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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 March 31, 2021
OR
☐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)
Indiana35-1562417
(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 classTrading
Symbol(s)		Name of each exchange
on which registered
Common stock, no par valueHBNCThe 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: 43,949,189 shares of Common Stock, no par value, at April 29, 2021.

Table of Contents
HORIZON BANCORP, INC.
FORM 10–Q
INDEX



2
Table of Contents
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS




HORIZON BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
March 31,
2021		December 31,
2020
(Unaudited)
Assets
Cash and due from banks$529,336 $249,711 
Interest earning time deposits7,983 8,965 
Investment securities, available for sale1,262,175 1,134,025 
Investment securities, held to maturity (fair value of $170,949 and $179,990)
161,650 168,676 
Loans held for sale7,798 13,538 
Loans, net of allowance for credit losses of $57,186 and $57,027
3,607,250 3,810,356 
Premises and equipment, net92,109 92,416 
Federal Home Loan Bank stock23,023 23,023 
Goodwill151,238 151,238 
Other intangible assets22,058 22,955 
Interest receivable20,951 21,396 
Cash value of life insurance97,262 96,751 
Other assets72,695 93,564 
Total assets$6,055,528 $5,886,614 
Liabilities
Deposits
Non–interest bearing$1,133,412 $1,053,242 
Interest bearing3,588,404 3,477,891 
Total deposits4,721,816 4,531,133 
Borrowings481,488 475,000 
Subordinated notes58,640 58,603 
Junior subordinated debentures issued to capital trusts56,604 56,548 
Interest payable1,772 2,712 
Other liabilities45,829 70,402 
Total liabilities5,366,149 5,194,398 
Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares
— — 
Common stock, no par value, Authorized 99,000,000 shares
Issued 43,974,258 and 43,905,631 shares, Outstanding 43,949,189 and 43,880,562 shares
— — 
Additional paid-in capital362,613 362,945 
Retained earnings316,080 301,419 
Accumulated other comprehensive income10,686 27,852 
Total stockholders’ equity689,379 692,216 
Total liabilities and stockholders’ equity$6,055,528 $5,886,614 
See notes to condensed consolidated financial statements
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HORIZON BANCORP, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)

Three Months Ended
March 31,
20212020
Interest Income
Loans receivable$40,818 $44,958 
Investment securities – taxable1,548 2,898 
Investment securities – tax exempt5,223 3,798 
Total interest income47,589 51,654 
Interest Expense
Deposits2,343 7,716 
Borrowed funds1,269 2,238 
Subordinated notes880 — 
Junior subordinated debentures issued to capital trusts559 775 
Total interest expense5,051 10,729 
Net Interest Income42,538 40,925 
Credit loss expense367 8,600 
Net Interest Income after Credit Loss Expense42,171 32,325 
Non–interest Income
Service charges on deposit accounts2,234 2,446 
Wire transfer fees255 171 
Interchange fees2,340 1,896 
Fiduciary activities1,743 2,528 
Gains on sale of investment securities (includes $914 and $339 for the three months ended March 31, 2021 and 2020, respectively, related to accumulated other comprehensive earnings reclassifications)
914 339 
Gain on sale of mortgage loans5,296 3,473 
Mortgage servicing income net of impairment213 25 
Increase in cash value of bank owned life insurance511 554 
Death benefit on bank owned life insurance— 233 
Other income367 398 
Total non–interest income13,873 12,063 
Non–interest Expense
Salaries and employee benefits16,871 16,591 
Net occupancy expenses3,318 3,252 
Data processing2,376 2,405 
Professional fees544 536 
Outside services and consultants1,702 1,915 
Loan expense2,822 2,099 
FDIC insurance expense800 150 
Other losses283 120 
Other expense3,456 4,081 
Total non–interest expense32,172 31,149 
Income Before Income Taxes23,872 13,239 
Income tax expense (includes $192 and $71 for the three months ended March 31, 2021 and 2020, respectively, related to income tax expense from reclassification items)
3,450 1,584 
Net Income$20,422 $11,655 
Basic Earnings Per Share$0.46 $0.26 
Diluted Earnings Per Share0.46 0.26 
See notes to condensed consolidated financial statements
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HORIZON BANCORP, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollar Amounts in Thousands)

Three Months Ended
March 31
20212020
Net Income$20,422 $11,655 
Other Comprehensive Income
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period3,053 (3,965)
Income tax effect(641)833 
Changes from derivative instruments2,412 (3,132)
Change in securities:
Unrealized appreciation (depreciation) for the period on AFS securities(23,885)7,992 
Accretion (amortization) from transfer of securities from available for sale to held to maturity securities17 (30)
Reclassification adjustment for securities gains realized in income(914)(339)
Income tax effect5,204 (1,601)
Unrealized gains (losses) on securities(19,578)6,022 
Other Comprehensive Income (Loss), Net of Tax(17,166)2,890 
Comprehensive Income$3,256 $14,545 
See notes to condensed consolidated financial statements
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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, January 1, 2020$— $— $379,853 $269,738 $6,432 $656,023 
Net income— — — 11,655 — 11,655 
Other comprehensive income, net of tax— — — — 2,890 2,890 
Amortization of unearned compensation— — 200 — — 200 
Exercise of stock options— — 255 — — 255 
Stock option expense— — 50 — — 50 
Stock issued stock plans— — 297 — — 297 
Repurchase of outstanding stock— — (19,636)— — (19,636)
Cash dividends on common stock ($0.12 per share)
— — — (5,257)— (5,257)
Balances, March 31, 2020$— $— $361,019 $260,501 $9,322 $630,842 
Balances, January 1, 2021$— $— $362,945 $301,419 $27,852 $692,216 
Net income— — — 20,422 — 20,422 
Other comprehensive loss, net of tax— — — — (17,166)(17,166)
Amortization of unearned compensation— — 335 — — 335 
Exercise of stock options— — 653 — — 653 
Stock option expense— — 27 — — 27 
Stock awards vested— — (1,347)— — (1,347)
Cash dividends on common stock ($0.12 per share)
— — — (5,761)— (5,761)
Balances, March 31, 2021$— $— $362,613 $316,080 $10,686 $689,379 

See notes to condensed consolidated financial statements

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HORIZON BANCORP, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar Amounts in Thousands)

Three Months Ended
March 31
20212020
Operating Activities
Net income$20,422 $11,655 
Items not requiring (providing) cash
Provision for credit losses367 8,600 
Depreciation and amortization2,657 2,610 
Share based compensation27 50 
Mortgage servicing rights income23 (347)
Mortgage servicing rights net impairment(236)322 
Premium amortization on securities, net2,224 1,997 
Gain on sale of investment securities(914)(339)
Gain on sale of mortgage loans(5,296)(3,473)
Proceeds from sales of loans137,060 68,892 
Loans originated for sale(126,024)(67,576)
Change in cash value life insurance(511)(554)
Gain on sale of other real estate owned— (8)
Net change in:
Interest receivable445 1,054 
Interest payable(940)(290)
Other assets9,223 6,068 
Other liabilities(5,156)(484)
Net cash provided by operating activities33,371 28,177 
Investing Activities
Purchases of securities available for sale(230,708)(129,405)
Proceeds from sales, maturities, calls and principal repayments of securities available for sale76,869 71,395 
Proceeds from maturities of securities held to maturity6,623 6,708 
Net change in interest earning time deposits982 (784)
Net change in loans202,290 (68,685)
Proceeds on the sale of OREO and repossessed assets507 155 
Change in premises and equipment, net(1,118)(2,030)
Death benefit on bank owned life insurance— 233 
Repurchase of outstanding stock— (19,636)
Net cash provided by (used in) investing activities55,445 (142,049)
Financing Activities
Net change in:
Deposits190,683 (48,731)
Borrowings6,581 154,935 
Net change from issuance of stock(694)552 
Net proceeds from issuance of subordinated notes— — 
Dividends paid on common stock(5,761)(5,257)
Net cash provided by financing activities190,809 101,499 
Net Change in Cash and Cash Equivalents279,625 (12,373)
Cash and Cash Equivalents, Beginning of Period249,711 98,831 
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HORIZON BANCORP, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar Amounts in Thousands)
Cash and Cash Equivalents, End of Period$529,336 $86,458 
Additional Supplemental Information
Interest paid$5,991 $11,019 
Income taxes paid— — 
Transfer of loans to other real estate and repossessed assets449 609 
See notes to condensed consolidated financial statements

