# HORIZON BANCORP INC /IN/ (HBNC) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from HORIZON BANCORP INC /IN/'s 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/706129/000070612925000036/hbnc-20241231.htm Accession: 0000706129-25-000036 Filing date: 2025-03-14 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/HBNC/ All MD&A years: /company/HBNC/mda/ Previous year: /company/HBNC/mda/fy2023/ (FY 2023) Next year: /company/HBNC/mda/fy2025/ (FY 2025) ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2024. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. All of such forward-looking statements are expressly qualified by reference to the cautionary statements provided under the caption “Forward-Looking Statements” included on page 3 of this report. Furthermore, a number of known and unknown factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. Therefore, you are encouraged to read in its entirety the information provided under the caption “Risk Factors” included under Item 1A in Part I of this report for a discussion of risk factors that may negatively impact our expected results, performance, or achievements discussed below. Overview Horizon 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 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. The Bank 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. Fourth Quarter and Full Year 2024 Highlights Fourth Quarter Highlights •Net interest income increased for the fifth consecutive quarter to $53.1 million for the three months ended December 31, 2024, compared to $46.9 million for the three months ended September 30, 2024. The net interest margin, on a fully taxable equivalent ("FTE") basis1, also expanded for the fifth consecutive quarter, to 2.97% compared with 2.66% for the three months ended September 30, 2024. •As previously disclosed, the Company completed the repositioning of $332.2 million of available-for-sale securities during the fourth quarter. While the sale resulted in a pre-tax loss of $39.1 million, the Company redeployed the proceeds received into higher-yielding loans and continued to manage down higher cost funding sources. •Total loans were $4.91 billion at December 31, 2024, up $108.6 million from September 30, 2024 balances. Consistent with the Company's stated growth strategy, the commercial portfolio showed continued organic growth momentum during the quarter, which was offset with planned run-off of lower-yielding indirect auto loans in the consumer loan portfolio. Loans held for sale (“HFS”) increased $65.5 million as a result of the Company’s transfer of its mortgage warehouse loan balances of $64.8 million at December 31, 2024. •Total deposits declined by $126.4 million during the quarter, to $5.60 billion at period end, with the majority of the decline in time deposits, which declined by $131.5 million. The Company's non-maturity deposit base continued to display strength, growing for the third consecutive quarter, including another quarter of relatively stable non-interest bearing deposit balances and growth in core relationship consumer and commercial portfolios. •Credit quality remained strong, with annualized net charge offs of 0.05% of average loans during the fourth quarter. Non-performing assets to total assets of 0.35% remains well within expected ranges, with no material change from the prior quarter. Provision for loan losses of $1.2 million reflects increased provision for unfunded commitments and net growth in commercial loans held for investment ("HFI"), partially offset by the elimination of the reserve associated with mortgage warehouse and the reduction of reserve related to the planned runoff of indirect auto in the current quarter, when compared with the prior quarter. 1 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure. 36 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) •Continued the process for the sale of the mortgage warehouse division during the quarter. Sold the business for a gain, effective January 17th, which will be recognized in Q1 2025 results. Full Year Highlights •Net interest income increased to $188.6 million for the year ended December 31, 2024, compared to $175.7 million for the year ended December 31, 2023. The net interest margin, on a fully taxable equivalent ("FTE")1 basis, also expanded to 2.68% compared with 2.54% for the year ended December 31, 2023. •The increase in FTE net interest margin is mainly a result of the Company's mix shift towards higher yielding commercial loans and away from lower-yielding investment securities, which resulted in the expansion of the yield on interest-earning assets outpacing the increase in the cost of interest-bearing liabilities. The Company experienced an increase in its overall average loan balances of $438.1 million or 10.3%, from $4.2 billion for the year ended December 31, 2023 to $4.7 billion for the year ended December 31, 2024, while average balances of investment securities declined by $470.4 million, or 16.2%, $2.4 billion billion from $2.9 billion in the same period a year ago. •As discussed above, the Company repositioned the available for sale securities during Q4 2024. The yield of the Company's investment portfolio remained consistent at 2.35% compared to year ended December 31, 2023. •Total loans were $4.91 billion at December 31, 2024, up $495.6 million from December 31, 2023 balances, or 11% year over year. Growth was led by commercial loans, which grew by $403.2 million during the year, 15%, and residential mortgage, which grew by $129.7 million, or 20%. Consistent with it's previously stated strategic objectives, the indirect auto portfolio declined by $96.0 million, or 24% during the year. •Credit quality remains strong, with net charge offs of 0.04% of average loans for the year ended December 31, 2024. Non-performing assets to total assets of 0.35% remains well within expected ranges, with no material change from the prior year. The provision for credit losses increased by $2.9 million from prior year. This was mainly due to the 9.7% loan growth experienced during the quarter. Allowance to total loans decreased from 1.13% to 1.07% during the period. Critical Accounting Estimates The Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10–K for 2024 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. The Company considers these policies to be its critical accounting estimates. Management has identified as critical accounting estimates as the allowance for credit losses, income taxes, 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 loans 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. Assets purchased with credit deterioration (“PCD”) represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At 1 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure. 37 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) acquisition, the allowance for credit losses on PCD assets is booked directly to 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. Allowance for Credit Losses on Off–Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The Company determines the estimated amount of expected credit extensions based on historical usage to calculate the amount of exposure for a loss estimate and has recorded an allowance. Allowance for Credit Losses on Available for Sale Securities For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recorded in other comprehensive income. Changes in the ACL are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. Allowance for Credit Losses on Held to Maturity Securities For held to maturity securities, the Company conducts an assessment of its held to maturity securities at the time of purchase and on at least an annual basis to ensure such investment securities remain within appropriate levels of risk and continue to perform satisfactorily in fulfilling its obligations. The Company considers, among other factors, the nature of the securities and credit ratings or financial condition of the issuer. If available, the Company obtains a credit rating for issuers from the Nationally Recognized Statistical Rating Organization (“NRSRO”) for consideration. If this assessment indicates that a material credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss. Income Taxes The Company is subject to the income tax laws of the U.S. its states and municipalities in which the Company operates. The tax laws are subject to potentially different interpretations by the taxpayer and the applicable taxing authorities. In determining the provision for income taxes, the Company makes judgments about the application of tax laws as well as estimates related to timing of when certain items when affect taxable income . Additionally, in the process of preparing tax returns, the Company’s management makes reasonable interpretations of the tax laws. Management’s interpretations are subject to review during examination by taxing authorities and disputes may arise over the respective tax positions. Management reviews income tax expense and the carrying value of deferred tax assets quarterly; and as if business events or circumstances warrant. US GAAP prescribes a recognition threshold of more-likely-than-not, 38 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Although the Company believes that its tax judgments, estimates, and interpretations are reasonable, actual results could differ and the Company may be exposed to losses or gains that could be material. For example. Company’s effective income tax rate could be materially affected when the Company prevails in matters for which reserves have been established or when the Company is required to pay amounts in excess of reserves. See Note 16 - Income Taxes to the Consolidated Financial Statements for a further discussion of income taxes. 