HORIZON BANCORP INC /IN/ 10-Q

ITEM 1 – FINANCIAL STATEMENTS HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollar Amounts in Thousands) March 31, 2023 December 31, 2022 (Unaudited) Assets Cash and due from banks $ 134,722 $ 123,505 Interest earning time deposits 3,098 2,812 Investment securities, available for sale 943,441 997,558 Investment securities, held to maturity (fair value of $ 1,709,392 and $ 1,681,309 ) 2,015,537 2,022,748 Loans held for sale 2,409 5,807 Loans, net of allowance for credit losses of $ 49,526 and $ 50,464 4,197,425 4,107,534 Premises and equipment, net 91,814 92,677 Federal Home Loan Bank stock 32,264 26,677 Goodwill 155,211 155,211 Other intangible assets 16,336 17,239 Interest receivable 36,428 35,294 Cash value of life insurance 147,156 146,175 Other assets 122,154 139,281 Total assets $ 7,897,995 $ 7,872,518 Liabilities Deposits Non–interest bearing $ 1,231,845 $ 1,277,768 Interest bearing 4,470,100 4,580,006 Total deposits 5,701,945 5,857,774 Borrowings 1,311,927 1,142,949 Subordinated notes 58,933 58,896 Junior subordinated debentures issued to capital trusts 57,087 57,027 Interest payable 5,922 5,380 Other liabilities 59,622 73,117 Total liabilities 7,195,436 7,195,143 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 44,041,213 and 43,937,889 shares — — Additional paid-in capital 354,035 354,188 Retained earnings 440,556 429,385 Accumulated other comprehensive loss ( 92,032 ) ( 106,198 ) Total stockholders’ equity 702,559 677,375 Total liabilities and stockholders’ equity $ 7,897,995 $ 7,872,518 See notes to condensed consolidated financial statements 3 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended March 31, 2023 2022 Interest Income Loans receivable $ 55,364 $ 36,539 Investment securities – taxable 8,725 7,391 Investment securities – tax exempt 7,556 6,697 Other 153 115 Total interest income 71,798 50,742 Interest Expense Deposits 14,819 1,496 Borrowed funds 9,771 1,080 Subordinated notes 880 880 Junior subordinated debentures issued to capital trusts 1,091 455 Total interest expense 26,561 3,911 Net Interest Income 45,237 46,831 Credit loss expense (recovery) 242 ( 1,386 ) Net Interest Income after Credit Loss Expense (Recovery) 44,995 48,217 Non–interest Income Service charges on deposit accounts 3,028 2,795 Wire transfer fees 109 159 Interchange fees 2,867 2,780 Fiduciary activities 1,275 1,503 Losses on sale of investment securities ( 500 ) — Gain on sale of mortgage loans 785 2,027 Mortgage servicing income, net 713 3,489 Increase in cash value of bank owned life insurance 981 510 Other income 362 892 Total non–interest income 9,620 14,155 Non–interest Expense Salaries and employee benefits 18,712 19,735 Net occupancy expenses 3,563 3,561 Data processing 2,669 2,537 Professional fees 533 314 Outside services and consultants 2,717 2,525 Loan expense 1,118 1,205 FDIC insurance expense 540 725 Core deposit intangible amortization 903 926 Other losses 221 168 Other expense 3,548 3,574 Total non–interest expense 34,524 35,270 Income Before Income Taxes 20,091 27,102 Income tax expense 1,863 3,539 Net Income $ 18,228 $ 23,563 Basic Earnings Per Share $ 0.42 $ 0.54 Diluted Earnings Per Share 0.42 0.54 See notes to condensed consolidated financial statements 4 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Dollar Amounts in Thousands) Three Months Ended March 31 2023 2022 Net Income $ 18,228 $ 23,563 Other Comprehensive Income (Loss) Change in fair value of derivative instruments: Change in fair value of derivative instruments for the period ( 558 ) 2,746 Income tax effect 116 ( 577 ) Changes from derivative instruments ( 442 ) 2,169 Change in securities: Unrealized gain (loss) for the period on available for sale securities 18,144 ( 80,824 ) Reclassification of securities from available for sale to held to maturity — ( 794 ) Amortization (accretion) from transfer of securities from available for sale to held to maturity securities ( 154 ) 243 Reclassification adjustment for securities (gains) losses realized in income 500 — Income tax effect ( 3,882 ) 17,089 Unrealized gains (losses) on securities 14,608 ( 64,286 ) Other Comprehensive Income (Loss), Net of Tax 14,166 ( 62,117 ) Comprehensive Income (Loss) $ 32,394 $ ( 38,554 ) See notes to condensed consolidated financial statements 5 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (Dollar Amounts in Thousands, Except Per Share Data) Three Months Ended Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balances, January 1, 2022 $ — $ — $ 352,122 $ 363,742 $ 7,345 $ 723,209 Net income — — — 23,563 — 23,563 Other comprehensive loss, net of tax — — — — ( 62,117 ) ( 62,117 ) Amortization of unearned compensation — — 516 — — 516 Exercise of stock options — — 94 — — 94 Stock option expense — — 13 — — 13 Net settlement of share awards — — ( 1,671 ) — — ( 1,671 ) Stock retirement plans — — 448 — — 448 Cash dividends on common stock ($ 0.15 per share) — — — ( 6,605 ) — ( 6,605 ) Balances, March 31, 2022 $ — $ — $ 351,522 $ 380,700 $ ( 54,772 ) $ 677,450 Balances, January 1, 2023 $ — $ — $ 354,188 $ 429,385 $ ( 106,198 ) $ 677,375 Net income — — — 18,228 — 18,228 Other comprehensive income, net of tax — — — — 14,166 14,166 Amortization of unearned compensation — — 758 — — 758 Net settlement of share awards — — ( 696 ) — — ( 696 ) Stock retirement plans — — ( 215 ) — — ( 215 ) Cash dividends on common stock ($ 0.16 per share) — — — ( 7,057 ) — ( 7,057 ) Balances, March 31, 2023 $ — $ — $ 354,035 $ 440,556 $ ( 92,032 ) $ 702,559 See notes to condensed consolidated financial statements 6 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Three Months Ended March 31 2023 2022 Operating Activities Net income $ 18,228 $ 23,563 Items not requiring (providing) cash Credit loss expense (recovery) 242 ( 1,386 ) Depreciation and amortization 2,601 2,742 Share based compensation 758 529 Amortization of mortgage servicing rights 247 750 Impairment (recovery) of mortgage servicing rights — ( 2,594 ) Premium amortization on securities, net 2,751 3,068 Loss on sale of investment securities 500 — Gain on sale of mortgage loans ( 785 ) ( 2,027 ) Proceeds from sales of loans 24,444 81,801 Loans originated for sale ( 20,489 ) ( 72,538 ) Gain on cash value life insurance ( 981 ) ( 510 ) Gain on sale of other real estate owned ( 103 ) ( 411 ) Net change in: Interest receivable ( 1,134 ) ( 1,339 ) Interest payable 542 ( 815 ) Other assets 3,900 657 