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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)

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 March 31, 2021 and March 31, 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 March 31, 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
March 31
20212020
Basic earnings per share
Net income$20,422 $11,655 
Weighted average common shares outstanding43,919,549 44,658,512 
Basic earnings per share$0.46 $0.26 
Diluted earnings per share
Net income $20,422 $11,655 
Weighted average common shares outstanding43,919,549 44,658,512 
Effect of dilutive securities:
Restricted stock102,048 39,845 
Stock options50,984 58,359 
Weighted average common shares outstanding44,072,581 44,756,716 
Diluted earnings per share$0.46 $0.26 

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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)
There were 138,010 shares for the three months ended March 31, 2021, which were not included in the computation of diluted earnings per share because they were non–dilutive. There were 293,665 shares for the three months ended March 31, 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.
Accounting Guidance Issued But Not Yet Adopted
FASB ASU No. 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
The FASB has issued ASU 2020–04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rates on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:
•A change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria.
•When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.
The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022.
ASU 2020–04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform.
The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through December 31, 2022 will not have a material impact on the consolidated financial statements.

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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)
Note 2 – Securities
The fair value of securities is as follows:
March 31, 2021
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Available for sale
U.S. Treasury and federal agencies$40,155 $— $(553)$39,602 
State and municipal992,461 22,182 (9,592)1,005,051 
Federal agency collateralized mortgage obligations116,072 3,019 (3)119,088 
Federal agency mortgage-backed pools84,609 2,866 (124)87,351 
Corporate notes10,015 1,072 (4)11,083 
Total available for sale investment securities$1,243,312 $29,139 $(10,276)$1,262,175 
Held to maturity
State and municipal$151,474 $9,109 $— $160,583 
Federal agency collateralized mortgage obligations1,959 22 (2)1,979 
Federal agency mortgage-backed pools8,217 171 (1)8,387 
Total held to maturity investment securities$161,650 $9,302 $(3)$170,949 

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 municipal803,100 35,014 (271)837,843 
Federal agency collateralized mortgage obligations144,022 3,448 (17)147,453 
Federal agency mortgage-backed pools114,484 4,315 — 118,799 
Corporate notes9,007 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 obligations2,661 36 — 2,697 
Federal agency mortgage-backed pools8,594 243 — 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 March 31, 2021 and December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
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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)
March 31, 2021December 31, 2020
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Available for sale
Within one year$48,715 $48,714 $44,206 $44,192 
One to five years72,803 74,114 61,594 63,006 
Five to ten years204,419 207,260 136,857 145,102 
After ten years716,694 725,648 589,200 615,473 
1,042,631 1,055,736 831,857 867,773 
Federal agency collateralized mortgage obligations116,072 119,088 144,022 147,453 
Federal agency mortgage–backed pools84,609 87,351 114,484 118,799 
Total available for sale investment securities$1,243,312 $1,262,175 $1,090,363 $1,134,025 
Held to maturity
Within one year$6,303 $6,329 $7,302 $7,327 
One to five years43,736 45,317 42,742 44,358 
Five to ten years77,214 82,247 82,087 88,300 
After ten years24,221 26,690 25,290 28,471 
151,474 160,583 157,421 168,456 
Federal agency collateralized mortgage obligations1,959 1,979 2,661 2,697 
Federal agency mortgage–backed pools8,217 8,387 8,594 8,837 
Total held to maturity investment securities$161,650 $170,949 $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.
March 31, 2021
Less than 12 Months12 Months or MoreTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Investment Securities
U.S. Treasury and federal agencies$37,697 $(553)$— $— $37,697 $(553)
State and municipal459,377 (9,485)1,458 (107)460,835 (9,592)
Federal agency collateralized mortgage obligations2,380 (5)— — 2,380 (5)
Federal agency mortgage-backed pools12,081 (125)— — 12,081 (125)
Corporate notes996 (4)— — 996 (4)
Total temporarily impaired securities$512,531 $(10,172)$1,458 $(107)$513,989 $(10,279)

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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
Less than 12 Months12 Months or MoreTotal
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 municipal56,287 (242)1,245 (29)57,532 (271)
Federal agency collateralized mortgage obligations6,358 (17)— — 6,358 (17)
Federal agency mortgage–backed pools— — — — — — 
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 March 31, 2021 or December 31, 2020. Accrued interest receivable on available for sale debt securities and held to maturity securities totaled $8.7 million at March 31, 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
March 31
20212020
Sales of securities available for sale
Proceeds$27,514 $32,036 
Gross gains914 389 
Gross losses— (50)



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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)
Note 3 – Loans
The table below identifies the Company’s loan portfolio segments and classes.
Portfolio SegmentClass of Financing Receivable
CommercialOwner occupied real estate
Non-owner occupied real estate
Residential spec homes
Development & spec land
Commercial and industrial
Real estateResidential mortgage
Residential construction
Mortgage warehouseMortgage warehouse
ConsumerDirect 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 March 31, 2021:

March 31,
2021		December 31,
2020
Commercial
Owner occupied real estate$482,687 $496,306 
Non–owner occupied real estate998,304 999,636 
Residential spec homes10,131 10,070 
Development & spec land26,384 26,372 
Commercial and industrial660,352 659,887 
Total commercial2,177,858 2,192,271 
Real estate
Residential mortgage558,374 598,700 
Residential construction23,555 25,586 
Mortgage warehouse266,246 395,626 
Total real estate848,175 1,019,912 
Consumer
Direct installment35,622 38,046 
Indirect installment352,189 357,511 
Home equity250,592 259,643 
Total consumer638,403 655,200 
Total loans3,664,436 3,867,383 
Allowance for credit losses(57,186)(57,027)
Net loans$3,607,250 $3,810,356 
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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)
As of March 31, 2021 and December 31, 2020, loans originated under the Federal Paycheck Protection Program (“PPP”) totaled approximately $252.3 million and $208.9 million, respectively, and are included with commercial loans. Total loans include net deferred loan fees of $5.0 million and $1.7 million at March 31, 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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HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)

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

Non–performing Loans

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

March 31, 2021
Non–accrualLoans 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$9,945 $— $603 $— $10,548 $5,441 
Non–owner occupied real estate225 — 316 — 541 541 
Residential spec homes— — — — — — 
Development & spec land70 — — — 70 70 
Commercial and industrial1,585 — 58 — 1,643 1,294 
Total commercial11,825 — 977 — 12,802 7,346 
Real estate
Residential mortgage5,427 71 940 1,478 7,916 7,797 
Residential construction— — — — — — 
Mortgage warehouse— — — — — — 
Total real estate5,427 71 940 1,478 7,916 7,797 
Consumer
Direct installment8 26 — — 34 34 
Indirect installment853 34 — — 887 887 
Home equity2,587 136 354 350 3,427 3,427 
Total consumer3,448 196 354 350 4,348 4,348 
Total$20,700 $267 $2,271 $1,828 $25,066 $19,491 

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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
Non–accrualLoans 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 estate237 — 330 — 567 567 
Residential spec homes— — — — — — 
Development & spec land70 — — — 70 70 
Commercial and industrial1,826 — 506 — 2,332 1,847 
Total commercial12,714 — 1,466 168 14,348 8,789 
Real estate
Residential mortgage5,674 17 922 1,381 7,994 7,097 
Residential construction— — — — — — 
Mortgage warehouse— — — — — — 
Total real estate5,674 17 922 1,381 7,994 7,097 
Consumer
Direct installment12 1 — — 13 13 
Indirect installment1,174 120 — — 1,294 1,294 
Home equity2,568 124 222 244 3,158 2,628 
Total consumer3,754 245 222 244 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 months ended March 31, 2021 and 2020 while the loans were in non–accrual status. Included in the $20.7 million of non–accrual loans and the $2.3 million of non–performing TDRs at March 31, 2021 were $2.4 million and $907,000, respectively, of loans acquired for which there were accretable yields recognized.

