HORIZON BANCORP INC /IN/ - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________to

Commission file number 0-10792

HORIZON BANCORP, INC.

(Exact name of registrant as specified in its charter)


Indiana			35-1562417
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

515 Franklin Street, Michigan City, Indiana 46360

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code: (219) 879-0211

Former name, former address and former fiscal year, if changed since last report: N/A

____________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered

Common stock, no par value

HBNC

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☐	Accelerated Filer	☒
Non-accelerated Filer	☐	Smaller Reporting Company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 43,950,720 shares of Common Stock, no par value, at August 2, 2021.

Table of Contents

HORIZON BANCORP, INC.

FORM 10–Q

INDEX


PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68
Item 4.	Controls and Procedures	68
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	69
Index to Exhibits		69
Signatures		71

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)


	June 30, 2021		December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	304,171	$	249,711
Interest earning time deposits	6,994		8,965
Investment securities, available for sale	1,691,186		1,134,025
Investment securities, held to maturity (fair value of $162,651 and $179,990)	153,284		168,676
Loans held for sale	7,228		13,538
Loans, net of allowance for credit losses of $55,649 and $57,027	3,463,870		3,810,356
Premises and equipment, net	88,604		92,416
Federal Home Loan Bank stock	23,023		23,023
Goodwill	151,238		151,238
Other intangible assets	21,160		22,955
Interest receivable	21,702		21,396
Cash value of life insurance	97,071		96,751
Other assets	79,696		93,564
Total assets	$	6,109,227	$	5,886,614
Liabilities
Deposits
Non–interest bearing	$	1,102,950	$	1,053,242
Interest bearing	3,678,676		3,477,891
Total deposits	4,781,626		4,531,133
Borrowings	439,094		475,000
Subordinated notes	58,676		58,603
Junior subordinated debentures issued to capital trusts	56,662		56,548
Interest payable	2,430		2,712
Other liabilities	60,365		70,402
Total liabilities	5,398,853		5,194,398
Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares	—		—
Common stock, no par value, Authorized 99,000,000 shares
Issued 44,039,562 and 43,905,631 shares, Outstanding 43,950,720 and 43,880,562 shares	—		—
Additional paid-in capital	359,227		362,945
Retained earnings	332,509		301,419
Accumulated other comprehensive income	18,638		27,852
Total stockholders’ equity	710,374		692,216
Total liabilities and stockholders’ equity	$	6,109,227	$	5,886,614

See notes to condensed consolidated financial statements

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				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Interest Income
Loans receivable	$	39,236	$	43,918	$	80,054	$	88,876
Investment securities – taxable	2,528		2,321		4,076		5,219
Investment securities – tax exempt	5,656		4,105		10,879		7,903
Total interest income	47,420		50,344		95,009		101,998
Interest Expense
Deposits	2,053		4,506		4,396		12,222
Borrowed funds	1,296		2,074		2,565		4,312
Subordinated notes	881		58		1,761		58
Junior subordinated debentures issued to capital trusts	558		710		1,117		1,485
Total interest expense	4,788		7,348		9,839		18,077
Net Interest Income	42,632		42,996		85,170		83,921
Credit loss expense (recovery)	(1,492)		7,057		(1,125)		15,657
Net Interest Income after Credit Loss Expense (Recovery)	44,124		35,939		86,295		68,264
Non–interest Income
Service charges on deposit accounts	2,157		1,888		4,391		4,334
Wire transfer fees	222		230		477		401
Interchange fees	2,892		2,327		5,232		4,223
Fiduciary activities	1,961		1,765		3,704		4,293
Gains on sale of investment securities (includes $0 and $248 for the three months ended June 30, 2021 and 2020, respectively, and $914 and $587 for the six months ended June 30, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications)	—		248		914		587
Gain on sale of mortgage loans	5,612		6,620		10,908		10,093
Mortgage servicing income net of impairment	1,503		(2,760)		1,716		(2,735)
Increase in cash value of bank owned life insurance	502		557		1,013		1,111
Death benefit on bank owned life insurance	266		—		266		233
Other income	92		250		459		648
Total non–interest income	15,207		11,125		29,080		23,188
Non–interest Expense
Salaries and employee benefits	17,730		15,629		34,601		32,220
Net occupancy expenses	3,084		3,190		6,402		6,442
Data processing	2,388		2,432		4,764		4,837
Professional fees	588		518		1,132		1,054
Outside services and consultants	2,220		1,759		3,922		3,674
Loan expense	3,107		2,692		5,929		4,791
FDIC insurance expense	500		235		1,300		385
Other losses	6		193		289		313
Other expense	3,765		3,784		7,221		7,865
Total non–interest expense	33,388		30,432		65,560		61,581
Income Before Income Taxes	25,943		16,632		49,815		29,871
Income tax expense (includes $0 and $52 for the three months ended June 30, 2021 and 2020, respectively, and $192 and $123 for the six months ended June 30, 2021 and 2020, respectively, related to income tax expense from reclassification items)	3,770		1,993		7,220		3,577
Net Income	$	22,173	$	14,639	$	42,595	$	26,294
Basic Earnings Per Share	$	0.50	$	0.33	$	0.97	$	0.59
Diluted Earnings Per Share	0.50		0.33		0.97		0.59

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollar Amounts in Thousands)


	Three Months Ended				Six Months Ended
	June 30				June 30
	2021		2020		2021		2020
Net Income	$	22,173	$	14,639	$	42,595	$	26,294
Other Comprehensive Income
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period	(18)		(135)		3,035		(4,100)
Income tax effect	4		28		(637)		861
Changes from derivative instruments	(14)		(107)		2,398		(3,239)
Change in securities:
Unrealized appreciation (depreciation) for the period on AFS securities	10,069		15,507		(13,816)		23,499
Accretion (amortization) from transfer of securities from available for sale to held to maturity securities	14		1		31		(29)
Reclassification adjustment for securities gains realized in income	—		(248)		(914)		(587)
Income tax effect	(2,117)		(3,205)		3,087		(4,806)
Unrealized gains (losses) on securities	7,966		12,055		(11,612)		18,077
Other Comprehensive Income (Loss), Net of Tax	7,952		11,948		(9,214)		14,838
Comprehensive Income	$	30,125	$	26,587	$	33,381	$	41,132

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statement 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		Total
Balances, April 1, 2020	$	—	$	—	$	361,019	$	260,501	$	9,322	$	630,842
Net income	—		—		—		14,639		—		14,639
Other comprehensive income, net of tax	—		—		—		—		11,948		11,948
Amortization of unearned compensation	—		—		(79)		—		—		(79)
Exercise of stock options	—		—		(98)		—		—		(98)
Stock option expense	—		—		27		—		—		27
Stock issued stock plans	—		—		218		—		—		218


Cash dividends on common stock ($0.12 per share)	—		—		—		(5,291)		—		(5,291)
Balances, June 30, 2020	$	—	$	—	$	361,087	$	269,849	$	21,270	$	652,206

Balances, April 1, 2021	$	—	$	—	$	362,613	$	316,080	$	10,686	$	689,379
Net income	—		—		—		22,173		—		22,173
Other comprehensive loss, net of tax	—		—		—		—		7,952		7,952

Amortization of unearned compensation	—		—		449		—		—		449
Exercise of stock options	—		—		116		—		—		116
Stock option expense	—		—		15		—		—		15


Stock retirement plans	—		—		(3,966)		—		—		(3,966)
Cash dividends on common stock ($0.13 per share)	—		—		—		(5,744)		—		(5,744)
Balances, June 30, 2021	$	—	$	—	$	359,227	$	332,509	$	18,638	$	710,374

Table of Contents

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)


	Six Months Ended
	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total
Balances, January 1, 2020	$	—	$	—	$	379,853	$	269,738	$	6,432	$	656,023
Net income	—		—		—		26,294		—		26,294
Other comprehensive income, net of tax	—		—		—		—		14,838		14,838
Impact of adoption of ASU No. 2016–13	—		—		—		(15,635)		—		(15,635)
Amortization of unearned compensation	—		—		122		—		—		122
Exercise of stock options	—		—		157		—		—		157
Stock option expense	—		—		77		—		—		77

Stock issued stock plans	—		—		514		—		—		514

Repurchase of outstanding stock	—		—		(19,636)		—		—		(19,636)
Cash dividends on common stock ($0.24 per share)	—		—		—		(10,548)		—		(10,548)
Balances, June 30, 2020	$	—	$	—	$	361,087	$	269,849	$	21,270	$	652,206

Balances, January 1, 2021	$	—	$	—	$	362,945	$	301,419	$	27,852	$	692,216
Net income	—		—		—		42,595		—		42,595
Other comprehensive loss, net of tax	—		—		—		—		(9,214)		(9,214)

Amortization of unearned compensation	—		—		784		—		—		784
Exercise of stock options	—		—		769		—		—		769
Stock option expense	—		—		42		—		—		42
Stock awards vested	—		—		(1,347)		—		—		(1,347)


Stock retirement plans	—		—		(3,966)		—		—		(3,966)
Cash dividends on common stock($0.25 per share)	—		—		—		(11,505)		—		(11,505)
Balances, June 30, 2021	$	—	$	—	$	359,227	$	332,509	$	18,638	$	710,374

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar Amounts in Thousands)


	Six Months Ended
	June 30
	2021		2020
Operating Activities
Net income	$	42,595	$	26,294
Items not requiring (providing) cash
Provision for (recovery of) credit losses	(1,125)		15,657
Depreciation and amortization	5,394		4,909
Share based compensation	42		77
Mortgage servicing rights income	340		(466)
Mortgage servicing rights net impairment	(1,843)		3,201
Premium amortization on securities, net	4,573		4,266
Gain on sale of investment securities	(914)		(587)
Gain on sale of mortgage loans	(10,908)		(10,093)
Proceeds from sales of loans	256,395		258,207
Loans originated for sale	(239,177)		(259,939)
Change in cash value life insurance	(1,013)		(1,111)
Gain on sale of other real estate owned	19		7
Net change in:
Interest receivable	(306)		(1,357)
Interest payable	(282)		(709)
Other assets	11,569		1,811
Other liabilities	(4,581)		661
Net cash provided by operating activities	60,778		40,828
Investing Activities
Purchases of securities available for sale	(700,359)		(207,160)
Proceeds from sales, maturities, calls and principal repayments of securities available for sale	125,616		126,826

Proceeds from maturities of securities held to maturity	14,617		16,138
Net change in interest earning time deposits	1,971		(792)
Change in FHLB stock	—		(1,161)
Net change in loans	347,010		(340,505)
Proceeds on the sale of OREO and repossessed assets	873		444
Change in premises and equipment, net	997		(2,913)

Death benefit on bank owned life insurance	266		233
Repurchase of outstanding stock	—		(19,636)

Net cash used in investing activities	(209,009)		(428,526)
Financing Activities
Net change in:
Deposits	250,493		376,597
Borrowings	(35,719)		33,458
Net change from issuance of stock	(578)		671
Net proceeds from issuance of subordinated notes	—		58,824
Dividends paid on common stock	(11,505)		(10,548)
Net cash provided by financing activities	202,691		459,002
Net Change in Cash and Cash Equivalents	54,460		71,304
Cash and Cash Equivalents, Beginning of Period	249,711		98,831

Table of Contents

HORIZON BANCORP, INC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar Amounts in Thousands)


Cash and Cash Equivalents, End of Period	$	304,171	$	170,135
Additional Supplemental Information
Interest paid	$	10,121	$	18,786
Income taxes paid	725		—
Transfer of loans to other real estate and repossessed assets	601		939

See notes to condensed consolidated financial statements

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”). Horizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. All inter–company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2021 and June 30, 2020 are not necessarily indicative of the operating results for the full year of 2021 or 2020. 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 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 2020 filed with the Securities and Exchange Commission on February 26, 2021. The condensed consolidated balance sheet of Horizon as of December 31, 2020 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 June 30, 2021, Horizon had repurchased a total of 373,323 shares at an average price per share of $15.86. In addition to the stock repurchase program, Horizon agreed to repurchase 1,000,000 shares at a price per share of $15.19 from an individual shareholder on March 6, 2020.

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				Six Months Ended
	June 30				June 30
	2021		2020		2021		2020
Basic earnings per share
Net income	$	22,173	$	14,639	$	42,595	$	26,294
Weighted average common shares outstanding	43,950,501		43,781,249		43,935,111		44,219,880
Basic earnings per share	$	0.50	$	0.33	$	0.97	$	0.59

Diluted earnings per share
Net income	$	22,173	$	14,639	$	42,595	$	26,294
Weighted average common shares outstanding	43,950,501		43,781,249		43,935,111		44,219,880
Effect of dilutive securities:
Restricted stock	106,175		7,614		104,421		40,017
Stock options	54,427		13,931		53,045		26,967
Weighted average common shares outstanding	44,111,103		43,802,794		44,092,577		44,286,864
Diluted earnings per share	$	0.50	$	0.33	$	0.97	$	0.59

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 137,705 and 137,705 shares for the three and six months ended June 30, 2021, which were not included in the computation of diluted earnings per share because they were non–dilutive. There were 504,085 and 285,588 shares for the three and six months ended June 30, 2020, which were not included in the computation of diluted earnings per share because they were non–dilutive.