Other liabilities ( 5,410 ) ( 3,297 ) Net cash provided by operating activities 25,311 28,193 Investing Activities Purchases of securities available for sale ( 817 ) ( 180,260 ) Proceeds from sales of securities available for sale 63,527 — Proceeds from maturities, calls and principal repayments of securities available for sale 8,386 23,089 Purchases of securities held to maturity ( 7,935 ) ( 345,794 ) Proceeds from maturities, calls and principal repayments of securities held to maturity 13,406 13,136 Net change in interest earning time deposits ( 286 ) 736 Purchase of FHLB stock ( 5,587 ) — Redemption of FHLB stock — 198 Purchase of loans ( 62,489 ) — Net change in loans ( 27,865 ) ( 68,629 ) Proceeds on the sale of OREO and repossessed assets 737 1,606 Premises and equipment expenditures ( 567 ) ( 1,078 ) Net cash used in investing activities ( 19,490 ) ( 556,996 ) Financing Activities Net change in deposits ( 155,829 ) 48,506 Proceeds from borrowings 522,548 239,179 Repayment of borrowings ( 354,634 ) ( 235,582 ) Net change in repurchase agreements 1,064 12,328 Net settlement of share awards ( 696 ) ( 1,671 ) Exercise of stock options — 94 Dividends paid on common stock ( 7,057 ) ( 6,605 ) Net cash provided by financing activities 5,396 56,249 Net Change in Cash and Cash Equivalents 11,217 ( 472,554 ) Cash and Cash Equivalents, Beginning of Period 123,505 593,508 Cash and Cash Equivalents, End of Period $ 134,722 $ 120,954 Additional Supplemental Information Interest paid $ 26,019 $ 4,726 7 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar Amounts in Thousands) Income taxes paid — — Transfer of loans to other real estate and repossessed assets 868 100 Transfer of available for sale securities to held to maturity securities — 120,881 See notes to condensed consolidated financial statements 8 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 1 - Accounting Policies The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp, Inc. (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”), which is an Indiana commercial bank. All inter–company balances and transactions have been eliminated. The results of operations for the periods ended March 31, 2023 and March 31, 2022 are not necessarily indicative of the operating results for the full year of 2023 or 2022. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments. Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10–K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on March 15, 2023 (the “2022 Annual Report on Form 10–K”). The condensed consolidated balance sheet of Horizon as of December 31, 2022 has been derived from the audited balance sheet as of that date. On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of March 31, 2023, Horizon had repurchased a total of 803,349 shares at an average price per share of $ 16.89 . Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted–average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share. Three Months Ended March 31 2023 2022 Basic earnings per share Net income $ 18,228 $ 23,563 Weighted average common shares outstanding 43,583,554 43,554,713 Basic earnings per share $ 0.42 $ 0.54 Diluted earnings per share Net income $ 18,228 $ 23,563 Weighted average common shares outstanding 43,583,554 43,554,713 Effect of dilutive securities: Restricted stock 142,318 129,793 Stock options 18,849 50,050 Weighted average common shares outstanding 43,744,721 43,734,556 Diluted earnings per share $ 0.42 $ 0.54 9 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) There were 601,685 shares for the three months ended March 31, 2023 which were not included in the computation of diluted earnings per share because they were non–dilutive. There were 1,000 shares for the three months ended March 31, 2022 which were not included in the computation of diluted earnings per share because they were non–dilutive. Revision of Previously Issued Financial Statements We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10–Q related to immaterial errors. The errors relate to the amortization expense of the indirect loan dealer reserve asset not being reported as a reduction in interest income on loans and the non–cash transfer of available for sale securities to held to maturity securities. The correction of these errors resulted in a reduction in interest income on loans receivable and a reduction in non–interest loan expense on the Company's consolidated income statement and the disclosure of the transfer of available for sale securities to held to maturity securities in the statements of cash flows. This revision does not impact the Company's net income. 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 Quarterly Report on Form 10–Q for the three months ended March 31, 2022. The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of the errors: Consolidated Statements of Income Three Months Ended March 31, 2022 As Reported Indirect Loan Dealer Reserve Adjustment As Revised Interest income Loans receivable $ 37,879 $ ( 1,340 ) $ 36,539 Total interest income 52,082 ( 1,340 ) 50,742 Net interest income 48,171 ( 1,340 ) 46,831 Net interest income after credit loss expense (recovery) 49,557 ( 1,340 ) 48,217 Non–interest expense Loan expense 2,545 ( 1,340 ) 1,205 Total non–interest expense 36,610 ( 1,340 ) 35,270 Net income 23,563 — 23,563 10 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Consolidated Statements of Cash Flows Three Months Ended March 31, 2022 As Reported Indirect Loan Dealer Reserve Adjustment Transfer of AFS Securities to HTM Securities As Revised Operating Activities Net change in other assets $ 4,730 $ 1,037 $ — $ 5,767 Net cash provided by operating activities 27,055 1,037 — 28,092 Investing activities Net change in loans ( 67,592 ) ( 1,037 ) — ( 68,629 ) Net cash used in investing activities ( 555,959 ) ( 1,037 ) — ( 556,996 ) Net Change in Cash and Cash Equivalents 120,954 — — 120,954 Additional Supplemental Information Transfer of available for sale securities to held to maturity securities — — 120,881 120,881 Adoption of New Accounting Standards Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures The FASB has issued ASU 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , in March 2022. These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, these amendments require that an entity disclose current–period gross write–offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326–20. The guidance is effective for entities that have adopted ASU 2016–13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. If an entity elects to early adopt ASU 2022–02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted this standard during the first quarter of 2023 and it did not have a material impact on the consolidated financial statements. 