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, mortgage derivatives, and deferred compensation plan assets and associated liabilities 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. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans that have been measured based on the fair value of the underlying collateral, loans held-for-sale recorded at the lower of cost or market, other real estate (primarily foreclosed property), and certain other assets and liabilities. Nonrecurring fair value adjustments typically involve write-downs of individual assets or application of lower of cost or fair value accounting. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of other critical audit estimate, such as the allowance for credit losses and income tax valuation. 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. 39 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Results of Operations Net Income Consolidated net income was $35.4 million, or $0.80 per diluted share, in 2024, $28.0 million or $0.64 per diluted share in 2023, and $93.4 million or $2.14 per diluted share in 2022. The increase in net income from the previous year reflects an increase of total interest income of $44.2 million and a decrease in income tax expense of $19.1 million, offset by increases in interest expense of $31.3 million, increases in non-interest expense of $12.6 million, and increase in credit loss expense of $2.9 million. Net Interest Income The largest component of 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 was $188.6 million in the year ended December 31, 2024, compared to $175.7 million in the year ended December 31, 2023, driven by strong expansion of the Company's net FTE interest margin1, while average interest earning assets increased by $75.7 million, or 1.04% from the prior year. Horizon’s net FTE interest margin was 2.68% for the year ended December 31, 2024, compared to 2.54% for the year ended December 31, 2023, attributable to the favorable volume and mix shift in average interest earning assets toward higher-yielding loans outpacing the increase in rates on average deposits driven by disciplined pricing strategies on both sides of the balance sheet. 1 Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure. 40 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related weighted average yields and rates on our interest earning assets and interest bearing liabilities for the periods indicated. [[GREPCENT_TABLE]] [["","Years Ended"],["","December 31, 2024","","December 31, 2023","","December 31, 2022"],["","Average Balance","","Interest","","Avg Rate","","Average Balance","","Interest","","Avg Rate","","Average Balance","","Interest","","Avg Rate"],["Assets"],["Interest earning assets"],["Interest-bearing deposits in banks","$","187,262","","","$","9,680","","","5.17","%","","$","95,795","","","$","4,967","","","5.19","%","","$","75,807","","","$","306","","","0.40","%"],["Federal Home Loan Bank stock","49,879","","","5,430","","","10.89","%","","33,312","","","2,250","","","6.75","%","","25,899","","","1,034","","","3.99","%"],["Investment securities \u2013 taxable","1,290,190","","","24,865","","","1.93","%","","1,658,160","","","32,160","","","1.94","%","","1,700,418","","","32,168","","","1.89","%"],["Investment securities \u2013 non\u2013taxable(1)","1,134,198","","","32,201","","","2.84","%","","1,236,607","","","35,929","","","2.91","%","","1,356,045","","","36,741","","","2.71","%"],["Loans receivable(2)(3)(4)","4,682,978","","","292,485","","","6.25","%","","4,244,893","","","245,594","","","5.79","%","","3,845,137","","","174,184","","","4.53","%"],["Total interest earning assets(1)","7,344,507","","","364,661","","","4.97","%","","7,268,767","","","320,900","","","4.41","%","","7,003,306","","","244,433","","","3.49","%"],["Non\u2013interest earning assets"],["Cash and due from banks","102,581","","","","","","","102,535","","","","","","","99,885"],["Allowance for loan losses","(51,282)","","","","","","","(49,774)","","","","","","","(52,606)"],["Other assets","433,752","","","","","","","548,100","","","","","","","483,330"],["Total average assets","$","7,829,558","","","","","","","$","7,869,628","","","","","","","$","7,533,915"],["Liabilities and Stockholders\u2019 Equity"],["Interest bearing liabilities"],["Interest-bearing demand deposits","$","1,672,181","","","$","27,504","","","1.64","%","","$","1,749,674","","","$","22,083","","","1.26","%","","$","1,971,567","","","$","5,460","","","0.28","%"],["Savings and money market deposits","1,693,394","","","39,581","","","2.34","%","","1,597,732","","","24,230","","","1.52","%","","1,750,544","","","4,868","","","0.28","%"],["Time deposits","1,165,349","","","47,957","","","4.12","%","","1,151,182","","","39,544","","","3.44","%","","791,557","","","7,481","","","0.95","%"],["Borrowings","1,166,145","","","42,059","","","3.61","%","","1,154,714","","","39,514","","","3.42","%","","696,584","","","11,938","","","1.71","%"],["Repurchase agreements","119,605","","","2,871","","","2.40","%","","137,153","","","2,964","","","2.16","%","","141,048","","","527","","","0.37","%"],["Subordinated notes","55,651","","","3,319","","","5.96","%","","58,764","","","3,511","","","5.97","%","","58,819","","","3,522","","","5.99","%"],["Junior subordinated debentures issued to capital trusts","57,362","","","4,588","","","8.00","%","","57,137","","","4,715","","","8.25","%","","56,899","","","2,719","","","4.78","%"],["Total interest bearing liabilities","5,929,687","","","167,879","","","2.83","%","","5,906,356","","","136,561","","","2.31","%","","5,467,018","","","36,515","","","0.67","%"],["Non\u2013interest bearing liabilities"],["Demand deposits","1,085,195","","","","","","","1,181,233","","","","","","","1,332,937"],["Accrued interest payable and other liabilities","76,883","","","","","","","75,765","","","","","","","50,330"],["Stockholders\u2019 equity","737,793","","","","","","","706,274","","","","","","","683,630"],["Total average liabilities and stockholders\u2019 equity","$","7,829,558","","","","","","","$","7,869,628","","","","","","","$","7,533,915"],["Net FTE interest income (Non-GAAP) and spread (5)","","$","196,782","","","2.13","%","","","","$","184,339","","","2.10","%","","","","$","207,918","","","2.81","%"],["Less FTE adjustments (4)","","","$","8,178","","","","","","","$","8,595","","","","","","","$","8,400"],["Net Interest Income","","","$","188,604","","","","","","","$","175,744","","","","","","","$","199,518"],["Net FTE interest margin (Non-GAAP) (4)(5)","","","","2.68","%","","","","","","2.54","%","","","","","","2.97","%"],["(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."],["(2) Includes fees on loans held for sale and held for investment. 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."],["(4) Management believes fully taxable equivalent, or FTE, interest income is useful to investors in evaluating the Company's performance as a comparison of the returns between a tax-free investment and a taxable alternative. The Company adjusts interest income and average rates for tax-exempt loans and securities to an FTE basis utilizing a 21% tax rate."],["(5) Non-GAAP financial metric. See non-GAAP reconciliation included herein for the most directly comparable GAAP measure."],["(6) Includes dividend income on Federal Home Loan Bank stock"]] [[/GREPCENT_TABLE]] 41 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) The following table illustrates the impact of changes in the volume of interest earning assets and interest bearing liabilities and interest rates on net interest income for the periods indicated. The changes in net income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. [[GREPCENT_TABLE]] [["","2024 - 2023","","2023 - 2022"],["","Total Change","","Change Due to Volume","","Change Due To Rate","","Total Change","","Change Due to Volume","","Change Due To Rate"],["Interest Income"],["Interest-bearing deposits in banks","$","4,713","","","$","4,729","","","$","(16)","","","$","4,661","","","$","102","","","$","4,559"],["Federal Home Loan Bank stock","3,180","","","1,426","","","1,754","","","1,216","","","356","","","860"],["Investment securities - taxable","(7,295)","","","(7,093)","","","(202)","","","(8)","","","(809)","","","801"],["Investment securities - non-taxable","(3,728)","","","(2,922)","","","(806)","","","(812)","","","(3,364)","","","2,552"],["Loans receivable","46,891","","","26,485","","","20,406","","","71,410","","","19,478","","","51,932"],["Total interest income","43,761","","","22,625","","","21,136","","","76,467","","","15,763","","","60,704"],["Interest Expense"],["Interest-bearing demand deposits","5,421","","","(1,016)","","","6,437","","","16,623","","","(682)","","","17,305"],["Savings and money market savings deposits","15,351","","","1,529","","","13,822","","","19,362","","","(461)","","","19,823"],["Time deposits","8,413","","","493","","","7,920","","","32,063","","","4,716","","","27,347"],["Borrowings","2,545","","","394","","","2,151","","","27,576","","","10,962","","","16,614"],["Repurchase agreements","(93)","","","(402)","","","309","","","2,437","","","(15)","","","2,452"],["Subordinated notes","(192)","","","(186)","","","(6)","","","(11)","","","(3)","","","(8)"],["Junior subordinated debentures issued to capital trusts","(127)","","","19","","","(146)","","","1,996","","","11","","","1,985"],["Total interest