Horizon has share–based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2020 Annual Report on Form 10–K. Also, the Company's shareholders approved the 2021 Omnibus Equity Incentive Plan at its Annual Meeting on May 6, 2021, adding 1.4 million additional shares to the plan and with no other significant changes from the Company's previous plan.

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 has been conducting monthly meetings to address contracts and hedge accounting relationships that reference LIBOR. All contracts referencing LIBOR as an interest rate have been identified and are in the process of being rewritten or refinanced by December 31, 2021, except for commercial loan interest rate swaps. Hedge accounting relationships referencing LIBOR will be modified by the counter parties. The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements.

Note 2 – Acquisitions

On May, 25, 2021, Horizon Bank entered into a definitive purchase and assumption agreement to acquire 14 TCF National Bank (“TCF”) branches in 11 Michigan counties with approximately $976 million in deposits and $278 million in associated loans, which are being divested by TCF Financial Corporation in connection with its merger with Huntington Bancshares Incorporated. The transaction, which is expected to be completed by the end of the third quarter of 2021, is subject to regulatory approval and other customary closing conditions and adjustments.

Table of Contents

HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 3 – Securities

The fair value of securities is as follows:


	June 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale
U.S. Treasury and federal agencies	$	191,490	$	228	$	(617)	$	191,101
State and municipal	1,090,693		27,993		(5,193)		1,113,493
Federal agency collateralized mortgage obligations	96,344		2,280		(2)		98,622
Federal agency mortgage-backed pools	165,016		2,641		(147)		167,510
Private labeled mortgage-backed pools	33,074		508		(14)		33,568
Corporate notes	85,637		1,318		(63)		86,892
Total available for sale investment securities	$	1,662,254	$	34,968	$	(6,036)	$	1,691,186
Held to maturity
State and municipal	$	144,430	$	9,176	$	—	$	153,606
Federal agency collateralized mortgage obligations	1,007		16		—		1,023
Federal agency mortgage-backed pools	3,733		175		—		3,908
Private labeled mortgage-backed pools	4,114		—		—		4,114
Total held to maturity investment securities	$	153,284	$	9,367	$	—	$	162,651


	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale
U.S. Treasury and federal agencies	$	19,750	$	—	$	(35)	$	19,715
State and municipal	803,100		35,014		(271)		837,843
Federal agency collateralized mortgage obligations	144,022		3,448		(17)		147,453
Federal agency mortgage-backed pools	114,484		4,315		—		118,799
Corporate notes	9,007		1,208		—		10,215
Total available for sale investment securities	$	1,090,363	$	43,985	$	(323)	$	1,134,025
Held to maturity
State and municipal	$	157,421	$	11,035	$	—	$	168,456
Federal agency collateralized mortgage obligations	2,661		36		—		2,697
Federal agency mortgage-backed pools	8,594		243		—		8,837
Total held to maturity investment securities	$	168,676	$	11,314	$	—	$	179,990

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2021 and December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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	June 30, 2021				December 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Within one year	$	46,747	$	46,784	$	44,206	$	44,192
One to five years	156,088		157,620		61,594		63,006
Five to ten years	362,439		366,313		136,857		145,102
After ten years	802,546		820,769		589,200		615,473
	1,367,820		1,391,486		831,857		867,773
Federal agency collateralized mortgage obligations	96,344		98,622		144,022		147,453
Federal agency mortgage–backed pools	165,016		167,510		114,484		118,799
Private labeled mortgage–backed pools	$	33,074	$	33,568	$	—	$	—
Total available for sale investment securities	$	1,662,254	$	1,691,186	$	1,090,363	$	1,134,025
Held to maturity
Within one year	$	4,314	$	4,349	$	7,302	$	7,327
One to five years	43,418		44,942		42,742		44,358
Five to ten years	73,870		78,956		82,087		88,300
After ten years	22,828		25,359		25,290		28,471
	144,430		153,606		157,421		168,456
Federal agency collateralized mortgage obligations	1,007		1,023		2,661		2,697
Federal agency mortgage–backed pools	3,733		3,908		8,594		8,837
Private labeled mortgage–backed pools	4,114		4,114		—		—
Total held to maturity investment securities	$	153,284	$	162,651	$	168,676	$	179,990

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.


	June 30, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment Securities
U.S. Treasury and federal agencies	$	96,033	$	(617)	$	—	$	—	$	96,033	$	(617)
State and municipal	346,889		(5,103)		1,435		(90)		348,324		(5,193)
Federal agency collateralized mortgage obligations	412		(2)		—		—		412		(2)
Federal agency mortgage–backed pools	77,091		(147)		—		—		77,091		(147)
Private labeled mortgage–backed pools	9,510		(14)		—		—		9,510		(14)
Corporate notes	22,169		(63)		—		—		22,169		(63)
Total temporarily impaired securities	$	552,104	$	(5,946)	$	1,435	$	(90)	$	553,539	$	(6,036)

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	December 31, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment Securities
U.S. Treasury and federal agencies	$	17,215	$	(35)	$	—	$	—	$	17,215	$	(35)
State and municipal	56,287		(242)		1,245		(29)		57,532		(271)
Federal agency collateralized mortgage obligations	6,358		(17)		—		—		6,358		(17)


Total temporarily impaired securities	$	79,860	$	(294)	$	1,245	$	(29)	$	81,105	$	(323)

No allowance for credit losses for available for sale debt securities or held to maturity securities was needed at June 30, 2021 or December 31, 2020. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $10.3 million at June 30, 2021 and $8.1 million at December 31, 2020 and is excluded from the estimate of credit losses.

The U.S. government sponsored entities and agencies and mortgage–backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses.

Based on an evaluation of available evidence, management believes the unrealized losses on state and municipal securities 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				Six Months Ended
	June 30				June 30
	2021		2020		2021		2020
Sales of securities available for sale
Proceeds	$	—	$	5,146	$	27,514	$	37,182
Gross gains	—		248		914		637
Gross losses	—		—		—		(50)

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Note 4 – Loans

The table below identifies the Company’s loan portfolio segments and classes.


Portfolio Segment						Class of Financing Receivable
Commercial						Owner occupied real estate
						Non-owner occupied real estate
						Residential spec homes
						Development & spec land
						Commercial and industrial
Real estate						Residential mortgage
						Residential construction
Mortgage warehouse						Mortgage warehouse
Consumer						Direct installment
						Indirect installment
						Home equity

Portfolio segment is defined as a level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Class of financing receivable is defined as a group of financing receivables determined on the basis of both of the following, 1) risk characteristics of the financing receivable, and 2) an entity’s method for monitoring and assessing credit risk. Generally, the Bank does not move loans from a revolving loan to a term loan other than construction loans. Construction loans are reviewed and rewritten prior to being originated as a term loan.

The following table presents total loans outstanding by portfolio class, as of June 30, 2021 and December 31, 2020:


	June 30, 2021		December 31, 2020
Commercial
Owner occupied real estate	$	475,908	$	496,306
Non–owner occupied real estate	995,314		999,636
Residential spec homes	9,215		10,070
Development & spec land	23,188		26,372
Commercial and industrial	601,002		659,887
Total commercial	2,104,627		2,192,271
Real estate
Residential mortgage	537,259		598,700
Residential construction	22,178		25,586
Mortgage warehouse	205,311		395,626
Total real estate	764,748		1,019,912
Consumer
Direct installment	36,189		38,046
Indirect installment	358,161		357,511
Home equity	255,794		259,643
Total consumer	650,144		655,200
Total loans	3,519,519		3,867,383
Allowance for credit losses	(55,649)		(57,027)
Net loans	$	3,463,870	$	3,810,356

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As of June 30, 2021 and December 31, 2020, Federal Paycheck Protection Program (“PPP”) loans totaled approximately $169.4 million and $208.9 million, respectively, and are included with commercial loans. Total loans include net deferred loan fees of $3.2 million and $1.7 million at June 30, 2021 and December 31, 2020, respectively.

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short–term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company's commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner–occupied commercial real estate loans versus non–owner occupied loans.

Real Estate and Consumer

With respect to residential loans that are secured by 1–4 family residences and are generally owner occupied, the Company generally establishes a maximum loan–to–value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1–4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Mortgage Warehousing

Horizon's mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon's agreement with the mortgage company. Each mortgage loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

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Based on these agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

Non–performing Loans

The following table presents non–accrual loans, loans past due over 90 days still on accrual, and troubled debt restructurings (“TDRs”) by class of loans:


	June 30, 2021
	Non–accrual		Loans Past Due Over 90 Days Still Accruing		Non–performing TDRs		Performing TDRs		Total Non–performing Loans		Non–accrual with no Allowance for Credit Losses
Commercial
Owner occupied real estate	$	6,847	$	—	$	603	$	—	$	7,450	$	2,378
Non–owner occupied real estate	1,020		—		303		—		1,323		1,323
Residential spec homes	—		—		—		—		—		—
Development & spec land	820		—		—		—		820		820
Commercial and industrial	694		—		58		—		752		510
Total commercial	9,381		—		964		—		10,345		5,031
Real estate
Residential mortgage	5,458		—		924		1,459		7,841		6,263
Residential construction	—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—
Total real estate	5,458		—		924		1,459		7,841		6,263
Consumer
Direct installment	18		—		—		—		18		18
Indirect installment	828		—		—		—		828		828
Home equity	2,490		—		406		394		3,290		2,896
Total consumer	3,336		—		406		394		4,136		3,742
Total	$	18,175	$	—	$	2,294	$	1,853	$	22,322	$	15,036

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	December 31, 2020
	Non–accrual		Loans Past Due Over 90 Days Still Accruing		Non–performing TDRs		Performing TDRs		Total Non–performing Loans		Non–accrual with no Allowance for Credit Losses
Commercial
Owner occupied real estate	$	10,581	$	—	$	630	$	168	$	11,379	$	6,305
Non–owner occupied real estate	237		—		330		—		567		567
Residential spec homes	—		—		—		—		—		—
Development & spec land	70		—		—		—		70		70
Commercial and industrial	1,826		—		506		—		2,332		1,847
Total commercial	12,714		—		1,466		168		14,348		8,789
Real estate
Residential mortgage	5,674		17		922		1,381		7,994		7,097
Residential construction	—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—
Total real estate	5,674		17		922		1,381		7,994		7,097
Consumer
Direct installment	12		1		—		—		13		13
Indirect installment	1,174		120		—		—		1,294		1,294
Home equity	2,568		124		222		244		3,158		2,628
Total consumer	3,754		245		222		244		4,465		3,935
Total	$	22,142	$	262	$	2,610	$	1,793	$	26,807	$	19,821

There was no interest income recognized on non–accrual loans during the three and six months ended June 30, 2021 and 2020, respectively, while the loans were in non–accrual status. Included in the $18.2 million of non–accrual loans and the $2.3 million of non–performing TDRs at June 30, 2021 were $2.5 million and $902,000, respectively, of loans acquired for which there were accretable yields recognized.

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The following table presents the payment status by class of loan, excluding non–accrual loans of $18.2 million and non–performing TDRs of $2.3 million at June 30, 2021:


	June 30, 2021
	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	$	468,458		$	—		$	—		$	—		$	—		$	468,458
Non–owner occupied real estate	993,914			—			77			—			77			993,991
Residential spec homes	9,215			—			—			—			—			9,215
Development & spec land	22,368			—			—			—			—			22,368
Commercial and industrial	599,623			445			182			—			627			600,250
Total commercial	2,093,578			445			259			—			704			2,094,282
Real estate
Residential mortgage	529,780			865			232			—			1,097			530,877
Residential construction	22,178			—			—			—			—			22,178
Mortgage warehouse	205,311			—			—			—			—			205,311
Total real estate	757,269			865			232			—			1,097			758,366
Consumer
Direct installment	36,162			2			7			—			9			36,171
Indirect installment	356,485			709			139			—			848			357,333
Home equity	252,220			500			178			—			678			252,898
Total consumer	644,867			1,211			324			—			1,535			646,402
Total	$	3,495,714		$	2,521		$	815		$	—		$	3,336		$	3,499,050
Percentage of total loans	99.90		%	0.07		%	0.02		%	0.00		%	0.10		%	100.00		%

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The following table presents the payment status by class of loan, excluding non–accrual loans of $22.1 million and non–performing TDRs of $2.6 million at December 31, 2020:


	December 31, 2020
	Current			30–59 Days Past Due			60–89 Days Past Due			90 Days or Greater Past Due			Total Past Due Loans			Total
Commercial
Owner occupied real estate	$	484,282		$	683		$	130		$	—		$	813		$	485,095
Non–owner occupied real estate	997,816			599			654			—			1,253			999,069
Residential spec homes	10,070			—			—			—			—			10,070
Development & spec land	25,552			—			750			—			750			26,302
Commercial and industrial	657,027			249			279			—			528			657,555
Total commercial	2,174,747			1,531			1,813			—			3,344			2,178,091
Real estate
Residential mortgage	590,944			905			238			17			1,160			592,104
Residential construction	25,586			—			—			—			—			25,586
Mortgage warehouse	395,626			—			—			—			—			395,626
Total real estate	1,012,156			905			238			17			1,160			1,013,316
Consumer
Direct installment	37,965			69			—			—			69			38,034
Indirect installment	354,655			1,356			206			120			1,682			356,337
Home equity	255,908			554			266			125			945			256,853
Total consumer	648,528			1,979			472			245			2,696			651,224
Total	$	3,835,431		$	4,415		$	2,523		$	262		$	7,200		$	3,842,631
Percentage of total loans	99.81		%	0.11		%	0.07		%	0.01		%	0.19		%	100.00		%

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Troubled Debt Restructurings

Loans modified as TDRs generally consist of allowing borrowers to defer scheduled principal payments and make interest only payments for a specified period of time at the stated interest rate of the original loan agreement or lower payments due to a modification of the loans' contractual terms. TDRs that continue to accrue interest are individually monitored on a monthly basis and evaluated for impairment annually and transferred to non–accrual status when it is probable that any remaining principal and interest payments due on the loan will not be collected in accordance with the contractual terms of the loan. TDRs that subsequently default are individually evaluated for impairment at the time of default.