11 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Accounting Guidance Issued But Not Yet Adopted FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rates on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: • A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria. • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform. The Company 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. FASB ASU No. 2023–02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method The FASB has issued ASU 2023–02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This guidance allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company is assessing ASU 2023–02 and its impact on its accounting and disclosures. 12 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 2 – Securities The fair value of securities is as follows: March 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. Treasury and federal agencies $ 294,218 $ — $ ( 23,878 ) $ 270,340 State and municipal 451,133 54 ( 59,978 ) 391,209 Federal agency collateralized mortgage obligations 25,919 — ( 1,360 ) 24,559 Federal agency mortgage-backed pools 211,697 — ( 27,573 ) 184,124 Corporate notes 81,974 256 ( 9,021 ) 73,209 Total available for sale investment securities $ 1,064,941 $ 310 $ ( 121,810 ) $ 943,441 Held to maturity U.S. Treasury and federal agencies $ 295,200 $ — $ ( 44,833 ) $ 250,367 State and municipal 1,127,691 1,115 ( 169,792 ) 959,014 Federal agency collateralized mortgage obligations 55,379 — ( 8,003 ) 47,376 Federal agency mortgage-backed pools 338,861 — ( 51,806 ) 287,055 Private labeled mortgage-backed pools 34,835 — ( 5,186 ) 29,649 Corporate notes 163,571 — ( 27,640 ) 135,931 Total held to maturity investment securities $ 2,015,537 $ 1,115 $ ( 307,260 ) $ 1,709,392 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 13 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 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 amortized cost and fair value of securities available for sale and held to maturity at March 31, 2023 and December 31, 2022, 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. March 31, 2023 Amortized Cost Fair Value Available for sale Within one year $ 2,607 $ 2,572 One to five years 336,326 310,880 Five to ten years 217,280 186,923 After ten years 271,112 234,383 827,325 734,758 Federal agency collateralized mortgage obligations 25,919 24,559 Federal agency mortgage–backed pools 211,697 184,124 Total available for sale investment securities $ 1,064,941 $ 943,441 Held to maturity Within one year $ 47,101 $ 46,946 One to five years 226,069 214,351 Five to ten years 317,729 276,719 After ten years 995,563 807,296 1,586,462 1,345,312 Federal agency collateralized mortgage obligations 55,379 47,376 Federal agency mortgage–backed pools 338,861 287,055 Private labeled mortgage–backed pools 34,835 29,649 Total held to maturity investment securities $ 2,015,537 $ 1,709,392 14 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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. March 31, 2023 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 $ 4,997 $ ( 95 ) $ 515,322 $ ( 68,616 ) $ 520,319 $ ( 68,711 ) State and municipal 119,929 ( 2,792 ) 1,116,520 ( 226,978 ) 1,236,449 ( 229,770 ) Federal agency collateralized mortgage obligations 6,226 ( 343 ) 65,710 ( 9,020 ) 71,936 ( 9,363 ) Federal agency mortgage–backed pools 9,256 ( 304 ) 461,906 ( 79,075 ) 471,162 ( 79,379 ) Private labeled mortgage–backed pools — — 29,649 ( 5,186 ) 29,649 ( 5,186 ) Corporate notes 28,997 ( 6,735 ) 178,954 ( 29,926 ) 207,951 ( 36,661 ) Total temporarily impaired securities $ 169,405 $ ( 10,269 ) $ 2,368,061 $ ( 418,801 ) $ 2,537,466 $ ( 429,070 ) 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 temporarily impaired securities $ 880,068 $ ( 75,452 ) $ 1,719,396 $ ( 406,840 ) $ 2,599,464 $ ( 482,292 ) Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. As of March 31, 2023 and December 31, 2022, the Company had 2,647 and 2,828 securities, respectively, with market values below their cost basis. The total fair value of these investments at March 31, 2023 and December 31, 2022 was $ 2.5 billion and $ 2.6 billion, which is approximately 95.7 % and 97.0 %, 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 recorded at March 31, 2023 or December 31, 2022. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $ 17.0 million at March 31, 2023 and $ 17.8 million at December 31, 2022 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. 15 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities, private labeled mortgage–backed pools and corporate notes were due to changes in interest rates. Due to the contractual terms, the issuers of state and municipal securities are not allowed to settle for less than the amortized cost of the security. In addition, the Company does not intend to sell these securities prior to the recovery of the amortized cost, which may not occur until maturity. Information regarding security proceeds, gross gains and gross losses are presented below. Three Months Ended March 31 2023 2022 Sales of securities available for sale Proceeds $ 63,526 $ — Gross gains 129 — Gross losses ( 629 ) — Note 3 – Loans The table below identifies the Company’s loan portfolio segments and classes. Portfolio Segment Class of Financing Receivable Commercial Owner occupied real estate Non-owner occupied real estate Residential spec homes Development & spec land Commercial and industrial Real estate Residential mortgage Residential construction Mortgage warehouse Mortgage warehouse Consumer Direct installment Indirect installment Home equity Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Class of financing receivable is defined as a group of financing receivables determined on the basis of both of the following, 1) risk characteristics of the financing receivable, and 2) an entity’s method for monitoring and assessing credit risk. Generally, the Bank does not move loans from a revolving loan to a term loan other than construction loans. Residential construction loans are reviewed and rewritten prior to being