expense","31,318","","","831","","","30,487","","","100,046","","","14,528","","","85,518"],["Net FTE interest income (Non-GAAP)","12,443","","","21,794","","","(9,351)","","","(23,579)","","","1,235","","","(24,814)"],["Less change in FTE adjustments","(417)","","","","","","","195"],["Net Interest Income","$","12,860","","","","","","","$","(23,774)"]] [[/GREPCENT_TABLE]] 42 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Non-Interest Income [[GREPCENT_TABLE]] [["","December 31,","","2024 - 2023","","2023 - 2022"],["","","Change","","Change"],["(Dollars in Thousands)","2024","","2023","","2022","","$","","%","","$","","%"],["Service charges on deposit accounts","$","12,940","","","$","12,227","","","$","11,598","","","$","713","","","5.8","%","","$","629","","","5.4","%"],["Wire transfer fees","461","","","448","","","595","","","13","","","2.9","%","","(147)","","","(24.7)","%"],["Interchange fees","13,799","","","12,861","","","12,402","","","938","","","7.3","%","","459","","","3.7","%"],["Fiduciary activities","5,394","","","5,080","","","5,381","","","314","","","6.2","%","","(301)","","","(5.6)","%"],["Gains (losses) on sale of investment securities","(39,140)","","","(32,052)","","","\u2014","","","(7,088)","","","22.1","%","","(32,052)","","","100.0","%"],["Gain on sale of mortgage loans","4,215","","","4,323","","","7,165","","","(108)","","","(2.5)","%","","(2,842)","","","(39.7)","%"],["Mortgage servicing income net of impairment","1,677","","","2,708","","","4,800","","","(1,031)","","","(38.1)","%","","(2,092)","","","(43.6)","%"],["Increase in cash value of bank owned life insurance","1,300","","","3,709","","","2,594","","","(2,409)","","","(65.0)","%","","1,115","","","43.0","%"],["Death benefit on bank owned life insurance","\u2014","","","\u2014","","","644","","","\u2014","","","\u2014","%","","(644)","","","(100.0)","%"],["Other income","2,325","","","2,694","","","2,272","","","(369)","","","(13.7)","%","","422","","","18.6","%"],["Total non-interest income","$","2,971","","","$","11,998","","","$","47,451","","","$","(9,027)","","","(75.2)","%","","$","(35,453)","","","(74.7)","%"]] [[/GREPCENT_TABLE]] Total non-interest income decreased $9.0 million for the year ended December 31, 2024 compared to the same period in 2023. The primary components of the change were as follows: Loss on sale of investment securities increased by $7.1 million for the year ended December 31, 2024 compared to the same period in 2023. The Company elected to sell certain lower yielding investment securities during Q4 2024. Cash value of bank owned life insurance decreased $2.4 million for the year ended December 31, 2024, as compared to the same period in 2023. The declines were due to the surrender of several policies during the fourth quarter of 2023. Mortgage servicing income decreased $1.0 million for the year ended December 31, 2024, as compared to the same periods in 2023. The decrease was primarily driven by higher levels of amortization expense of mortgage servicing rights in the current period. These decreases were partially offset by increases in service charges on deposit accounts of $713 thousand for the year ended December 31, 2024, as compared to the same period in 2023, primarily as a result of higher transaction-based fee activity in the current period, as well as an increase in interchange fees of $938 thousand for the year ended December 31, 2024 compared to same period in 2023, primarily as a result of increased volumes in debit card activity and reduced merchant processing expenses. 43 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Non-Interest Expense [[GREPCENT_TABLE]] [["","December 31,","","2024 - 2023","","2023 - 2022"],["","","Change","","Change"],["(Dollars in Thousands)","2024","","2023","","2022","","$","","%","","$","","%"],["Non\u2013interest Expense"],["Salaries and employee benefits","$","88,244","","","$","80,809","","","$","80,283","","","$","7,435","","","9.2","%","","$","526","","","0.7","%"],["Net occupancy expenses","13,376","","","13,355","","","13,323","","","21","","","0.2","%","","32","","","0.2","%"],["Data processing","10,861","","","11,626","","","10,567","","","(765)","","","(6.6)","%","","1,059","","","10.0","%"],["Professional fees","2,733","","","2,645","","","1,843","","","88","","","3.3","%","","802","","","43.5","%"],["Outside services and consultants","14,564","","","9,942","","","10,850","","","4,622","","","46.5","%","","(908)","","","(8.4)","%"],["Loan expense","4,076","","","4,980","","","5,411","","","(904)","","","(18.2)","%","","(431)","","","(8.0)","%"],["FDIC insurance expense","5,032","","","3,880","","","2,558","","","1,152","","","29.7","%","","1,322","","","51.7","%"],["Core deposit intangible amortization","3,403","","","3,612","","","3,702","","","(209)","","","(5.8)","%","","(90)","","","(2.4)","%"],["Other losses","1,199","","","1,051","","","1,046","","","148","","","14.1","%","","5","","","0.5","%"],["Other expense","15,348","","","14,384","","","13,618","","","964","","","6.7","%","","766","","","5.6","%"],["Total non\u2013interest expense","$","158,836","","","$","146,284","","","$","143,201","","","$","12,552","","","8.6","%","","$","3,083","","","2.2","%"]] [[/GREPCENT_TABLE]] Non-interest expense increased $12.6 million for the year ended December 31, 2024 compared to the same period in 2023, primarily the result of higher expenses related to salaries and employee benefits, outside services and consultants, and FDIC insurance expense, which was partially mitigated by lower loan and data processing expenses. Salaries and employee benefits expense increased by $7.4 million for the year ended December 31, 2024 when compared to the same period in 2023, partially attributable to ongoing hiring efforts in revenue generating roles in commercial lending, equipment finance and treasury management. In addition, the current period was unfavorably impacted by an expenses related to the termination of legacy benefits and compensation programs and additional performance based compensation expense relative to the prior periods. Outside services and consultant expense increased by $4.6 million for the year ended December 31, 2024 when compared to the same period in 2023, primarily related to strategic initiatives undertaken during the year. FDIC insurance expense increased by $1.2 million in the year ended December 31, 2024 compared to the year ago period. The increase in the period related to higher incurred assessment rates. Other expenses, which includes corporate and other service expenses, increased by $1.0 million for the year ended December 31, 2024 when compared to the same period in 2023. Loan expense decreased by $904 thousand for the year ended December 31, 2024 when compared to the same period in 2023. This is primarily due to decreases in credit monitoring expenses. This is partially offset by increases in expenses related to repossessed assets. Data processing expense decreased by $765 thousand for the year ended December 31, 2024 when compared to the same period in 2023. This is primarily a result of reduction in 3rd party vendor expenses, consistent with strategic initiatives undertaken by the Company. 44 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments [[GREPCENT_TABLE]] [["","December 31,","","December 31,"],["","2024","","2023"],["Allowance for Credit Losses on Loans"],["Balance at beginning of period","$","50,029","","","$","50,464"],["Provision for credit losses on loans","3,854","","","2,090"],["Net loan (charge-offs) recoveries:"],["Commercial","199","","","(944)"],["Residential Real estate","28","","","33"],["Mortgage warehouse","\u2014","","","\u2014"],["Consumer","(2,130)","","","(1,614)"],["Total net loan charge-offs","(1,903)","","","(2,525)"],["Balance at end of period","$","51,980","","","$","50,029"],["Liability for Unfunded Lending Commitments"],["Balance at beginning of period","615","","","403"],["Provision (reversal) for credit losses on unfunded lending commitments","1,534","","","212"],["Balance at end of period","$","2,149","","","$","615"],["Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments","$","54,129","","","$","50,644"]] [[/GREPCENT_TABLE]] For the year ended December 31, 2024, the Company recorded credit loss expense of $5.4 million. This compares to a provision for credit losses of $2.5 million for the year ended December 31, 2023. The increase in the provision is primary attributable to the increase in the provision for unfunded commitments and net loan growth experienced in the commercial and real estate portfolio segment. For the year ended December 31, 2024, the loan portfolio excluding loans held for sale increased by $429.4 million, or 9.7%. The loan growth experienced was mainly attributable to increased focus on the commercial and real estate portfolio segment. The commercial and real estate loan portfolio segments grew by $403.2 million, or 15.1% and $76.7 million, or 10.6%, respectively. The growth is partially offset by the transfer of the mortgage warehouse portfolio to held-for-sale and the runoff of the consumer indirect auto portfolio. For the year ended, the allowance for credit losses included net charge offs of $1.9 million, or 0.04% of average loans outstanding, compared to net charge-offs of $2.5 million, or 0.05% of average loans outstanding for the year ended December 31, 2023. The Company’s allowance for credit losses as a percentage of period-end loans HFI was 1.07% at December 31, 2024, compared to 1.13% at December 31, 2023. Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio against various economic backdrops, which periodically change. The liability for unfunded lending commitments was $2.1 million at December 31, 2024, an increase from $1.5 million. This is primarily attributable to net increases in the volume of unfunded commitments during 2024, and is consistent with the loan growth experienced during the period. Income Taxes The Company’s income tax expense for the year ended December 31, 2024 was $(8.08) million compared to an expense of $11.02 million for the year ended December 31, 2023, resulting in effective tax rates of (29.5)% and 28.3%, respectively. The decrease in the effective tax rate during the year was primarily attributable to the reduction of the Company's pre-tax income and release of the previously established valuation allowance in 2024, which 45 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) resulted in a tax benefit of $5.2 million in the current period, compared with the establishment of the tax valuation allowance and tax expenses related to the termination of bank owned life insurance policies in 2023 that did not recur in 2024. During the fourth quarter of 2024, the Company completed an analysis and determined they qualified to make a specific tax election related to one of their subsidiaries. Pursuant to the election, a method change was filed for income tax purposes with the completion of the 2023 tax returns that resulted in a release of the valuation allowance previously recorded at December 31, 2023 as part of the current year evaluation of the realizability of the deferred tax assets. [[GREPCENT_TABLE]] [["","","December 31","","2024 - 2023 Change","","2023 - 2022 Change"],["For the year ended","","2024","","2023","","2022","","$","","%","","$","","%"],["Income tax expense"],["Currently payable"],["Federal","","$","8,558","","","$","14,980","","","$","9,111","","","(6,422)","","","(42.9)","%","","5,869","","","64.4","%"],["State","","363","","","(640)","","","888","","","1,003","","","(156.7)","%","","(1,528)","","","(172.1)","%"],["Deferred"],["Federal","","(15,528)","","","(3,393)","","","2,208","","","(12,135)","","","357.6","%","","(5,601)","","","(253.7)","%"],["State","","(1,472)","","","71","","","(31)","","","(1,543)","","","(2173.2)","%","","102","","","(329.0)","%"],["Total income tax expense","","$","(8,079)","","","$","11,018","","","$","12,176","","","(19,097)","","","(173.3)","%","","(1,158)","","","(9.5)","%"],["Reconciliation of federal statutory to actual tax expense"],["Federal statutory income tax at 21%","","$","5,743","","","$","8,190","","","$","22,173","","","(2,447)","","","(29.9)","%","","(13,983)","","","(63.1)","%"],["Tax exempt interest","","(6,427)","","","(6,777)","","","(6,623)","","","350","","","(5.2)","%","","(154)","","","2.3","%"],["Tax exempt BOLI income","","(273)","","","(779)","","","(746)","","","506","","","(65.0)","%","","(33)","","","4.4","%"],["Stock compensation","","150","","","(88)","","","(232)","","","238","","","(270.5)","%","","144","","","(62.1)","%"],["Revaluation of deferred tax assets","","(5,201)","","","5,201","","","\u2014","","","(10,402)","","","(200.0)","%","","5,201","","","\u2014","%"],["Other tax exempt income","","\u2014","","","(371)","","","(454)","","","371","","","(100.0)","%","","83","","","(18.3)","%"],["State tax","","(1,185)","","","142","","","676","","","(1,327)","","","(934.5)","%","","(534)","","","(79.0)","%"],["Tax credit investments","","(1,290)","","","(2,976)","","","(2,774)","","","1,686","","","(56.7)","%","","(202)","","","7.3","%"],["BOLI redemption ordinary income","","\u2014","","","5,316","","","\u2014","","","(5,316)","","","(100.0)","%","","5,316","","","\u2014","%"],["BOLI redemption excise","","\u2014","","","2,532","","","\u2014","","","(2,532)","","","(100.0)","%","","2,532","","","\u2014","%"],["Nondeductible and other","","404","","","628","","","156","","","(224)","","","(35.7)","%","","472","","","302.6","%"],["Actual tax expense","","$","(8,079)","","","$","11,018","","","$","12,176","","","(19,097)","","","(173.3)","%","","(1,158)","","","(9.5)","%"]] [[/GREPCENT_TABLE]] 46 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Financial Condition Horizon’s total assets were $7.8 billion as of December 31, 2024, a decrease of $139.3 million from December 31, 2023. The decrease in total assets was primarily due to a decrease in investment securities of $391.5 million, due to the repositioning of about $325 million of available-for-sale securities in the fourth quarter of 2024, and interest-bearing deposits of $212.4 million, partially offset by an increase in loans, net of allowance for credit losses, of $427.5 million and in loans held for sale of $66.2 million. Investment Securities Investment securities carrying values totaled $2.1 billion at December 31, 2024, and consisted of Treasury and federal agency securities of $280.2 million (13.3%); state and municipal securities of $1.3 billion (59.5%); U.S. government agency mortgage backed securities of $364.3 million (17.3%); private labeled mortgage–backed pools of $29.3 million (1.4%); and corporate securities of $177.1 million (8.4%). As indicated above, 17.3% of the investment portfolio consists of U.S. government agency mortgage backed securities. These instruments are secured by residential mortgages of varying maturities. Principal and interest payments are received monthly as the underlying mortgages are repaid. These payments also include prepayments of mortgage balances as borrowers either sell their homes or refinance their mortgages. Therefore, mortgage–backed securities have maturities that are stated in terms of average life. The average life is the average amount of time that each dollar of principal is expected to be outstanding. As of December 31, 2024, the mortgage–backed securities in the investment portfolio had an average duration of just over 8 years. Securities that have interest rates above current market rates are purchased at a premium. Municipal securities are priced by a third party using a pricing grid which estimates prices based on recent sales of similar securities. All municipal securities are investment grade or local non–rated issuers. A credit review is performed annually on the municipal securities portfolio. At December 31, 2024 and 2023, 11% and 22%, respectively, of investment securities were classified as available for sale. Securities classified as available for sale are carried at their fair value, with both unrealized gains and losses recorded, net of tax, in accumulated other comprehensive income or loss, a component of stockholders’ equity. Net unrealized losses on these securities totaled $48.3 million, which resulted in a balance of $38.2 million, net of tax, included in stockholders’ equity at December 31, 2024. This compared to net unrealized loss on securities which totaled $69.0 million, net of tax, included in stockholders’ equity at December 31, 2023. Based on current market conditions, the Company intends to hold its available-for-sale securities in unrealized loss positions through the anticipated recovery period. The following is a schedule of maturities of each categories of available for sale and held to maturity debt securities and the related weighted–average yield of such securities as of December 31, 2024: 47 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) [[GREPCENT_TABLE]] [["","One Year or Less","","After One Year Through Five Years","","After Five Years Through Ten Years","","After Ten Years"],["(dollars in thousands)","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield"],["Available for sale"],["U.S. Treasury and federal agencies(1)","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","289","","","2.56","%","","$","1,513","","","1.89","%"],["State and municipal","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","126,127","","","2.67","%","","75,706","","","2.43","%"],["US government agency mortgage-backed securities","\u2014","","","\u2014","%","","300","","","2.99","%","","\u2014","","","\u2014","%","","14,242","","","2.03","%"],["Private labeled mortgage-backed pools(2)","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Corporate notes","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","15,499","","","4.09","%","","\u2014","","","\u2014","%"],["Total available for sale","\u2014","","","\u2014","%","","300","","","2.99","%","","141,915","","","2.83","%","","91,461","","","2.36","%"],["Held to maturity"],["U.S. Treasury and federal agencies(1)","37,483","","","1.50","%","","62,144","","","1.72","%","","83,668","","","2.48","%","","55,836","","","2.96","%"],["State and municipal","20,822","","","3.20","%","","120,632","","","3.29","%","","184,022","","","3.31","%","","541,230","","","3.41","%"],["US government agency mortgage-backed securities","1,890","","","2.49","%","","39,229","","","1.66","%","","85,484","","","1.91","%","","168,219","","","2.15","%"],["Private labeled mortgage-backed pools(2)","\u2014","","","\u2014","%","","\u2014","","","","","\u2014","","","","","25,320","","","2.65","%"],["Corporate notes","\u2014","","","\u2014","%","","95,232","","","2.82","%","","45,059","","","4.28","%","","\u2014","","","\u2014","%"],["Total held to maturity","60,195","","","2.12","%","","317,237","","","2.64","%","","398,233","","","2.95","%","","790,605","","","3.09","%"],["Total investment securities","$","60,195","","","2.12","%","","$","317,537","","","2.64","%","","$","540,148","","","2.91","%","","$","882,066","","","3.01","%"],["(1) Fair value is based on contractual maturity or call date where a call option exists"],["(2) Maturity based upon final maturity date"]] [[/GREPCENT_TABLE]] The weighted–average interest rates are based on coupon rates for securities purchased at par value an on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields on tax-exempt securities have been computed on a tax-equivalent basis using the federal statutory tax rate of 21%. As a member of the Federal Home Loan Bank system, Horizon is required to maintain an investment in the common stock of the Federal Home Loan Bank. The investment in common stock is based on a predetermined formula. At December 31, 2024 and 2023, Horizon had investments in the common stock of the Federal Home Loan Bank totaling $53.8 million and $34.5 million, respectively. At December 31, 2024, Horizon did not maintain a trading account. For more information about securities, see Note 3 – Securities to the Consolidated Financial Statements at Item 8. 