HBNC Q1 2016 10-Q

Horizon Bancorp (HBNC) SEC Quarterly Report (10-Q) for Q2 2016

HBNC Q3 2016 10-Q
HBNC Q1 2016 10-Q HBNC Q3 2016 10-Q
Table of Contents

HORIZON BANCORP

FORM 10-Q

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

Commission file number 0-10792

HORIZON BANCORP

(Exact name of registrant as specified in its charter)

Indiana 35-1562417

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

515 Franklin Square, 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

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer ¨ Accelerated Filer x
Non-accelerated Filer ¨   Do not check if smaller reporting company Smaller Reporting Company ¨

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 14,776,952 shares of Common Stock, no par value, at August 9, 2016.

Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statement of Stockholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations 41

Item 3.

Quantitative and Qualitative Disclosures about Market Risk 57

Item 4.

Controls and Procedures 57

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings 58

Item 1A.

Risk Factors 58

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds 58

Item 3.

Defaults Upon Senior Securities 58

Item 4.

Mine Safety Disclosures 58

Item 5.

Other Information 58

Item 6.

Exhibits 59

Signatures

60

Index To Exhibits

61

2

Table of Contents

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

June 30 December 31
2016 2015
(Unaudited)

Assets

Cash and due from banks

$ 109,224 $ 48,650

Investment securities, available for sale

455,239 444,982

Investment securities, held to maturity (fair value of $180,059 and $193,703)

173,696 187,629

Loans held for sale

7,812 7,917

Loans, net of allowance for loan losses of $14,226 and $14,534

1,923,599 1,734,597

Premises and equipment, net

61,186 60,798

Federal Reserve and Federal Home Loan Bank stock

16,636 13,823

Goodwill

56,458 49,600

Other intangible assets

8,686 7,371

Interest receivable

11,526 10,535

Cash value of life insurance

57,944 54,504

Other assets

36,074 31,995

Total assets

$ 2,918,080 $ 2,652,401

Liabilities

Deposits

Non-interest bearing

$ 397,412 $ 335,955

Interest bearing

1,684,849 1,544,198

Total deposits

2,082,261 1,880,153

Borrowings

492,883 449,347

Subordinated debentures

32,874 32,797

Interest payable

961 507

Other liabilities

28,099 22,765

Total liabilities

2,637,078 2,385,569

Commitments and contingent liabilities

Stockholders' Equity

Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 0 and 12,500 shares

-   12,500

Common stock, no par value Authorized, 44,000,000 shares Issued, 12,590,784 and 11,995,324 shares Outstanding, 12,571,534 and 11,939,887 shares

-   -  

Additional paid-in capital

120,758 106,370

Retained earnings

156,651 148,685

Accumulated other comprehensive income (loss)

3,593 (723

Total stockholders' equity

281,002 266,832

Total liabilities and stockholders' equity

$ 2,918,080 $ 2,652,401

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

Three Months Ended Six Months Ended
June 30 June 30
2016 2015 2016 2015
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Interest Income

Loans receivable

$ 20,794 $ 17,981 $ 40,541 $ 34,843

Investment securities

Taxable

2,661 2,067 5,205 4,221

Tax exempt

1,195 1,079 2,432 2,156

Total interest income

24,650 21,127 48,178 41,220

Interest Expense

Deposits

1,557 1,237 3,048 2,469

Borrowed funds

1,721 1,539 3,480 3,018

Subordinated debentures

503 501 1,007 997

Total interest expense

3,781 3,277 7,535 6,484

Net Interest Income

20,869 17,850 40,643 34,736

Provision for loan losses

232 1,906 764 2,520

Net Interest Income after Provision for Loan Losses

20,637 15,944 39,879 32,216

Non-interest Income

Service charges on deposit accounts

1,335 1,085 2,573 2,084

Wire transfer fees

175 182 296 333

Interchange fees

1,663 1,366 3,121 2,468

Fiduciary activities

1,465 1,216 3,100 2,513

Gain on sale of investment securities (includes $767 for the three months ended and $875 for the six months ended June 30, 2016 and $0 for the three months ended and $124 for the six months ended June 30, 2015, related to accumulated other comprehensive earnings reclassifications)

