at December 31, 2022 and $ 15.8 million at December 31, 2021, respectively. 95 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Real Estate and Consumer With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Mortgage Warehousing Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days. 96 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement. Non–performing Loans The following table presents non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructured loans by class of loans: December 31, 2022 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–performing Loans with no Allowance for Credit Losses Commercial Owner occupied real estate $ 3,423 $ — $ — $ 568 $ 3,991 $ 3,805 Non–owner occupied real estate 3,866 — — 269 4,135 2,211 Residential spec homes 101 — — — 101 101 Development & spec land 815 — — — 815 65 Commercial and industrial 288 — — — 288 288 Total commercial 8,493 — — 837 9,330 6,470 Real estate Residential mortgage 5,479 43 1,210 1,391 8,123 8,123 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 5,479 43 1,210 1,391 8,123 8,123 Consumer Direct installment 138 26 — — 164 164 Indirect installment 745 23 — — 768 768 Home equity 2,775 — 338 342 3,455 3,455 Total consumer 3,658 49 338 342 4,387 4,387 Total $ 17,630 $ 92 $ 1,548 $ 2,570 $ 21,840 $ 18,980 97 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) December 31, 2021 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–performing Loans with no Allowance for Credit Losses Commercial Owner occupied real estate $ 4,247 $ — $ — $ 603 4,850 $ 2,796 Non–owner occupied real estate 761 — 285 — 1,046 1,046 Residential spec homes — — — — — — Development & spec land 919 — — — 919 919 Commercial and industrial 694 — — — 694 456 Total commercial 6,621 — 285 603 7,509 5,217 Real estate Residential mortgage 5,626 66 892 1,421 8,005 8,005 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 5,626 66 892 1,421 8,005 8,005 Consumer Direct installment 7 — — — 7 7 Indirect installment 538 15 — — 553 553 Home equity 2,170 64 344 367 2,945 2,945 Total consumer 2,715 79 344 367 3,505 3,505 Total $ 14,962 $ 145 $ 1,521 $ 2,391 $ 19,019 $ 16,727 There was no interest income recognized on non–accrual loans during the twelve months ended December 31, 2022 and 2021 while the loans were in non–accrual status. Included in the $ 17.6 million of non–accrual loans and the $ 1.5 million of non–performing TDRs at December 31, 2022 were $ 1.5 million and $ 105,000 , respectively, of loans acquired for which there were accretable yields recognized. Included in the $ 15.0 million of non–accrual loans and the $ 1.5 million of non–performing TDRs at December 31, 2021 were $ 2.2 million and $ 290,000 , respectively, of loans acquired for which there were accretable yields recognized. 98 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents the payment status by class of loan, excluding non–accrual loans of $ 17.6 million and non–performing TDRs of $ 1.5 million at December 31, 2022: December 31, 2022 Current 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Total Loans Commercial Owner occupied real estate $ 590,870 $ 269 — — $ 269 $ 591,139 Non–owner occupied real estate 1,183,195 16 — — 16 1,183,211 Residential spec homes 10,737 — — — — 10,737 Development & spec land 26,513 — 30 — 30 26,543 Commercial and industrial 646,792 507 — — 507 647,299 Total commercial 2,458,107 792 30 — 822 2,458,929 Real estate Residential mortgage 603,630 1,980 209 43 2,232 605,862 Residential construction 40,741 — — — — 40,741 Mortgage warehouse 69,529 — — — — 69,529 Total real estate 713,900 1,980 209 43 2,232 716,132 Consumer Direct installment 56,266 168 16 26 210 56,476 Indirect installment 494,341 4,536 904 23 5,463 499,804 Home equity 405,405 1,413 661 — 2,074 407,479 Total consumer 956,012 6,117 1,581 49 7,747 963,759 Total $ 4,128,019 $ 8,889 $ 1,820 $ 92 $ 10,801 $ 4,138,820 99 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents the payment status by class of loans, excluding non–accrual loans of $ 15.0 million and non–performing TDRs $ 1.5 million of at December 31, 2021: December 31, 2021 Current 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Total 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 383,532 2,271 136 15 2,422 385,954 Home equity 287,382 849 161 64 1,074 288,456 Total consumer 734,209 3,529 300 79 3,908 738,117 Total $ 3,633,370 $ 7,892 $ 644 $ 145 $ 8,681 $ 3,642,051 The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Troubled Debt Restructurings Loans modified as troubled debt restructurings (“TDRs”) generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans' contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default. At December 31, 2022 and 2021, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of December 31, 2022, the Company had $ 4.1 million in TDRs and $ 2.6 million were performing according to the restructured terms and four TDRs were returned to accrual status during 2022. As of December 31, 2021, the Company had $ 3.9 million in TDRs and $ 2.4 million were performing according to the restructured terms and five TDRs was returned to accrual status during 2021. There were no specific reserves allocated to TDRs at December 31, 2022 or 2021 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the CARES Act during 2022. 100 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents TDRs by loan portfolio: December 31, 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 — 269 269 285 — 285 Residential spec homes — — — — — — Development & spec land — — — — — — Commercial and industrial — — — — — — Total commercial — 837 837 285 603 888 Real estate Residential mortgage 1,210 1,391 2,601 892 1,421 2,313 Residential construction — — — — — — Mortgage warehouse — — — — — — Total real estate 1,210 1,391 2,601 892 1,421 2,313 Consumer Direct installment — — — — — — Indirect installment — — — — — — Home equity 338 342 680 344 367 711 Total consumer 338 342 680 344 367 711 Total $ 1,548 $ 2,570 $ 4,118 $ 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 December 31, 2022 and 2021, the Bank modified loans totaling $ 34,000 and $ 10.9 million, respectively, which qualify for treatment under the CARES Act. Collateral Dependent Financial Assets A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent. 101 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The tables below present the amortized cost basis and ACL allocated for collateral dependent loans in accordance with ASC326, which are individually evaluated to determine expected credit losses, at December 31, 2022 and 2021. December 31, 2022 Real Estate Accounts Receivable/Equipment Other Total ACL Allocation Commercial Owner occupied real estate $ 3,905 $ 95 $ — $ 4,000 $ 215 Non–owner occupied real estate 4,135 — — 4,135 988 Residential spec homes 101 — — 101 — Development & spec land 815 — — 815 36 Commercial and industrial — 248 31 279 — Total commercial 8,956 343 31 9,330 1,239 Total collateral dependent loans $ 8,956 $ 343 $ 31 $ 9,330 $ 1,239 December 31, 2021 Real Estate Accounts Receivable/Equipment Other Total ACL Allocation Commercial Owner occupied real estate $ 11,201 $ 103 $ — $ 11,304 $ 632 Non–owner occupied real estate 2,068 — — 2,068 — Development & spec land 919 — — 919 — Commercial and industrial 427 1,218 — 1,645 128 Total commercial 14,615 1,321 — 15,936 760 Total collateral dependent loans $ 14,615 $ 1,321 $ — $ 15,936 $ 760 Credit Quality Indicators Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade. • For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective regions (ranging from $ 3,000,000 to $ 6,000,000 ) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (“CCBO”). • Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO when recommending an upgrade. • The CCBO, or a designee, meets periodically with loan officers to discuss the status of past–due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. • Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions 102 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) 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 Loan and Lease Losses. For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non–accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged–off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non–accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass. Horizon Bank employs a nine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The most recent review and approval of the loan policy was in October 2020. The loan grade definitions are detailed below. Risk Grade 1: Excellent (Pass) Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges. Risk Grade 2: Good (Pass) Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three years consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long–term debt ratings of Baa or better and meeting defined key financial metric ranges. Risk Grade 3: Satisfactory (Pass) Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered and meeting defined key financial metric ranges. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply: • At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory; • At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss. • The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. • During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. 103 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Risk Grade 4 Satisfactory/Monitored: Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory rated loans and meet defined key financial metric ranges. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization. Risk Grade 4W Management Watch: Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion. Commercial construction loans are graded as 4W Management Watch until the projects are completed and stabilized. Risk Grade 5: Special Mention Loans which possess some temporary (normally less than one year) credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength and must meet defined key financial metric ranges. Risk Grade 6: Substandard One or more of the following characteristics may be exhibited in loans classified Substandard: • Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. • Loans are inadequately protected by the current net worth and paying capacity of the obligor. • The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. • Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. • Unusual courses of action are needed to maintain a high probability of repayment. • The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments. • The lender is forced into a subordinated or unsecured position due to flaws in documentation. • Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms. • The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. • There is a significant deterioration in market conditions to which the borrower is highly vulnerable. • The borrower meets defined key financial metric ranges. 104 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Risk Grade 7: Doubtful One or more of the following characteristics may be present in loans classified Doubtful: • Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable. • The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. • The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known. • The borrower meets defined key financial metric ranges. Risk Grade 8: Loss Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 105 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following tables present loans by credit grades and origination year at December 31, 2022. December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Total Commercial Owner occupied real estate Pass $ 102,986 $ 78,420 $ 50,751 $ 50,807 $ 38,518 $ 168,574 $ 76,493 $ 566,549 Special Mention — 6,677 — 7 — 2,729 83 9,496 Substandard 1,016 253 983 834 3,116 9,439 2,876 18,517 Doubtful — — — — — — — — Total owner occupied real estate $ 104,002 $ 85,350 $ 51,734 $ 51,648 $ 41,634 $ 180,742 $ 79,452 $ 594,562 Non–owner occupied real estate Pass $ 186,272 $ 176,077 $ 134,395 $ 96,566 $ 57,382 $ 305,264 $ 182,681 $ 1,138,637 Special Mention — 1,415 265 883 39,239 617 — 42,419 Substandard — — 246 — 3,532 2,243 — 6,021 Doubtful — — — — — — — — Total non–owner occupied real estate $ 186,272 $ 177,492 $ 134,906 $ 97,449 $ 100,153 $ 308,124 $ 182,681 $ 1,187,077 Residential spec homes Pass $ 379 $ 3,957 $ 146 $ — $ — $ 1,922 $ 4,334 $ 10,738 Special Mention — — — — — — — — Substandard — — — — — — 100 100 Doubtful — — — — — — — — Total residential spec homes $ 379 $ 3,957 $ 146 $ — $ — $ 1,922 $ 4,434 $ 10,838 Development & spec land Pass $ 1,586 $ 1,230 $ 449 $ 270 $ 5 $ 9,739 $ 13,008 $ 26,287 Special Mention — — — — — 145 — 145 Substandard — — — — — 178 748 926 Doubtful — — — — — — — — Total development & spec land $ 1,586 $ 1,230 $ 449 $ 270 $ 5 $ 10,062 $ 13,756 $ 27,358 Commercial & industrial Pass $ 207,019 $ 139,759 $ 32,997 $ 34,303 $ 41,044 $ 119,850 $ 49,859 $ 624,831 Special Mention 718 368 31 562 706 2,251 — 4,636 Substandard — 2,720 2,216 532 1,618 5,517 5,517 18,120 Doubtful — — — — — — — — Total commercial & industrial 207,737 142,847 35,244 35,397 43,368 127,618 55,376 647,587 Total commercial $ 499,976 $ 410,876 $ 222,479 $ 184,764 $ 185,160 $ 628,468 $ 335,699 $ 2,467,422 106 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 107,224 $ 156,595 $ 91,314 $ 33,768 $ 36,147 $ 178,588 $ 792 $ 604,428 Non–performing — 493 285 623 631 6,091 — 8,123 Total residential mortgage $ 107,224 $ 157,088 $ 91,599 $ 34,391 $ 36,778 $ 184,679 $ 792 $ 612,551 Residential construction Performing $ 187 $ — $ — $ — $ — $ — $ 40,554 $ 40,741 Non–performing — — — — — — — — Total residential construction $ 187 $ — $ — $ — $ — $ — $ 40,554 $ 40,741 Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 69,529 $ 69,529 Non–performing — — — — — — — — Total mortgage warehouse — — — — — — 69,529 69,529 Total real estate $ 107,411 $ 157,088 $ 91,599 $ 34,391 $ 36,778 $ 184,679 $ 110,875 $ 722,821 December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Total Consumer Direct installment Performing $ 19,851 $ 12,708 $ 7,204 $ 7,682 $ 3,952 $ 5,044 $ 9 $ 56,450 Non–performing — 50 13 65 25 11 — 164 Total direct installment $ 19,851 $ 12,758 $ 7,217 $ 7,747 $ 3,977 $ 5,055 $ 9 $ 56,614 Indirect installment Performing $ 259,446 $ 118,961 $ 60,062 $ 34,576 $ 19,062 $ 7,674 $ — $ 499,781 Non–performing 27 169 210 181 101 80 — 768 Total indirect installment $ 259,473 $ 119,130 $ 60,272 $ 34,757 $ 19,163 $ 7,754 $ — $ 500,549 Home equity Performing $ 160,124 $ 85,254 $ 41,438 $ 26,984 $ 21,606 $ 64,642 $ 7,089 $ 407,137 Non–performing 108 16 19 140 152 1,077 1,943 3,455 Total home equity 160,232 85,270 41,457 27,124 21,758 65,719 9,032 410,592 Total consumer $ 439,556 $ 217,158 $ 108,946 $ 69,628 $ 44,898 $ 78,528 $ 9,041 $ 967,755 107 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents loans by credit grades at December 31, 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 $ 2,213,945 108 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 116,118 $ 105,051 $ 44,691 $ 50,778 $ 56,330 $ 182,838 $ — $ 555,806 Non–performing — 78 448 854 66 6,559 — 8,005 Total residential mortgage $ 116,118 $ 105,129 $ 45,139 $ 51,632 $ 56,396 $ 189,397 $ — $ 563,811 Residential construction Performing $ — $ — $ — $ — $ — $ — $ 30,571 $ 30,571 Non–performing — — — — — — — — Total residential construction $ — $ — $ — $ — $ — $ — $ 30,571 $ 30,571 Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 109,031 $ 109,031 Non–performing — — — — — — — — Total mortgage warehouse — — — — — — 109,031 109,031 Total real estate $ 116,118 $ 105,129 $ 45,139 $ 51,632 $ 56,396 $ 189,397 $ 139,602 $ 703,413 December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Total Consumer Direct installment Performing $ 18,826 $ 12,756 $ 13,390 $ 7,027 $ 6,036 $ 5,577 $ 95 $ 63,707 Non–performing — — — — 1 6 — 7 Total direct installment $ 18,826 $ 12,756 $ 13,390 $ 7,027 $ 6,037 $ 5,583 $ 95 $ 63,714 Indirect installment Performing $ 166,188 $ 94,835 $ 61,110 $ 41,451 $ 17,650 $ 4,705 $ — $ 385,939 Non–performing 46 93 162 92 88 72 — 553 Total indirect installment $ 166,234 $ 94,928 $ 61,272 $ 41,543 $ 17,738 $ 4,777 $ — $ 386,492 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 $ 265,458 $ 159,654 $ 109,302 $ 75,584 $ 46,436 $ 76,740 $ 8,002 $ 741,176 109 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 6 – Allowance for Credit and Loan Losses The following table represents, by loan portfolio segment, a summary of changes in the ACL on loans for the twelve months ended December 31, 2022 and 2021. Twelve Months Ended December 31, 2022 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 40,775 $ 3,856 $ 1,059 $ 8,596 $ 54,286 Credit loss expense (recovery) ( 7,650 ) 1,668 ( 39 ) 3,802 ( 2,219 ) PCD loans charge–offs ( 760 ) — — — ( 760 ) Charge–offs ( 266 ) ( 97 ) — ( 2,231 ) ( 2,594 ) Recoveries 346 150 — 1,255 1,751 Balance, end of period $ 32,445 $ 5,577 $ 1,020 $ 11,422 $ 50,464 Twelve Months Ended December 31, 2021 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 42,210 $ 4,620 $ 1,267 $ 8,930 $ 57,027 Credit loss expense (recovery) ( 1,320 ) ( 755 ) ( 208 ) 199 ( 2,084 ) PCD loan charge–offs 984 — — — 984 Charge–offs ( 1,368 ) ( 159 ) — ( 1,272 ) ( 2,799 ) Recoveries 269 150 — 739 1,158 Balance, end of period $ 40,775 $ 3,856 $ 1,059 $ 8,596 $ 54,286 The Company utilized the Cumulative Loss Rate method in determining expected future credit losses. The loss rate method measures the amount of loan charge–offs, net of recoveries, (“loan losses”) recognized over the life of a pool and compares those loan losses to the outstanding loan balance of that pool as of a specific point in time (“pool date”). To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look–back period includes January 2013 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit–related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible. The Company’s CECL estimate applies to a forecast that incorporates macroeconomic trends and other environmental factors. Management utilized National, Regional and Local Leading Economic Indexes, as well as 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. 