48 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Total Loans, HFI Total loans held for investment, net of deferred fees/costs, the principal earning asset of the Bank, were $4.8 billion at December 31, 2024. The current level of total loans increased 9.7% from the December 31, 2023, level of $4.4 billion primarily due to an increase in commercial and residential mortgage loans, offset by a decrease in consumer, residential construction and mortgage warehouse loans during the year. The table below provides comparative detail on the loan categories. [[GREPCENT_TABLE]] [["","December 31,","","December 31,","","Dollar","","Percent"],["","2024","","2023","","Change","","Change"],["Commercial"],["Owner occupied real estate","$","667,165","","","$","640,731","","","$","26,434","","","4.1","%"],["Non\u2013owner occupied real estate","1,501,456","","","1,273,838","","","227,618","","","17.9","%"],["Residential spec homes","15,611","","","13,489","","","2,122","","","15.7","%"],["Development & spec land","18,627","","","34,039","","","(15,412)","","","(45.3)","%"],["Commercial and industrial","875,297","","","712,863","","","162,434","","","22.8","%"],["Total commercial","3,078,156","","","2,674,960","","","403,196","","","15.1","%"],["Real estate"],["Residential mortgage","783,961","","","654,295","","","129,666","","","19.8","%"],["Residential construction","18,948","","","26,841","","","(7,893)","","","(29.4)","%"],["Mortgage warehouse","\u2014","","","45,078","","","(45,078)","","","(100.0)","%"],["Total real estate","802,909","","","726,214","","","76,695","","","10.6","%"],["Consumer"],["Installment","97,190","","","52,366","","","44,824","","","85.6","%"],["Indirect auto","303,901","","","399,946","","","(96,045)","","","(24.0)","%"],["Home equity","564,884","","","564,144","","","740","","","0.1","%"],["Total consumer","965,975","","","1,016,456","","","(50,481)","","","(5.0)","%"],["Total loans HFI","4,847,040","","","4,417,630","","","429,410","","","9.7","%"],["Allowance for loan losses","(51,980)","","","(50,029)","","","(1,951)","","","3.9","%"],["Loans HFI, net","$","4,795,060","","","$","4,367,601","","","$","427,459","","","9.8","%"]] [[/GREPCENT_TABLE]] The acceptance and management of credit risk is an integral part of the Bank’s business as a financial intermediary. The Bank has established underwriting standards including a policy that monitors the lending function through strict administrative and reporting requirements as well as an internal loan review of commercial, residential real estate and consumer loans. The Bank also uses an independent third–party loan review function that regularly reviews asset quality. 49 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Changes in the mix of the loans HFI portfolio averages are shown in the following table. [[GREPCENT_TABLE]] [["","December 31,","","December 31,"],["","2024","","2023"],["Commercial","$","2,811,689","","","$","2,498,453"],["Real estate","784,043","","","675,520"],["Mortgage warehouse","61,219","","","54,798"],["Consumer","1,022,619","","","1,011,166"],["Total average loans HFI","$","4,679,570","","","$","4,239,937"]] [[/GREPCENT_TABLE]] Maturities and Sensitivities of Loans HFI to Changes in Interest Rates The following table presents the maturity distribution based on payment due dates of our loan portfolio as December 31, 2024. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index as well as a breakdown of floating rate loans. [[GREPCENT_TABLE]] [["","Due in One Year or Less","","After One, but Within Five Years","","After Five, but Within Fifteen Years","","After Fifteen Years","","Total"],["Commercial","$","439,618","","","$","1,422,575","","","$","1,095,011","","","$","120,952","","","$","3,078,156"],["Real estate","791","","","9,349","","","45,341","","","747,427","","","802,908"],["Consumer","13,029","","","281,896","","","178,441","","","492,610","","","965,976"],["Total","$","453,438","","","$","1,713,820","","","$","1,318,793","","","$","1,360,989","","","$","4,847,040"],["Loans with fixed interest rates:"],["Commercial","$","139,217","","","$","918,940","","","$","387,664","","","$","53,610","","","$","1,499,431"],["Real estate","780","","","8,690","","","26,058","","","487,369","","","522,897"],["Consumer","8,619","","","265,255","","","168,268","","","26,540","","","468,682"],["Total","$","148,616","","","$","1,192,885","","","$","581,990","","","$","567,519","","","$","2,491,010"],["Loans with variable interest rates:"],["Commercial","$","300,401","","","$","503,636","","","$","707,346","","","$","67,342","","","$","1,578,725"],["Real estate","11","","","659","","","19,283","","","260,058","","","280,011"],["Consumer","4,411","","","16,640","","","10,173","","","466,070","","","497,294"],["Total","$","304,823","","","$","520,935","","","$","736,802","","","$","793,470","","","$","2,356,030"]] [[/GREPCENT_TABLE]] 50 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Commercial Loans HFI Commercial loans totaled $3.08 billion, or 63.5% of total loans as of December 31, 2024, compared to $2.67 billion, or 60.6% as of December 31, 2023. The increase during 2024 was due to growth in all types of commercial loans. Commercial loans consisted of the following types of loans at December 31: [[GREPCENT_TABLE]] [["","December 31, 2024","","December 31, 2023"],["","Number","","Amount","","Percent of Portfolio","","Number","","Amount","","Percent of Portfolio"],["SBA guaranteed","284","","","$","74,342","","","2","%","","258","","","$","54,806","","","2.0","%"],["Municipal government","104","","","126,488","","","4","%","","69","","","101,676","","","3.8","%"],["Lines of credit","1,512","","","665,981","","","22","%","","1,467","","","590,943","","","22.1","%"],["Real estate and equipment","4,767","","","2,211,345","","","72","%","","5,313","","","1,927,535","","","72.1","%"],["Total","6,667","","","$","3,078,156","","","100","%","","7,107","","","$","2,674,960","","","100.0","%"]] [[/GREPCENT_TABLE]] At December 31, 2024, the commercial loan portfolio held $355.6 million of adjustable rate loans that had interest rate floors in the terms of the note. Of the commercial loans with interest rate floors, loans totaling $39.3 million were at their floor at December 31, 2024. The Bank's commercial loan portfolio consists generally of approximately 28% commercial and industrial loans and approximately 72% commercial real estate loans. Commercial loans are originated in the primary geographic markets of Indiana and Michigan. Commercial and industrial loans typically are comprised of loans to finance working capital, equipment and titled vehicles. The top five segments with the commercial and industrial portfolio as of December 31, 2024 as a percentage of total commercial loans were finance and insurance; construction; manufacturing; health care and education; and individuals and other services, with the highest concentration in health care and education at approximately 15% of total commercial loans. Owner occupied real estate loans are comprised of loans secured by the real estate for the business operator's facilities such as their office, warehouse, manufacturing facility or medical offices. The top five segments within the owner occupied real estate portfolio as of December 31, 2024 as a percentage of total commercial loans were health care and education; individuals and other services; real estate rental and leasing; retail trade; and manufacturing with the highest concentration in health care and education at approximately 22% of total commercial loans. Non–owner occupied real estate loans are categorized as loans reliant on the leasing and/or operation of the underlying real estate for repayment. The top five segments within the non–owner occupied real estate portfolio as of December 31, 2024 as a percentage of total commercial loans were lessor's of multi–family; warehouse and industrial; retail; hospitality; and non–medical offices with the highest concentration in lessor's of multi–family at approximately 19% of total commercial loans. Management actively monitors commercial and industrial loans and commercial real estate loans by NAICS code, geography and real estate sector. Commercial real estate loans are managed to internal portfolio limits for certain real estate categories, as well as regulatory concentration limits based on Tier 1 capital plus allowance for credit losses, percent of portfolio and comparison to peer data. The Bank also utilizes external data sources to monitor commercial real estate segment and market trends. 