767 -   875 124

Gain on sale of mortgage loans

3,529 2,642 5,643 5,021

Mortgage servicing income net of impairment

500 300 947 479

Increase in cash value of bank owned life insurance

351 257 696 515

Death benefit on bank owned life insurance

-   -   -   145

Other income

84 138 482 570

Total non-interest income

9,869 7,186 17,733 14,252

Non-interest Expense

Salaries and employee benefits

10,317 8,385 20,382 16,889

Net occupancy expenses

1,901 1,375 3,837 2,926

Data processing

1,134 966 2,239 1,889

Professional fees

747 660 1,578 1,187

Outside services and consultants

2,198 918 3,297 1,544

Loan expense

1,409 1,367 2,604 2,624

FDIC insurance expense

409 339 814 676

Other losses

136 150 403 105

Other expense

3,304 2,490 6,148 4,878

Total non-interest expense

21,555 16,650 41,302 32,718

Income Before Income Tax

8,951 6,480 16,310 13,750

Income tax expense (includes $268 for the three months ended and $306 for the six months ended June 30, 2016 and $0 for the three months ended and $43 for the six months ended June 30, 2015, related to income tax expense from reclassification items)

2,625 1,752 4,603 3,664

Net Income

6,326 4,728 11,707 10,086

Preferred stock dividend

-   (31 (42 (63

Net Income Available to Common Shareholders

$ 6,326 $ 4,697 $ 11,665 $ 10,023

Basic Earnings Per Share

$ 0.52 $ 0.51 $ 0.97 $ 1.09

Diluted Earnings Per Share

0.52 0.49 0.96 1.04

See notes to condensed consolidated financial statements

4

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

Three Months Ended June 30 Six Months Ended June 30
2016 2015 2016 2015
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Net Income

$ 6,326 $ 4,728 $ 11,707 $ 10,086

Other Comprehensive Income (Loss)

Change in fair value of derivative instruments:

Change in fair value of derivative instruments for the period

(83 511 (645 182

Income tax effect

29 (179 226 (64

Changes from derivative instruments

(54 332 (419 118

Change in securities:

Unrealized appreciation (depreciation) for the period on AFS securities

2,691 (2,364 8,637 (402

Amortization from transfer of securities from available-for-sale to held-to-maturity securities

(248 (158 (477 (272

Reclassification adjustment for securities gains realized in income

(767 -   (875 (124

Income tax effect

(511 882 (2,550 279

Unrealized gains (losses) on securities

949 (1,640 4,735 (519

Other Comprehensive Income (Loss), Net of Tax

895 (1,308 4,316 (401

Comprehensive Income

$ 7,221 $ 3,420 $ 16,023 $ 9,685

See notes to condensed consolidated financial statements

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H ORIZON B ANCORP AND S UBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

Accumulated
Additional Other
Preferred Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total

Balances, January 1, 2016

$ 12,500 $ 106,370 $ 148,685 $ (723 $ 266,832

Net income

11,707 11,707

Other comprehensive loss, net of tax

4,316 4,316

Redemption of preferred stock

(12,500 (12,500

Amortization of unearned compensation

150 150

Stock option expense

170 170

Stock issued in acquisition

14,068 14,068

Cash dividends on preferred stock (1.00%)

(42 (42

Cash dividends on common stock ($.30 per share)

(3,699 (3,699

Balances, June 30, 2016

$ -   $ 120,758 $ 156,651 $ 3,593 $ 281,002

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

Six Months Ended June 30
2016 2015
(Unaudited) (Unaudited)

Operating Activities

Net income

$ 11,707 $ 10,086

Items not requiring (providing) cash

Provision for loan losses

764 2,520

Depreciation and amortization

2,463 1,883

Share based compensation

170 138

Mortgage servicing rights net impairment

840 356

Premium amortization on securities available for sale, net

2,673 1,289

Gain on sale of investment securities

(875 (124

Gain on sale of mortgage loans

(5,643 (5,021

Proceeds from sales of loans

144,197 155,746

Loans originated for sale

(138,452 (152,259

Change in cash value of life insurance

(695 (515

Gain (Loss) on sale of other real estate owned

118 (206

Net change in

Interest receivable

(355 (577

Interest payable

399 (36

Other assets

(5,624 4,099

Other liabilities

316 (1,511

Net cash provided by operating activities

12,003 15,868

Investing Activities

Purchases of securities available for sale

(50,143 (47,958

Proceeds from sales, maturities, calls, and principal repayments of securities available for sale