At June 30, 2021, the types of concessions the Company has made on restructured loans have been temporary rate reductions and/or reductions in monthly payments, and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as a TDR unless the loan bears interest at a market rate. As of June 30, 2021, the Company had $4.1 million in TDRs and $1.9 million were performing according to the restructured terms and $93,000 TDRs were returned to accrual status during 2021. There were no specific reserves allocated to TDRs at June 30, 2021 based on the discounted cash flows or, when appropriate, the fair value of the collateral. These TDRs are exclusive of loans modified under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

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The following table presents TDRs by class of loan:


	June 30, 2021						December 31, 2020
	Non–accrual		Accruing		Total		Non–accrual		Accruing		Total
Commercial
Owner occupied real estate	$	603	$	—	$	603	$	630	$	168	$	798
Non–owner occupied real estate	303		—		303		330		—		330
Residential spec homes	—		—		—		—		—		—
Development & spec land	—		—		—		—		—		—
Commercial and industrial	58		—		58		506		—		506
Total commercial	964		—		964		1,466		168		1,634
Real estate
Residential mortgage	924		1,459		2,383		922		1,381		2,303
Residential construction	—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—
Total real estate	924		1,459		2,383		922		1,381		2,303
Consumer
Direct installment	—		—		—		—		—		—
Indirect installment	—		—		—		—		—		—
Home equity	406		394		800		222		244		466
Total consumer	406		394		800		222		244		466
Total	$	2,294	$	1,853	$	4,147	$	2,610	$	1,793	$	4,403

Loans Modified under the CARES Act

The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At June 30, 2021 and December 31, 2020, the Bank modified loans totaling $52.5 million and $126.7 million, respectively, which qualify for treatment under the CARES Act.

Collateral Dependent Financial Assets

A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent.

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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.


	June 30, 2021
	Real Estate		Accounts Receivable/Equipment		Other		Total		ACL Allocation
Commercial
Owner occupied real estate	$	7,341	$	109	$	—	$	7,450	$	1,267
Non–owner occupied real estate	1,323		—		—		1,323		—
Residential spec homes	—		—		—		—		—
Development & spec land	820		—		—		820		—
Commercial and industrial	—		752		—		752		160
Total commercial	9,484		861		—		10,345		1,427










Total collateral dependent loans	$	9,484	$	861	$	—	$	10,345	$	1,427


	December 31, 2020
	Real Estate		Accounts Receivable/Equipment		Other		Total		ACL Allocation
Commercial
Owner occupied real estate	$	11,309	$	114	$	—	$	11,423	$	1,605
Non–owner occupied real estate	1,032		—		—		1,032		—
Residential spec homes	—		—		—		—		—
Development & spec land	70		—		—		70		—
Commercial and industrial	2,245		210		—		2,455		252
Total commercial	14,656		324		—		14,980		1,857










Total collateral dependent loans	$	14,656	$	324	$	—	$	14,980	$	1,857

Credit Quality Indicators

Horizon Bank's processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re–evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.

•For new and renewed commercial loans, the Bank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade of the loans. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective regions (ranging from $1,000,000 to $3,500,000) 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, Senior Commercial Credit Officer (“SCCO”) or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO, SCCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO or SCCO, however, lenders must present their factual information to either the Loan Committee, CCBO or SCCO 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.

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•Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management's analysis of the adequacy of the Allowance for Credit Losses.

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non–accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non–accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.

Horizon Bank employs a nine–grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.

Risk Grade 1: Excellent (Pass)

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents or loans to any publicly held company with a current long–term debt rating of A or better and meeting defined key financial metric ranges.

Risk Grade 2: Good (Pass)

Loans to businesses that have strong financial statements containing an unmodified opinion from a CPA firm and at least three years consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five years consecutive years of profits, a five years satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities with required margins where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit histories; or loans to publicly held companies with current long–term debt ratings of Baa or better and meeting defined key financial metric ranges.

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered and meeting defined key financial metric ranges. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

•At inception, the loan was properly underwritten, did not possess an unwanted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory.

•At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

•The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

•During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

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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.

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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.

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The following tables present loans by credit grades and origination year at June 30, 2021.


June 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Commercial
Owner occupied real estate
Pass	$	29,263	$	56,383	$	56,495	$	48,945	$	43,937	$	153,980	$	39,681	$	428,684
Special Mention	—		—		1,023		1,129		8,852		11,638		—		22,642
Substandard	—		1,012		1,005		3,919		1,568		13,275		3,803		24,582
Doubtful	—		—		—		—		—		—		—		—
Total owner occupied real estate	$	29,263	$	57,395	$	58,523	$	53,993	$	54,357	$	178,893	$	43,484	$	475,908

Non–owner occupied real estate
Pass	$	69,815	$	111,666	$	109,816	$	60,224	$	133,171	$	267,245	$	166,989	$	918,926
Special Mention	—		851		1,214		29,438		4,512		12,111		303		48,429
Substandard	—		—		15,417		1,155		94		8,921		2,372		27,959
Doubtful	—		—		—		—		—		—		—		—
Total non–owner occupied real estate	$	69,815	$	112,517	$	126,447	$	90,817	$	137,777	$	288,277	$	169,664	$	995,314

Residential spec homes
Pass	$	500	$	368	$	606	$	—	$	—	$	841	$	6,900	$	9,215
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total residential spec homes	$	500	$	368	$	606	$	—	$	—	$	841	$	6,900	$	9,215

Development & spec land
Pass	$	1,445	$	563	$	563	$	1,480	$	2,169	$	12,177	$	3,247	$	21,644
Special Mention	—		—		—		—		—		190		200		390
Substandard	—		—		—		—		—		404		750		1,154
Doubtful	—		—		—		—		—		—		—		—
Total development & spec land	$	1,445	$	563	$	563	$	1,480	$	2,169	$	12,771	$	4,197	$	23,188

Commercial & industrial
Pass	$	205,256	$	85,641	$	55,244	$	50,770	$	68,524	$	63,323	$	32,927	$	561,685
Special Mention	3,152		3,455		1,086		2,394		6,996		4,508		910		22,501
Substandard	2,689		570		2,213		3,001		1,717		4,321		2,305		16,816
Doubtful	—		—		—		—		—		—		—		—
Total commercial & industrial	$	211,097	$	89,666	$	58,543	$	56,165	$	77,237	$	72,152	$	36,142	$	601,002
Total commercial	$	312,120	$	260,509	$	244,682	$	202,455	$	271,540	$	552,934	$	260,387	$	2,104,627

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June 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Real estate
Residential mortgage
Performing	$	52,716	$	103,892	$	48,617	$	61,616	$	68,983	$	193,594	$	—	$	529,418
Non–performing	—		—		377		634		—		6,830		—		7,841
Total residential mortgage	$	52,716	$	103,892	$	48,994	$	62,250	$	68,983	$	200,424	$	—	$	537,259

Residential construction
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	22,178	$	22,178
Non–performing	—		—		—		—		—		—		—		—
Total residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	22,178	$	22,178

Mortgage warehouse
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	205,311	$	205,311
Non–performing	—		—		—		—		—		—		—		—
Total mortgage warehouse	$	—	$	—	$	—	$	—	$	—	$	—	$	205,311	$	205,311
Total real estate	$	52,716	$	103,892	$	48,994	$	62,250	$	68,983	$	200,424	$	227,489	$	764,748


June 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Consumer
Direct installment
Performing	$	7,408	$	9,665	$	7,494	$	4,271	$	4,174	$	3,151	$	8	$	36,171
Non–performing	—		—		—		—		15		3		—		18
Total direct installment	$	7,408	$	9,665	$	7,494	$	4,271	$	4,189	$	3,154	$	8	$	36,189

Indirect installment
Performing	$	78,798	$	113,258	$	77,097	$	54,691	$	25,441	$	8,048	$	—	$	357,333
Non–performing	—		83		177		204		229		135		—		828
Total indirect installment	$	78,798	$	113,341	$	77,274	$	54,895	$	25,670	$	8,183	$	—	$	358,161

Home equity
Performing	$	30,630	$	60,376	$	36,093	$	28,389	$	23,158	$	68,575	$	5,283	$	252,504
Non–performing	10		38		10		84		73		1,296		1,779		3,290
Total home equity	$	30,640	$	60,414	$	36,103	$	28,473	$	23,231	$	69,871	$	7,062	$	255,794
Total consumer	$	116,846	$	183,420	$	120,871	$	87,639	$	53,090	$	81,208	$	7,070	$	650,144

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The following tables present loans by credit grades and origination year at December 31, 2020.


December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Commercial
Owner occupied real estate
Pass	$	57,726	$	65,558	$	49,455	$	49,032	$	47,480	$	127,373	$	40,027	$	436,651
Special Mention	—		1,081		5,928		10,205		4,207		12,787		325		34,533
Substandard	1,021		1,231		4,012		2,504		2,839		9,673		3,842		25,122
Doubtful	—		—		—		—		—		—		—		—
Total owner occupied real estate	$	58,747	$	67,870	$	59,395	$	61,741	$	54,526	$	149,833	$	44,194	$	496,306

Non–owner occupied real estate
Pass	$	115,667	$	120,023	$	73,669	$	133,396	$	99,674	$	208,649	$	166,986	$	918,064
Special Mention	862		1,236		28,723		1,298		2,548		13,182		4,072		51,921
Substandard	—		15,552		1,477		107		6,422		4,521		1,572		29,651
Doubtful	—		—		—		—		—		—		—		—
Total non–owner occupied real estate	$	116,529	$	136,811	$	103,869	$	134,801	$	108,644	$	226,352	$	172,630	$	999,636

Residential spec homes
Pass	$	737	$	237	$	—	$	298	$	368	$	1,177	$	7,253	$	10,070
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total residential spec homes	$	737	$	237	$	—	$	298	$	368	$	1,177	$	7,253	$	10,070

Development & spec land
Pass	$	573	$	736	$	1,522	$	2,461	$	672	$	11,971	$	6,907	$	24,842
Special Mention	—		—		—		—		—		274		—		274
Substandard	—		—		—		—		—		506		750		1,256
Doubtful	—		—		—		—		—		—		—		—
Total development & spec land	$	573	$	736	$	1,522	$	2,461	$	672	$	12,751	$	7,657	$	26,372

Commercial & industrial
Pass	$	253,953	$	63,772	$	58,978	$	88,121	$	26,044	$	70,706	$	30,845	$	592,419
Special Mention	8,779		1,164		1,088		9,306		1,835		11,870		3,040		37,082
Substandard	4,233		7,079		11,072		1,660		636		3,322		2,384		30,386
Doubtful	—		—		—		—		—		—		—		—
Total commercial & industrial	$	266,965	$	72,015	$	71,138	$	99,087	$	28,515	$	85,898	$	36,269	$	659,887
Total commercial	$	443,551	$	277,669	$	235,924	$	298,388	$	192,725	$	476,011	$	268,003	$	2,192,271

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December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Real estate
Residential mortgage
Performing	$	109,487	$	68,556	$	86,572	$	89,051	$	65,718	$	171,322	$	—	$	590,706
Non–performing	—		296		636		39		300		6,723		—		7,994
Total residential mortgage	$	109,487	$	68,852	$	87,208	$	89,090	$	66,018	$	178,045	$	—	$	598,700

Residential construction
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	25,586	$	25,586
Non–performing	—		—		—		—		—		—		—		—
Total residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	25,586	$	25,586

Mortgage warehouse
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	395,626	$	395,626
Non–performing	—		—		—		—		—		—		—		—
Total mortgage warehouse	$	—	$	—	$	—	$	—	$	—	$	—	$	395,626	$	395,626
Total real estate	$	109,487	$	68,852	$	87,208	$	89,090	$	66,018	$	178,045	$	421,212	$	1,019,912


December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Consumer
Direct installment
Performing	$	12,552	$	9,552	$	5,828	$	5,946	$	2,124	$	2,019	$	12	$	38,033
Non–performing	—		—		—		5		3		5		—		13
Total direct installment	$	12,552	$	9,552	$	5,828	$	5,951	$	2,127	$	2,024	$	12	$	38,046

Indirect installment
Performing	$	134,394	$	97,408	$	74,215	$	36,763	$	8,636	$	4,801	$	—	$	356,217
Non–performing	84		223		392		361		80		154		—		1,294
Total indirect installment	$	134,478	$	97,631	$	74,607	$	37,124	$	8,716	$	4,955	$	—	$	357,511

Home equity
Performing	$	63,946	$	42,762	$	34,807	$	27,553	$	22,450	$	59,503	$	5,464	$	256,485
Non–performing	—		9		111		74		121		1,237		1,606		3,158
Total home equity	$	63,946	$	42,771	$	34,918	$	27,627	$	22,571	$	60,740	$	7,070	$	259,643
Total consumer	$	210,976	$	149,954	$	115,353	$	70,702	$	33,414	$	67,719	$	7,082	$	655,200