110 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, loan purpose, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of the borrower and concentrations, and historical or expected credit loss patterns. Note 7 – Premises and Equipment December 31 2022 December 31 2021 Land $ 30,257 $ 28,079 Buildings and improvements 85,977 86,507 Furniture and equipment 35,044 33,136 Total cost 151,278 147,722 Accumulated depreciation ( 58,601 ) ( 54,281 ) Net premises and equipment $ 92,677 $ 93,441 Note 8 – Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $ 1.532 billion and $ 1.540 billion at December 31, 2022 and 2021. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights. Mortgage servicing rights are included in other assets on the balance sheets as of December 31, 2022 and 2021. December 31 2022 December 31 2021 December 31 2020 Mortgage servicing rights Balances, January 1 $ 17,780 $ 17,644 $ 15,046 Servicing rights capitalized 3,184 4,209 5,530 Amortization of servicing rights ( 2,345 ) ( 4,073 ) ( 2,932 ) Balances, December 31 18,619 17,780 17,644 Impairment allowance Balances, January 1 ( 2,594 ) ( 5,172 ) ( 719 ) Additions — — ( 5,106 ) Reductions 2,594 2,578 653 Balances, December 31 — ( 2,594 ) ( 5,172 ) Mortgage servicing rights, net $ 18,619 $ 15,186 $ 12,472 Fair value, beginning of period $ 15,236 $ 12,356 $ 14,405 Fair value, end of period $ 19,992 $ 15,236 $ 12,356 111 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 9 – Goodwill and Intangible Assets December 31 2022 December 31 2021 Balance, January 1 $ 154,572 $ 151,238 Goodwill acquired — 3,334 Measurement period adjustment 639 — Balances, December 31 $ 155,211 $ 154,572 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. No impairment loss was recorded in 2022 or 2021. The Company tested goodwill for impairment during 2022 and 2021. In both valuations, the fair value exceeded the Company’s carrying value, therefore, it was concluded goodwill is not impaired. For additional details related to impairment testing, see the “Goodwill and Intangible Assets” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Item 7 of this Annual Report on Form 10–K. As a result of acquisitions, the Company has recorded certain amortizable intangible assets related to core deposit intangibles. These core deposit intangibles are being amortized over seven years to ten years using an accelerated method. Amortizable intangible assets are summarized as follows: December 31, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortizable intangible assets Core deposit intangible $ 42,220 $ ( 24,981 ) $ 40,590 $ ( 17,635 ) Amortization expense for intangible assets totaled $ 3.6 million, $ 3.9 million , and $ 3.8 million for the years ended December 31, 2022, 2021 and 2020. Estimated amortization for the years ending December 31 is as follows: Year Amount 2023 $ 3,612 2024 3,403 2025 3,044 2026 2,566 2027 2,119 Thereafter 2,495 $ 17,239 112 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 10 – Deposits December 31 2022 December 31 2021 Non–interest bearing demand deposits $ 1,277,768 $ 1,360,338 Interest bearing demand deposits 1,931,863 1,947,973 Money market (variable rate) 744,262 826,317 Savings deposits 906,766 937,477 Certificates of deposit of $250,000 or more 551,365 299,537 Other certificates and time deposits 445,750 431,349 Total deposits $ 5,857,774 $ 5,802,991 Certificates and other time deposits for both retail and brokered maturing in years ending December 31 are as follows: Retail Brokered Total 2023 $ 679,021 $ 18,580 $ 697,601 2024 109,545 150,000 259,545 2025 19,057 — 19,057 2026 10,490 — 10,490 2027 10,261 — 10,261 Thereafter 161 — 161 $ 828,535 $ 168,580 $ 997,115 Note 11 – Borrowings December 31 2022 December 31 2021 Federal Home Loan Bank advances, variable and fixed rates ranging from 1.54 % to 4.90 %, due at various dates through July 29, 2032 $ 575,376 $ 525,484 Securities sold under agreements to repurchase 137,871 130,798 Federal funds purchased 134,746 — Federal Reserve Bank discount window 244,000 — Secured borrowings 50,956 56,457 Total borrowings $ 1,142,949 $ 712,739 The Federal Home Loan Bank advances are secured by first and second mortgage loans, commercial real estate loans and mortgage warehouse loans totaling approximately $ 1.6 billion. Advances are subject to restrictions or penalties in the event of prepayment. At December 31, 2022, the Bank had a total of $ 350.0 million in putable advances. The call dates for these advances range from January 19, 2023 to January 30, 2023 even though maturity dates extend beyond those dates. At December 31, 2022, the Bank had available approximately $ 438.0 million in credit lines with various money center banks, including the FHLB. 113 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Contractual maturities in years ending December 31 are as follows: Year Amount 2023 $ 742,684 2024 50,117 2025 73 2026 75 2027 — Thereafter 350,000 $ 1,142,949 Note 12 – Repurchase Agreements Securities sold under agreements to repurchase consist of obligations of the Bank to other parties. The obligations are secured by federal agency collateralized mortgage obligations and federal agency mortgage-backed pools and such collateral is held in safekeeping by third parties. The maximum amount of outstanding agreements at any month end during 2022 and 2021 totaled $ 148.7 million and $ 145.2 million and the daily average of such agreements totaled $ 141.0 million and $ 123.7 million. The agreements at December 31, 2022 are overnight agreements. The following table shows repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements: December 31, 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 $ 137,871 $ — $ — $ — $ — $ — $ 137,871 Securities pledged for Repurchase Agreements Federal agency collateralized mortgage obligations $ 13,882 $ — $ — $ — $ — $ — $ 13,882 Federal agency mortgage–backed pools 137,646 — — — — — 137,646 Private labeled mortgage–backed pools 8,989 — — — — — 8,989 Total $ 160,517 $ — $ — $ — $ — $ — $ 160,517 Note 13 – Subordinated Notes On June 24, 2020, Horizon issued $ 60.0 million in aggregate principal amount, $ 58.5 million proceeds, net of related issuance costs of $ 1.5 million, of 5.625 % fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625 % per 114 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three–Month Term SOFR), plus 549 basis points, payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, commencing on October 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero. Horizon may, at its option, beginning with the interest payment date of July 1, 2025 and on any interest payment date thereafter, redeem the Notes, in whole or in part. The Notes will not otherwise be redeemable by Horizon prior to maturity, unless certain events occur. The redemption price for any redemption is 100 % of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations. The Notes are unsecured subordinated obligations, and rank pari passu, or equally, with all of Horizon's future unsecured subordinated debt and are junior to all existing and future senior debt. The Notes are structurally subordinated to all existing and future liabilities of Horizon's subsidiaries, including the deposit liabilities and