65,523 40,359

Purchases of securities held to maturity

(17,960 -  

Proceeds from maturities of securities held to maturity

12,934 1,535

Proceeds from the sale of FHLB stock

(2,231 268

Net change in loans

(88,250 (142,131

Proceeds on the sale of OREO and repossessed assets

1,253 1,793

Change in premises and equipment, net

(683 (3,587

Acquisition of Kosciusko, net of cash received

30,437 -  

Net cash used in investing activities

(49,120 (149,721

Financing Activities

Net change in

Deposits

78,622 102,404

Borrowings

35,310 34,115

Redemption of preferred stock

(12,500 -  

Proceeds from issuance of stock

389

Dividends paid on common shares

(3,699 (2,611

Dividends paid on preferred shares

(42 (63

Net cash provided by financing activities

97,691 134,234

Net Change in Cash and Cash Equivalents

60,574 381

Cash and Cash Equivalents, Beginning of Period

48,650 43,476

Cash and Cash Equivalents, End of Period

$ 109,224 $ 43,857

Additional Supplemental Information

Interest paid

$ 7,081 $ 6,519

Income taxes paid

4,750 3,700

Transfer of loans to other real estate owned

1,971 (1,384

The Company purchased all of the capital stock of Kosciusko for $22,581 on June 1, 2016. In conjunction with the acquisition, liabilities were assumed as follows:

Fair value of assets acquired

155,413 -  

Less: common stock issued

14,068 -  

Cash paid for the capital stock

8,513 -  

Liabilities assumed

132,832 -  

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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 ("Horizon" or the "Company") and its wholly-owned subsidiaries, including Horizon Bank, N.A. ("Bank"). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2016 and June 30, 2015 are not necessarily indicative of the operating results for the full year of 2016 or 2015. 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 2015 filed with the Securities and Exchange Commission on February 29, 2016. The condensed consolidated balance sheet of Horizon as of December 31, 2015 has been derived from the audited balance sheet as of that date.

Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share.

Three Months Ended Six Months Ended
June 30 June 30
2016 2015 2016 2015
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Basic earnings per share

Net income

$ 6,326 $ 4,728 $ 11,707 $ 10,086

Less: Preferred stock dividends

-   31 42 63

Net income available to common shareholders

$ 6,326 $ 4,697 $ 11,665 $ 10,023

Weighted average common shares outstanding

12,179,253 9,240,005 12,064,335 9,228,075

Basic earnings per share

$ 0.52 $ 0.51 $ 0.97 $ 1.09

Diluted earnings per share

Net income available to common shareholders

$ 6,326 $ 4,697 $ 11,665 $ 10,023

Weighted average common shares outstanding

12,179,253 9,240,005 12,064,335 9,228,075

Effect of dilutive securities:

Warrants

-   324,698 -   323,198

Restricted stock

20,721 34,892 21,050 30,816

Stock options

42,804 37,991 41,643 33,462

Weighted average shares outstanding

12,242,778 9,637,586 12,127,028 9,615,551

Diluted earnings per share

$ 0.52 $ 0.49 $ 0.96 $ 1.04

There were zero shares for both the three and six months ended June 30, 2016, respectively, and 2,500 and 41,444 for the three and six months ended June 30, 2015 which were not included in the computation of diluted earnings per share because they were non-dilutive.

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2015 Annual Report on Form 10-K.

Note 2 – Acquisitions

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation ("Peoples") and Horizon Bank N.A.'s acquisition of Peoples Federal Savings Bank of DeKalb County ("Peoples FSB"), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock (the "Exchange Ratio") and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon's stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. The Company had approximately $4.9 million in costs related to the acquisition as of December 31, 2015. These expenses were classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company increased its deposit base and reduced transaction costs. The Company also expects to reduce cost through economies of scale.

Under the purchase method of accounting, the total estimated purchase price is allocated to Peoples net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management's preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the Peoples acquisition is allocated as follows:

ASSETS

Cash and due from banks

$ 205,054

Investment securities, held to maturity

2,038

Commercial

67,435

Residential mortgage

137,331

Consumer

19,593

Total loans

224,359

Premises and equipment, net

5,524

FRB and FHLB stock

2,743

Goodwill

21,424

Core deposit intangible

4,394

Interest receivable

1,279

Cash value of life insurance

13,898

Other assets

4,364

Total assets purchased

$ 485,077

Common shares issued

$ 55,506

Cash paid

22,641

Total estimated purchase price

$ 78,147

LIABILITIES

Deposits

Non-interest bearing

$ 28,251

NOW accounts

65,771

Savings and money market

125,176

Certificates of deposits

131,889

Total deposits

351,087

Borrowings

48,884

Interest payable

21

Other liabilities

6,938

Total liabilities assumed

$ 406,930

Of the total purchase price of $78.1 million, $4.4 million has been allocated to core deposit intangible. Additionally, $21.0 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over seven years on a straight line basis.