originated as a term loan. 16 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents total loans outstanding by portfolio class, as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 Commercial Owner occupied real estate $ 609,550 $ 594,562 Non–owner occupied real estate 1,217,831 1,187,077 Residential spec homes 11,841 10,838 Development & spec land 30,159 27,358 Commercial and industrial 636,078 647,587 Total commercial 2,505,459 2,467,422 Real estate Residential mortgage 623,634 612,551 Residential construction 38,825 40,741 Mortgage warehouse 52,957 69,529 Total real estate 715,416 722,821 Consumer Direct installment 55,443 56,614 Indirect installment 503,207 500,549 Home equity 467,426 410,592 Total consumer 1,026,076 967,755 Total loans 4,246,951 4,157,998 Allowance for credit losses ( 49,526 ) ( 50,464 ) Net loans $ 4,197,425 $ 4,107,534 Total loans include net deferred loan costs of $ 24.6 million at March 31, 2023 and $ 22.7 million at December 31, 2022, respectively. The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short–term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company's commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner–occupied commercial real estate loans versus non–owner occupied loans. 17 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Real Estate and Consumer With respect to residential loans that are secured by 1–4 family residences and are generally owner occupied, the Company generally establishes a maximum loan–to–value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1–4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Mortgage Warehousing Horizon's mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon's agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days. Based on these agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement. 18 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Non–performing Loans The following table presents non–accrual loans and loans past due over 90 days still on accrual by class of loans at March 31, 2023: March 31, 2023 Non–accrual Loans Past Due Over 90 Days Still Accruing Total Non–performing Loans Non–performing with no Allowance for Credit Losses Commercial Owner occupied real estate $ 3,292 $ — $ 3,292 $ 3,106 Non–owner occupied real estate 3,834 — 3,834 1,393 Residential spec homes 101 — 101 — Development & spec land 813 — 813 65 Commercial and industrial 483 — 483 289 Total commercial 8,523 — 8,523 4,853 Real estate Residential mortgage 6,884 42 6,926 6,926 Residential construction — — — — Mortgage warehouse — — — — Total real estate 6,884 42 6,926 6,926 Consumer Direct installment 73 — 73 73 Indirect installment 820 95 915 915 Home equity 3,360 — 3,360 3,360 Total consumer 4,253 95 4,348 4,348 Total $ 19,660 $ 137 $ 19,797 $ 16,127 19 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructurings (“TDRs”) by class of loan at December 31, 2022: December 31, 2022 Non–accrual Loans Past Due Over 90 Days Still Accruing Non–performing TDRs Performing TDRs Total Non–performing Loans Non–performing with no Allowance for Credit Losses Commercial Owner occupied real estate $ 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 There was no interest income recognized on non–accrual loans during the three months ended March 31, 2023 and 2022, respectively, while the loans were in non–accrual status. 20 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents the payment status by class of loan, excluding non–accrual loans of $ 19.7 million at March 31, 2023: March 31, 2023 Current 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Total Loans Commercial Owner occupied real estate $ 603,832 $ 2,028 $ 398 $ — $ 2,426 $ 606,258 Non–owner occupied real estate 1,213,846 151 — — 151 1,213,997 Residential spec homes 11,740 — — — — 11,740 Development & spec land 29,346 — — — — 29,346 Commercial and industrial 634,193 1,232 170 — 1,402 635,595 Total commercial 2,492,957 3,411 568 — 3,979 2,496,936 Real estate Residential mortgage 614,702 1,704 302 42 2,048 616,750 Residential construction 38,825 — — — — 38,825 Mortgage warehouse 52,957 — — — — 52,957 Total real estate 706,484 1,704 302 42 2,048 708,532 Consumer Direct installment 55,284 61 25 — 86 55,370 Indirect installment 497,813 4,041 438 95 4,574 502,387 Home equity 460,645 2,753 668 — 3,421 464,066 Total consumer 1,013,742 6,855 1,131 95 8,081 1,021,823 Total $ 4,213,183 $ 11,970 $ 2,001 $ 137 $ 14,108 $ 4,227,291 21 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents the payment status by class of loan, excluding non–accrual loans of $ 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 Loans Total 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 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. Modified Loans The Company adopted ASU 2022–02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, during the first quarter of 2023. This amendment eliminated 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. During the first quarter of 2023, the Company did not modify any loans. Prior to the adoption of ASU 2022–02, loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans' contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default. 22 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents TDRs by class of loan at December 31, 2022: December 31, 2022 Non–accrual Accruing Total Commercial Owner occupied real estate $ — $ 568 $ 568 Non–owner occupied real estate — 269 269 Residential spec homes — — — Development & spec land — — — Commercial and industrial — — — Total commercial — 837 837 Real estate Residential mortgage 1,210 1,391 2,601 Residential construction — — — Mortgage warehouse — — — Total real estate 1,210 1,391 2,601 Consumer Direct installment — — — Indirect installment — — — Home equity 338 342 680 Total consumer 338 342 680 Total $ 1,548 $ 2,570 $ 4,118 Collateral Dependent Financial Assets A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent. 23 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses. March 31, 2023 Real Estate Accounts Receivable/Equipment Other Total ACL Allocation Commercial Owner occupied real estate $ 3,201 $ 91 $ — $ 3,292 $ 63 Non–owner occupied real estate 3,834 — — 3,834 996 Residential spec homes 101 — — 101 47 Development & spec land 813 — — 813 3 Commercial and industrial — 443 40 483 153 Total commercial 7,949 534 40 8,523 1,262 Total collateral dependent loans $ 7,949 $ 534 $ 40 $ 8,523 $ 1,262 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 Credit Quality Indicators Horizon Bank's processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re–evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade. • For new and renewed commercial loans, the Bank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade of the loans. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective regions (ranging from $ 3,000,000 to $ 6,000,000 ) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (“CCBO”). • Commercial loan officers are responsible for reviewing their loan portfolios and reporting any adverse material change to the CCBO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO when recommending an upgrade. • The CCBO, or a designee, meets periodically with loan officers to discuss the status of past due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. 24 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) • Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management's analysis of the adequacy of the Allowance for Credit Losses. For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non–accrual, or are classified as modified loans are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non–accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass. Horizon Bank employs a nine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below. Risk Grade 1: Excellent (Pass) Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges. Risk Grade 2: Good (Pass) Loans to businesses that have strong financial statements containing an unmodified opinion from a CPA firm and at least three years consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five years satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long–term debt ratings of Baa or better and meeting defined key financial metric ranges. Risk Grade 3: Satisfactory (Pass) Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered and meeting defined key financial metric ranges. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply: • At inception, the loan was properly underwritten, did not possess an unwanted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory. • At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss. • The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. • During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. 25 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Risk Grade 4: Satisfactory/Monitored (Pass) Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory rated loans and meet defined key financial metric ranges. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank's minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization. Risk Grade 4W: Management Watch (Pass) Loans in this category are considered to be of acceptable quality and meet defined key financial metric ranges, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion. Commercial construction loans are graded as 4W Management Watch until the projects are completed and stabilized. Risk Grade 5: Special Mention Loans which possess some temporary (normally less than one year) credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,“ impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength and must meet defined key financial metric ranges. Risk Grade 6: Substandard One or more of the following characteristics may be exhibited in loans classified Substandard: • Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. • Loans are inadequately protected by the current net worth and paying capacity of the obligor. • The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. • Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. • Unusual courses of action are need to maintain a high probability of repayment. • The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments. • The lender is forced into a subordinated or unsecured position due to flaws in documentation. • Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms. • The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. • There is a significant deterioration in market conditions to which the borrower is highly vulnerable. • The borrower meets defined key financial metric ranges. 26 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Risk Grade 7: Doubtful One or more of the following characteristics may be present in loans classified Doubtful: • Loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of principal highly improbable. • The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. • The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known. • The borrower meets defined key financial metric ranges. Risk Grade 8: Loss Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all of a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 27 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables present loans by credit grades and origination year at March 31, 2023. March 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial Owner occupied real estate Pass $ 21,899 $ 103,870 $ 78,372 $ 49,277 $ 49,487 $ 197,586 $ 81,560 $ 582,051 Special Mention — — 7,014 178 6 2,122 — 9,320 Substandard — 1,011 — 978 834 12,477 2,879 18,179 Doubtful — — — — — — — — Total owner occupied real estate $ 21,899 $ 104,881 $ 85,386 $ 50,433 $ 50,327 $ 212,185 $ 84,439 $ 609,550 Gross charge–offs during period $ — $ 54 $ 53 $ — $ — $ 1 $ — $ 108 Non–owner occupied real estate Pass $ 20,791 $ 180,019 $ 174,548 $ 134,137 $ 95,150 $ 339,009 $ 220,088 $ 1,163,742 Special Mention — — 1,395 262 874 45,794 — 48,325 Substandard — — — 231 — 5,533 — 5,764 Doubtful — — — — — — — — Total non–owner occupied real estate $ 20,791 $ 180,019 $ 175,943 $ 134,630 $ 96,024 $ 390,336 $ 220,088 $ 1,217,831 Gross charge–offs during period $ — $ — $ — $ — $ — $ 9 $ — $ 9 Residential spec homes Pass $ — $ 1,353 $ 3,478 $ 4 $ — $ 1,862 $ 5,043 $ 11,740 Special Mention — — — — — — — — Substandard — — — — — — 101 101 Doubtful — — — — — — — — Total residential spec homes $ — $ 1,353 $ 3,478 $ 4 $ — $ 1,862 $ 5,144 $ 11,841 Gross charge–offs during period $ — $ — $ — $ — $ — $ — $ — $ — Development & spec land Pass $ 126 $ 1,581 $ 1,173 $ 435 $ 265 $ 9,116 $ 16,402 $ 29,098 Special Mention — — — — — 137 — 137 Substandard — — — — — 176 748 924 Doubtful — — — — — — — — Total development & spec land $ 126 $ 1,581 $ 1,173 $ 435 $ 265 $ 9,429 $ 17,150 $ 30,159 Gross charge–offs during period $ — $ — $ — $ — $ — $ — $ — $ — Commercial & industrial Pass $ 25,602 $ 205,191 $ 125,533 $ 28,765 $ 31,573 $ 148,658 $ 49,544 $ 614,866 Special Mention 1,437 810 358 262 557 4,181 45 7,650 Substandard — 208 2,674 2,052 471 5,536 2,621 13,562 Doubtful — — — — — — — — Total commercial & industrial $ 27,039 $ 206,209 $ 128,565 $ 31,079 $ 32,601 $ 158,375 $ 52,210 $ 636,078 Gross charge–offs during period $ — $ — $ — $ — $ — $ 20 $ — $ 20 28 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) March 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Total Real estate Residential mortgage Performing $ 7,241 $ 114,051 $ 166,043 $ 88,929 $ 32,761 $ 207,683 $ — $ 616,708 Non–performing — 125 671 283 581 5,266 — 6,926 Total residential mortgage $ 7,241 $ 114,176 $ 166,714 $ 89,212 $ 33,342 $ 212,949 $ — $ 623,634 Gross charge–offs during period $ — $ — $ — $ — $ — $ 4 $ — $ 4 Residential construction Performing $ — $ 805 $ — $ — $ — $ — $ 38,020 $ 38,825 Non–performing — — — — — — — — Total residential construction $ — $ 805 $ — $ — $ — $ — $ 38,020 $ 38,825 Gross charge–offs during period $ — $ — $ — $ — $ — $ — $ — $ — Mortgage warehouse Performing $ — $ — $ — $ — $ — $ — $ 52,957 $ 52,957 Non–performing — — — — — — — — Total mortgage warehouse $ — $ — $ — $ — $ — $ — $ 52,957 $ 52,957 Gross charge–offs during period $ — $ — $ — $ — $ — $ — $ — $ — March 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Total Consumer Direct installment Performing $ 4,423 $ 18,442 $ 11,381 $ 6,402 $ 6,805 $ 7,827 $ 90 $ 55,370 Non–performing — — 47 — 14 12 — 73 Total direct installment $ 4,423 $ 18,442 $ 11,428 $ 6,402 $ 6,819 $ 7,839 $ 90 $ 55,443 Gross charge–offs during period $ — $ 6 $ 4 $ 6 $ — $ 9 $ — $ 25 Indirect installment Performing $ 47,543 $ 243,829 $ 108,694 $ 53,136 $ 29,064 $ 20,026 $ — $ 502,292 Non–performing — 197 233 177 161 147 — 915 Total indirect installment $ 47,543 $ 244,026 $ 108,927 $ 53,313 $ 29,225 $ 20,173 $ — $ 503,207 Gross charge–offs during period $ — $ 310 $ 159 $ 22 $ 14 $ 12 $ — $ 517 Home equity Performing $ 31,042 $ 201,796 $ 80,890 $ 37,038 $ 25,132 $ 79,547 $ 8,621 $ 464,066 Non–performing — 108 16 62 138 1,015 2,021 3,360 Total home equity $ 31,042 $ 201,904 $ 80,906 $ 37,100 $ 25,270 $ 80,562 $ 10,642 $ 467,426 Gross charge–offs during period $ — $ — $ — $ — $ — $ — $ — $ — 29 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables present loans by credit grades and origination year at December 31, 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 30 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) December 31, 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 31 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 4 – Allowance for Credit and Loan Losses The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 Commercial Real Estate Mortgage Warehouse Consumer Total Balance, beginning of period $ 32,445 $ 5,577 $ 1,020 $ 11,422 $ 50,464 Credit loss expense (recovery) ( 1,031 ) ( 1,136 ) ( 222 ) 1,984 ( 405 ) PCD loan charge–offs ( 154 ) — — — ( 154 ) Charge–offs ( 137 ) ( 4 ) — ( 542 ) ( 683 ) Recoveries 33 10 — 261 304 Balance, end of period $ 31,156 $ 4,447 $ 798 $ 13,125 $ 49,526 Three Months Ended March 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) ( 2,692 ) 485 ( 4 ) 825 ( 1,386 ) PCD loan charge–offs ( 256 ) — — — ( 256 ) Charge–offs ( 80 ) — — ( 287 ) ( 367 ) Recoveries 42 10 — 179 231 Balance, end of period $ 37,789 $ 4,351 $ 1,055 $ 9,313 $ 52,508 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 2008 through the economic cycle, on a quarterly 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 econometrics, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and quantitative adjustments were utilized to reflect the forecast and other relevant factors. The forecasted loss rate then reverts to the historical base rate on a straight–line methodology for the remaining life of loan for each pool. 32 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 5 – Loan Servicing Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $ 1.514 billion and $ 1.532 billion at March 31, 2023 and December 31, 2022. 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 March 31, 2023 and December 31, 2022. Three Months Ended March 31, March 31, 2023 2022 Mortgage servicing rights Balance, beginning of period $ 18,619 $ 17,780 Servicing rights capitalized 228 1,562 Amortization of servicing rights ( 247 ) ( 750 ) Balance, end of period 18,600 18,592 Impairment allowance Balance, beginning of period — ( 2,594 ) Additions — — Reductions — 2,594 Balance, end of period — — Mortgage servicing rights, net $ 18,600 $ 18,592 Note 6 – Goodwill The carrying amount of goodwill was $ 155.2 million as of March 31, 2023 and December 31, 2022, respectively. There were no changes in the carrying amount of goodwill for the three months ended March 31, 2023 and 2022. Goodwill is assessed for impairment annually, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment. Goodwill was assessed for impairment using a qualitative analysis as of March 31, 2023 which resulted in no goodwill impairment charges for the three months ended March 31, 2023. 33 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 7 – Repurchase Agreements The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Company’s control. The following tables show repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements: March 31, 2023 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 $ 138,935 $ — $ — $ — $ — $ — $ 138,935 Securities pledged for Repurchase Agreements Federal agency collateralized mortgage obligations $ 11,620 $ — $ — $ — $ — $ — $ 11,620 Federal agency mortgage–backed pools 151,007 — — — — — 151,007 Private labeled mortgage–backed pools 9,025 — — — — — 9,025 Total $ 171,652 $ — $ — $ — $ — $ — $ 171,652 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 34 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 8 – Subordinated Notes On June 24, 2020, Horizon issued $ 60.0 million in aggregate principal amount of 5.625 % fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625 % per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the benchmark rate, which is expected to be Three–Month Term SOFR (the “Benchmark Rate”), plus 549 basis points, payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, commencing on October 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark Rate is less than zero, the Benchmark Rate shall be deemed to be zero. Horizon may, at its option, beginning