51 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Residential Real Estate Loans Residential real estate loans totaled $802.9 million, or 16.6% of total loans as of December 31, 2024, compared to $681.1 million, or 15.4% of total loans as of December 31, 2023. This category consists of home mortgages that generally require a loan to value of no more than 80%. Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio. The increase during 2024 was primarily due to jumbo fixed rate loan growth that are held on the balance sheet, as variable rate loans remained flat during the year. In addition to the customary real estate loans described above, the Bank also had outstanding on December 31, 2024, $470.8 million in revolving home equity lines of credit compared to $478.7 million at December 31, 2023. Credit lines normally limit the loan to collateral value to no more than 89%. Home equity credit lines are primarily not combined with a first mortgage and are therefore evaluated in the allowance for loan losses as a separate pool. These loans are classified as consumer loans in the Loans table above and in Note 4 of the Consolidated Financial Statements at Item 8. Residential real estate lending is a highly competitive business. As of December 31, 2024, the real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but could generally be categorized as follows: [[GREPCENT_TABLE]] [["","December 31, 2024","","December 31, 2023"],["","Amount","","Percent of Portfolio","","Yield","","Amount","","Percent of Portfolio","","Yield"],["Fixed rate"],["Monthly payment","$","525,682","","","65.7","%","","4.94","%","","$","402,038","","","59.0","%","","4.06","%"],["Biweekly payment","2","","","\u2014","%","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","%"],["Adjustable rate"],["Monthly payment","274,453","","","34.3","%","","5.40","%","","279,098","","","41.0","%","","4.98","%"],["Subtotal","800,137","","","100.0","%","","5.10","%","","681,136","","","100.0","%","","4.44","%"],["Loans held for sale (1)","2,772","","","","","","","1,418"],["Total real estate loans","$","802,909","","","","","","","$","682,554"],["(1) Loans held for sale excludes mortgage warehouse loans reclassified during Q4 2024. See Note 1 for more details"]] [[/GREPCENT_TABLE]] In addition to the real estate loan portfolio, the Bank originates and sells real estate loans and retains the servicing rights. During 2024 and 2023, approximately $129.7 million and $142.8 million, respectively, of residential mortgages were sold into the secondary market. Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately$1.4 billion and $1.5 billion at December 31, 2024 and 2023. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2024, totaled approximately $19.8 million compared to the carrying value of $18.2 million. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including loan term, rate type and investor type, were used to stratify the originated mortgage servicing rights. 52 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) [[GREPCENT_TABLE]] [["","December 31,","","December 31,","","December 31,"],["","2024","","2023","","2022"],["Mortgage servicing rights"],["Balances, January 1","$","18,807","","","$","18,619","","","$","17,780"],["Servicing rights capitalized","1,359","","","1,220","","","3,184"],["Amortization of servicing rights","(1,971)","","","(1,032)","","","(2,345)"],["Balances, December 31","18,195","","","18,807","","","18,619"],["Impairment allowance"],["Balances, January 1","\u2014","","","\u2014","","","(2,594)"],["Additions","\u2014","","","\u2014","","","\u2014"],["Reductions","\u2014","","","\u2014","","","2,594"],["Balances, December 31","\u2014","","","\u2014","","","\u2014"],["Mortgage servicing rights, net","$","18,195","","","$","18,807","","","$","18,619"]] [[/GREPCENT_TABLE]] Mortgage Warehouse Loans Horizon’s mortgage warehousing 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. At December 31, 2024, the mortgage warehouse loan balance was $64.8 million compared to $45.1 million as of December 31, 2023. During the three months ended December 31, 2024, the Company elected to transfer its mortgage warehouse loan portfolio at the lower of unamortized cost or fair market value to loans held for sale from the held for investment loan portfolio. On January 17, 2025, the Company completed the sale of its mortgage warehouse loan portfolio to an unrelated third party. Consumer Loans Consumer loans totaled $1.0 billion, or 19.9% of total loans as of December 31, 2024, compared to $1.0 billion, or 23.0% as of December 31, 2023. The decrease during 2024 was due to portfolio runoff within the Company's indirect auto portfolio that more than offset new originations. This decrease was partially offset by increases in the Company's installment portfolio. Credit Quality Non-Performing Assets Non–performing loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. From time to time, the Bank obtains information which may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of such, it is management's policy to convert the loan from an “earning asset” to a non–accruing loan. Further, it is management's policy to place a commercial loan on non–accrual status when delinquent in excess of 90 days or management has determined that the borrower's ability to continue to make payments is in doubt. The officer responsible for the loan, Executive Vice President and Chief Commercial Banking Officer, Senior Vice President Commercial Credit Officer and the Vice President Senior Commercial Workout Manager review all loans placed on 53 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) non–accrual status. Management continues to work diligently toward returning non–performing loans to an earning asset basis. The following table represents credit quality within the portfolio for 2024 and 2023: [[GREPCENT_TABLE]] [["","(Dollars in Thousands, except Ratios)"],["","December 31,"],["","2024","","2023"],["Non-accrual loans"],["Commercial","5,658","","","$","7,362"],["Residential Real estate","11,215","","","8,058"],["Mortgage warehouse","\u2014","","","\u2014"],["Consumer","8,919","","","4,290"],["Total non-accrual loans","$","25,792","","","$","19,710"],["90 days and greater delinquent - accruing interest","1,166","","","559"],["Total non-performing loans","$","26,958","","","$","20,269"],["Other real estate owned"],["Commercial","407","","","$","1,124"],["Residential Real estate","\u2014","","","182"],["Mortgage warehouse","\u2014","","","\u2014"],["Consumer","17","","","205"],["Total other real estate owned","$","424","","","$","1,511"],["Total non-performing assets","$","27,382","","","$","21,780"],["Net charge-offs (recoveries)"],["Commercial","(199)","","","944"],["Residential Real estate","(28)","","","(33)"],["Mortgage warehouse","\u2014","","","\u2014"],["Consumer","2,130","","","1,614"],["Total net charge-offs","$","1,903","","","$","2,525"],["Allowance for credit losses"],["Commercial","30,953","","","29,736"],["Residential Real estate","2,715","","","2,503"],["Mortgage warehouse","\u2014","","","481"],["Consumer","18,312","","","17,309"],["Total allowance for credit losses","$","51,980","","","$","50,029"],["Credit quality ratios"],["Non-accrual loans to HFI loans","0.53","%","","0.45","%"],["Non-performing assets to total assets","0.35","%","","0.27","%"],["Net charge-offs of average total loans","0.04","%","","0.07","%"],["Allowance for credit losses to non-accrual loans","192.82","%","","246.83","%"]] [[/GREPCENT_TABLE]] Non–performing loans totaled 51.9% and 40.5% of the allowance for credit losses at December 31, 2024 and 2023. respectively. Non–performing loans at December 31, 2024 totaled $27.0 million, an increase from $20.3 million as of December 31, 2023. The level of non–performing loans in 2024 remained consistent when compared to prior years. 54 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Non–performing loans as a percentage of total loans was 0.56% as of December 31, 2024, an increase from 0.46% as of December 31, 2023. [[GREPCENT_TABLE]] [["","Non-Accrual Loans","","Percent of Non\u2013Accrual Loans in Each Category to Total Loans","","Total Loans"],["December 31, 2024"],["Commercial","$","5,658","","","0.18","%","","$","3,078,156"],["Real estate","11,215","","","1.40","%","","802,909"],["Mortgage warehouse","\u2014","","","0.00","%","","\u2014"],["Consumer","8,919","","","0.92","%","","965,975"],["Total","$","25,792","","","0.53","%","","$","4,847,040"],["Allowance for credit losses on loans","$","51,980"],["Ratio of allowance for credit losses on loans to non\u2013performing loans","49.62","%"],["December 31, 2023"],["Commercial","$","7,362","","","0.28","%","","$","2,674,960"],["Real estate","8,058","","","1.18","%","","681,136"],["Mortgage warehouse","\u2014","","","0.00","%","","45,078"],["Consumer","4,849","","","0.48","%","","1,016,456"],["Total","$","20,269","","","0.46","%","","$","4,417,630"],["Allowance for credit losses on loans","$","50,029"],["Ratio of allowance for credit losses on loans to non\u2013performing loans","40.51","%"]] [[/GREPCENT_TABLE]] Other Real Estate Owned (“OREO”) totaled $0.4 million on December 31, 2024, a decrease of $0.8 million from December 31, 2023. On December 31, 2024, OREO was comprised of two properties, both of which properties were bank owned. No mortgage warehouse loans were non–performing or OREO as of December 31, 2024 and 2023. Allowance and Provision for Credit Losses The table below provides an allocation of the year–end allowance for credit losses on loans by loan portfolio segment; however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments. 