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Note 5 – Allowance for Credit and Loan Losses

The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended June 30, 2021
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	42,980	$	4,229	$	1,163	$	8,814	$	57,186
Provision for credit losses on loans	(1,168)		(144)		(8)		(172)		(1,492)
PCD loan charge–offs	(6)		—		—		—		(6)
Charge–offs	(67)		—		—		(237)		(304)
Recoveries	27		23		—		215		265
Balance, end of period	$	41,766	$	4,108	$	1,155	$	8,620	$	55,649


	Three Months Ended June 30, 2020
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	32,550	$	5,654	$	1,055	$	9,181	$	48,440

Provision for credit losses on loans	6,603		202		135		117		7,057
Charge–offs	(15)		(34)		—		(526)		(575)
Recoveries	9		10		—		149		168
Balance, end of period	$	39,147	$	5,832	$	1,190	$	8,921	$	55,090


	Six Months Ended June 30, 2021
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	42,210	$	4,620	$	1,267	$	8,930	$	57,027


Provision for credit losses on loans	(240)		(600)		(112)		(173)		(1,125)
PCD loan charge–offs	(6)		—		—		—		(6)
Charge–offs	(263)		—		—		(472)		(735)
Recoveries	65		88		—		335		488
Balance, end of period	$	41,766	$	4,108	$	1,155	$	8,620	$	55,649


	Six Months Ended June 30, 2020
	Commercial		Real Estate		Mortgage Warehouse		Consumer		Total
Balance, beginning of period	$	11,996	$	923	$	1,077	$	3,671	$	17,667
Impact of adopting ASC 326	13,618		4,048		—		4,911		22,577
Provision for credit losses on loans	13,519		902		113		1,123		15,657
Charge–offs	(84)		(60)		—		(1,144)		(1,288)
Recoveries	98		19		—		360		477
Balance, end of period	$	39,147	$	5,832	$	1,190	$	8,921	$	55,090

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”).

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To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date.

The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look–back period includes January 2012 through the current period, on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.

Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit–related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.

The Company’s CECL estimate applies to a forecast that incorporates macroeconomic trends and other environmental factors. Management utilized National, Regional and Local Leading Economic Indexes, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and qualitative adjustments were utilized to reflect the forecast and other relevant factors.

The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, loan purpose, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of the borrower and concentrations, and historical or expected credit loss patterns.

Note 6 – Loan Servicing

Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1.5 billion and $1.5 billion at June 30, 2021 and December 31, 2020.

The aggregate fair value of capitalized mortgage servicing rights was approximately $14.5 million and $12.5 million at June 30, 2021 and December 31, 2020, compared to the carrying values of $14.5 million and $12.5 million at June 30, 2021 and December 31, 2020, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.


	June 30,		December 31,
	2021		2020
Mortgage servicing rights
Balance, beginning of period	$	17,644	$	15,046
Servicing rights capitalized	2,161		5,530
Amortization of servicing rights	(2,014)		(2,932)
Balance, end of period	17,791		17,644
Impairment allowance
Balance, beginning of period	(5,172)		(719)
Additions	—		(5,106)
Reductions	1,843		653
Balance, end of period	(3,329)		(5,172)
Mortgage servicing rights, net	$	14,462	$	12,472

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HORIZON BANCORP, INC AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The Bank reduced impairment by approximately $1.8 million for the six months ended June 30, 2021. The Bank recorded additional impairment of approximately $4.5 million for the year ended December 31, 2020.

Note 7 – Goodwill

The following table presents the Company’s carrying amount of goodwill as of June 30, 2021 and December 31, 2020.


	June 30,		December 31,
	2021		2020
Balance, beginning of period	$	151,238	$	151,238
Goodwill acquired during the period	—		—

Balance, end of period	$	151,238	$	151,238

In accordance with ASC 350–20, the Company conducts a goodwill impairment test at least annually, or more frequently as events occur or circumstances change that would more–likely–than–not reduce the fair value below its carrying amount. In the second quarter of 2020, the onset of the COVID–19 pandemic prompted the Company to assess qualitative and quantitative factors to determine whether it was more–likely–than–not the fair value of the Company was less than the carrying amount. The Company assessed relevant events and circumstances, including macroeconomic conditions, industry and market considerations, overall financial performance, changes in the composition or carrying amount of assets and liabilities, the market price of the Company’s common stock and other relevant facts. The Company performed both a market capitalization approach and a discounted cash flow approach to determine the fair value of the Company during the second quarter of 2020 which resulted in no goodwill impairment.

The Company updated their analysis above during the second quarter of 2021 which resulted in no goodwill impairment charges for the six months ended June 30, 2021.

Note 8 – Repurchase Agreements

The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Company’s control.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The following table shows repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements:


	June 30, 2021
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to one year		One to three years		Three to five years		Five to ten years		Beyond ten years		Total
Repurchase Agreements and repurchase-to-maturity transactions
Repurchase Agreements	$	128,453	$	—	$	—	$	—	$	—	$	—	$	128,453
Securities pledged for Repurchase Agreements
Federal agency collateralized mortgage obligations	$	47,460	$	—	$	—	$	—	$	—	$	—	$	47,460
Federal agency mortgage–backed pools	82,188		—		—		—		—		—		82,188
Total	$	129,648	$	—	$	—	$	—	$	—	$	—	$	129,648

Note 9 – Subordinated Notes

On June 24, 2020, Horizon issued $60.0 million in aggregate principal amount of 5.625% fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625% per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three–Month Term SOFR), 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 10 – Derivative Financial Instruments

Cash Flow Hedges – As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three months LIBOR and to pay interest to the counterparty at a fixed rate of 4.20% on a notional amount of $12.0 million at June 30, 2021 and December 31,

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

2020, respectively. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.62% on a notional amount of $10.0 million at December 31, 2020. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a fixed rate of 2.81% on a notional amount of $50.0 million at June 30, 2021 and December 31, 2020. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap 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 June 30, 2021, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges – Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At June 30, 2021, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan and security agreements being hedged were $459.6 million at June 30, 2021 and $442.7 million at December 31, 2020.

Other Derivative Instruments – The Company enters into non–hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At June 30, 2021, 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.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The following tables summarize the fair value of derivative financial instruments utilized by Horizon:


	Asset Derivatives			Liability Derivatives
	June 30, 2021			June 30, 2021
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	22,693	Other liabilities	$	27,901
Total derivatives designated as hedging instruments		22,693			27,901
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets	499		Other liabilities	—
Total derivatives not designated as hedging instruments		499			—
Total derivatives		$	23,192		$	27,901


	Asset Derivatives			Liability Derivatives
	December 31, 2020			December 31, 2020
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	35,388	Other liabilities	$	43,631
Total derivatives designated as hedging instruments		35,388			43,631
Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets	1,045		Other liabilities	—
Total derivatives not designated as hedging instruments		1,045			—
Total derivatives		$	36,433		$	43,631

The effect of the derivative instruments on the condensed consolidated statements of income for the three and six–month periods ending June 30 is as follows:


	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Derivatives in cash flow hedging relationship
Interest rate contracts	$	(14)	$	(107)	$	2,398	$	(3,239)

FASB Accounting Standards Codification (“ASC”) Topic 820–10–20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820–10–55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended				Six Months Ended
		June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Derivative in fair value hedging relationship
Interest rate contracts	Interest income - loans	$	(4,830)	$	(3,162)	$	12,695	$	(29,492)
Interest rate contracts	Interest income - loans	4,830		3,162		(12,695)		29,492
Total		$	—	$	—	$	—	$	—


	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended				Six Months Ended
		June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Derivative not designated as hedging relationship
Mortgage contracts	Other income - gain on sale of loans	$	696	$	(679)	$	(545)	$	364

Note 11 – Disclosures about Fair Value of Assets and Liabilities

The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:

Level 1 –Quoted prices in active markets for identical assets or liabilities

Level 2 –Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 –Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2021. 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

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Notes to Condensed Consolidated Financial Statements

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(Table Dollar Amounts in Thousands, Except Per Share Data)

curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.

Hedged loans

Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:


	June 30, 2021
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	191,101	$	—	$	191,101	$	—
State and municipal	1,113,493		—		1,113,493		—
Federal agency collateralized mortgage obligations	98,622		—		98,622		—
Federal agency mortgage–backed pools	167,510		—		167,510		—
Private labeled mortgage–backed pools	33,568		—		33,568
Corporate notes	86,892		—		86,892		—
Total available for sale securities	1,691,186		—		1,691,186		—
Interest rate swap agreements asset	22,693		—		22,693		—
Forward sale commitments	499		—		499		—
Interest rate swap agreements liability	(27,901)		—		(27,901)		—

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)


	December 31, 2020
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	19,715	$	—	$	19,715	$	—
State and municipal	837,843		—		837,843		—
Federal agency collateralized mortgage obligations	147,453		—		147,453		—
Federal agency mortgage–backed pools	118,799		—		118,799		—
Corporate notes	10,215		—		10,215		—
Total available for sale securities	1,134,025		—		1,134,025		—
Interest rate swap agreements asset	35,388		—		35,388		—
Forward sale commitments	1,045		—		1,045		—
Interest rate swap agreements liability	(43,631)		—		(43,631)		—

Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Non-interest Income
Total gains and losses from:
Hedged loans	$	(4,830)	$	(3,162)	$	12,695	$	(29,492)
Fair value interest rate swap agreements	4,830		3,162		(12,695)		29,492
Derivative loan commitments	696		(679)		(545)		364
	$	696	$	(679)	$	(545)	$	364

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)
June 30, 2021
Collateral dependent loans	$	8,918	$	—	$	—	$	8,918
Mortgage servicing rights	14,462		—		—		14,462
December 31, 2020
Collateral dependent loans	$	13,123	$	—	$	—	$	13,123
Mortgage servicing rights	12,472		—		—		12,472

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month–end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment increased by $1.8 million during the first six months of 2021 and decreased by $3.2 million during the first six months of 2020.

The following table presents qualitative information about unobservable inputs used in recurring and non–recurring Level 3 fair value measurements, other than goodwill.

June 30, 2021

Fair
Value

Valuation
Technique

Unobservable
Inputs

Range
(Weighted Average)

Collateral dependent loans

8,918

Collateral based measurement

Discount to reflect current market conditions and ultimate collectibility

0.0%-66.0% (13.8%)

Mortgage servicing rights

14,462

Discounted cash flows

Discount rate,

Constant prepayment rate,

Probability of default

8.0%-8.0% (8.0%),

9.9%-28.5% (13.6%),

0.0%-4.5%(0.5%)

December 31, 2020

Fair
Value

Valuation
Technique

Unobservable
Inputs

Range
(Weighted Average)

Collateral dependent loans

13,123

Collateral based measurement

Discount to reflect current market conditions and ultimate collectibility

0.0%-72.0%(12.4%)

Mortgage servicing rights

12,472

Discounted cash flows

Discount rate,
Constant prepayment rate,
Probability of default

7.8%-7.8% (7.8%),

11.5%-20.9%(17.5%),

0.0%-1.0%(0.8%)

Note 12 – Fair Value of Financial Instruments

The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts.

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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 June 30, 2021 and December 31, 2020. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off–balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Due from Banks – The carrying amounts approximate fair value.

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.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall.


	June 30, 2021
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and due from banks	$	304,171	$	304,171	$	—	$	—
Interest–earning time deposits	6,994		—		7,107		—
Investment securities, held to maturity	153,284		—		162,651		—
Loans held for sale	7,228		—		—		7,228
Loans (excluding loan level hedges), net	3,463,870		—		—		3,389,962
Stock in FHLB	23,023		—		23,023		—
Interest receivable	21,702		—		21,702		—
Liabilities
Non–interest bearing deposits	$	1,102,950	$	1,102,950	$	—	$	—
Interest bearing deposits	3,678,676		—		3,658,436		—
Borrowings	439,094		—		439,763		—
Subordinated notes	58,676		—		58,033		—
Junior subordinated debentures issued to capital trusts	56,662		—		53,163		—
Interest payable	2,430		—		2,430		—


	December 31, 2020
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and due from banks	$	249,711	$	249,711	$	—	$	—
Interest–earning time deposits	8,965		—		9,136		—
Investment securities, held to maturity	168,676		—		179,990		—
Loans held for sale	13,538		—		—		13,538
Loans (excluding loan level hedges), net	3,810,356		—		—		3,767,348
Stock in FHLB	23,023		—		23,023		—
Interest receivable	21,396		—		21,396		—
Liabilities
Non–interest bearing deposits	$	1,053,242	$	1,053,242	$	—	$	—
Interest bearing deposits	3,477,891		—		3,466,522		—
Borrowings	475,000		—		483,245		—
Subordinated notes	58,603		—		57,626		—
Junior subordinated debentures issued to capital trusts	56,548		—		52,676		—
Interest payable	2,712		—		2,712		—

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 13 – Accumulated Other Comprehensive Income


	June 30, 2021		December 31, 2020
Unrealized gain on securities available for sale	$	28,932	$	43,662
Unamortized loss on securities held to maturity, previously transferred from AFS	(134)		(165)
Unrealized loss on derivative instruments	(5,208)		(8,243)
Tax effect	(4,952)		(7,402)
Total accumulated other comprehensive income	$	18,638	$	27,852

Note 14 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital framework (known as “Basel III”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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 June 30, 2021 and December 31, 2020, 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 second quarter of 2021 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well capitalized status for bank holding companies.