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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 table presents the payment status by class of loan, excluding non–accrual loans of $20.7 million and non–performing TDRs of $2.3 million at March 31, 2021:

March 31, 2021
Current30–59 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$471,589 $550 $— $— $550 $472,139 
Non–owner occupied real estate996,904 859 — — 859 997,763 
Residential spec homes10,131 — — — — 10,131 
Development & spec land25,564 750 — — 750 26,314 
Commercial and industrial658,555 105 49 — 154 658,709 
Total commercial2,162,743 2,264 49 — 2,313 2,165,056 
Real estate
Residential mortgage550,699 431 806 71 1,308 552,007 
Residential construction23,555 — — — — 23,555 
Mortgage warehouse266,246 — — — — 266,246 
Total real estate840,500 431 806 71 1,308 841,808 
Consumer
Direct installment35,481 99 8 26 133 35,614 
Indirect installment350,692 547 63 34 644 351,336 
Home equity246,683 543 289 136 968 247,651 
Total consumer632,856 1,189 360 196 1,745 634,601 
Total$3,636,099 $3,884 $1,215 $267 $5,366 $3,641,465 
Percentage of total loans99.85 %0.11 %0.03 %0.01 %0.15 %100.00 %

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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 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
Current30–59 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 estate997,816 599 654 — 1,253 999,069 
Residential spec homes10,070 — — — — 10,070 
Development & spec land25,552 — 750 — 750 26,302 
Commercial and industrial657,027 249 279 — 528 657,555 
Total commercial2,174,747 1,531 1,813 — 3,344 2,178,091 
Real estate
Residential mortgage590,944 905 238 17 1,160 592,104 
Residential construction25,586 — — — — 25,586 
Mortgage warehouse395,626 — — — — 395,626 
Total real estate1,012,156 905 238 17 1,160 1,013,316 
Consumer
Direct installment37,965 69 — — 69 38,034 
Indirect installment354,655 1,356 206 120 1,682 356,337 
Home equity255,908 554 266 125 945 256,853 
Total consumer648,528 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 loans99.81 %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 March 31, 2021, the type 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 March 31, 2021, the Company had $4.1 million in TDRs and $1.8 million were performing according to the restructured terms and no TDRs were returned to accrual status during 2021. There were no specific reserves allocated to TDRs at March 31, 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 Conronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

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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 table presents TDRs by class of loan:
March 31, 2021December 31, 2020
Non–accrualAccruingTotalNon–accrualAccruingTotal
Commercial
Owner occupied real estate$603 $— $603 $630 $168 $798 
Non–owner occupied real estate316 — 316 330 — 330 
Residential spec homes— — — — — — 
Development & spec land— — — — — — 
Commercial and industrial58 — 58 506 — 506 
Total commercial977 — 977 1,466 168 1,634 
Real estate
Residential mortgage940 1,478 2,418 922 1,381 2,303 
Residential construction— — — — — — 
Mortgage warehouse— — — — — — 
Total real estate940 1,478 2,418 922 1,381 2,303 
Consumer
Direct installment— — — — — — 
Indirect installment— — — — — — 
Home equity354 350 704 222 244 466 
Total consumer354 350 704 222 244 466 
Total$2,271 $1,828 $4,099 $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 March 31, 2021 and December 31, 2020, the Bank modified loans totaling $91.6 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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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses.
March 31, 2021
Real EstateAccounts Receivable/EquipmentOtherTotalACL
Allocation
Commercial
Owner occupied real estate$10,404 $145 $— $10,549 $1,600 
Non–owner occupied real estate541 — — 541 — 
Residential spec homes— — — — — 
Development & spec land70 — — 70 — 
Commercial and industrial— 1,643 — 1,643 195 
Total commercial11,015 1,788 — 12,803 1,795 
Total collateral dependent loans$11,015 $1,788 $— $12,803 $1,795 

December 31, 2020
Real EstateAccounts Receivable/EquipmentOtherTotalACL
Allocation
Commercial
Owner occupied real estate$11,309 $114 $— $11,423 $1,605 
Non–owner occupied real estate1,032 — — 1,032 — 
Residential spec homes— — — — — 
Development & spec land70 — — 70 — 
Commercial and industrial2,245 210 — 2,455 252 
Total commercial14,656 324 — 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 or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCBO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCBO, however, lenders must present their factual information to either the Loan Committee or the CCBO when recommending an upgrade.
•The CCBO, or a designee, meets periodically with loan officers to discuss the status of past due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.
•Monthly, senior management meets as members of the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate
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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)
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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(Unaudited)
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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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(Table Dollar Amounts in Thousands, Except Per Share Data)
Risk Grade 7: Doubtful
One or more of the following characteristics may be present in loans classified Doubtful:
•Loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of principal highly improbable.
•The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.
•The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.
•The borrower meets defined key financial metric ranges.
Risk Grade 8: Loss
Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all of a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.


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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 present loans by credit grades and origination year at March 31, 2021.
March 31, 202120212020201920182017PriorRevolving LoansTotal
Commercial
Owner occupied real estate
Pass$9,140 $58,133 $66,526 $50,807 $44,193 $166,293 $39,369 $434,461 
Special Mention— — 1,053 1,226 9,358 12,043 — 23,680 
Substandard— 1,016 1,020 3,919 2,484 12,306 3,801 24,546 
Doubtful— — — — — — — — 
Total owner occupied real estate$9,140 $59,149 $68,599 $55,952 $56,035 $190,642 $43,170 $482,687 
Non–owner occupied real estate
Pass$30,379 $112,865 $108,782 $72,116 $130,971 $296,725 $163,134 $914,972 
Special Mention— 857 1,225 29,458 1,285 15,270 4,022 52,117 
Substandard— — 16,883 1,158 99 10,769 2,306 31,215 
Doubtful— — — — — — — — 
Total non–owner occupied real estate$30,379 $113,722 $126,890 $102,732 $132,355 $322,764 $169,462 $998,304 
Residential spec homes
Pass$500 $335 $628 $— $— $1,360 $7,308 $10,131 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total residential spec homes$500 $335 $628 $— $— $1,360 $7,308 $10,131 
Development & spec land
Pass$42 $569 $724 $1,480 $2,193 $12,613 $7,051 $24,672 
Special Mention— — — — — — — — 
Substandard— — — 478 — 484 750 1,712 
Doubtful— — — — — — — — 
Total development & spec land$42 $569 $724 $1,958 $2,193 $13,097 $7,801 $26,384 
Commercial & industrial
Pass$136,320 $175,946 $58,700 $57,056 $83,191 $80,196 $30,175 $621,584 
Special Mention2,478 4,317 1,029 987 7,191 4,935 1,096 22,033 
Substandard2,245 1,835 2,564 3,724 1,474 2,390 2,503 16,735 
Doubtful— — — — — — — — 
Total commercial & industrial$141,043 $182,098 $62,293 $61,767 $91,856 $87,521 $33,774 $660,352 
Total commercial$181,104 $355,873 $259,134 $222,409 $282,439 $615,384 $261,515 $2,177,858 

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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
March 31, 202120212020201920182017PriorRevolving LoansTotal
Real estate
Residential mortgage
Performing$19,705 $109,655 $56,914 $71,948 $80,572 $211,664 $— $550,458 
Non–performing— — 378 635 38 6,865 — 7,916 
Total residential mortgage$19,705 $109,655 $57,292 $72,583 $80,610 $218,529 $— $558,374 
Residential construction
Performing$— $— $— $— $— $— $23,555 $23,555 
Non–performing— — — — — — — — 
Total residential construction$— $— $— $— $— $— $23,555 $23,555 
Mortgage warehouse
Performing$— $— $— $— $— $— $266,246 $266,246 
Non–performing— — — — — — — — 
Total mortgage warehouse$— $— $— $— $— $— $266,246 $266,246 
Total real estate$19,705 $109,655 $57,292 $72,583 $80,610 $218,529 $289,801 $848,175 