55 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) [[GREPCENT_TABLE]] [["","Amount of Allowance Allocated","","Percent of Loans in Each Category to Total Loans","","Total Loans","","Ratio of Allowance Allocated to Loans in Each Category"],["December 31, 2024"],["Commercial","$","30,953","","","63.5","%","","$","3,078,156","","","1.01","%"],["Real estate","2,715","","","16.6","%","","802,909","","","0.34","%"],["Mortgage warehouse","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Consumer","18,312","","","19.9","%","","965,975","","","1.90","%"],["Total","$","51,980","","","100.0","%","","$","4,847,040","","","1.07","%"],["December 31, 2023"],["Commercial","$","29,736","","","60.6","%","","$","2,674,960","","","1.11","%"],["Real estate","2,503","","","15.4","%","","681,136","","","0.37","%"],["Mortgage warehouse","481","","","1.0","%","","45,078","","","1.07","%"],["Consumer","17,309","","","23.0","%","","1,016,456","","","1.70","%"],["Total","$","50,029","","","100.0","%","","$","4,417,630","","","1.13","%"]] [[/GREPCENT_TABLE]] At December 31, 2024, the allowance for credit losses was $52.0 million, or 1.07% of total loans outstanding, compared to $50.0 million, or 1.13%, at December 31, 2023. During 2024, a provision for credit losses on loans was recorded totaling $5.4 million compared to $2.5 million in 2023. Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of all of its loan portfolios. As a result of its quarterly reviews, a provision for credit losses is determined to bring the total ACL to a level called for by the analysis. Horizon's reserve includes allocations for potential future loan losses related to economic factors and the nature and characteristics of its loan portfolios. No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for credit losses. Horizon considers the allowance for credit losses to be adequate to cover losses inherent in the loan portfolio as of December 31, 2024. The following table presents information regarding the net charge-offs to average amount of loans outstanding by portfolio segment (dollars in thousands): 56 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) [[GREPCENT_TABLE]] [["","Net (Charge-offs)/Recoveries","","Average Loans Outstanding","","Net (Charge-offs)/ Recoveries to Average Loans Outstanding"],["December 31, 2024"],["Commercial","$","199","","","2,811,689","","","0.01","%"],["Real estate","28","","","784,043","","","0.00","%"],["Mortgage warehouse","\u2014","","","61,219","","","0.00","%"],["Consumer","(2,130)","","","1,022,619","","","(0.21)","%"],["Total","$","(1,903)","","","$","4,679,570","","","(0.04)","%"],["December 31, 2023"],["Commercial","$","(944)","","","2,498,453","","","(0.04)","%"],["Real estate","33","","","675,520","","","0.00","%"],["Mortgage warehouse","\u2014","","","54,798","","","0.00","%"],["Consumer","(1,614)","","","1,011,166","","","(0.16)","%"],["Total","$","(2,525)","","","$","4,239,937","","","(0.06)","%"],["December 31, 2022"],["Commercial","$","(680)","","","2,280,553","","","(0.03)","%"],["Real estate","53","","","621,163","","","0.01","%"],["Mortgage warehouse","\u2014","","","89,409","","","0.00","%"],["Consumer","(976)","","","850,667","","","(0.11)","%"],["Total","$","(1,603)","","","$","3,841,792","","","(0.04)","%"]] [[/GREPCENT_TABLE]] 57 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Deferred Tax Horizon had a net deferred tax asset totaling $49.9 million as of December 31, 2024 and a net deferred tax asset of $33.5 million as of December 31, 2023. The following table shows the major components of deferred tax: [[GREPCENT_TABLE]] [["","December 31,","","December 31,"],["","2024","","2023"],["Assets"],["Allowance for credit losses","$","12,590","","","$","12,546"],["Net operating loss and tax credits","10,805","","","9,592"],["Director and employee benefits","3,334","","","2,471"],["Unrealized loss on AFS securities and cash flow hedge","29,355","","","17,706"],["Basis in partnership equity investments","1,940","","","1,322"],["Capital loss carryover","\u2014","","","5,201"],["Fair value adjustment on acquisitions","883","","","\u2014"],["Other","2,938","","","2,856"],["Total assets","61,845","","","51,694"],["Liabilities"],["Depreciation","(4,061)","","","(4,512)"],["State tax","\u2014","","","(253)"],["Federal Home Loan Bank stock dividends","(353)","","","(365)"],["Difference in basis of intangible assets","(6,553)","","","(4,545)"],["Fair value adjustment on acquisitions","\u2014","","","(2,142)"],["Other","(1,003)","","","(1,131)"],["Total liabilities","(11,970)","","","(12,948)"],["Valuation allowance","\u2014","","","(5,201)"],["Net deferred tax asset/(liability)","$","49,875","","","$","33,545"]] [[/GREPCENT_TABLE]] Deposits The primary source of funds for the Bank comes from the acceptance of demand and time deposits. However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank and other sources when it can do so at interest rates and terms that are more favorable than those required for deposited funds or loan demand is greater than the ability to grow deposits. Total deposits were $5.6 billion at December 31, 2024, compared to $5.7 billion at December 31, 2023. Average deposits and rates by category for the three years ended December 31 are as follows: [[GREPCENT_TABLE]] [["","Average Balance Outstanding for the","","Average Rate Paid for the"],["","Years Ended December 31","","Years Ended December 31"],["","2024","","2023","","2022","","2024","","2023","","2022"],["Non\u2013interest bearing demand deposits","$","1,085,195","","","$","1,181,233","","","$","1,332,937"],["Interest bearing demand deposits","1,672,181","","","1,749,674","","","1,971,567","","","1.64","%","","1.26","%","","0.28","%"],["Savings deposits","755,856","","","841,644","","","940,499","","","0.91","%","","0.61","%","","0.13","%"],["Money market","937,538","","","756,092","","","810,083","","","3.49","%","","2.52","%","","0.45","%"],["Time deposits","1,165,349","","","1,151,178","","","791,519","","","4.12","%","","3.44","%","","0.95","%"],["Total deposits","$","5,616,119","","","$","5,679,821","","","$","5,846,605"]] [[/GREPCENT_TABLE]] The $63.7 million decrease in average deposits during 2024 was primarily due to the increase in rates during 2023 creating a competitive deposit environment and management's decision to strategically exit some higher-cost non- 58 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) relationship accounts, in addition to deposits leaving the banking system for alternative investment options. The transactional accounts average balances, as the lower cost funding sources, decreased $77.9 million and the average balances for higher cost time deposits increased $14.2 million. Horizon continually enhances its interest bearing consumer and commercial demand deposit products based on local market conditions and its need for funding to support various types of assets. As of December 31, 2024 and 2023, approximately $2.5 billion and $2.6 billion, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for Horizon Bank's regulatory reporting requirements. Included in amounts as of December 31, 2024 were $1.0 billion of public deposits insured through the State of Indiana’s Public Deposit Insurance Fund. Deposits that were not insured by the FDIC or State of Indiana's Public Deposit Insurance Fund represented 28% of total deposits as of December 31, 2024. Certificates and other time deposits for both retail and brokered maturing in years ending December 31, 2024 are as follows: [[GREPCENT_TABLE]] [["","Retail","","Brokered","","Total"],["2025","$","924,549","","","$","99,509","","","$","1,024,058"],["2026","33,733","","","15,023","","","48,756"],["2027","9,165","","","\u2014","","","9,165"],["2028","2,826","","","\u2014","","","2,826"],["2029","4,329","","","\u2014","","","4,329"],["Thereafter","19","","","\u2014","","","19"],["","$","974,621","","","$","114,532","","","$","1,089,153"]] [[/GREPCENT_TABLE]] Certificates of deposit of $250,000 or more, which are considered to be rate sensitive and are not considered a part of core deposits, mature as follows as of December 31, 2024: [[GREPCENT_TABLE]] [["Due in three months or less","$","291,732"],["Due after three months through six months","139,080"],["Due after six months through one year","82,233"],["Due after one year","36,316"],["","$","549,361"]] [[/GREPCENT_TABLE]] Interest expense on time certificates of $250,000 or more was approximately $22.7 million, $16.7 million and $4.2 million for 2024, 2023 and 2022. Off–Balance Sheet Arrangements As of December 31, 2024, Horizon did not have any off–balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off–balance sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party and under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. 