The Company acquired the $228.6 million loan portfolio at a fair value discount of $4.8 million. The performing portion of the portfolio, $223.4 million, had an estimated fair value of $220.0 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The Company acquired certain loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

The loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

Loans with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of July 1, 2015.

Contractually required principal and interest at acquisition

$ 5,730

Contractual cash flows not expected to be collected (nonaccretable differences)

715

Expected cash flows at acquisition

5,015

Interest component of expected cash flows (accretable discount)

647

Fair value of acquired loans accounted for under ASC 310-30

$ 4,368

The results of operations of Peoples and Peoples FSB have been included in the Company's consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended June 30, 2016 and 2015 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
2016 2015 2016 2015

Summary of Operations:

Net Interest Income

$ 20,869 $ 20,829 $ 40,643 $ 40,690

Provision for Loan Losses

232 1,936 764 2,580

Net Interest Income after Provision for Loan Losses

20,637 18,893 39,879 38,110

Non-interest Income

9,869 8,086 17,733 16,145

Non-Interest Expense

21,555 19,852 41,302 39,014

Income before Income Taxes

8,951 7,127 16,310 15,241

Income Tax Expense

2,625 1,779 4,603 3,791

Net Income

6,326 5,348 11,707 11,450

Net Income Available to Common Shareholders

$ 6,326 $ 5,317 $ 11,665 $ 11,387

Basic Earnings Per Share

$ 0.52 $ 0.46 $ 0.97 $ 0.99

Diluted Earnings Per Share

$ 0.52 $ 0.45 $ 0.96 $ 0.96

The pro forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro forma information for the three and six months ended June 30, 2015 includes $657,000, net of tax, of operating revenue from Peoples and approximately $95,000, net of tax, of non-recurring expenses directly attributable to the Peoples acquisition.

The pro forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation ("Kosciusko") and Horizon Bank's acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 3.0122 shares of Horizon common stock for each share of Kosciusko's common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consists of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 582,287 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $24.85 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million. The Company has had approximately $1.6 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Kosciusko acquisition is detailed in the following table. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

ASSETS

Cash and due from banks

$ 38,950

Investment securities, held to maturity

1,191

Commercial

67,310

Residential mortgage

26,244

Consumer

6,319

Total loans

99,873

Premises and equipment, net

1,466

FRB and FHLB stock

582

Goodwill

6,858

Core deposit intangible

1,867

Interest receivable

636

Cash value of life insurance

2,745

Other assets

1,245

Total assets purchased

$ 155,413

Common shares issued

$ 14,068

Cash paid

8,513

Total estimated purchase price

$ 22,581

LIABILITIES

Deposits

Non-interest bearing

$ 28,549

NOW accounts

35,213

Savings and money market

26,953

Certificates of deposits

32,771

Total deposits

123,486

Borrowings

8,303

Interest payable

55

Other liabilities

988

Total liabilities assumed

$ 132,832

Of the total estimated purchase price of $22.6 million, $1.9 million has been allocated to core deposit intangible. Additionally, $6.9 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over seven years on a straight line basis.

The Company acquired loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The Company acquired the $130.5 million loan portfolio at a fair value discount of $6.4 million. The performing portion of the portfolio, $106.2 million, had an estimated fair value of $104.6 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

Pro-forma statements were not presented due to the immateriality of the transaction.

On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation ("LaPorte Bancorp") and Horizon Bank's acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.629 shares of Horizon common stock for each share of LaPorte Bancorp's common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consists of 65% stock and 35% cash. LaPorte Bancorp shareholders owning fewer than 100 shares of common stock received $17.50 in cash for each common share. As a result of LaPorte stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 2,280,992 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $27.54 per share of Horizon common stock, the transaction has an implied valuation of approximately $101.7 million.

As of July 18, 2016, LaPorte Bancorp had total assets of approximately $536.0 million, total deposits of approximately $370.9 million and total net loans of approximately $316.8 million.

Utilizing July 15, 2016 financials for both Horizon and LaPorte Bancorp and an estimate of the fair market value adjustments associated with the merger, Horizon would have total assets of approximately $3.5 billion, total deposits of approximately $2.5 billion and total net loans of approximately $2.2 billion on a pro forma basis. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided.