March 31, 202120212020201920182017PriorRevolving LoansTotal
Consumer
Direct installment
Performing$2,906 $10,729 $8,407 $5,033 $4,871 $3,575 $67 $35,588 
Non–performing— 26 — — 4 4 — 34 
Total direct installment$2,906 $10,755 $8,407 $5,033 $4,875 $3,579 $67 $35,622 
Indirect installment
Performing$33,036 $125,035 $87,287 $64,394 $30,973 $10,577 $— $351,302 
Non–performing— 70 164 257 227 169 — 887 
Total indirect installment$33,036 $125,105 $87,451 $64,651 $31,200 $10,746 $— $352,189 
Home equity
Performing$11,184 $62,319 $39,276 $30,598 $24,791 $73,747 $5,250 $247,165 
Non–performing— — 17 159 73 1,389 1,789 3,427 
Total home equity$11,184 $62,319 $39,293 $30,757 $24,864 $75,136 $7,039 $250,592 
Total consumer$47,126 $198,179 $135,151 $100,441 $60,939 $89,461 $7,106 $638,403 

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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following tables present loans by credit grades and origination year at December 31, 2020.
December 31, 202020202019201820172016PriorRevolving LoansTotal
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 
Substandard1,021 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 Mention862 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 Mention8,779 1,164 1,088 9,306 1,835 11,870 3,040 37,082 
Substandard4,233 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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HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
December 31, 202020202019201820172016PriorRevolving LoansTotal
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, 202020202019201820172016PriorRevolving LoansTotal
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–performing84 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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HORIZON BANCORP, INC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 4 – Allowance for Credit and Loan Losses
The following tables represent, by loan portfolio segment, a summary of changes in the ACL on loans for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021
CommercialReal EstateMortgage WarehouseConsumerTotal
Balance, beginning of period$42,210 $4,620 $1,267 $8,930 $57,027 
Provision for credit losses on loans928 (456)(104)(1)367 
Charge–offs(196)— — (235)(431)
Recoveries38 65 — 120 223 
Balance, end of period$42,980 $4,229 $1,163 $8,814 $57,186 

Three Months Ended March 31, 2020
CommercialReal EstateMortgage WarehouseConsumerTotal
Balance, beginning of period$11,996 $923 $1,077 $3,671 $17,667 
Impact of adopting ASC 32613,618 4,048 — 4,911 22,577 
Provision for credit losses on loans6,916 700 (22)1,006 8,600 
Charge–offs(69)(26)— (618)(713)
Recoveries89 9 — 211 309 
Balance, end of period$32,550 $5,654 $1,055 $9,181 $48,440 


The Company utilized the Cumulative Loss Rate method in determining expected future credit losses. The loss rate method measures the amount of loan charge–offs, net of recoveries, (“loan losses”) recognized over the life of a pool and compares those loan losses to the outstanding loan balance of that pool as of a specific point in time (“pool date”).
To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date.
The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look–back period includes January 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.

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


Note 5 – Loan Servicing

Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $1.532 billion and $1.527 billion at March 31, 2021 and December 31, 2020.

The aggregate fair value of capitalized mortgage servicing rights was approximately $12.9 million and $12.5 million at March 31, 2021 and December 31, 2020, compared to the carrying values of $12.9 million and $12.5 million at March 31, 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.

March 31,December 31,
20212020
Mortgage servicing rights
Balance, beginning of period$17,644 $15,046 
Servicing rights capitalized1,130 5,530 
Amortization of servicing rights(962)(2,932)
Balance, end of period17,812 17,644 
Impairment allowance
Balance, beginning of period(5,172)(719)
Additions— (5,106)
Reductions235 653 
Balance, end of period(4,937)(5,172)
Mortgage servicing rights, net$12,875 $12,472 

The Bank reduced impairment by approximately $235,000 for the three months ended March 31, 2021. The Bank recorded additional impairment of approximately $4.5 million for the year ended December 31, 2020.


Note 6 – Goodwill

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

March 31,December 31,
20212020
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
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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)
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 the analysis above during the first quarter of 2021 which resulted in no goodwill impairment charges for the three months ended March 31, 2021.

Note 7 – Repurchase Agreements
The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to acquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Company’s control.
The following table shows repurchase agreements accounted for as secured borrowings and the related securities, at fair value, pledged for repurchase agreements:

March 31, 2021
Remaining Contractual Maturity of the Agreements
Overnight
and
Continuous		Up to one
year		One to three
years		Three to five
years		Five to ten
years		Beyond ten
years		Total
Repurchase Agreements and repurchase-to-maturity transactions
Repurchase Agreements$116,011 $— $— $— $— $— $116,011 
Securities pledged for Repurchase Agreements
Federal agency collateralized mortgage obligations$59,030 $— $— $— $— $— $59,030 
Federal agency mortgage–backed pools59,994 — — — — — 59,994 
Total$119,024 $— $— $— $— $— $119,024 


Note 8 – Subordinated Notes
On June 24, 2020, Horizon issued $60.0 million in aggregate principal amount of 5.625% fixed–to–floating rate subordinated notes (the “Notes”). The Notes were offered in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Notes mature on July 1, 2030 (the “Maturity Date”). From and including the date of original issuance to, but excluding, July 1, 2025 or the date of earlier redemption (the “fixed rate period”), the Notes bear interest at an initial rate of 5.625% per annum, payable semi–annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2021. The last interest payment date for the fixed rate period will be July 1, 2025. From and including July 1, 2025 to, but excluding, the Maturity Date or the date of earlier redemption (the “floating rate period”), the Notes bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three–Month Term SOFR), 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.

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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 may, at its option, beginning with the interest payment date of July 1, 2025 and on any interest payment date thereafter, redeem the Notes, in whole or in part. The Notes will not otherwise be redeemable by Horizon prior to maturity, unless certain events occur. The redemption price for any redemption is 100% of the principal amount of the Notes, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations.
The Notes are unsecured subordinated obligations, and rank pari passu, or equally, with all of Horizon's future unsecured subordinated debt and are junior to all existing and future senior debt. The Notes are structurally subordinated to all existing and future liabilities of Horizon's subsidiaries, including the deposit liabilities and claims of other creditors of Horizon Bank, and are effectively subordinated to Horizon’s existing and future secured indebtedness. There is no sinking fund for the Notes. The Notes are obligations of Horizon only and are not obligations of, and are not guaranteed by, any of Horizon’s subsidiaries.

Note 9 – Derivative Financial Instruments
Cash Flow Hedges – As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into 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 March 31, 2021 and December 31, 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 March 31, 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 March 31, 2021, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.
Fair Value Hedges – Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. 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 March 31, 2021, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

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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 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 $457.1 million at March 31, 2021 and $442.7 million at December 31, 2020.
Other Derivative Instruments – The Company enters into non–hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At March 31, 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.
The following tables summarize the fair value of derivative financial instruments utilized by Horizon:
Asset DerivativesLiability Derivatives
March 31, 2021March 31, 2021
Balance Sheet
Location		Fair
Value		Balance Sheet
Location		Fair
Value
Derivatives designated as hedging instruments
Interest rate contractsOther assets$17,864 Other liabilities$23,053 
Total derivatives designated as hedging instruments17,864 23,053 
Derivatives not designated as hedging instruments
Mortgage loan contractsOther assets504 Other liabilities701 
Total derivatives not designated as hedging instruments504 701 
Total derivatives$18,368 $23,754 

Asset DerivativesLiability Derivatives
December 31, 2020December 31, 2020
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedging instruments
Interest rate contractsOther assets$35,388 Other liabilities$43,631 
Total derivatives designated as hedging instruments35,388 43,631 
Derivatives not designated as hedging instruments
Mortgage loan contractsOther assets1,045 Other liabilities— 
Total derivatives not designated as hedging instruments1,045 — 
Total derivatives$36,433 $43,631 
The effect of the derivative instruments on the condensed consolidated statements of income for the three–month periods ending March 31 is as follows:
Amount of Loss Recognized in Other Comprehensive Income on Derivative
(Effective Portion)
Three Months Ended
March 31, 2021March 31, 2020
Derivatives in cash flow hedging relationship
Interest rate contracts$2,412 $(3,132)

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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)
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.
Location of gain
(loss)
recognized on derivative		Amount of Gain (Loss) Recognized on Derivative
Three Months Ended
March 31, 2021March 31, 2020
Derivative in fair value hedging relationship
Interest rate contractsInterest income - loans$17,525 $(26,330)
Interest rate contractsInterest income - loans(17,525)26,330 
Total$— $— 