In October 2019, the federal banking agencies finalized a new rule that will simplify capital requirements for qualified community banks that opt into the new community bank leverage ratio framework. The new framework was available to use in March 31, 2020 Call Reports or Forms FRY-9C (as applicable) for depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets, among other qualifying criteria. Horizon did not elect the new community bank leverage ratio framework.

As of March 31, 2020, the Company and Bank elected the transition option of the 2019 CECL Rule which allows banking organizations to phase in over a three–year period the day–one adverse effects of CECL on their regulatory capital ratios.

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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 June 30, 2021 and December 31, 2020 were as follows:


	Actual				Required for Capital Adequacy Purposes(1)				Required For Capital Adequacy Purposes with Capital Buffer(1)				Well Capitalized Under Prompt Corrective Action Provisions(1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2021
Total capital (to risk–weighted assets)(1)
Consolidated	$	687,957	16.65	%	$	330,550	8.00	%	$	433,847	10.50	%	N/A		N/A
Bank	573,430		14.09	%	325,581		8.00	%	427,325		10.50	%	$	406,977	10.00	%
Tier 1 capital (to risk–weighted assets)(1)
Consolidated	634,359		15.35	%	247,958		6.00	%	351,274		8.50	%	N/A		N/A
Bank	520,873		12.80	%	244,159		6.00	%	345,892		8.50	%	325,546		8.00	%
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated	519,058		12.56	%	185,968		4.50	%	289,284		7.00	%	N/A		N/A
Bank	520,873		12.80	%	183,119		4.50	%	284,852		7.00	%	264,506		6.50	%
Tier 1 capital (to average assets)(1)
Consolidated	634,359		10.76	%	235,821		4.00	%	235,821		4.00	%	N/A		N/A
Bank	520,873		8.79	%	237,030		4.00	%	237,030		4.00	%	296,287		5.00	%
December 31, 2020
Total capital (to risk–weighted assets)(1)
Consolidated	$	648,804	14.91	%	$	348,024	8.00	%	$	456,782	10.50	%	N/A		N/A
Bank	532,315		12.21	%	348,810		8.00	%	457,813		10.50	%	$	436,013	10.00	%
Tier 1 capital (to risk–weighted assets)(1)
Consolidated	607,340		13.96	%	261,018		6.00	%	369,775		8.50	%	N/A		N/A
Bank	492,221		11.29	%	261,606		6.00	%	370,609		8.50	%	348,808		8.00	%
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated	491,281		11.29	%	195,764		4.50	%	304,522		7.00	%	N/A		N/A
Bank	492,221		11.29	%	196,205		4.50	%	305,207		7.00	%	283,407		6.50	%
Tier 1 capital (to average assets)(1)
Consolidated	607,340		10.68	%	227,507		4.00	%	227,507		4.00	%	N/A		N/A
Bank	492,221		8.71	%	226,158		4.00	%	226,158		4.00	%	282,697		5.00	%
(1) As defined by regulatory agencies

Note 15 – General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operation and cash flows of the Company.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward–Looking Statements

This report contains certain forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp, Inc. (“Horizon” or the “Company”) and Horizon Bank (the “Bank”). Horizon intends such forward–looking statements to be covered by the safe harbor provisions for forward–looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward–looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward–looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward–looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward–looking statement include but are not limited to:

•COVID–19 related impact on Horizon and its customers, employees and vendors, which may depend on several factors, including the scope and continued duration of the pandemic, its influence on the financial markets, long–term and post–pandemic changes in the banking preferences and behaviors of customers, supply chain risks to the bank and its customers and actions taken by governmental authorities and other third parties in response to the pandemic;

•economic conditions and their impact on Horizon and its customers, including local and global economic recovery from the pandemic;

•changes to government regulations, including the CARES Act, on the accounting for modified loans;

•changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;

•the effect of low or negative interest rates on net interest rate margin and their impact on mortgage loan volumes and the outflow of deposits;

•loss of key Horizon personnel;

•increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks, which may have been accelerated by the pandemic;

•potential loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g. Apple Pay or Bitcoin) take a greater market share of the payment systems;

•estimates of fair value of certain of Horizon’s assets and liabilities;

•volatility and disruption in financial markets;

•prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;

•sources of liquidity;

•potential risk of environmental liability related to lending activities;

•changes in the competitive environment in Horizon’s market areas and among other financial service providers;

•legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular;

•changes in regulatory supervision and oversight, including monetary policy and capital requirements;

•changes in accounting policies or procedures as may be adopted and required by regulatory agencies;

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

•litigation, regulatory enforcement, tax, and legal compliance risk and costs, as applicable generally and specifically to the financial and fiduciary (generally and as an ESOP fiduciary) environment, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same;

•the effects and costs of governmental investigations or related actions by third parties;

•rapid technological developments and changes;

•the risks presented by cyber terrorism and data security breaches;

•the rising costs of effective cybersecurity;

•containing costs and expenses;

•the ability of the U.S. federal government to manage federal debt limits;

•the potential influence on the U.S. financial markets and economy from the effects of climate change and social justice initiatives;

•the potential influence on the U.S. financial markets and economy from material changes outside the U.S. or in overseas relations, including changes in the U.S. trade relations related to imposition of tariffs, Brexit and the phase out of the London Interbank Offered Rate (“LIBOR”), and the geopolitical risk related to the increasing tension with China, Taiwan, Russia, Iran and other countries which could lead to disruption in supply chains, logistics and overall markets; and

•the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings.

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward–looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward–looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward–looking statements, see “Risk Factors” in Item 1A of Part I of our 2020 Annual Report on Form 10–K and in the subsequent reports we file with the SEC.

Overview

Horizon Bancorp, Inc. (“Horizon” or the “Company”) is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in northern and central Indiana and southern and central Michigan through its bank subsidiary, Horizon Bank (“Horizon Bank” or the “Bank”) and other affiliated entities and Horizon Risk Management, Inc. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. Horizon Bank (formerly known as “Horizon Bank, N.A.”) was founded in 1873 as a national association, and it remained a national association until its conversion to an Indiana commercial bank effective June 23, 2017. The Bank is a full–service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly–owned subsidiary of Horizon.

Over the last 20 years, Horizon has expanded its geographic reach and experienced financial growth through a combination of both organic expansion and mergers and acquisitions. Horizon's initial operations focused on northwest Indiana, but since then, the Company has developed a presence in new markets in southern and central Michigan and northeastern and central Indiana.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

Second Quarter 2021 Highlights

•Net income grew to a record $22.2 million, up 8.6% from the linked quarter and 51.5% from the year–ago period. Diluted earnings per share (“EPS”) of $0.50 includes the $0.01 after–tax impact of expenses associated with Horizon’s agreement to acquire 14 TCF National Bank branches, approximately $976 million in deposits and approximately $278 million in loans in a financially and strategically attractive extension of Horizon’s low–cost deposit franchise in Michigan, announced in the quarter. EPS was $0.46 for the first quarter of 2021 and $0.33 for the second quarter of 2020.

•Pre–tax, pre–provision net income grew to a second–quarter record $24.5 million, up 0.9% from the linked quarter and 3.2% from the year–ago period. This non–GAAP financial measure is utilized by banks to provide a greater understanding of pre–tax profitability before giving effect to credit loss expense. (See the “Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Income” table below.)

•Net interest income was $42.6 million for the quarter, compared to $42.5 million for the first quarter of 2021 and $43.0 million for the second quarter of 2020. Reported net interest margin (“NIM”) was 3.14% and adjusted NIM was 3.13%, with reported NIM declining by 15 basis points and adjusted NIM decreasing by four basis points from the first quarter of 2021. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation of adjusted NIM.) An estimated seven basis points attributed to Federal Paycheck Protection Program (“PPP”) lending improved the margin, offset by an estimated 21 basis point compression attributed to excess liquidity held during the quarter, for both NIM and adjusted NIM.

•Horizon’s in–market consumer and commercial deposit relationships, combined with strategic pricing moves to manage deposit growth and runoff of higher–priced time deposits, contributed to continued improvement in the cost of interest bearing liabilities, which declined to 0.45% in the quarter, compared to 0.50% in the first quarter of 2021 and 0.74% in the second quarter of 2020.

•Non–interest expense was $33.4 million in the quarter, or 2.18% of average assets on an annualized basis, compared to $32.2 million, or 2.20%, in the first quarter of 2021 and $30.4 million, or 2.18%, in the second quarter of 2020.

•The efficiency ratio for the period was 57.73% compared to 57.03% for the first quarter of 2021 and 56.23% for the second quarter of 2020. The adjusted efficiency ratio was 57.45% compared to 57.97% for the first quarter of 2021 and 56.49% for the second quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below.)

•Horizon experienced an increased return on average assets (“ROAA”) of 1.45% and return on average common equity (“ROACE”) of 12.59% in the quarter, as well as adjusted ROAA of 1.46% and adjusted ROACE of 12.61%, excluding the impact of acquisition expenses and prepayment penalties, net of tax, and death benefits on bank owned life insurance. (See the “Non–GAAP Reconciliation of Return on Average Assets” and the “Non–GAAP Reconciliation of Return on Average Common Equity” tables below.)

•Horizon recorded a provision release of $1.5 million and maintained solid asset quality metrics at period end, including non–performing loans declining 10.9% during the quarter to $22.3 million, or 0.63% of total loans, substandard loans declining 4.6% to $82.5 million, or 2.3% of total loans, net charge–offs declining 81.3% to $39,000, or 0.00% of average loans for the period, and COVID–19 deferrals declining 42.7% to $52.5 million, or 1.5% of total loans.

•Total non–interest income grew to $15.2 million, up 9.6% from the linked quarter and 36.7% from the year–ago period, due to favorable impact of mortgage production, bank owned life insurance, banking fees and fiduciary activities. Following record residential lending in 2020, mortgage–related non–interest income remained strong in the second three months of 2021, with gain on mortgage loan sales of $5.6 million and net mortgage servicing income of $1.5 million. The Horizon Bank (the “Bank”) originated $173.0 million in mortgage loans during the quarter, with 61% of volume from purchases, as Horizon continued to focus residential lending on prime borrowers in Indiana and Michigan markets.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

•Loans, excluding PPP lending, totaled $3.36 billion on June 30, 2021, were lower reflecting cash reserves maintained by many current and prospective commercial borrowers and retail households through the quarter. Loans, excluding PPP lending, totaled $3.42 billion on March 31, 2021 and $3.69 billion on June 30, 2020.

•Horizon’s book value per share and tangible book value per share increased to all–time highs of $16.16 and $12.24, respectively. (See the “Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share” table below.)

•As part of the Company's annual branch performance review and a third–party analysis of the Bank's retail network, Horizon's Board of Directors approved the permanent closure of nine Indiana branch locations and one in Michigan to occur on August 27, 2021. Access to Horizon branch that provides the same products and services will be in close proximity of the consolidated branch in addition to alternative delivery channels are available, including online banking and mobile banking. Any impairment to fixed assets is not estimated to be material.

•Horizon increased cash dividends paid in the quarter by 8.3% to $0.13 per share, as previously announced. As of June 30, 2021, in excess of $129 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value.

Coronavirus Update/Status

The coronavirus (“COVID–19”) pandemic has placed significant health, economic and other major pressure throughout the communities we serve, in the states of Indiana and Michigan, the United States and the entire world. We have implemented a number of procedures in response to the pandemic to support the safety and well–being of our employees, customers and shareholders that continue through the date of this report:

•Employees

◦Safety and well–being of employees and families is our first priority.

◦Installed sneeze guards, customer directional signage, implemented mask requirements, and continuing with sanitizing and social distancing protocols.

◦Substantial reduction in percentage of employees working remotely.

•Consumers

◦100% of our branch locations are now open to lobby traffic.

◦Payment relief

▪Approximately $2 million consumer and mortgage loans have been modified as of June 30, 2021, down from $6 million as of December 31, 2020 and $63 million as of June 30, 2020.

▪Continued to provide new loans to qualified applicants.

▪Provided mortgage loan education programs.

▪Provided additional financial assistance in the form of fee waivers and a freeze on all debt collection activities.

•Businesses

◦Preferred SBA Lender

▪Active participant in all SBA loan programs (PPP, 7a, Express and 504).

◦Payment Relief Programs

▪Approximately $51 million in commercial loans with payment extensions as of June 30, 2021, down from $121 million as of December 31, 2020 and $470 million as of June 30, 2020.

▪Processed and received approval for 4,003 PPP loans, funding approximately $450.1 million.

▪As of June 30, 2021, $276.5 million of PPP loans had been forgiven.

•Communities

◦Increased volunteerism in support of local not–for–profit entities.

◦Contributed over $300,000 during 2020 to COVID–19 related not–for–profit efforts (local food banks, United Way, housing).

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

◦Participated in community conference calls related to COVID–19.

◦Partnered with local neighborhood housing partnerships to provide funding for low to moderate income families.

◦Partnered with local Certified Development Corporations to provide capital to small businesses.