claims of other creditors of Horizon Bank, and are effectively subordinated to Horizon's existing and future secured indebtedness. There is no sinking fund for the Notes. The Notes are obligations of Horizon only and are not obligations of, and are not guaranteed by, any of Horizon's subsidiaries. Note 14 – Junior Subordinated Debentures Issued to Capital Trusts In October of 2004, Horizon formed Horizon Statutory Trust II (“Trust II”), a wholly owned statutory business trust. Trust II sold $ 10.3 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 1.95 % ( 6.72 % at December 31, 2022) and mature on November 23, 2034, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $ 17,500 were capitalized and were amortized to October 31, 2009, the first call date of the securities. In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (“Trust III”), a wholly owned statutory business trust. Trust III sold $ 12.4 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 1.65 % ( 6.42 % at December 31, 2022) and mature on January 30, 2037, and securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $ 12,647 were capitalized and are being amortized to the first call date of the securities. The Company assumed additional debentures as the result of the acquisition of Alliance Bank Corporation in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I a wholly owned business trust (“Alliance Trust”), to sell $ 5.2 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Alliance. The junior subordinated debentures are the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 2.65 % ( 7.42 % at 115 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) December 31, 2022) and mature in June 2034, and securities may be called at any quarterly interest payment date at par. The Company assumed additional debentures as the result of the American Trust & Savings Bank purchase and assumption in 2010. In March 2004, Am Tru Inc., the holding company for American Trust & Savings Bank, formed Am Tru Statutory Trust I a wholly owned business trust (“Am Tru Trust”), to sell $ 3.5 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Am Tru Inc. The junior subordinated debentures are the sole assets of Am Tru Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 2.85 % ( 7.62 % at December 31, 2022) and mature in December 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 3.5 million, net of the remaining purchase discount, at December 31, 2022. The Company assumed additional debentures as the result of the Heartland merger in July 2012. In December 2006, Heartland formed Heartland (IN) Statutory Trust II a wholly owned business trust (“Heartland Trust”), to sell $ 3.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Heartland. The junior subordinated debentures are the sole assets of Heartland Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 1.67 % ( 6.44 % at December 31, 2022) and mature in December 2036, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 2.1 million, net of the remaining purchase discount, at December 31, 2022. The Company assumed additional debentures as the result of the LaPorte merger in July 2016. In October 2007, LaPorte assumed debentures as the result of its acquisition of City Savings Financial Corporation (“City Savings”). In June 2003, City Savings formed City Savings Statutory Trust I a wholly owned business trust (“City Savings Trust”), to sell $ 5.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from City Savings. The junior subordinated debentures are the sole assets of City Savings Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 3.10 % ( 7.87 % at December 31, 2022) and mature in June 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 4.5 million, net of the remaining purchase discount, at December 31, 2022. The Company assumed additional debentures as the result of the Salin merger in March 2019. In October 2003, Salin Bancshares, Inc. (“Salin”) formed Salin Statutory Trust I (“Salin Trust”), to sell $ 20.0 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Salin. The junior subordinated debentures are the sole assets of Salin Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the securities bear interest at a rate of 90–day LIBOR plus 2.95 % ( 7.72 % at December 31, 2022) and mature in October 2033, and securities may be called at any quarterly interest payment date at par. The carrying value was $ 18.1 million, net of the remaining purchase discount, at December 31, 2022. The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1 Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded as interest expense. Note 15 – Employee Stock Ownership Plan Effective January 1, 2007, Horizon converted its stock bonus plan to an employee stock ownership plan (“ESOP”). Prior to that date, Horizon maintained an employee stock bonus plan that covered substantially all employees. The stock bonus plan was noncontributory, and Horizon made matching contributions of amounts contributed by the employees to the Employee Thrift Plan and discretionary contributions. Prior to the establishment of the employee stock bonus plan, Horizon maintained an ESOP that was terminated in 1999. The prior ESOP accounts of active 116 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) employees and the discretionary accounts of active employees remain in the new ESOP. The Matching contribution accounts under the stock bonus plan were transferred to the Employee Thrift Plan. Horizon's ESOP was terminated on July 1, 2021. The Internal Revenue Service issued a favorable determination letter on October 29, 2021, and the Plan distributed all assets to participants in 2022. Total cash contributions and expense recorded for the ESOP was $ 0 in 2022, $ 0 in 2021 and $ 591,000 in 2020. The ESOP, which was not leveraged, owned no shares of Horizon’s stock as of December 31, 2022. Note 16 – Employee Benefit Plans The Employee Thrift Plan (“Plan”) provides that all employees of Horizon with the requisite hours of service are eligible for the Plan. The Plan permits voluntary employee contributions and Horizon may make discretionary matching and profit sharing contributions. Each eligible employee is vested according to a schedule based upon years of service. Employee voluntary contributions are vested at all times. The Bank’s expense related to the Plan totaled approximately $ 1.9 million in 2022, $ 1.5 million in 2021 and $ 1.4 million in 2020. The Plan owned a total of 799,956 shares of Horizon’s stock or 1.8 % of the outstanding shares as of December 31, 2022. The Pentegra Defined Benefit Plan (“Pentegra Plan”), acquired from the Peoples acquisition, was terminated in April of 2020. The Pentegra Plan was transferred into annuity contracts and will no longer be administered by the Company. The termination liability was $ 3.4 million, which the Company recorded a $ 2.9 million withdrawal liability resulting in an additional termination expense in 2020 of $ 460,000 . 117 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 17 – Income Tax December 31 2022 December 31 2021 December 31 2020 Income tax expense Currently payable Federal $ 9,111 $ 11,742 $ 16,914 State 888 1,303 2,377 Deferred Federal 2,208 2,056 ( 7,970 ) State ( 31 ) 255 ( 1,451 ) Total income tax expense $ 12,176 $ 15,356 $ 9,870 Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 21% $ 22,173 $ 21,514 $ 16,457 Tax exempt interest ( 6,623 ) ( 5,362 ) ( 4,090 ) Tax exempt BOLI income ( 746 ) ( 604 ) ( 531 ) Stock compensation ( 232 ) ( 250 ) ( 160 ) Other tax exempt income ( 454 ) ( 404 ) ( 334 ) State tax 676 1,231 733 Tax credit investments ( 2,774 ) ( 981 ) ( 2,284 ) Nondeductible and other 156 212 79 Actual tax expense $ 12,176 $ 15,356 $ 9,870 December 31 2022 December 31 2021 Assets Allowance for loan losses $ 12,762 $ 13,707 Net operating loss and tax credits 9,313 — Director and employee benefits 2,019 2,094 Unrealized loss on AFS securities and cash flow hedge 28,230 — Other 555 1,785 Total assets 52,879 17,586 Liabilities Depreciation ( 4,599 ) ( 4,540 ) State tax ( 262 ) ( 261 ) Federal Home Loan Bank stock dividends ( 368 ) ( 371 ) Difference in basis of intangible assets ( 4,440 ) ( 3,476 ) Fair value adjustment on acquisitions ( 2,807 ) ( 3,435 ) Unrealized gain on AFS securities and cash flow hedge — ( 1,953 ) Other ( 68 ) ( 222 ) Total liabilities ( 12,544 ) ( 14,258 ) Net deferred tax asset/(liability) $ 40,335 $ 3,328 During 2022, the Company generated a state net operating loss of $ 6.2 million that may be carried forward for 15 years. Additionally, the Company generated tax credits resulting in a carryforward of $ 9.0 million. These credits may be carried forward for 20 years. The Company expects to generate sufficient taxable income in the future to utilize the losses and credit carryforwards. 