Location of gain
(loss)
recognized on derivative		Amount of Gain (Loss) Recognized on Derivative
Three Months Ended
March 31, 2021March 31, 2020
Derivative not designated as hedging relationship
Mortgage contractsOther income - gain on sale of loans$(1,241)$1,043 


Note 10 – Disclosures about Fair Value of Assets and Liabilities
The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:
Level 1 –Quoted prices in active markets for identical assets or liabilities
Level 2 –Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 –Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 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
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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)
terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed–income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.
Hedged loans
Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.
Interest rate swap agreements
The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:
March 31, 2021
Fair ValueQuoted 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$39,602 $— $39,602 $— 
State and municipal1,005,051 — 1,005,051 — 
Federal agency collateralized mortgage obligations119,088 — 119,088 — 
Federal agency mortgage–backed pools87,351 — 87,351 — 
Corporate notes11,083 — 11,083 — 
Total available for sale securities1,262,175 — 1,262,175 — 
Interest rate swap agreements asset17,864 — 17,864 — 
Forward sale commitments504 — 504 — 
Interest rate swap agreements liability(23,053)— (23,053)— 
Commitments to originate loans(701)— (701)— 

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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 ValueQuoted 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 municipal837,843 — 837,843 — 
Federal agency collateralized mortgage obligations147,453 — 147,453 — 
Federal agency mortgage–backed pools118,799 — 118,799 — 
Corporate notes10,215 — 10,215 — 
Total available for sale securities1,134,025 — 1,134,025 — 
Interest rate swap agreements asset35,388 — 35,388 — 
Forward sale commitments1,045 — 1,045 — 
Interest rate swap agreements liability(46,631)— (46,631)— 
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
March 31, 2021March 31, 2020
Non-interest Income
Total gains and losses from:
Hedged loans$17,525 $(26,330)
Fair value interest rate swap agreements(17,525)26,330 
Derivative loan commitments(1,241)1,043 
$(1,241)$1,043 
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 ValueQuoted Prices in Active Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
March 31, 2021
Collateral dependent loans$11,008 $— $— $11,008 
Mortgage servicing rights12,875 — — 12,875 
December 31, 2020
Collateral dependent loans$13,123 $— $— $13,123 
Mortgage servicing rights12,472 — — 12,472 

Collateral Dependent Loans: For loans identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
Collateral dependent loans are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
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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)
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 decreased by $236,000 during the first three months of 2021 and increased by $322,000 during the first three 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.
March 31, 2021
Fair
Value		Valuation
Technique		Unobservable
Inputs		Range
(Weighted Average)
Collateral dependent loans$11,008 Collateral based measurementDiscount to reflect current market conditions and ultimate collectibility
0.0%-98.6% (14.0%)
Mortgage servicing rights12,875 Discounted cash flows
Discount rate,
Constant prepayment rate,
Probability of default
7.8%-7.8% (7.8%),
11.9%-30.6% (16.6%),
0.0%-1.2%(0.7%)

December 31, 2020
Fair
Value		Valuation
Technique		Unobservable
Inputs		Range
(Weighted Average)
Collateral dependent loans$13,123 Collateral based measurementDiscount to reflect current market conditions and ultimate collectibility
0.0%-72.0%(12.4%)
Mortgage servicing rights12,472 Discounted cash flowsDiscount 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 11 – Fair Value of Financial Instruments
The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts.
The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at March 31, 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.
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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)
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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HORIZON BANCORP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall.
March 31, 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$529,336 $529,336 $— $— 
Interest–earning time deposits7,983 — 8,123 — 
Investment securities, held to maturity161,650 — 170,949 — 
Loans held for sale7,798 — — 7,798 
Loans (excluding loan level hedges), net3,607,250 — — 3,535,694 
Stock in FHLB23,023 — 23,023 — 
Interest receivable20,951 — 20,951 — 
Liabilities
Non–interest bearing deposits$1,133,412 $1,133,412 $— $— 
Interest bearing deposits3,588,404 — 3,541,714 — 
Borrowings481,488 — 481,549 — 
Subordinated notes58,640 — 57,756 — 
Junior subordinated debentures issued to capital trusts56,604 — 52,924 — 
Interest payable1,772 — 1,772 — 

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 deposits8,965 — 9,136 — 
Investment securities, held to maturity168,676 — 179,990 — 
Loans held for sale13,538 — — 13,538 
Loans (excluding loan level hedges), net3,810,356 — — 3,767,348 
Stock in FHLB23,023 — 23,023 — 
Interest receivable21,396 — 21,396 — 
Liabilities
Non–interest bearing deposits$1,053,242 $1,053,242 $— $— 
Interest bearing deposits3,477,891 — 3,466,522 — 
Borrowings475,000 — 483,245 — 
Subordinated notes58,603 — 57,626 — 
Junior subordinated debentures issued to capital trusts56,548 — 52,676 — 
Interest payable2,712 — 2,712 — 
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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)

Note 12 – Accumulated Other Comprehensive Income
March 31,
2021		December 31,
2020
Unrealized gain on securities available for sale$18,863 $43,662 
Unamortized loss on securities held to maturity, previously transferred from AFS(148)(165)
Unrealized loss on derivative instruments(5,190)(8,243)
Tax effect(2,839)(7,402)
Total accumulated other comprehensive income$10,686 $27,852 

Note 13 – Regulatory Capital
Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. These capital requirements implement changes arising from the Dodd–Frank Wall Street Reform and Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital framework (known as “Basel III”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off–balance–sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Company and Bank are subject to minimum regulatory capital requirements as defined and calculated in accordance with the Basel III–based regulations. As allowed under Basel III rules, the Company made the decision to opt–out of including accumulated other comprehensive income in regulatory capital. The minimum regulatory capital requirements are set forth in the table below.
In addition, to be categorized as well capitalized, the Company and Bank must maintain Total risk–based, Tier I risk–based, common equity Tier I risk–based and Tier I leverage ratios as set forth in the table below. As of March 31, 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 first 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 March 31, 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)
AmountRatioAmountRatioAmountRatioAmountRatio
March 31, 2021
Total capital (to risk–weighted assets)(1)
Consolidated$669,098 16.94 %$315,985 8.00 %$414,730 10.50 %N/AN/A
Bank548,682 13.86 %316,700 8.00 %415,668 10.50 %$395,874 10.00 %
Tier 1 capital (to risk–weighted assets)(1)
Consolidated622,085 15.75 %236,985 6.00 %335,728 8.50 %N/AN/A
Bank503,222 12.71 %237,556 6.00 %336,537 8.50 %316,741 8.00 %
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated506,877 12.84 %177,644 4.50 %276,335 7.00 %N/AN/A
Bank503,222 12.71 %178,167 4.50 %277,148 7.00 %257,352 6.50 %
Tier 1 capital (to average assets)(1)
Consolidated622,085 10.82 %229,976 4.00 %229,976 4.00 %N/AN/A
Bank503,222 8.81 %228,478 4.00 %228,478 4.00 %285,597 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/AN/A
Bank532,315 12.21 %348,810 8.00 %457,813 10.50 %$436,013 10.00 %
Tier 1 capital (to risk–weighted assets)(1)
Consolidated607,340 13.96 %261,018 6.00 %369,775 8.50 %N/AN/A
Bank492,221 11.29 %261,606 6.00 %370,609 8.50 %348,808 8.00 %
Common equity tier 1 capital (to risk–weighted assets)(1)
Consolidated491,281 11.29 %195,764 4.50 %304,522 7.00 %N/AN/A
Bank492,221 11.29 %196,205 4.50 %305,207 7.00 %283,407 6.50 %
Tier 1 capital (to average assets)(1)
Consolidated607,340 10.68 %227,507 4.00 %227,507 4.00 %N/AN/A
Bank492,221 8.71 %226,158 4.00 %226,158 4.00 %282,697 5.00 %
(1) As defined by regulatory agencies

Note 14 – 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 Months ended March 31, 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 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 Months ended March 31, 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 Months ended March 31, 2021 and 2020
First Quarter 2021 Highlights
•Generated return on average assets (“ROAA”) of 1.40% and return on average common equity (“ROACE”) of 11.88% in the quarter, as well as adjusted ROAA of 1.35% and adjusted ROACE of 11.46%, excluding the impact of gains on sale of investment securities, net of tax. (See the “Non–GAAP Reconciliation of Return on Average Assets” and the “Non–GAAP Reconciliation of Return on Average Common Equity” tables below.)
•Earned net income of $20.4 million, or $0.46 diluted earnings per share, compared to $21.9 million, or $0.50 diluted earnings per share, for the fourth quarter of 2020 and $11.7 million, or $0.26 diluted earnings per share, for the first quarter of 2020.