Financial Summary


	For the Three Months Ended
	June 30,			March 31,			June 30,
Net Interest Income and Net Interest Margin	2021			2021			2020
Net interest income	$	42,632		$	42,538		$	42,996
Net interest margin	3.14		%	3.29		%	3.47		%
Adjusted net interest margin	3.13		%	3.17		%	3.35		%


	For the Three Months Ended
	June 30,		March 31,		June 30,
Asset Yields and Funding Costs	2021		2021		2020
Interest earning assets	3.48	%	3.66	%	4.05	%
Interest bearing liabilities	0.45	%	0.50	%	0.74	%


	For the Three Months Ended
Non–interest Income and Mortgage Banking Income	June 30,		March 31,		June 30,
	2021		2021		2020
Total non–interest income	$	15,207	$	13,873	$	11,125
Gain on sale of mortgage loans	5,612		5,296		6,620
Mortgage servicing income net of impairment	1,503		213		(2,760)


	For the Three Months Ended
	June 30,			March 31,			June 30,
Non–interest Expense	2021			2021			2020
Total non–interest expense	$	33,388		$	32,172		$	30,432
Annualized non–interest expense to average assets	2.18		%	2.20		%	2.18		%


	At or for the Three Months Ended
Credit Quality	June 30,		March 31,		June 30,
	2021		2021		2020
Allowance for credit losses to total loans	1.58	%	1.56	%	1.38	%
Non–performing loans to total loans	0.63	%	0.68	%	0.70	%
Percent of net charge–offs to average loans outstanding for the period	0.00	%	0.01	%	0.01	%

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020


Allowance for	December 31,			Net Reserve				June 30,
Credit Losses	2020			1Q20		2Q20			2021
Commercial	$	42,210		$	770	$	(1,214)		$	41,766
Retail Mortgage	4,620			(391)		(121)			4,108
Warehouse	1,267			(104)		(8)			1,155
Consumer	8,930			(116)		(194)			8,620
Allowance for Credit Losses (“ACL”)	$	57,027		$	159	$	(1,537)		$	55,649
ACL/Total Loans	1.47		%						1.58		%

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2020 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for Credit Losses

The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.

The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast. Loan losses are estimated using the fair value of collateral for collateral–dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged–off against the ACL. Recoveries of amounts previously charged–off are credited to the ACL. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID–19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350–10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At June 30, 2021, Horizon had core deposit intangibles of $21.2 million subject to amortization and $151.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID–19, Horizon assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock and other relevant events. Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and stress testing performed. At the conclusion of the most recent qualitative assessment, the Company determined that as of June 30, 2021, it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the COVID–19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.

Mortgage Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing–retained basis. Capitalized servicing rights are amortized into non–interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market–based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage–servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, from time–to–time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815–10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

change in fair value of both the hedge instruments and the underlying loans is recorded in non–interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.

Valuation Measurements

Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post–retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.

Financial Condition

On June 30, 2021, Horizon’s total assets were $6.1 billion, an increase of approximately $222.6 million compared to December 31, 2020. The increase was primarily in investment securities available for sale of $557.2 million and cash and due from banks of $54.5 million. These increases were offset by a decrease in net loans of $346.5 million, investments held to maturity of $15.4 million and other assets of $13.9 million.

Investment securities were comprised of the following as of (dollars in thousands):


	June 30, 2021				December 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
U.S. Treasury and federal agencies	$	191,490	$	191,101	$	19,750	$	19,715
State and municipal	1,090,693		1,113,493		803,100		837,843
Federal agency collateralized mortgage obligations	96,344		98,622		144,022		147,453
Federal agency mortgage–backed pools	165,016		167,510		114,484		118,799
Private labeled mortgage–backed pools	33,074		33,568		—		—
Corporate notes	85,637		86,892		9,007		10,215
Total available for sale investment securities	$	1,662,254	$	1,691,186	$	1,090,363	$	1,134,025
Held to maturity
State and municipal	$	144,430	$	153,606	$	157,421	$	168,456
Federal agency collateralized mortgage obligations	1,007		1,023		2,661		2,697
Federal agency mortgage–backed pools	3,733		3,908		8,594		8,837
Private labeled mortgage–backed pools	4,114		4,114		—		—
Total held to maturity investment securities	$	153,284	$	162,651	$	168,676	$	179,990

Investment securities available for sale increased $557.2 million since December 31, 2020 to $1.7 billion as of June 30, 2021. This increase was due to additional purchases to increase earning assets.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

Gross loans decreased $354.2 million since December 31, 2020 to $3.5 billion as of June 30, 2021. Mortgage warehouse, commercial, residential mortgage, loans held for sale and consumer decreased $190.3 million, $87.6 million, $64.8 million, $6.3 million and $5.1 million, respectively. PPP loans decreased $39.4 million since December 31, 2020 to $169.4 million as of June 30, 2021.

Total deposits increased $250.5 million since December 31, 2020 to $4.8 billion as of June 30, 2021. This increase was primarily due to Federal stimulus payments to consumers and funds from the origination of PPP loans.

Total borrowings decreased from $475.0 million as of December 31, 2020 to $439.1 million as of June 30, 2021. At June 30, 2021, the Company had $178.5 million in short-term funds borrowed compared to $315.5 million at December 31, 2020. During the second quarter of 2021, the Bank paid–off $50.0 million in long–term Federal Home Loan Bank of Indianapolis advances which resulted in a prepayment penalty of $125,000.

Stockholders’ equity totaled $710.4 million at June 30, 2021 compared to $692.2 million at December 31, 2020. The increase in stockholders’ equity during the period was due to the generation of net income, offset by dividends paid and a decrease in accumulated other comprehensive income during the period. Book value per common share at June 30, 2021 increased to $16.16 compared to $15.78 at December 31, 2020.

Results of Operations

Overview

Consolidated net income for the three–month period ended June 30, 2021 was $22.2 million, or $0.50 diluted earnings per share, compared to $14.6 million, or $0.33 diluted earnings per share for the same period in 2020. The increase in net income for the three–month period ended June 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $4.1 million and a decrease in credit loss expense of $8.5 million, offset by an increase in non–interest expense of $3.0 million, an increase in income tax expense of $1.8 million and a decrease in net interest income of $364,000. Excluding acquisition expenses, gain on sale of investment securities, death benefit on bank owned life insurance and prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the second quarter of 2021 was $22.2 million, or $0.50 diluted earnings per share, compared to $14.4 million, or $0.32 diluted earnings per share for the second quarter of 2020.

Consolidated net income for the six–month period ended June 30, 2021 was $42.6 million, or $0.97 diluted earnings per share, compared to $26.3 million, or $0.59 diluted earnings per share for the same period in 2020. The increase in net income for the six–month period ended June 30, 2021 when compared to the same prior year period reflects an increase in non–interest income of $5.9 million, an increase in net interest income of $1.2 million and a decrease in credit loss expense of $16.8 million, offset by increases in non–interest expense of $4.0 million and income tax expense of $3.6 million. Excluding acquisition expenses, gain on sale of investment securities, death benefits on bank owned life insurance and prepayment penalties on borrowings (“adjusted net income”), adjusted net income for the six–month period ended June 30, 2021 was $41.9 million, or $0.95 diluted earnings per share, compared to $25.6 million, or $0.57 diluted earnings per share for the six–month period ended June 30, 2020.

Net Interest Income

The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread, which affects the net interest margin. Volume refers to the average dollar levels of interest earning assets and interest bearing liabilities. Net interest spread refers to the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin refers to net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities.

Net interest income during the three months ended June 30, 2021 was $42.6 million, a decrease of $364,000 from the $43.0 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 57 basis points to 3.48% for the three months ended June 30, 2021 from 4.05% for the three months ended June 30, 2020. Interest income decreased $2.9 million from $50.3 million for the three months ended June 30, 2020 to $47.4 million for the same

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

period in 2021. The decrease in interest income was due to a decrease in yield as interest earning assets reprice during the current low rate environment. Interest income from acquisition–related purchase accounting adjustments was $230,000 for the three months ending June 30, 2021 compared to $1.6 million for the same period of 2020.

Rates paid on interest bearing liabilities decreased by 29 basis points for the three–month period ended June 30, 2021 compared to the same period in 2020. Interest expense decreased $2.6 million when compared to the three–month period ended June 30, 2020 to $4.8 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 33 basis points while the cost of average borrowings decreased 20 basis points. Average balances of interest bearing deposits increased $381.1 million and average balances of borrowings decreased $164.4 million for the three-month period ended June 30, 2021 when compared to the same period in 2020.

The net interest margin decreased 33 basis points from 3.47% for the three–month period ended June 30, 2020 to 3.14% for the same period in 2021. The decrease in the margin for the three–month period ended June 30, 2021 compared to the same period in 2020 was due to a decrease in the yield on interest earning assets, offset by a decrease in the cost of interest bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.13% for the three-month period ending June 30, 2021 compared to 3.35% for the same period in 2020.

The net interest margin was impacted due to PPP lending and high level of cash held during the second quarter of 2021. Horizon estimates that the PPP loans increased the net interest margin by seven basis points for the second quarter of 2021. This assumes these PPP loans were not included in average interest earning assets or interest income and were primarily funded by the growth in non–interest bearing deposits. In addition, Horizon estimates that the high level of cash held on the balance sheet compressed the net interest margin by 21 basis points for the second quarter of 2021. This assumes that the high level of cash was not included in average interest earning assets or interest income and was excluded from non–interest bearing deposits.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

The following are the average balance sheets for the three months ending (dollars in thousands):


	Average Balance Sheets
	(Dollar Amount in Thousands, Unaudited)
		Three Months Ended						Three Months Ended
		June 30, 2021						June 30, 2020
		Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	Assets
	Interest earning assets
	Federal funds sold	$	359,184	$	98	0.11	%	$	62,832	$	17	0.11	%
	Interest earning deposits	29,584		44		0.60	%	20,278		61		1.21	%
	Investment securities – taxable	645,139		2,386		1.48	%	481,552		2,243		1.87	%
	Investment securities – non–taxable (1)	1,054,703		5,656		2.72	%	647,375		4,105		3.15	%
	Loans receivable (2) (3)	3,570,774		39,236		4.43	%	3,900,599		43,918		4.54	%
	Total interest earning assets	5,659,384		47,420		3.48	%	5,112,636		50,344		4.05	%
	Non–interest earning assets
	Cash and due from banks	84,469						84,297
	Allowance for credit losses	(57,196)						(48,611)
	Other assets	455,850						472,373
	Total average assets	$	6,142,507					$	5,620,695
	Liabilities and Stockholders’ Equity
	Interest bearing liabilities
	Interest bearing deposits	$	3,680,796	$	2,053	0.22	%	$	3,299,661	$	4,506	0.55	%
	Borrowings	453,856		1,296		1.15	%	618,274		2,074		1.35	%
	Subordinated notes	58,653		881		6.02	%	4,527		58		5.15	%
	Junior subordinated debentures issued to capital trusts	56,627		558		3.95	%	52,835		710		5.40	%
	Total interest bearing liabilities	4,249,932		4,788		0.45	%	3,975,297		7,348		0.74	%
	Non–interest bearing liabilities
	Demand deposits	1,139,068						924,890
	Accrued interest payable and other liabilities	46,855						71,018
	Stockholders’ equity	706,652						649,490
	Total average liabilities and stockholders’ equity	$	6,142,507					$	5,620,695

	Net interest income/spread			$	42,632	3.03	%			$	42,996	3.31	%
	Net interest income as a percent of average interest earning assets (1)					3.14	%					3.47	%

(1)	Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)	Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)	Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

Net interest income during the six months ended June 30, 2021 was $85.2 million, an increase of $1.2 million from the $83.9 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 68 basis points to 3.57% for the six months ended June 30, 2021 from 4.25% for the six months ended June 30, 2020. Interest income decreased $7.0 million from $102.0 million for the six months ended June 30, 2020 to $95.0 million for the same period in 2021. Average interest earning assets during the six months ended June 30, 2021 increased $620.7 million to $5.6 billion compared to $4.9 billion during the six months ended June 30, 2020. Interest income from acquisition–related purchase accounting adjustments was $1.8 million for the six months ended June 30, 2021 compared to $3.0 million for the same period of 2020.

Rates paid on interest bearing liabilities decreased 46 basis points for the six–month period ended June 30, 2021 compared to the same period in 2020. Interest expense decreased $8.2 million when compared to the six–month period ended June 30, 2020 to $9.8 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost of average interest bearing deposits decreased 50 basis points while the cost of average borrowings decreased 40 basis points. Average balances of interest bearing deposits increased $340.4 million and average balances of borrowings decreased $110.2 million for the six–month period ended June 30, 2021 when compared to the same period in 2020.