118 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Retained earnings of the Bank include approximately $ 12.8 million for which no deferred income tax liability has been recognized. This amount represents an allocation of previously acquired institutions income to bad debt deductions as of December 31, 1987 for tax purposes only. Reductions of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of “bank” status would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for the Company was approximately $ 2.7 million at December 31, 2022. The Company files income tax returns in the U.S. federal jurisdiction. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2019. Note 18 – Accumulated Other Comprehensive Gain (Loss) The components of accumulated other comprehensive gain (loss) included in capital are as follows: December 31 2022 December 31 2021 Unrealized gain (loss) on securities available for sale $ ( 140,144 ) $ 7,201 Unamortized gain on securities held to maturity, previously transferred from AFS 3,740 5,770 Unrealized gain (loss) on derivative instruments 1,976 ( 3,673 ) Tax effect 28,230 ( 1,953 ) Total accumulated other comprehensive income (loss) $ ( 106,198 ) $ 7,345 Note 19 – Commitments, Off–Balance Sheet Risk and Contingencies The Bank was not required to have any cash on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 2022. These balances would be included in cash and cash equivalents and would not earn interest. The Bank is a party to financial instruments with off-balance sheet risk in the ordinary course of business to meet financing needs of its customers. These financial instruments include commitments to make loans and standby letters of credit. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements. At December 31, 2022 and 2021, commitments to make loans amounted to approximately $ 1.5 billion and $ 1.3 billion and commitments under outstanding standby letters of credit amounted to approximately $ 17.8 million and $ 12.7 million. Since many commitments to make loans and standby letters of credit expire without being used, the amount does not necessarily represent future cash advances. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The Company determines the estimated amount of expected credit extensions based on historical usage to calculate the amount of exposure for a loss estimate. After review of the expected credit losses on off–balance sheet exposures, the Company determined the amount not being recorded as immaterial at this time. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation. 119 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 20 – Regulatory Capital Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, or leverage ratio. For December 31, 2022 and 2021, Basel III rules require the Company and Bank to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. To be categorized as well capitalized, the Company and Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk- based and Tier I leverage ratios as set forth in the table below. As of December 31, 2022 and December 31, 2021, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the year ending December 31, 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 indicated in Note 1, the Company adopted ASC 326 and has elected to apply the CECL transition provisions. 120 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Horizon and the Bank’s actual and required capital ratios as of December 31, 2022 and 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 December 31, 2022 Total capital (to risk–weighted assets) (1) Consolidated $ 776,390 14.37 % $ 432,172 8.00 % $ 567,226 10.50 % N/A N/A Bank 726,339 13.59 % 427,456 8.00 % 561,036 10.50 % $ 534,320 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 729,835 13.51 % 324,129 6.00 % 459,183 8.50 % N/A N/A Bank 679,784 12.72 % 320,592 6.00 % 454,172 8.50 % 427,456 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 609,630 11.28 % 243,097 4.50 % 378,151 7.00 % N/A N/A Bank 679,784 12.72 % 240,444 4.50 % 374,024 7.00 % 347,308 6.50 % Tier 1 capital (to average assets) (1) Consolidated 729,835 10.03 % 291,122 4.00 % 291,122 4.00 % N/A N/A Bank 679,784 8.89 % 305,996 4.00 % 305,996 4.00 % 382,495 5.00 % December 31, 2021 Total capital (to risk–weighted assets) (1) Consolidated $ 708,198 15.71 % $ 360,737 8.00 % $ 473,468 10.500 % N/A N/A Bank 664,061 14.72 % 361,015 8.00 % 473,832 10.500 % $ 451,269 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 661,729 14.68 % 270,553 6.00 % 383,284 8.500 % N/A N/A Bank 617,592 13.69 % 270,761 6.00 % 383,578 8.500 % 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 7.500 % N/A N/A Bank 617,592 13.69 % 203,071 4.50 % 315,888 7.500 % 293,325 6.50 % Tier 1 capital (to average assets) (1) Consolidated 661,729 9.05 % 292,335 4.00 % 292,335 4.000 % N/A N/A Bank 617,592 8.50 % 29,064 4.00 % 290,646 4.000 % 363,307 5.00 % (1) As defined by regulatory agencies The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was phased in by increments starting in 2016 and was fully implemented by 2019 at 2.50 %. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. 121 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 21 – Share–Based Compensation A summary of option activity under the Horizon Bancorp 2003 Omnibus Equity Incentive Plan (“2003 Plan”) as of December 31, 2022, and changes during the year then ended, is presented below: Shares Weighted– Average Exercise Price Weighted– Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding, beginning of year 4,050 $ 7.49 Granted — — Exercised ( 4,050 ) 7.49 Forfeited — — Outstanding, end of year — — 0 $ — Exercisable, end of year — — 0 — As of December 31, 2022, there are no outstanding awards issued under the 2003 Plan On June 18, 2013, the Board of Directors adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (“2013 Plan”), which was approved by the Company’s shareholders on May 8, 2014. Under the 2013 Plan, Horizon may issue up to 1,556,325 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2013 Plan limits the number of shares available to 225,000 for incentive stock options and to 900,000 for the grant of non–option awards. The shares available for issuance under the 2013 Plan may be divided among the various types of awards and among the participants as the Committee determines. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2013 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award. The 2013 Plan was amended on May 3, 2018, upon shareholder approval, primarily to allow grants of other types of stock–based awards, such as awards valued in whole or in part by reference to the value of shares of Horizon common stock. All share data has been adjusted for the 3:2 stock split on June 15, 2018 and November 14, 2016. The restricted shares can vest over a period of time established by the Committee at the time of each grant, but the restricted shares already granted under the 2013 Plan generally vest at the end of three, four or five years of continuous employment. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight–line method over the vesting period. The performance shares that are awarded become earned and vested based on the achievement of certain performance goals during a performance period as established by the Committee at the time of each grant. The performance goals under the presently–awarded grant agreements are based on a comparison of the Company’s average performance over the performance period for the return on common equity, compounded annual growth rate of total assets, and return on average assets, all as relative to the average performance for publicly traded banks with total assets between $ 1 billion and $ 5 billion on the SNL Bank Index. Holders of performance share awards receive pass–through dividends but do not have any voting rights before the performance shares are earned and vested. The options shares granted under the 2013 Plan vest at a rate designated per the individual agreements. The fair value of options granted is estimated on the date of the grant using an option–pricing model. There have been no options granted since 2019. 