with the interest payment date of July 1, 2025 and on any interest payment date thereafter, redeem the Notes, in whole or in part. The Notes will not otherwise be redeemable by Horizon prior to maturity, unless certain events occur. The redemption price for any redemption is 100 % of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations. The Notes are unsecured subordinated obligations, and rank pari passu, or equally, with all of Horizon's future unsecured subordinated debt and are junior to all existing and future senior debt. The Notes are structurally subordinated to all existing and future liabilities of Horizon's subsidiaries, including the deposit liabilities and claims of other creditors of Horizon Bank, and are effectively subordinated to Horizon’s existing and future secured indebtedness. There is no sinking fund for the Notes. The Notes are obligations of Horizon only and are not obligations of, and are not guaranteed by, any of Horizon’s subsidiaries. Note 9 – 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 on July 20, 2018. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.81 % on a notional amount of $ 50.0 million at March 31, 2023 and December 31, 2022. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. This interest rate swap agreement matures on July 19, 2026. Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At March 31, 2023, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months. Fair Value Hedges Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or 35 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At March 31, 2023, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months. The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in non–interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. 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 March 31, 2023, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income. The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans. The following tables summarize the fair value of derivative financial instruments utilized by Horizon: Asset Derivatives Liability Derivatives March 31, 2023 March 31, 2023 Notional Amount Fair Value Notional Amount Fair Value Derivatives designated as hedging instruments Interest rate contracts – cash flow hedges $ 50,000 $ 1,418 $ — $ — Total derivatives designated as hedging instruments 50,000 1,418 — — Derivatives not designated as hedging instruments Interest rate contracts – fair value hedges 530,858 33,446 530,858 33,446 Mortgage loan contracts 11,907 37 — — Commitments to originate mortgage loans 8,775 219 — — Total derivatives not designated as hedging instruments 551,540 33,702 530,858 33,446 Total derivatives $ 601,540 $ 35,120 $ 530,858 $ 33,446 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 36 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The effect of the derivative instruments on the condensed consolidated statements of comprehensive income for the three–month periods ended March 31 is as follows: Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative Three Months Ended March 31, 2023 March 31, 2022 Derivatives in cash flow hedging relationship Interest rate contracts $ ( 442 ) $ 2,169 The effect of the derivative designated as a hedging instrument on the condensed consolidated statements of income for the three–month periods ended March 31 is as follows: Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended March 31, 2023 March 31, 2022 Derivative designated as hedging instruments Interest rate contracts – cash flow hedges Interest expense – Borrowings $ 209 $ ( 340 ) Total $ 209 $ ( 340 ) The effect of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three–month periods ended March 31 is as follows: Location of gain (loss) recognized on derivative Amount of Gain (Loss) Recognized on Derivative Three Months Ended March 31, 2023 March 31, 2022 Derivatives not designated as hedging instruments Interest rate contracts – fair value hedge Interest income – loans receivable $ 120 $ ( 112 ) Interest rate contracts – fair value hedge Interest income – investment securities 49 ( 65 ) Mortgage loan contracts Non–interest income – Gain on sale of loans 87 ( 348 ) Commitments to originate mortgage loans Non–interest income – Gain on sale of loans ( 65 ) ( 675 ) Total $ 191 $ ( 1,200 ) 37 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Note 10 – Disclosures about Fair Value of Assets and Liabilities The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices in active markets for identical assets or liabilities Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2023. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Available for sale securities When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage–backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features. Hedged loans Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used. Interest rate swap agreements The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy. 38 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following: March 31, 2023 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 $ 270,340 $ — $ 270,340 $ — State and municipal 391,209 — 391,209 — Federal agency collateralized mortgage obligations 24,559 — 24,559 — Federal agency mortgage–backed pools 184,124 — 184,124 — Corporate notes 73,209 — 73,209 — Total available for sale securities 943,441 — 943,441 — Interest rate swap agreements asset 34,864 — 34,864 — Commitments to originate mortgage loans 219 — 219 — Mortgage loan contracts 37 — 37 — Interest rate swap agreements liability ( 33,446 ) — ( 33,446 ) — 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 ) — 39 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Certain other assets are measured at fair value on a non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment): Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2023 Collateral dependent loans $ 7,261 $ — $ — $ 7,261 December 31, 2022 Collateral dependent loans $ 8,091 $ — $ — $ 8,091 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. The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill. March 31, 2023 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average) Collateral dependent loans $ 7,261 Collateral based measurement Discount to reflect current market conditions and ultimate collectibility 0.0 %- 78.9 % ( 14.8 %) 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 collectibility 0.0 %- 100.0 %( 13.3 %) Note 11 – 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. 