The net interest margin decreased 30 basis points from 3.51% for the six–month period ended June 30, 2020 to 3.21% for the same period in 2021. The decrease in the margin for the six–month period ended June 30, 2021 compared to the same period in 2020 was due to a decrease in the yield of interest earning assets, offset by a decrease in the cost of interest bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments and prepayment penalties on borrowings (“adjusted net interest margin”), the margin would have been 3.15% for the six–month period ended June 30, 2021 compared to 3.39% for the same period in 2020.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020


	Average Balance Sheets
	(Dollar Amount in Thousands, Unaudited)
		Six Months Ended						Six Months Ended
		June 30, 2021						June 30, 2020
		Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	Assets
	Interest earning assets
	Federal funds sold	$	313,467	$	164	0.11	%	$	43,903	$	113	0.52	%
	Interest earning deposits	27,567		90		0.66	%	23,391		163		1.40	%
	Investment securities – taxable	528,250		3,822		1.46	%	491,360		4,943		2.02	%
	Investment securities – non–taxable (1)	1,005,855		10,879		2.76	%	618,080		7,903		3.16	%
	Loans receivable (2) (3)	3,674,977		80,054		4.41	%	3,752,654		88,876		4.78	%
	Total interest earning assets	5,550,116		95,009		3.57	%	4,929,388		101,998		4.25	%
	Non–interest earning assets
	Cash and due from banks	84,866						81,203
	Allowance for credit losses	(57,486)						(36,588)
	Other assets	462,401						459,184
	Total average assets	$	6,039,897					$	5,433,187
	Liabilities and Stockholders’ Equity
	Interest bearing liabilities
	Interest bearing deposits	$	3,602,882	$	4,396	0.25	%	$	3,262,492	$	12,222	0.75	%
	Borrowings	465,502		2,565		1.11	%	575,702		4,312		1.51	%
	Subordinated debentures	58,635		1,761		6.06	%	2,264		58		5.15	%
	Junior subordinated debentures issued to capital trusts	56,599		1,117		3.98	%	52,801		1,485		5.66	%
	Total interest bearing liabilities	4,183,618		9,839		0.47	%	3,893,259		18,077		0.93	%
	Non–interest bearing liabilities
	Demand deposits	1,101,377						820,997
	Accrued interest payable and other liabilities	52,850						63,393
	Stockholders’ equity	702,052						655,538
	Total average liabilities and stockholders’ equity	$	6,039,897					$	5,433,187
	Net interest income/spread			$	85,170	3.10	%			$	83,921	3.32	%
	Net interest income as a percent of average interest earning assets (1)					3.21	%					3.51	%

(1)	Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)	Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)	Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

Credit Loss Expense

Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio. During the three–month period ended June 30, 2021, a provision reversal of $1.5 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $7.1 million for the same period of 2020. During the three–month period ended June 30, 2021, commercial loan net charge–offs were $46,000, residential mortgage loan net recoveries were $23,000 and consumer loan net charge–offs were $22,000.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

During the six–month period ended June 30, 2021, a provision reversal of $1.1 million was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to a provision expense of $15.7 million for the same period of 2020. During the six–month period ended June 30, 2021, commercial loan net charge–offs were $204,000, residential mortgage loan net recoveries were $88,000 and consumer net charge–offs were $137,000.

The ACL balance at June 30, 2021 was $55.6 million, or 1.58% of total loans compared to an ACL balance of $57.0 million at December 31, 2020 or 1.47% of total loans. The increase in the ACL to total loans ratio was primarily due to a decrease in loans from December 31, 2020, including a decrease in PPP loans of $39.4 million which do not require a related ACL balance.

As of June 30, 2021, non–performing loans totaled $22.3 million, which reflects a 6 basis point decrease in non–performing loans to total loans, or a $4.5 million decrease from $26.8 million in non–performing loans as of December 31, 2020. Non–performing commercial loans decreased by $4.0 million, non–performing real estate loans decreased by $153,000 and non–performing consumer loans decreased by $329,000 at June 30, 2021 compared to December 31, 2020.

The Bank has elected (i) to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and (ii) to suspend any determination of a loan modified as a result of the effects of COVID–19 pandemic as being a TDR, including impairment for accounting purposes. At June 30, 2021, the Bank modified loans totaling $52.5 million which qualify for treatment under the CARES Act. The following is a summary of loan modifications related to the COVID–19 pandemic by type of loan.


Type of Loan	#	Net Balance	% of Total Modifications		% of Portfolio
Commercial	20	$50.8	96.8	%	2.4	%
Mortgage (Retained Only)	10	$1.1	2.1	%	0.2	%
Indirect Auto	4	$0.0	0.0	%	0.0	%
Consumer Direct	4	$0.5	1.0	%	0.0	%
Consumer Revolving	2	$0.1	0.1	%	0.8	%
Total	40	$52.5	100.0	%	1.6	%

Mortgage (Serviced Only)	27

Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.5 million at June 30, 2021 compared to $1.9 million at December 31, 2020.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

Non–interest Income

The following is a summary of changes in non–interest income for the three months ending June 30, 2021 and 2020 (table dollar amounts in thousands):


	Three Months Ended
	June 30,				Amount		Percent
	2021		2020		Change		Change
Non–interest Income
Service charges on deposit accounts	$	2,157	$	1,888	$	269	14.2	%
Wire transfer fees	222		230		(8)		(3.5)	%
Interchange fees	2,892		2,327		565		24.3	%
Fiduciary activities	1,961		1,765		196		11.1	%
Gain on sale of investment securities	—		248		(248)		(100.0)	%
Gain on sale of mortgage loans	5,612		6,620		(1,008)		(15.2)	%
Mortgage servicing net of impairment	1,503		(2,760)		4,263		(154.5)	%
Increase in cash surrender value of bank owned life insurance	502		557		(55)		(9.9)	%
Death benefit on bank owned life insurance	266		—		266		0.0	%
Other income	92		250		(158)		(63.2)	%
Total non–interest income	$	15,207	$	11,125	$	4,082	36.7	%

Total non–interest income was $4.1 million higher during the second quarter of 2021 compared to the same period of 2020. Residential mortgage loan activity during the second quarter of 2021 generated $5.6 million of income from the gain on sale of mortgage loans, down from $6.6 million for the same period in 2020 due to a lower volume of loans sold, offset by an increase in the percentage gain on loans sold. Mortgage servicing rights, net of impairment, increased $4.3 million during the second quarter of 2021 compared to the same period of 2020 primarily due to the reversal of $1.6 million in impairment charges during the second quarter of 2021. Interchange fees, service charges on deposit accounts and death benefit on bank owned life insurance increased $565,000, $269,000, $266,000, respectively, when comparing the second quarter of 2021 to the same period of 2020.

The following is a summary of changes in non–interest income for the six months ending June 30, 2021 and 2020 (table dollar amounts in thousands):


	Six Months Ended
	June 30,				Amount		Percent
	2021		2020		Change		Change
Non–interest Income
Service charges on deposit accounts	$	4,391	$	4,334	$	57	1.3	%
Wire transfer fees	477		401		76		19.0	%
Interchange fees	5,232		4,223		1,009		23.9	%
Fiduciary activities	3,704		4,293		(589)		(13.7)	%
Gain on sale of investment securities	914		587		327		55.7	%
Gain on sale of mortgage loans	10,908		10,093		815		8.1	%
Mortgage servicing net of impairment	1,716		(2,735)		4,451		(162.7)	%
Increase in cash surrender value of bank owned life insurance	1,013		1,111		(98)		(8.8)	%
Death benefit on bank owned life insurance	266		233		33		14.2	%
Other income	459		648		(189)		(29.2)	%
Total non–interest income	$	29,080	$	23,188	$	5,892	25.4	%

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

Total non–interest income was $5.9 million higher for the six–month period ended June 30, 2021 compared to the same period of 2020. Residential mortgage loan activity during the six–month period ended June 30, 2021 generated $10.9 million of income from the gain on sale of mortgage loans, up from $10.1 million for the same period in 2020 due to an increase in the percentage gain on loans sold. Mortgage servicing rights, net of impairment, increased $4.5 million during the six–month period ended June 30, 2021 compared to the same period of 2020 due to the reversal of $1.8 million in impairment charges during the six–month period ended June 30, 2021 compared to impairment charges of $3.2 million during the same period in 2020. Interchange fees increased $1.0 million during the six–month period ended June 30, 2021 compared to the same period of 2020.

Non–interest Expense

The following is a summary of changes in non–interest expense for the three months ending June 30, 2021 and 2020 (table dollar amounts in thousands):


	Three Months Ended
	June 30,								June 30,
	2021								2020								Adjusted
	Actual			Acquisition Expenses		Adjusted			Actual			Acquisition Expenses		Adjusted			Amount Change		Percent Change
Non–interest Expense
Salaries and employee benefits	$	17,730		$	—	$	17,730		$	15,629		$	—	$	15,629		$	2,101	13.4	%
Net occupancy expenses	3,084			—		3,084			3,190			—		3,190			(106)		(3.3)	%
Data processing	2,388			—		2,388			2,432			—		2,432			(44)		(1.8)	%
Professional fees	588			(51)		537			518			—		518			19		3.7	%
Outside services and consultants	2,220			(187)		2,033			1,759			—		1,759			274		15.6	%
Loan expense	3,107			—		3,107			2,692			—		2,692			415		15.4	%
FDIC deposit insurance	500			—		500			235			—		235			265		112.8	%
Other losses	6			—		6			193			—		193			(187)		(96.9)	%
Other expenses	3,765			(4)		3,761			3,784			—		3,784			(23)		(0.6)	%
Total non–interest expense	$	33,388		$	(242)	$	33,146		$	30,432		$	—	$	30,432		$	2,714	8.9	%
Annualized Non–interest Exp. to Avg. Assets	2.18		%			2.16		%	2.18		%			2.18		%

Total non–interest expense was $3.0 million higher for the second quarter of 2021 when compared to the second quarter of 2020. Increases in salaries and employee benefits, outside services and consultants, loan expense and FDIC insurance expense were offset in part by decreases in other losses and net occupancy expenses. Salaries and benefits expense for the three months ended June 30, 2020 did not include accruals related to annual bonus payments, while a normalized level of annual bonus accruals were recorded for the three months ended June 30, 2021. Excluding acquisition expenses, total non–interest expense increased by $2.7 million in the second quarter when compared to the same period in 2020.

Annualized non–interest expense as a percent of average assets was 2.18% for the three months ended June 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.16% and 2.18% for the three months ended June 30, 2021 and 2020, respectively.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

The following is a summary of changes in non–interest expense for the six months ending June 30, 2021 and 2020 (table dollar amounts in thousands):


	Six Months Ended
	June 30,								June 30,
	2021								2020								Adjusted
	Actual			Acquisition Expenses		Adjusted			Actual			Acquisition Expenses		Adjusted			Amount Change		Percent Change
Non–interest Expense
Salaries and employee benefits	$	34,601		$	—	$	34,601		$	32,220		$	—	$	32,220		$	2,381	7.4	%
Net occupancy expenses	6,402			—		6,402			6,442			—		6,442			(40)		(0.6)	%
Data processing	4,764			—		4,764			4,837			—		4,837			(73)		(1.5)	%
Professional fees	1,132			(51)		1,081			1,054			—		1,054			27		2.6	%
Outside services and consultants	3,922			(187)		3,735			3,674			—		3,674			61		1.7	%
Loan expense	5,929			—		5,929			4,791			—		4,791			1,138		23.8	%
FDIC deposit insurance	1,300			—		1,300			385			—		385			915		237.7	%
Other losses	289			—		289			313			—		313			(24)		(7.7)	%
Other expenses	7,221			(4)		7,217			7,865			—		7,865			(648)		(8.2)	%
Total non–interest expense	$	65,560		$	(242)	$	65,318		$	61,581		$	—	$	61,581		$	3,737	6.1	%
Annualized Non–interest Exp. to Avg. Assets	2.19		%			2.18		%	2.28		%			2.28		%

Total non–interest expense was $4.0 million higher for the six–month period ended June 30, 2021 compared to the same period of 2020. Increases in salaries and employee benefits, loan expenses and FDIC insurance expense were offset in part by a decrease in other expense. Salaries and benefits expense for the six–month period ended June 30, 2020 did not include accruals related to annual bonus payments, while a normalized level of annual bonus accruals were recorded for the six–month period ended June 30, 2021. Excluding acquisition expenses, total non–interest expense increased $3.7 million for the six–month period ended June 30, 2021 compared to the same period of 2020.

Annualized non–interest expense as a percent of average assets was 2.19% and 2.28% for the six–month period ended June 30, 2021 and 2020, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percent of average assets was 2.18% and 2.28% for the six–month period ended June 30, 2021 and 2020, respectively.

Income Taxes

Income tax expense totaled $3.8 million for the second quarter of 2021, an increase of $1.8 million when compared to the second quarter of 2020. The increase in income tax expense in the second quarter of 2021 compared to the second quarter of 2020 was primarily due to an increase in income before taxes of $9.3 million.

Income tax expense totaled $7.2 million for the six–month period ended June 30, 2021, an increase of $3.6 million when compared to the same period of 2020. The increase in income tax expense was primarily due to an increase in income before taxes of $19.9 million.

Liquidity

The Bank maintains a stable base of core deposits provided by long–standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans,

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At June 30, 2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $890.6 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $1.04 billion at December 31, 2020. The Bank had approximately $1.2 billion of unpledged investment securities at June 30, 2021 compared to $632.4 million at December 31, 2020.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2021. Stockholders’ equity totaled $710.4 million as of June 30, 2021, compared to $692.2 million as of December 31, 2020. For the six months ended June 30, 2021, the ratio of average stockholders’ equity to average assets was 11.62% compared to 11.82% for the twelve months ended December 31, 2020. The increase in stockholders’ equity during the period was the result of net income recorded during the period offset in part by a decrease in accumulated other comprehensive income and dividends declared.

Horizon paid common stock dividends in the amount of $0.25 per share during the first six months of 2021 and $0.24 per share for the same period of 2020. The dividend payout ratio (dividends as a percent of basic earnings per share) was 25.8% and 40.7% for the first six months of 2021 and 2020, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2020.