122 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) A summary of option activity under the 2013 Plan as of December 31, 2022, and changes during the year then ended, is presented below: Shares Weighted– Average Exercise Price Weighted– Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding, beginning of year 200,878 $ 14.46 Granted — — Exercised ( 32,365 ) 13.51 Forfeited ( 500 ) 16.76 Outstanding, end of year 168,013 14.64 3.92 $ 339,389 Exercisable, end of year 168,013 14.64 3.92 339,389 There have been no options granted during the years 2022, 2021 and 2020. On January 19, 2021, the Board of Directors adopted the Horizon Bancorp 2021 Omnibus Equity Incentive Plan (“2021 Plan”), which was approved by the Company’s shareholders on May 6, 2021. Under the 2021 Plan, Horizon may issue up to 1,787,548 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2021 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award. The restricted shares can vest over a period of time established by the Committee at the time of each grant, but the restricted shares already granted under the 2021 Plan generally vest at the end of three, four or five years of continuous employment. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight–line method over the vesting period. The performance shares that are awarded become earned and vested based on the achievement of certain performance goals during a performance period as established by the Committee at the time of each grant. The performance goals under the presently–awarded grant agreements are based on a comparison of the Company’s average performance over the performance period for the return on common equity, compounded annual growth rate of total assets, and return on average assets, all as relative to the average performance for publicly traded banks with total assets between $ 5 billion and $ 10 billion on the SNL Bank Index. Holders of performance awards receive pass–through dividends but do not have any voting rights before the performance shares are earned and vested. The option shares granted under the 2021 Plan vest at a rate designated per the individual agreements. A summary of the status of Horizon’s non–vested restricted and performance shares as of December 31, 2022 are presented below: Shares Weighted Average Grant Date Fair Value Non–vested, beginning of year 423,309 $ 14.78 Vested ( 97,014 ) 16.63 Granted 220,073 19.90 Forfeited ( 25,909 ) 14.31 Non–vested, end of year 520,459 16.45 123 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Compensation expense recognized in the income statement for option–based payment arrangements during 2022, 2021 and 2020 was $ 13,000 , $ 68,000 and $ 132,000 . The recognized tax benefit related thereto was approximately $ 3,000 , $ 14,000 and $ 28,000 for the years ended December 31, 2022, 2021 and 2020. No stock options were granted during 2022 or 2021. Compensation expense recognized in the income statement for restricted share and performance share based payment arrangements during 2022, 2021 and 2020 was $ 2.5 million, $ 1.8 million, and $ 1.2 million. The recognized tax benefit related thereto was approximately $ 517,000 , $ 368,000 , and $ 253,000 for the years ended December 31, 2022, 2021 and 2020. Cash received from option exercise under all share–based payment arrangements for the years ended December 31, 2022, 2021 and 2020 was $ 145,000 , $ 1.1 million, and $ 255,000 . The actual tax benefit realized for the tax deductions from option exercise of the share–based payment arrangements totaled $ 126,000 , $ 334,000 , and $ 59,000 , for the years ended December 31, 2022, 2021 and 2020. As of December 31, 2022, there was $ 4.8 million of total unrecognized compensation cost related to all non–vested share–based compensation arrangements granted under all of the plans. That cost is expected to be recognized over a weighted–average period of 2.75 years. Under all plans, forfeitures of share–based compensation grants are recognized as they occur. Note 22 – Derivative Financial Instruments Cash Flow Hedges As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into an interest rate swap agreement for a portion of its floating rate debt which matured on December 16, 2021. The agreement provided for the Company to receive interest from the counterparty at three months LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 4.20 % on a notional amount of $ 12.0 million. Under the agreement, the Company paid or received the net interest amount monthly, with the monthly settlements included in interest expense. The Company assumed an additional interest rate swap agreement as the result of the LaPorte acquisition in July 2016 which matured on March 15, 2021. The agreement provided for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average rate of 2.62 % on a notional amount of $ 10.0 million. Under the agreement, the Company paid or received the net interest amount monthly, with the monthly settlements included in interest expense. On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counter party at a rate of 2.81 % on a notional amount of $ 50.0 million at December 31, 2022 and 2021. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. Management has designated the interest rate swap agreements as cash flow hedging instruments. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. At December 31, 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. 124 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable rate liabilities used in the Company's asset/liability management activities at December 31, 2022 and 2021. December 31, 2022 Weighted Average Rate Cash Flow Hedges Notional Amount Weighted Average Remaining Maturity (years) Fair Value Receive Pay Interest rate swaps $ 50,000 3.6 years $ 1,976 1 month LIBOR 2.81 % December 31, 2021 Weighted Average Rate Cash Flow Hedges Notional Amount Weighted Average Remaining Maturity (years) Fair Value Receive Pay Interest rate swaps $ 50,000 4.6 years $ ( 3,673 ) 1 month LIBOR 2.81 % 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. The Company has also entered into interest rate swap agreements on individual security agreements, converting the fixed rate security to a variable rate. At December 31, 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 and security agreements are recorded as gains or losses in non–interest income. The fair value hedges are considered to be highly effective. The notional amounts of the loan and security agreements being hedged were $ 514.6 million at December 31, 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 December 31, 2022, the Company’s fair values of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income. The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans. 125 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following tables summarize the fair value of derivative financial instruments utilized by Horizon: Asset Derivatives Liability Derivatives December 31, 2022 December 31, 2022 Notional Amount Fair Value Notional Amount Fair Value Derivatives designated as hedging instruments Interest rate contracts – cash flow hedges $ 50,000 $ 1,976 $ — $ — Total derivatives designated as hedging instruments 50,000 1,976 — — Derivatives not designated as hedging instruments Interest rate contracts – fair value hedges 514,551 42,619 514,551 42,619 Mortgage loan contracts — — 13,800 50 Commitments to originate mortgage loans 12,179 284 — — Total derivatives not designated as hedging instruments 526,730 42,903 528,351 42,669 Total derivatives $ 576,730 $ 44,879 $ 528,351 $ 42,669 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 hedge 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 $ 582,597 $ 18,330 The effect of the derivative instruments on the consolidated statement of comprehensive income (loss) for the 12–month periods ended December 31 is as follows: Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative Years Ended December 31 2022 2021 2020 Derivatives in cash flow hedging relationship Interest rate contracts $ 4,463 $ 3,610 $ ( 3,004 ) 126 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The effect of the derivative instruments on the consolidated statements of income for the 12–month periods ended December 31 is as follows: Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Years Ended December 31 2022 2021 2020 Derivative designated as hedging instruments Interest rate contracts – cash flow hedges Interest expense – Borrowings $ ( 628 ) $ ( 1,901 ) $ ( 1,838 ) Total $ ( 628 ) $ ( 1,901 ) $ ( 1,838 ) Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Years Ended December 31 2022 2021 2020 Derivative not designated as hedging instruments Interest rate contracts – fair value hedge Interest income – loans receivable $ ( 39 ) $ ( 372 ) $ ( 223 ) Interest rate contracts – fair value hedge Interest income – investment securities ( 99 ) ( 267 ) ( 183 ) Mortgage loan contracts Non–interest income – Gain on sale of loans 188 ( 238 ) 38 Commitments to originate mortgage loans Non–interest income – Gain on sale of loans ( 753 ) ( 8 ) 781 Total $ ( 703 ) $ ( 885 ) $ 413 Note 23 – Disclosures about fair value of assets and liabilities The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended December 31, 2022. 