•Pre–tax, pre–provision net income totaled a first–quarter record $24.2 million, compared to $26.9 million for the fourth quarter of 2020 and $21.8 million for the first three months of 2020. 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.)

•Non–interest expense was $32.2 million in the quarter, or 2.20% of average assets on an annualized basis, compared to $36.5 million, or 2.47%, in the fourth quarter of 2020 and $31.1 million, or 2.38%, in the first quarter of 2020.

•The efficiency ratio for the period was 57.03% compared to 57.54% for the fourth quarter of 2020 and 58.79% for the first quarter of 2020. The adjusted efficiency ratio was 57.97% compared to 56.48% for the fourth quarter of 2020 and 59.43% for the first quarter of 2020. (See the “Non-GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio” table below.)

•Following record residential lending last year and during what has historically been its seasonally lightest volume quarter, mortgage–related non–interest income remained strong in the first three months of 2021, with gain on mortgage loan sales of $5.3 million and net mortgage servicing income of $213,000. The bank originated $155.6 million in mortgage loans during the quarter, with 65% of volume from refinances, as Horizon continued to focus residential lending on prime borrowers in Indiana and Michigan markets.

•Net interest income was $42.5 million for the quarter, compared to $43.6 million for the fourth quarter of 2020 and $40.9 million for the first quarter of 2020. First quarter 2021 net interest income remained relatively stable in the current environment, given previously disclosed initiatives to optimize returns on earning assets, including increasing investment securities to 23.5% of assets from 22.1% in the fourth quarter of 2020 and 20.6% in the first quarter of 2020.

•Reported net interest margin (“NIM”) of 3.29% and adjusted NIM of 3.17%, with reported NIM declining by 5 basis points and adjusted NIM decreasing by 27 basis points from the fourth quarter of 2020. (See the “Non–GAAP Reconciliation of Net Interest Margin” table for the definition of this non–GAAP calculation.) An estimated 10 basis points attributed to Federal Paycheck Protection Program (“PPP”) lending improved the margin, offset by an estimated 16 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 0.50% in the quarter, compared to 0.94% in the fourth quarter of 2020 and 1.13% in the first quarter of 2020.

•Increased the allowance for credit losses (“ACL”) 0.3% year–to–date to $57.2 million at period end, representing 1.56% of total loans, reflecting implementation of the Current Expected Credit Losses (“CECL”) accounting method and prudent increases in the Company’s general reserves.

•COVID–19 deferral levels improved to 2.5% of total loans at period end, compared to 3.3% on December 31, 2020, and the bank experienced no material specific loan losses attributable to COVID–19 closures.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
•Maintained solid asset quality metrics at period end, including non–performing loans declining 6.5% during the quarter to $25.1 million, or 0.68% of total loans, and substandard loans declining 12.5% to $86.5 million, or 2.4% of total loans, while net charge–offs remained unchanged at 0.01% of average loans for the period.

•Loans excluding PPP lending totaled $3.42 billion on March 31, 2021, reflecting Horizon’s successful efforts to secure payoffs of loans previously classified as substandard, as well as cash reserves maintained by many current and prospective commercial borrowers and retail households through the quarter. Loans excluding PPP lending totaled $3.67 billion on December 31, 2020 and $3.71 billion on March 31, 2020.

•Horizon announced an 8.3% increase in its quarterly cash dividend in March to $0.13 per share, paying uninterrupted dividends for over 30 years. As of March 31, 2021, in excess of $127 million in cash was maintained at the holding company, providing considerable future optionality to build shareholder value.

•Horizon opened a new full–service branch on March 31, 2021 in Gary to improve access to financial services in this Northwest Indiana community.
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 March 31, 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 $89 million in commercial loans with payment extensions as of March 31, 2021, down from $121 million as of December 31, 2020 and $470 million as of June 30, 2020.
▪Processed and received approval for 3,807 PPP loans, funding approximately $441.8 million.
▪As of March 31, 2021, $185.7 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).
◦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.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
Financial Summary
For the Three Months Ended
March 31,December 31,March 31,
Net Interest Income and Net Interest Margin202120202020
Net interest income$42,538 $43,622 $40,925 
Net interest margin3.29 %3.34 %3.56 %
Adjusted net interest margin3.17 %3.44 %3.44 %

For the Three Months Ended
March 31,December 31,March 31,
Asset Yields and Funding Costs202120202020
Interest earning assets3.66 %4.05 %4.47 %
Interest bearing liabilities0.50 %0.94 %1.13 %

For the Three Months Ended
Non–interest Income and
Mortgage Banking Income		March 31,December 31,March 31,
202120202020
Total non–interest income$13,873 $19,733 $12,063 
Gain on sale of mortgage loans5,296 7,815 3,473 
Mortgage servicing income net of impairment213 327 25 

For the Three Months Ended
March 31,December 31,March 31,
Non–interest Expense202120202020
Total non–interest expense$32,172 $36,453 $31,149 
Annualized non–interest expense to average assets2.20 %2.47 %2.38 %


At or for the Three Months Ended
Credit QualityMarch 31,December 31,March 31,
202120202020
Allowance for credit losses to total loans1.56 %1.47 %1.30 %
Non–performing loans to total loans0.68 %0.69 %0.65 %
Percent of net charge–offs to average loans outstanding for the period0.01 %0.01 %0.01 %

Allowance forDecember 31,Net Reserve BuildMarch 31,
Credit Losses20201Q202021
Commercial$42,210 $770 $42,980 
Retail Mortgage4,620 (391)4,229 
Warehouse1,267 (104)1,163 
Consumer8,930 (116)8,814 
Allowance for Credit Losses (“ACL”)
$57,027 $159 $57,186 
ACL/Total Loans1.47 %1.56 %


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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
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 March 31, 2021, Horizon had core deposit intangibles of $22.1 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.
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 March 31, 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.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
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 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.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
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 March 31, 2021, Horizon’s total assets were $6.1 billion, an increase of approximately $168.9 million compared to December 31, 2020. The increase was primarily in cash and due from banks of $279.6 million and investment securities available for sale of $128.2 million. These increases were offset by a decrease in net loans of $203.1 million and other assets of $20.9 million.
Investment securities were comprised of the following as of (dollars in thousands):
March 31, 2021December 31, 2020
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Available for sale
U.S. Treasury and federal agencies$40,155 $39,602 $19,750 $19,715 
State and municipal992,461 1,005,051 803,100 837,843 
Federal agency collateralized mortgage obligations116,072 119,088 144,022 147,453 
Federal agency mortgage–backed pools84,609 87,351 114,484 118,799 
Corporate notes10,015 11,083 9,007 10,215 
Total available for sale investment securities$1,243,312 $1,262,175 $1,090,363 $1,134,025 
Held to maturity
State and municipal$151,474 $160,583 $157,421 $168,456 
Federal agency collateralized mortgage obligations1,959 1,979 2,661 2,697 
Federal agency mortgage–backed pools8,217 8,387 8,594 8,837 
Total held to maturity investment securities$161,650 $170,949 $168,676 $179,990 
Investment securities available for sale increased $128.2 million since December 31, 2020 to $1.3 billion as of March 31, 2021. This increase was due to additional purchases to increase earning assets.
Gross loans decreased $208.7 million since December 31, 2020 to $3.7 billion as of March 31, 2021. Mortgage warehouse, residential mortgage, consumer, commercial and loans held for sale decreased $129.4 million, $42.4 million, $16.8 million, $14.4 million and $5.7 million. PPP loans increased $43.4 million since December 31, 2020 to $252.3 million as of March 31, 2021.
Total deposits increased $190.7 million since December 31, 2020 to $4.7 billion as of March 31, 2021. This increase was primarily due to Federal stimulus payments to consumers and funds from the origination of PPP loans.
Total borrowings increased from $475.0 million as of December 31, 2020 to $481.5 million as of March 31, 2021. At March 31, 2021, the Company had $166.0 million in short-term funds borrowed compared to $315.5 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 Months ended March 31, 2021 and 2020
Stockholders’ equity totaled $689.4 million at March 31, 2021 compared to $692.2 million at December 31, 2020. The decrease in stockholders’ equity during the period was due to a decrease in accumulated other comprehensive income during the period, offset by the generation of net income. Book value per common share at March 31, 2021 decreased to $15.69 compared to $15.78 at December 31, 2020 as a result of the decrease in accumulated other comprehensive income during the period.