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

Use of Non–GAAP Financial Measures

Certain information set forth in this quarterly report on Form 10–Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non–GAAP financial measures relating to net income, diluted earnings per share, net interest margin, the allowance for credit losses, tangible stockholders’ equity, tangible book value per share, the return on average assets, the return on average common equity, and pre–tax pre–provision net income. In each case, we have identified special circumstances that we consider to be adjustments and have excluded them, to show the impact of such events as acquisition–related purchase accounting adjustments, among others we have identified in our reconciliations. Horizon believes that these non–GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and other adjustments. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.


Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
	Three Months Ended										Six Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,		June 30,		June 30,
	2021		2021		2020		2020		2020		2021		2020
Net income as reported	$	22,173	$	20,422	$	21,893	$	20,312	$	14,639	$	42,595	$	26,294
Acquisition expenses	242		—		—		—		—		242		—
Tax effect	(51)		—		—		—		—		(51)		—
Net income excluding acquisition expenses	22,364		20,422		21,893		20,312		14,639		42,786		26,294
(Gain)/loss on sale of investment securities	—		(914)		(2,622)		(1,088)		(248)		(914)		(587)
Tax effect	—		192		551		228		52		192		123
Net income excluding (gain)/loss on sale of investment securities	22,364		19,700		19,822		19,452		14,443		42,064		25,830
Death benefit on bank owned life insurance (“BOLI”)	(266)		—		—		(31)		—		(266)		(233)
Net income excluding death benefit on BOLI	22,098		19,700		19,822		19,421		14,443		41,798		25,597
Prepayment penalties on borrowings	125		—		3,804		—		—		125		—
Tax effect	(26)		—		(799)		—		—		(26)		—
Net income excluding prepayment penalties on borrowings	22,197		19,700		22,827		19,421		14,443		41,897		25,597
Adjusted net income	$	22,197	$	19,700	$	22,827	$	19,421	$	14,443	$	41,897	$	25,597

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020


Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
	Three Months Ended										Six Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,		June 30,		June 30,
	2021		2021		2020		2020		2020		2021		2020
Diluted earnings per share (“EPS”) as reported	$	0.50	$	0.46	$	0.50	$	0.46	$	0.33	$	0.97	$	0.59
Acquisition expenses	0.01		—		—		—		—		0.01		—
Tax effect	—		—		—		—		—		—		—
Diluted EPS excluding acquisition expenses	0.51		0.46		0.50		0.46		0.33		0.98		0.59
(Gain)/loss on sale of investment securities	—		(0.02)		(0.06)		(0.02)		(0.01)		(0.02)		(0.01)
Tax effect	—		—		0.01		0.01		—		—		—
Diluted EPS excluding (gain)/loss on investment securities	0.51		0.44		0.45		0.45		0.32		0.96		0.58
Death benefit on BOLI	(0.01)		—		—		—		—		(0.01)		(0.01)
Diluted EPS excluding death benefit on BOLI	0.50		0.44		0.45		0.45		0.32		0.95		0.57
Prepayment penalties on borrowings	—		—		0.09		—		—		—		—
Tax effect	—		—		(0.02)		—		—		—		—
Diluted EPS excluding prepayment penalties on borrowings	0.50		0.44		0.52		0.45		0.32		0.95		0.57
Adjusted Diluted EPS	$	0.50	$	0.44	$	0.52	$	0.45	$	0.32	$	0.95	$	0.57


Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
	Three Months Ended										Six Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,		June 30,		June 30,
	2021		2021		2020		2020		2020		2021		2020
Pre–tax income	$	25,943	$	23,872	$	23,860	$	24,638	$	16,632	$	49,815	$	29,871
Credit loss expense (reversal)	(1,492)		367		3,042		2,052		7,057		(1,125)		15,657
Pre–tax, pre–provision net income	$	24,451	$	24,239	$	26,902	$	26,690	$	23,689	$	48,690	$	45,528
Pre–tax, pre–provision net income	$	24,451	$	24,239	$	26,902	$	26,690	$	23,689	$	48,690	$	45,528
Acquisition expenses	242		—		—		—		—		242		—
(Gain)/loss on sale of investment securities	—		(914)		(2,622)		(1,088)		(248)		(914)		(587)
Death benefit on bank owned life insurance	(266)		—		—		(31)		—		(266)		(233)
Prepayment penalties on borrowings	125		—		3,804		—		—		125		—
Adjusted pre–tax, pre–provision net income	$	24,552	$	23,325	$	28,084	$	25,571	$	23,441	$	47,877	$	44,708

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020


Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
	Three Months Ended															Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2021			2021			2020			2020			2020			2021			2020
Net interest income as reported	$	42,632		$	42,538		$	43,622		$	43,397		$	42,996		$	85,170		$	83,921
Average interest earning assets	5,659,384			5,439,634			5,365,888			5,251,611			5,112,636			5,550,116			4,929,388
Net interest income as a percentage of average interest earning assets (“Net Interest Margin”)	3.14		%	3.29		%	3.34		%	3.39		%	3.47		%	3.21		%	3.51		%
Net interest income as reported	$	42,632		$	42,538		$	43,622		$	43,397		$	42,996		$	85,170		$	83,921
Acquisition–related purchase accounting adjustments (“PAUs”)	(230)			(1,579)			(2,461)			(1,488)			(1,553)			(1,809)			(2,987)
Prepayment penalties on borrowings	125			—			3,804			—			—			125			—
Adjusted net interest income	$	42,527		$	40,959		$	44,965		$	41,909		$	41,443		$	83,486		$	80,934
Adjusted net interest margin	3.13		%	3.17		%	3.44		%	3.27		%	3.35		%	3.15		%	3.39		%


Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
	June 30,		March 31,		December 31,		September 30,		June 30,
	2021		2021		2020		2020		2020
Total stockholders’ equity	$	710,374	$	689,379	$	692,216	$	670,293	$	652,206
Less: Intangible assets	172,398		173,296		174,193		175,107		176,020
Total tangible stockholders’ equity	$	537,976	$	516,083	$	518,023	$	495,186	$	476,186
Common shares outstanding	43,950,720		43,949,189		43,880,562		43,874,353		43,821,878
Book value per common share	$	16.16	$	15.69	$	15.78	$	15.28	$	14.88
Tangible book value per common share	$	12.24	$	11.74	$	11.81	$	11.29	$	10.87

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020


Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
	Three Months Ended															Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2021			2021			2020			2020			2020			2021			2020
Non–interest expense as reported	$	33,388		$	32,172		$	36,453		$	33,407		$	30,432		$	65,560		$	61,581
Net interest income as reported	42,632			42,538			43,622			43,397			42,996			85,170			83,921
Non–interest income as reported	$	15,207		$	13,873		$	19,733		$	16,700		$	11,125		$	29,080		$	23,188
Non–interest expense/(Net interest income + Non–interest income) ("Efficiency Ratio")	57.73		%	57.03		%	57.54		%	55.59		%	56.23		%	57.38		%	57.49		%

Non–interest expense as reported	$	33,388		$	32,172		$	36,453		$	33,407		$	30,432		$	65,560		$	61,581
Acquisition expenses	(242)			—			—			—			—			(242)			—
Non–interest expense excluding acquisition expenses	33,146			32,172			36,453			33,407			30,432			65,318			61,581
Net interest income as reported	42,632			42,538			43,622			43,397			42,996			85,170			83,921
Prepayment penalties on borrowings	125			—			3,804			—			—			125			—
Net interest income excluding prepayment penalties on borrowings	42,757			42,538			47,426			43,397			42,996			85,295			83,921
Non–interest income as reported	15,207			13,873			19,733			16,700			11,125			29,080			23,188
(Gain)/loss on sale of investment securities	—			(914)			(2,622)			(1,088)			(248)			(914)			(587)
Death benefit on bank owned life insurance ("BOLI")	(266)			—			—			(31)			—			(266)			(233)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI	$	14,941		$	12,959		$	17,111		$	15,581		$	10,877		$	27,900		$	22,368
Adjusted efficiency ratio	57.45		%	57.97		%	56.48		%	56.64		%	56.49		%	57.70		%	57.94		%

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020


Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
	Three Months Ended															Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2021			2021			2020			2020			2020			2021			2020
Average assets	$	6,142,507		$	5,936,149		$	5,864,086		$	5,768,691		$	5,620,695		$	6,039,897		$	5,433,187
Return on average assets ("ROAA") as reported	1.45		%	1.40		%	1.49		%	1.40		%	1.05		%	1.42		%	0.97		%
Acquisition expenses	0.02			—			—			—			—			0.01			—
Tax effect	—			—			—			—			—			—			—
ROAA excluding acquisition expenses	1.47			1.40			1.49			1.40			1.05			1.43			0.97
(Gain)/loss on sale of investment securities	—			(0.06)			(0.18)			(0.08)			(0.02)			(0.03)			(0.02)
Tax effect	—			0.01			0.04			0.02			—			0.01			—
ROAA excluding (gain)/loss on sale of investment securities	1.47			1.35			1.35			1.34			1.03			1.41			0.95
Death benefit on bank owned life insurance ("BOLI")	(0.02)			—			—			—			—			(0.01)			(0.01)
ROAA excluding death benefit on BOLI	1.45			1.35			1.35			1.34			1.03			1.40			0.94
Prepayment penalties on borrowings	0.01			—			0.26			—			—			—			—
Tax effect	—			—			(0.05)			—			—			—			—
ROAA excluding prepayment penalties on borrowings	1.46			1.35			1.56			1.34			1.03			1.40			0.94
Adjusted ROAA	1.46		%	1.35		%	1.56		%	1.34		%	1.03		%	1.40		%	0.94		%

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020


Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
	Three Months Ended															Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2021			2021			2020			2020			2020			2021			2020
Average common equity	$	706,652		$	697,401		$	680,857		$	668,797		$	649,490		$	702,052		$	655,538
Return on average common equity ("ROACE") as reported	12.59		%	11.88		%	12.79		%	12.08		%	9.07		%	12.23		%	8.07		%
Merger expenses	0.14			—			—			—			—			0.07			—
Tax effect	(0.03)			—			—			—			—			(0.01)			—
ROACE excluding merger expenses	12.70			11.88			12.79			12.08			9.07			12.29			8.07
(Gain)/loss on sale of investment securities	—			(0.53)			(1.53)			(0.65)			(0.15)			(0.26)			(0.18)
Tax effect	—			0.11			0.32			0.14			0.03			0.06			0.04
ROACE excluding (gain)/loss on sale of investment securities	12.70			11.46			11.58			11.57			8.95			12.09			7.93
Death benefit on bank owned life insurance ("BOLI")	(0.15)			—			—			(0.02)			—			(0.08)			(0.07)
ROACE excluding death benefit on BOLI	12.55			11.46			11.58			11.55			8.95			12.01			7.86
Prepayment penalties on borrowings	0.07			—			2.22			—			—			0.04			—
Tax effect	(0.01)			—			(0.47)			—			—			(0.01)			—
ROACE excluding prepayment penalties on borrowings	12.61			11.46			13.33			11.55			8.95			12.04			7.86
Adjusted ROACE	12.61		%	11.46		%	13.33		%	11.55		%	8.95		%	12.04		%	7.86		%

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2021 and 2020

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2020 Annual Report on Form 10–K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2020 Annual Report on Form 10–K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of disclosure controls and procedures as of June 30, 2021, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a–15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended June 30, 2021, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

ITEM 1. LEGAL PROCEEDINGS

Horizon and its subsidiaries are involved in various legal proceedings incidental to the conduct of their business. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form 10–K for the fiscal year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Unregistered Sales of Equity Securities: Not Applicable

(b)Use of Proceeds: Not Applicable

(c)Repurchase of Our Equity Securities: Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

ITEM 6. EXHIBITS

(a) Exhibits


Exhibit No.	Description	Location
10.1	2021 Omnibus Equity Incentive Plan	Incorporated by reference to Appendix A to Registrant's definitive proxy statement for 2021 Annual Meeting of Shareholders
10.2	Form of Restricted Stock Award Agreement (time–based)	Incorporated by reference to Exhibit 10.2 to Registrant's Form 8–K filed on May 11, 2021
10.3	Form of Restricted Stock Award Agreement (performance–based)	Incorporated by reference to Exhibit 10.3 to Registrant's Form 8–K filed on May 11, 2021
10.4	Form of Restricted Stock Unit Award Agreement (time–based)	Incorporated by reference to Exhibit 10.4 to Registrant's Form 8–K filed on May 11, 2021
10.5	Form of Restricted Stock Unit Award Agreement (performance–based)	Incorporated by reference to Exhibit 10.5 to Registrant's Form 8–K filed on May 11, 2021
10.6	Form of Stock Option Award Agreement (time–based)	Incorporated by reference to Exhibit 10.6 to Registrant's Form 8–K filed on May 11, 2021
31.1	Certification of Craig M. Dwight	Attached
31.2	Certification of Mark E. Secor	Attached
32	Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached
101	Inline Interactive Data Files	Attached
104	The cover page from the Company’s Quarterly Report on Form 10–Q for the quarter ended June 30, 2021, has been formatted in Inline XBRL	Within the Inline XBRL document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						HORIZON BANCORP, INC.

August 3, 2021						/s/ Craig M. Dwight
Date						Craig M. Dwight
						Chief Executive Officer

August 3, 2021						/s/ Mark E. Secor
Date						Mark E. Secor
						Chief Financial Officer