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 127 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage–backed pools, private–label mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. Government–sponsored mortgage–backed securities and corporate securities. Level 3 fair value for securities was determined using grid pricing that incorporates market estimates based on interest rates, maturity dates, coupon rates and ratings. Level 3 fair value for securities that have little to no market activity can also be priced at book value for lack of another reasonable pricing source or methodology. Hedged loans Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used. Interest rate swap agreements The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following: December 31, 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 $ 267,179 $ — $ 267,179 $ — State and municipal 433,544 — 433,544 — Federal agency collateralized mortgage obligations 31,215 — 31,215 — Federal agency mortgage–backed pools 190,656 — 190,656 — Corporate notes 74,964 — 74,964 — Total available for sale securities 997,558 — 997,558 — Interest rate swap agreements asset 44,595 — 44,595 — Commitments to originate mortgage loans 284 — 284 — Interest rate swap agreements liability ( 42,619 ) — ( 42,619 ) — Mortgage loan contracts ( 50 ) — ( 50 ) — 128 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) December 31, 2021 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 ) — The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable Level 3 inputs for the year ended December 31, 2022. Available for Sale Securities Years Ended December 31 2022 2021 Beginning balance $ 125,496 $ — Transfer to Level 2 ( 125,496 ) — Included in other comprehensive income — ( 134 ) Purchases, issuances and settlements — 125,630 Principal payments — — Ending balance $ — $ 125,496 Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment): Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Collateral dependent loans $ 8,091 $ — $ — $ 8,091 December 31, 2021 Collateral dependent loans $ 15,176 $ — $ — $ 15,176 Mortgage servicing rights 15,186 — — 15,186 129 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company's fair value of MSRs is calculated by pooling loans into buckets of homogeneous characteristics and performing a present value analysis of the future cash flows. The buckets are created based on individual loans characteristics such as loan age, note rate, product type, and the investor remittance schedule. For each individual buckets the Company models the unique expected future cash flow. The model utilizes assumptions to estimate future cash flow, including estimates of prepayment, discount rates, servicing costs, ancillary income, escrow calculations and delinquencies. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 2022 and 2021. December 31, 2022 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 8,091 Collateral based measurement Discount to reflect current market conditions and ultimate collectability 0.0 %– 100.0 % ( 13.3 %) December 31, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) State and municipal securities $ 120,464 Grid pricing Maturity date, Weighted average coupon 1 month– 16 years, 2.05 % Corporate securities 5,032 Grid pricing Maturity date, Weighted average coupon 9 years– 17 years, 3.97 % Collateral dependent loans $ 15,176 Collateral based measurement Discount to reflect current market conditions and ultimate collectability 0.0 %– 54.0 % ( 4.8 %) Mortgage servicing rights 15,186 Discounted cash flows Discount rate, Constant prepayment rate, Probability of default 8.0 %– 8.0 % ( 8.0 %), 8.4 %– 14.6 % ( 11.6 %), 0.0 %– 2.0 %( 0.4 %) Note 24 – 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. 130 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at December 31, 2022 and December 31, 2021. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities which are not financial instruments as defined by the FASB ASC fair value hierarchy. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Due from Banks — The carrying amounts approximate fair value. Held to Maturity Securities — For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities. Loans Held for Sale — The carrying amounts approximate fair value. Net Loans — The fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. FHLB Stock — Fair value of FHLB stock is based on the price at which it may be resold to the FHLB Interest Receivable/Payable — The carrying amounts approximate fair value. Deposits — The fair value of demand deposits, savings accounts, interest bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity. Borrowings — Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings. Subordinated Notes — The fair value of subordinated notes is based on discounted cash flows based on current borrowing rates for similar types of instruments. Junior Subordinated Debentures to Capital Trusts — Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures. Commitments to Extend Credit and Standby Letters of Credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed–rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value. 131 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall. December 31, 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 $ 123,505 $ 123,505 $ — $ — Interest–earning time deposits 2,812 — 2,778 — Investment securities, held to maturity 2,022,748 — 1,681,309 — Loans held for sale 5,807 — — 5,807 Loans (excluding loan level hedges), net 4,107,534 — — 3,852,458 Stock in FHLB 26,677 — 26,677 — Interest receivable 35,294 — 35,294 — Liabilities Non–interest bearing deposits $ 1,277,768 $ 1,277,768 $ — $ — Interest bearing deposits 4,580,006 — 4,100,154 — Borrowings 1,142,949 — 1,139,926 — Subordinated notes 58,896 — 56,496 — Junior subordinated debentures issued to capital trusts 57,027 — 51,327 — Interest payable 5,380 — 5,380 — 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 3,604,248 — — 3,513,346 Stock in FHLB 24,440 — 24,440 — Interest receivable 26,137 — 26,137 — Liabilities Non–interest bearing deposits $ 1,360,338 $ 1,360,338 $ — $ — Interest bearing deposits 4,442,653 — 4,369,011 — Borrowings 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 — 132 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Note 25 – General Litigation The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company. Note 26 – Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of Horizon Bancorp, Inc.: Condensed Balance Sheets December 31 2022 December 31 2021 Assets Total cash and cash equivalents $ 54,097 $ 53,907 Investment in subsidiaries 748,983 796,054 Other assets 10,519 9,510 Total assets $ 813,599 $ 859,471 Liabilities Subordinated notes $ 58,896 $ 58,750 Junior subordinated debentures issued to capital trusts 57,027 56,785 Other liabilities 20,301 20,727 Stockholders’ Equity 677,375 723,209 Total liabilities and stockholders’ equity $ 813,599 $ 859,471 Condensed Statements of Income Years Ended December 31 2022 2021 2020 Operating Income (Expense) Dividend income from subsidiaries $ 34,750 $ 22,500 $ 61,400 Other income 45 25 106 Interest expense ( 6,258 ) ( 5,767 ) ( 4,483 ) Salaries and employee benefits ( 2,551 ) ( 1,890 ) ( 1,997 ) Other expense ( 411 ) ( 591 ) ( 517 ) Income Before Undistributed Income of Subsidiaries 25,575 14,277 54,509 Undistributed Income of Subsidiaries 66,473 71,439 13,131 Income Before Tax 92,048 85,716 67,640 Income Tax Benefit 1,360 1,375 859 Net Income Available to Common Shareholders $ 93,408 $ 87,091 $ 68,499 133 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Table dollars in thousands except for per share data) Condensed Statements of