Results of Operations
Overview
Consolidated net income for the three–month period ended March 31, 2021 was $20.4 million, or $0.46 diluted earnings per share, compared to $11.7 million, or $0.26 diluted earnings per share for the same period in 2020. The increase in net income for the three–month period ended March 31, 2021 when compared to the same prior year period reflects an increase in net interest income of $1.6 million, an increase in non–interest income of $1.8 million and a decrease in credit loss expense of $8.2 million, offset by increases in non–interest expense of $1.0 million and income tax expense of $1.9 million. Excluding gain on sale of investment securities and death benefit on bank owned life insurance (“adjusted net income”), adjusted net income for the first quarter of 2021 was $19.7 million, or $0.44 diluted earnings per share, compared to $11.2 million, or $0.24 diluted earnings per share for the first quarter of 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 March 31, 2021 was $42.5 million, an increase of $1.6 million from the $40.9 million earned during the same period in 2020. Yields on the Company’s interest earning assets decreased by 81 basis points to 3.66% for the three months ended March 31, 2021 from 4.47% for the three months ended March 31, 2020. Interest income decreased $4.1 million from $51.7 million for the three months ended March 31, 2020 to $47.6 million for the same 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 $1.6 million for the three months ending March 31, 2021 compared to $1.4 million for the same period of 2020.

Rates paid on interest bearing liabilities decreased by 63 basis points for the three–month period ended March 31, 2021 compared to the same period in 2020. Interest expense decreased $5.7 million when compared to the three–month period ended March 31, 2020 to $5.1 million for the same period in 2021. This decrease was due to lower rates paid on deposits and borrowings. The cost on average interest bearing deposits decreased 69 basis points while the cost of average borrowings decreased 61 basis points. Average balances of interest bearing deposits increased $298.8 million and average balances of borrowings decreased $55.9 million for the three-month period ended March 31, 2021 when compared to the same period in 2020.
The net interest margin decreased 27 basis points from 3.56% for the three–month period ended March 31, 2020 to 3.29% for the same period in 2021. The decrease in the margin for the three–month period ended March 31, 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 (“adjusted net interest margin”), the margin would have been 3.17% for the three-month period ending March 31, 2021 compared to 3.44% 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 Months ended March 31, 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 EndedThree Months Ended
March 31, 2021March 31, 2020
Average
Balance		InterestAverage
Rate		Average
Balance		InterestAverage
Rate
Assets
Interest earning assets
Federal funds sold$267,241 $66 0.10 %$24,974 $96 1.55 %
Interest earning deposits25,527 31 0.49 %26,491 101 1.53 %
Investment securities – taxable410,063 1,451 1.44 %501,144 2,701 2.27 %
Investment securities – non–taxable (1)
956,464 5,223 2.80 %588,784 3,798 3.18 %
Loans receivable (2) (3)
3,780,339 40,818 4.39 %3,604,809 44,958 5.03 %
Total interest earning assets5,439,634 47,589 3.66 %4,746,202 51,654 4.47 %
Non–interest earning assets
Cash and due from banks85,269 78,108 
Allowance for credit losses(57,779)(24,468)
Other assets469,025 457,490 
Total average assets$5,936,149 $5,257,332 
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits$3,524,103 $2,343 0.27 %$3,225,323 $7,716 0.96 %
Borrowings477,278 1,269 1.08 %533,129 2,238 1.69 %
Subordinated notes58,616 880 6.09 %— — — %
Junior subordinated debentures issued to capital trusts56,571 559 4.01 %56,333 775 5.53 %
Total interest bearing liabilities4,116,568 5,051 0.50 %3,814,785 10,729 1.13 %
Non–interest bearing liabilities
Demand deposits1,063,268 717,257 
Accrued interest payable and other liabilities58,912 57,702 
Stockholders’ equity697,401 667,588 
Total average liabilities and stockholders’ equity$5,936,149 $5,257,332 
Net interest income/spread$42,538 3.16 %$40,925 3.34 %
Net interest income as a percent of average interest earning assets (1)
3.29 %3.56 %
(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 Months ended March 31, 2021 and 2020
The net interest margin was impacted due to PPP lending and excess liquidity held during the first quarter of 2021. Horizon estimates that the PPP loans increased the net interest margin by 10 basis points for the first 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 16 basis points for the first 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.

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 March 31, 2021, a provision of $367,000 was required to reflect the nature of our loan portfolios and general characteristics of certain loan pools compared to $8.6 million for the same period of 2020. During the three–month period ended March 31, 2021, commercial loan net charge–offs were $158,000, residential mortgage loan net recoveries were $65,000 and consumer loan net charge–offs were $115,000.

The ACL balance at March 31, 2021 was $57.2 million, or 1.56% 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 and was primarily driven by allocations for sectors of loans with potentially higher risk of loss due to the nature and characteristics of these portfolios.

As of March 31, 2021, non–performing loans totaled $25.1 million, which reflects a 1 basis point decrease in non–performing loans to total loans, or a $1.7 million decrease from $26.8 million in non–performing loans as of December 31, 2020. Non–performing commercial loans decreased by $1.5 million, non–performing real estate loans decreased by $78,000 and non–performing consumer loans decreased by $117,000 at March 31, 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 March 31, 2021, the Bank modified loans totaling $91.6 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
Commercial36$89.497.6 %4.1 %
Mortgage (Retained Only)13$1.41.5 %0.2 %
Indirect Auto2$0.0— %— %
Consumer Direct5$0.70.8 %1.1 %
Consumer Revolving2$0.10.1 %— %
Total58$91.6100.0 %2.5 %
Mortgage (Serviced Only)56
Other Real Estate Owned (“OREO”) and repossessed assets totaled $1.7 million at March 31, 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 Months ended March 31, 2021 and 2020
Non–interest Income
The following is a summary of changes in non–interest income for the three months ending March 31, 2021 and 2020 (table dollar amounts in thousands):
Three Months Ended
March 31,AmountPercent
20212020ChangeChange
Non–interest Income
Service charges on deposit accounts$2,234 $2,446 $(212)(8.7)%
Wire transfer fees255 171 84 49.1 %
Interchange fees2,340 1,896 444 23.4 %
Fiduciary activities1,743 2,528 (785)(31.1)%
Gain on sale of investment securities914 339 575 169.6 %
Gain on sale of mortgage loans5,296 3,473 1,823 52.5 %
Mortgage servicing net of impairment213 25 188 752.0 %
Increase in cash surrender value of bank owned life insurance511 554 (43)(7.8)%
Death benefit on bank owned life insurance— 233 (233)0.0 %
Other income367 398 (31)(7.8)%
Total non–interest income$13,873 $12,063 $1,810 15.0 %
Total non–interest income was $1.8 million higher during the first quarter of 2021 compared to the same period of 2020. Residential mortgage loan activity during the first quarter of 2021 generated $5.3 million of income from the gain on sale of mortgage loans, up from $3.5 million for the same period in 2020 due to a higher volume of loans sold and an increase in the percentage gain on loans sold. Mortgage servicing rights, net of impairment, increased $188,000 during the first quarter of 2021 compared to the same period of 2020. Fiduciary income decreased $785,000 during the first quarter of 2021 compared to the same period of 2020 due to the timing of the recognition of ESOP related fee income. Service charges on deposit accounts, death benefit on bank owned life insurance and other income decreased $212,000, $233,000, and $31,000, respectively, when comparing the first quarter of 2021 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 March 31, 2021 and 2020 (table dollar amounts in thousands):
Three Months Ended
March 31,March 31,AmountPercent
Non–interest Expense20212020ChangeChange
Salaries and employee benefits$16,871 $16,591 $280 1.7 %
Net occupancy expenses3,318 3,252 66 2.0 %
Data processing2,376 2,405 (29)(1.2)%
Professional fees544 536 8 1.5 %
Outside services and consultants1,702 1,915 (213)(11.1)%
Loan expense2,822 2,099 723 34.4 %
FDIC deposit insurance800 150 650 433.3 %
Other losses283 120 163 135.8 %
Other expenses3,456 4,081 (625)(15.3)%
Total non–interest expense$32,172 $31,149 $1,023 3.3 %
Annualized Non–interest Exp. to Avg. Assets2.20 %2.38 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
Total non–interest expense was $1.0 million higher for the first quarter of 2021 when compared to the first quarter of 2020. Increases in loan expense, FDIC deposit insurance and salaries and employee benefits were offset in part by a decrease in other expense and outside services and consultants expense.
Annualized non–interest expense as a percent of average assets were 2.20% and 2.38% for the three months ended March 31, 2021 and 2020, respectively.