59 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) Liquidity & Capital Resources Capital Resources Stockholders’ equity is influenced primarily by earnings, dividends, and changes in the unrealized holding gains or losses, net of taxes, on available-for-sale investment securities. Stockholders’ equity increased $44.8 million, or 6.2%, to $763.6 million as of December 31, 2024 from $718.8 million as of December 31, 2023, due to changes in accumulated other comprehensive loss related to unrealized gains on available-for-sale securities and retention of earnings, which is primarily offset by cash dividend payments on outstanding common stock. On December 17, 2024, the Company approved a dividend of $0.16 per share, payable on January 17, 2025 to stockholders of record on January 3, 2025. On July 16, 2019, the Board of Directors of the Company authorized a stock repurchase program for up to 2,250,000 shares of Horizon’s issued and outstanding common stock, no par value. As of December 31, 2024, Horizon had repurchased a total of 803,349 shares at an average price per share of $16.89. The Company did not repurchase outstanding common shares during 2024. As a bank holding company, the Company must comply with the capital requirements established by the Federal Reserve, and our subsidiary Bank must comply with the capital requirements established by the FDIC. The current risk-based guidelines applicable to us and our Bank are based on the Basel III framework, as implemented by the federal bank regulators. As of December 31, 2024 and 2023, the Company had capital levels that, in all cases, exceeded the guidelines to be deemed “well-capitalized.” For additional information regarding our capital levels, see “Notes to Consolidated Financial Statements—Regulatory Capital,” included in Part IV, Item 15 of this report. Liquidity The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayments, investment security sales, cash flows and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the FHLB and the Federal Reserve Bank (“FRB”). At December 31, 2024, Horizon had available approximately $1.7 billion in available credit from the FHLB, FRB Discount Window and various money center banks. The following factors could impact Horizon’s funding needs in the future: ◦Horizon had outstanding borrowings of approximately $1.1 billion with the FHLB and total borrowing capacity with the FHLB of $1.6 billion. Generally, the loan terms from the FHLB are better than the terms Horizon can receive from other sources, making it less expensive to borrow money from the FHLB. Financial difficulties at the FHLB could reduce or eliminate Horizon’s additional borrowing capacity with the FHLB or the FHLB could change collateral requirements, which could lower the Company’s borrowing availability. ◦Horizon had a total of $190.0 million of unused Federal Fund lines from various money center banks. These are uncommitted lines and could be withdrawn at any time by the correspondent banks. ◦Horizon had a total of $800.8 million of available collateral at the FRB secured by securities. These securities may mature, call, or be sold, which would reduce the available collateral. ◦Horizon had approximately $38.4 million of unpledged investment securities at December 31, 2024. 60 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) ◦A downgrade in Horizon’s ability to obtain credit due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, or a significant merger or acquisition could impact the availability of funding sources. ◦An act of terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund, hedge fund or a government agency could affect the cost and availability of funding sources. ◦Market speculation or rumors about Horizon or the banking industry in general may adversely affect the cost and availability of normal funding sources. If any of these events occur, they could force Horizon to borrow money from other sources including negotiable certificates of deposit. Such other monies may only be available at higher interest rates and on less advantageous terms, which will impact our net income and could impact our ability to grow. Management believes Horizon has adequate funding sources to meet short and long term needs. Horizon maintains a liquidity contingency plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity through a problem period. During 2024, cash flows were generated primarily from the proceeds from borrowings totaling $512.8 million, the sales, maturities, and principal repayments of investment securities of $88.4 million. Cash flows were primarily used to purchase investments totaling $0.3 million, to purchase loans totaling $240.0 million, an increase in net loans of $217.1 million, a decrease in deposits of $64.2 million and the repayment of borrowings totaling $563.5 million. The net cash and cash equivalent position decreased by $233.1 million during 2024. At December 31, 2024, the Bank had $1.0 billion in commitments to extend credit outstanding, excluding interest rate lock commitments for residential mortgage loans intended for sale in the secondary market that meet the definition of a derivative. Time deposits due within one year of December 31, 2024 totaled $1.0 billion, or 94.0% of time deposits. If these maturing time deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits due on or before December 31, 2024. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Use of Non-GAAP Financial Measures In addition to financial measures presented in accordance with GAAP, this document refers to non-GAAP financial measures, which Horizon believes are helpful to investors and provide a greater understanding of our business and financial results without the impact of items or events that may obscure trends in the Company’s underlying performance. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this document for reconciliations of the non-GAAP information identified herein and its most comparable GAAP measures. 61 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) [[GREPCENT_TABLE]] [["Non\u2013GAAP Reconciliation of Net Fully-Taxable Equivalent (\"FTE\") Interest Margin"],["(Dollars in Thousands, Unaudited)"],["","","December 31,","","December 31,","","December 31,"],["","","2024","","2023","","2022"],["Interest income (GAAP)","(A)","$","356,483","","","$","312,305","","","$","236,033"],["Taxable-equivalent adjustment:"],["Investment securities - tax exempt (1)","","$","6,762","","","$","7,545","","","$","7,716"],["Loan receivable (2)","","$","1,416","","","$","1,050","","","$","684"],["FTE Interest income (non-GAAP)","(B)","$","364,661","","","$","320,900","","","$","244,433"],["Interest expense (GAAP)","(C)","$","167,879","","","$","136,561","","","$","36,515"],["Net interest income (GAAP)","(D) =(A) - (C)","$","188,604","","","$","175,744","","","$","199,518"],["Net FTE interest income (non-GAAP)","(E) = (B) - (C)","$","196,782","","","$","184,339","","","$","207,918"],["Average interest earning assets","(F)","7,344,507","","","7,268,767","","","7,003,306"],["Net FTE interest margin (non-GAAP)","(G) = (E) / (F)","2.68","%","","2.54","%","","2.97","%"],["(1) The following represents municipal securities interest income for investment securities classified as available-for-sale and held-to-maturity"],["(2) The following represents municipal loan interest income for loan receivables classified as held for sale and held for investment"],["(3) Management believes fully taxable equivalent, or FTE, interest income is useful to investors in evaluating the Company's performance as a comparison of the returns between a tax-free investment and a taxable alternative. The Company adjusts interest income for tax-exempt loans and securities to an FTE basis utilizing a 21% tax rate"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Non\u2013GAAP Reconciliation of Return on Average Tangible Common Equity"],["(Dollars in Thousands, Unaudited)"],["","","Year Ended"],["","","December 31,","","December 31,","","December 31,"],["","","2024","","2023","","2022"],["Net income (loss) (GAAP)","(A)","$","35,429","","","$","27,981","","","$","93,408"],["Average stockholders' equity","(B)","$","737,793","","","$","706,274","","","$","683,630"],["Average intangible assets","(C)","167,238","","","170,745","","","174,003"],["Average tangible equity (Non-GAAP)","(D) = (B) - (C)","$","570,555","","","$","535,529","","","$","509,627"],["Return on average tangible common equity (\"ROACE\") (non-GAAP)","(E) = (A) / (D)","6.21","%","","5.22","%","","18.33","%"]] [[/GREPCENT_TABLE]] 62 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data) [[GREPCENT_TABLE]] [["Non\u2013GAAP Reconciliation of Tangible Common Equity to Tangible Assets"],["(Dollars in Thousands, Unaudited)"],["","","Year Ended"],["","","December 31,","","December 31,","","December 31,"],["","","2024","","2023","","2022"],["Total stockholders' equity (GAAP)","(A)","$","763,582","","","$","718,812","","","$","677,375"],["Intangible assets (end of period)","(B)","165,434","","","168,837","","","172,450"],["Total tangible common equity (non-GAAP)","(C) = (A) - (B)","$","598,148","","","$","549,975","","","$","504,925"],["Total assets (GAAP)","(D)","7,801,146","","","7,940,485","","","7,872,518"],["Intangible assets (end of period)","(B)","165,434","","","168,837","","","172,450"],["Total tangible assets (non-GAAP)","(E) = (D) - (B)","$","7,635,712","","","$","7,771,648","","","$","7,700,068"],["Tangible common equity to tangible assets (Non-GAAP)","(G) = (C) / (E)","7.83","%","","7.08","%","","6.56","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Non\u2013GAAP Reconciliation of Tangible Book Value Per Share"],["(Dollars in Thousands, Unaudited)"],["","","Year Ended"],["","","December 31,","","December 31,","","December 31,"],["","","2024","","2023","","2022"],["Total stockholders' equity (GAAP)","(A)","$","763,582","","","$","718,812","","","$","677,375"],["Intangible assets (end of period)","(B)","165,434","","","168,837","","","172,450"],["Total tangible common equity (non-GAAP)","(C) = (A) - (B)","$","598,148","","","$","549,975","","","$","504,925"],["Common shares outstanding","(D)","43,722,086","","","43,652,063","","","43,574,151"],["Tangible book value per common share (non-GAAP)","(E) = (C) / (D)","$","13.68","","","$","12.60","","","$","11.59"]] [[/GREPCENT_TABLE]] 63 Table of Contents HORIZON BANCORP, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial Condition and Results of Operations (Table dollars in thousands except per share data)