Comprehensive Income (Loss) Years Ended December 31 2022 2021 2020 Net Income $ 93,408 $ 87,091 $ 68,499 Other Comprehensive Income (Loss) Change in fair value of derivative instruments, net of taxes 4,463 3,610 ( 3,004 ) Unrealized gain (loss) for the period on held to maturity securities, net of taxes ( 1,603 ) 4,687 ( 46 ) Unrealized gain (loss) on available for sale securities, net of taxes ( 116,403 ) ( 28,082 ) 27,865 Less: reclassification adjustment for realized gains included in net income, net of taxes — ( 722 ) ( 3,395 ) ( 113,543 ) ( 20,507 ) 21,420 Comprehensive Income (Loss) $ ( 20,135 ) $ 66,584 $ 89,919 Condensed Statements of Cash Flows Years Ended December 31 2022 2021 2020 Operating Activities Net income $ 93,408 $ 87,091 $ 68,499 Items not requiring (providing) cash Equity in undistributed net income of subsidiaries ( 66,473 ) ( 71,439 ) ( 13,131 ) Change in: Share based compensation 2,475 1,819 1,338 Other assets ( 284 ) 730 ( 20 ) Other liabilities 120 946 ( 14 ) Net cash provided by operating activities 29,246 19,147 56,672 Investing Activities Capital contribution to subsidiary — ( 60,000 ) — Net cash used in investing activities — ( 60,000 ) — Financing Activities Other change in borrowings 388 384 16 Repurchase of outstanding stock — ( 7,607 ) ( 19,636 ) Dividends paid on common shares ( 27,765 ) ( 24,768 ) ( 21,183 ) Proceeds from issuance of stock — — 1,233 Net settlement of share awards ( 1,824 ) ( 1,355 ) — Stock option exercises 145 1,062 157 Net proceeds from issuance of subordinated notes — — 58,824 Net cash (used in) provided by financing activities ( 29,056 ) ( 32,284 ) 19,411 Net Change in Cash and Cash Equivalents 190 ( 73,137 ) 76,083 Cash and Cash Equivalents at Beginning of Year 53,907 127,044 50,961 Cash and Cash Equivalents at End of Year $ 54,097 $ 53,907 $ 127,044 134 Table of Contents Report of Independent Registered Public Accounting Firm Audit Committee, Board of Directors and Shareholders Horizon Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Horizon Bancorp, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2023, expressed an adverse opinion thereon . Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses (“ACL”) The Company’s loan portfolio totaled $4.2 billion as of December 31, 2022 and the allowance for credit losses on loans was $50.5 million. As more fully described in Notes 1, 5 and 6 to the Company’s consolidated financial statements, the Company estimates its exposure to expected credit losses as of the balance sheet date, for existing financial instruments held at amortized cost, securities classified as available for sale and off-balance sheet 135 Table of Contents exposures, such as unfunded loan commitments, letters of credit and other financial guarantees that are not unconditionally cancellable by the Company. The determination of the ACL requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates, loan credit risk grading and identifying loans requiring individual evaluation among others. As disclosed by management, different assumptions and conditions could result in a materially different amount for the estimate of the ACL. We identified the ACL at December 31, 2022 as a critical audit matter. Auditing the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s identification of credit quality indicators, grouping of loans determined to be similar into pools, estimating the remaining life of loans in a pool, assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan credit risk grades. Our audit procedures related to the estimated allowance for credit losses at December 31, 2022 included: • Testing the design and operating effectiveness of internal controls, including those related to technology, over the ACL, the establishment of qualitative adjustments for current and expected conditions, grading and risk classification of loans and establishment of specific reserves on individually evaluated loans and management’s review controls over the ACL balance as a whole including attending internal CECL committee, commercial watch, and disclosure committee meetings. • Testing clerical and computational accuracy of the formulas within the calculation. • Testing of completeness and accuracy of the information and reports utilized in the ACL. • Evaluating the precision of management review of the adequacy of the ACL. • Evaluating the current and expected qualitative adjustments, including assessing the basis for the adjustments and the reasonableness of the significant assumptions. • Evaluating the forecast adjustment, including assessing that it is reasonable and supportable. • Evaluating the relevance and reliability of data and assumptions. • Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of allowance on specific loans. • Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years. • Evaluating credit quality indicators such as trends in delinquencies, nonaccruals, charge-offs, and loan grades. • Identifying fields in the various loan systems that defined the loan pools and tested the design and operating effectiveness of internal controls surrounding the input and maintenance of those fields. /s/ FORVIS, LLP (Formerly, BKD, LLP) We have served as the Company’s auditor since 1998. Indianapolis, Indiana March 15, 2023 136 Table of Contents Report of Independent Registered Public Accounting Firm Audit Committee, Board of Directors and Shareholders Horizon Bancorp, Inc. Opinion on the Internal Control over Financial Reporting We have audited Horizon Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated March 15, 2023 , expressed an unqualified opinion on those consolidated financial statements . A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses has been identified and included in management’s assessment: • Insufficient controls over the reporting, classification and disclosure of loans, investments and individual cash flows line items. • Lack of sufficient controls around the financial reporting process that allowed for the timely release of financial statements. These material weaknesses were considered in determining the nature, timi ng, and extent of auditing procedures applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 15, 2023, on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Financial Statements . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 137 Table of Contents Definitions and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. /s/ FORVIS, LLP (Formerly, BKD, LLP) Indianapolis, Indiana March 15, 2023 138 Table of Contents HORIZON BANCORP, INC. MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS Management is responsible for the preparation and presentation of the consolidated financial statements and related notes on the preceding pages. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and include amounts that are based on management’s best estimates and judgments. Financial information elsewhere in the Annual Report is consistent with that in the consolidated financial statements. In meeting its responsibility for the accuracy of the consolidated financial statements, management relies on Horizon’s system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded to permit the preparation of appropriate financial information. The system of internal controls is supplemented by a program of internal audits to independently evaluate the adequacy and application of financial and operating controls and compliance with Company policies and procedures. The Audit Committee of the Board of Directors meets periodically with management, the independent accountants and the internal auditors to ensure that each is properly discharging its responsibilities with regard to the consolidated financial statements and internal accounting controls. The independent accountants have full and free access to the Audit Committee and meet with it to discuss auditing and financial reporting matters. The consolidated financial statements in the Annual Report have been audited by FORVIS, LLP, an independent registered public accounting firm, for 2022, 2021 and 2020. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and included consideration of internal accounting controls, tests of accounting records and other audit procedures to the extent necessary to allow them to express their opinion on the fairness of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. 139 Table of Contents HORIZON BANCORP, INC. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None