40 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The 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 March 31, 2023 and December 31, 2022. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheets as well as certain off–balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Due from Banks – The carrying amounts approximate fair value. Interest-earning time deposits – The fair values of the Company’s interest–earning time deposits are estimated using discounted cash flow analyses based on current rates for similar types of interest–earning time deposits. Held–to–Maturity Securities – For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities. Loans Held for Sale – The carrying amounts approximate fair value. Net Loans – The fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. FHLB Stock – Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Interest Receivable/Payable – The carrying amounts approximate fair value. Deposits – The fair value of demand deposits, savings accounts, interest–bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity. Borrowings – Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings. Subordinated Notes – The fair value of subordinated notes is based on discounted cash flows based on current borrowing rates for similar types of instruments. Junior Subordinated Debentures Issued to Capital Trusts – Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures. Commitments to Extend Credit and Standby Letters of Credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed–rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short–term nature of these agreements, carrying amounts approximate fair value. 41 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The following tables present estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall. March 31, 2023 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 $ 134,722 $ 134,722 $ — $ — Interest–earning time deposits 3,098 — 3,055 — Investment securities, held to maturity 2,015,537 — 1,709,392 — Loans held for sale 2,409 — — 2,409 Loans (excluding loan level hedges), net 4,197,425 — — 3,939,326 Stock in FHLB 32,264 — 32,264 — Interest receivable 36,428 — 36,428 — Mortgage servicing rights — — — — Liabilities Non–interest bearing deposits $ 1,231,845 $ 1,231,845 $ — $ — Interest bearing deposits 4,470,100 — 4,122,923 — Borrowings 1,311,927 — 1,300,233 — Subordinated notes 58,933 — 57,600 — Junior subordinated debentures issued to capital trusts 57,087 — 50,569 — Interest payable 5,922 — 5,922 — 42 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) 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 — Mortgage servicing rights — — — — 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 — Note 12 – Accumulated Other Comprehensive Income (Loss) March 31, 2023 December 31, 2022 Unrealized gain (loss) on securities available for sale $ ( 121,500 ) $ ( 140,144 ) Unamortized gain (loss) on securities held to maturity, previously transferred from AFS 3,586 3,740 Unrealized gain (loss) on derivative instruments 1,418 1,976 Tax effect 24,464 28,230 Total accumulated other comprehensive income (loss) $ ( 92,032 ) $ ( 106,198 ) Note 13 – Regulatory Capital Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital framework (known as “Basel III”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 43 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) The Company and Bank are subject to minimum regulatory capital requirements as defined and calculated in accordance with the Basel III–based regulations. As allowed under Basel III rules, the Company made the decision to opt–out of including accumulated other comprehensive income in regulatory capital. The minimum regulatory capital requirements are set forth in the table below. In addition, to be categorized as well capitalized, the Company and Bank must maintain Total risk–based, Tier I risk–based, common equity Tier I risk–based and Tier I leverage ratios as set forth in the table below. As of March 31, 2023 and December 31, 2022, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the first quarter of 2023 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well capitalized status for bank holding companies. 44 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Data) Horizon and the Bank’s actual and required capital ratios as of March 31, 2023 and December 31, 2022 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 March 31, 2023 Total capital (to risk–weighted assets) (1) Consolidated $ 791,701 14.41 % $ 439,335 8.00 % $ 576,627 10.50 % N/A N/A Bank 736,730 13.56 % 434,541 8.00 % 570,335 10.50 % $ 543,176 10.00 % Tier 1 capital (to risk–weighted assets) (1) Consolidated 742,175 13.51 % 329,501 6.00 % 466,794 8.50 % N/A N/A Bank 687,204 12.65 % 325,906 6.00 % 461,700 8.50 % 434,541 8.00 % Common equity tier 1 capital (to risk–weighted assets) (1) Consolidated 621,647 11.32 % 247,126 4.50 % 384,418 7.00 % N/A N/A Bank 687,241 12.65 % 244,429 4.50 % 380,223 7.00 % 353,065 6.50 % Tier 1 capital (to average assets) (1) Consolidated 742,175 10.06 % 295,057 4.00 % 295,057 4.00 % N/A N/A Bank 687,204 8.86 % 310,125 4.00 % 310,125 4.00 % 387,657 5.00 % 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 % 305,999 4.00 % 382,495 5.00 % (1) As defined by regulatory agencies 45 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Note 14 – General Litigation As of April 20, 2023, a putative class action lawsuit entitled Chad Key, et al. v. Horizon Bancorp, Inc., et al., Case No. 1:23-cv-02961 (”Securities Action”) was filed against the Company and two of its officers in the U.S. District Court for the Eastern District of New York. The Securities Action asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 alleging, among other things, the Company made materially false and misleading statements and failed to disclose material adverse facts which allegedly resulted in harm to a putative class of purchasers of our securities from March 9, 2022 and March 10, 2023. We are still evaluating the complaint, which is subject to amendment, but based on current knowledge we believe that the claims are without merit. We believe the likelihood of loss is remote. Accordingly, no accrual has been made. 46 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition And Results of Operations For the Three Months ended March 31, 2023 and 2022