Income Taxes
Income tax expense totaled $3.5 million for the first quarter of 2021 an increase of $1.9 million when compared to the first quarter of 2020. The increase in income tax expense in the first quarter of 2021 compared to the first quarter of 2020 was primarily due to a increase in income before taxes of $10.6 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, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At March 31, 2021, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $946.1 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 $772.8 million of unpledged investment securities at March 31, 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 March 31, 2021. Stockholders’ equity totaled $689.4 million as of March 31, 2021, compared to $692.2 million as of December 31, 2020. For the three months ended March 31, 2021, the ratio of average stockholders’ equity to average assets was 11.75% compared to 11.82% for the twelve months ended December 31, 2020. The decrease in stockholders’ equity during the period was the result of a decrease in accumulated other comprehensive income and dividends declared, offset by net income recorded during the period.
Horizon paid common stock dividends in the amount of $0.12 per share during the first three months of 2021 and $0.12 per share for the same period of 2020. The dividend payout ratio (dividends as a percent of basic earnings per share) was 26.1% and 46.2% for the first three 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 Months ended March 31, 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
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Net income as reported$20,422 $21,893 $20,312 $14,639 $11,655 
(Gain)/loss on sale of investment
securities		(914)(2,622)(1,088)(248)(339)
Tax effect192 551 228 52 71 
Net income excluding (gain)/loss on sale of investment securities19,700 19,822 19,452 14,443 11,387 
Death benefit on bank owned life insurance (“BOLI”)— — (31)— (233)
Net income excluding death benefit on BOLI19,700 19,822 19,421 14,443 11,154 
Adjusted net income$19,700 $19,822 $19,421 $14,443 $11,154 


Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Diluted earnings per share (“EPS”) as reported$0.46 $0.50 $0.46 $0.33 $0.26 
(Gain)/loss on sale of investment securities(0.02)(0.06)(0.02)(0.01)(0.01)
Tax effect— 0.01 0.01 — — 
Diluted EPS excluding (gain)/loss on investment securities0.44 0.45 0.45 0.32 0.25 
Death benefit on BOLI— — — — (0.01)
Diluted EPS excluding death benefit on BOLI0.44 0.45 0.45 0.32 0.24 
Adjusted Diluted EPS$0.44 $0.45 $0.45 $0.32 $0.24 

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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Pre–tax income$23,872 $23,860 $24,638 $16,632 $13,239 
Credit loss expense367 3,042 2,052 7,057 8,600 
Pre–tax, pre–provision net income$24,239 $26,902 $26,690 $23,689 $21,839 
Pre–tax, pre–provision net income$24,239 $26,902 $26,690 $23,689 $21,839 
(Gain)/loss on sale of investment securities(914)(2,622)(1,088)(248)(339)
Death benefit on bank owned life insurance— — (31)— (233)
Adjusted pre–tax, pre–provision net income$23,325 $24,280 $25,571 $23,441 $21,267 

Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Net interest income as reported$42,538 $43,622 $43,397 $42,996 $40,925 
Average interest earning assets5,439,634 5,365,888 5,251,611 5,112,636 4,746,202 
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”)		3.29 %3.34 %3.39 %3.47 %3.56 %
Net interest income as reported$42,538 $43,622 $43,397 $42,996 $40,925 
Acquisition–related purchase accounting adjustments
(“PAUs”)		(1,579)(2,461)(1,488)(1,553)(1,434)
Prepayment penalties on borrowings— 3,804 — — — 
Adjusted net interest income$40,959 $44,965 $41,909 $41,443 $39,491 
Adjusted net interest margin3.17 %3.44 %3.27 %3.35 %3.44 %


Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Total stockholders’ equity$689,379 $692,216 $670,293 $652,206 $630,842 
Less: Intangible assets173,296 174,193 175,107 176,020 176,961 
Total tangible stockholders’ equity$516,083 $518,023 $495,186 $476,186 $453,881 
Common shares outstanding43,949,189 43,880,562 43,874,353 43,821,878 43,763,623 
Book value per common share$15.69 $15.78 $15.28 $14.88 $14.41 
Tangible book value per common
share		$11.74 $11.81 $11.29 $10.87 $10.37 

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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Non–interest expense as reported$32,172 $36,453 $33,407 $30,432 $31,149 
Net interest income as reported42,538 43,622 43,397 42,996 40,925 
Non–interest income as reported$13,873 $19,733 $16,700 $11,125 $12,063 
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio")		57.03 %57.54 %55.59 %56.23 %58.79 %
Non–interest expense as reported$32,172 $36,453 $33,407 $30,432 $31,149 
Net interest income as reported42,538 43,622 43,397 42,996 40,925 
Prepayment penalties on borrowings— 3,804 — — — 
Net interest income excluding prepayment penalties on borrowings42,538 47,426 43,397 42,996 40,925 
Non–interest income as reported13,873 19,733 16,700 11,125 12,063 
(Gain)/loss on sale of investment securities(914)(2,622)(1,088)(248)(339)
Death benefit on bank owned life insurance ("BOLI")— — (31)— (233)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI$12,959 $17,111 $15,581 $10,877 $11,491 
Adjusted efficiency ratio57.97 %56.48 %56.64 %56.49 %59.43 %

Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Average assets$5,936,149 $5,864,086 $5,768,691 $5,620,695 $5,257,332 
Return on average assets ("ROAA") as reported1.40 %1.49 %1.40 %1.05 %0.89 %
(Gain)/loss on sale of investment securities(0.06)(0.18)(0.08)(0.02)(0.03)
Tax effect0.01 0.04 0.02 — 0.01 
ROAA excluding (gain)/loss on sale of investment securities1.35 1.35 1.34 1.03 0.87 
Death benefit on bank owned life insurance ("BOLI")— — — — (0.02)
ROAA excluding death benefit on BOLI1.35 1.35 1.34 1.03 0.85 
Adjusted ROAA1.35 %1.35 %1.34 %1.03 %0.85 %


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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months ended March 31, 2021 and 2020
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended
March 31,December 31,September 30,June 30,March 31,
20212020202020202020
Average common equity$697,401 $680,857 $668,797 $649,490 $667,588 
Return on average common equity ("ROACE") as reported11.88 %12.79 %12.08 %9.07 %7.02 %
(Gain)/loss on sale of investment securities(0.53)(1.53)(0.65)(0.15)(0.20)
Tax effect0.11 0.32 0.14 0.03 0.04 
ROACE excluding (gain)/loss on sale of investment securities11.46 11.58 11.57 8.95 6.86 
Death benefit on bank owned life insurance ("BOLI")— — (0.02)— (0.14)
ROACE excluding death benefit on BOLI11.46 11.58 11.55 8.95 6.72 
Adjusted ROACE11.46 %11.58 %11.55 %8.95 %6.72 %


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 March 31, 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 March 31, 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.
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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.		DescriptionLocation
31.1Attached
31.2Attached
32Attached
101Inline Interactive Data FilesAttached
104
The cover page from the Company’s Quarterly Report on Form 10–Q for the quarter ended March 31, 2021, has been formatted in Inline XBRL
Within the Inline XBRL document

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Table of Contents
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.
April 30, 2021/s/ Craig M. Dwight
DateCraig M. Dwight
Chief Executive Officer
April 30, 2021/s/ Mark E. Secor
DateMark E. Secor
Chief Financial Officer

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