12

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 3 – Securities

The fair value of securities is as follows:

Gross Gross
June 30, 2016 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

Available for sale

U.S. Treasury and federal agencies

$ 18,384 $ 86 $ -   $ 18,470

State and municipal

60,961 1,654 (4 62,611

Federal agency collateralized mortgage obligations

151,736 2,596 (69 154,263

Federal agency mortgage-backed pools

215,445 4,654 (276 219,823

Corporate notes

32 40 -   72

Total available for sale investment securities

$ 446,558 $ 9,030 $ (349 $ 455,239

Held to maturity

State and municipal

$ 143,093 $ 7,586 $ (2,606 $ 148,073

Federal agency collateralized mortgage obligations

8,424 199 -   8,623

Federal agency mortgage-backed pools

22,179 1,184 -   23,363

Total held to maturity investment securities

$ 173,696 $ 8,969 $ (2,606 $ 180,059

Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2015 Cost Gains Losses Value

Available for sale

U.S. Treasury and federal agencies

$ 5,940 $ 3 $ (17 $ 5,926

State and municipal

73,829 1,299 (33 75,095

Federal agency collateralized mortgage obligations

157,291 567 (1,655 156,203

Federal agency mortgage-backed pools

206,970 2,080 (1,346 207,704

Corporate notes

32 22 -   54

Total available for sale investment securities

$ 444,062 $ 3,971 $ (3,051 $ 444,982

Held to maturity

U.S. Treasury and federal agencies

$ 5,859 $ 93 $ -   $ 5,952

State and municipal

146,331 5,375 (253 151,453

Federal agency collateralized mortgage obligations

9,051 27 (124 8,954

Federal agency mortgage-backed pools

26,388 1,141 (185 27,344

Total held to maturity investment securities

$ 187,629 $ 6,636 $ (562 $ 193,703

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio and held-to-maturity, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At June 30, 2016, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company's investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at June 30, 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2016 and December 31, 2015, 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.

June 30, 2016 December 31, 2015
Amortized Fair Amortized Fair
Cost Value Cost Value

Available for sale

Within one year

$ 7,123 $ 7,153 $ 7,192 $ 7,232

One to five years

46,104 46,664 38,197 38,894

Five to ten years

11,351 11,804 16,807 17,152

After ten years

14,799 15,532 17,605 17,797

79,377 81,153 79,801 81,075

Federal agency collateralized mortgage obligations

151,736 154,263 157,291 156,203

Federal agency mortgage-backed pools

215,445 219,823 206,970 207,704

Total available for sale investment securities

$ 446,558 $ 455,239 $ 444,062 $ 444,982

Held to maturity

Within one year

$ -   $ -   $ -   $ -  

One to five years

20,415 20,436 17,815 18,403

Five to ten years

88,183 92,551 106,167 110,026

After ten years

34,495 35,086 28,208 28,976

143,093 148,073 152,190 157,405

Federal agency collateralized mortgage obligations

8,424 8,623 9,051 8,954

Federal agency mortgage-backed pools

22,179 23,363 26,388 27,344

Total held to maturity investment securities

$ 173,696 $ 180,059 $ 187,629 $ 193,703

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.

Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
June 30, 2016 Value Losses Value Losses Value Losses

State and municipal

$ 1,763 $ (2,609 $ 132 $ (1 $ 1,895 $ (2,610

Federal agency collateralized mortgage obligations

4,059 (23 9,079 (46 13,138 (69

Federal agency mortgage-backed pools

23,361 (276 -   -   23,361 (276

Total temporarily impaired securities

$ 29,183 $ (2,908 $ 9,211 $ (47 $ 38,394 $ (2,955

Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2015 Value Losses Value Losses Value Losses

U.S. Treasury and federal agencies

$ 5,468 $ (17 $ -   $ -   $ 5,468 $ (17

State and municipal

17,353 (280 446 (6 17,799 (286

Federal agency collateralized mortgage obligations

89,459 (1,124 25,428 (655 114,887 (1,779

Federal agency mortgage-backed pools

113,244 (1,212 16,506 (319 129,750 (1,531

Total temporarily impaired securities

$ 225,524 $ (2,633 $ 42,380 $ (980 $ 267,904 $ (3,613

Three Months Ended June 30 Six Months Ended June 30
2016 2015 2016 2015

Sales of securities available for sale (Unaudited)

Proceeds

$ 17,536 $ -   $ 25,077 $ 13,332

Gross gains

952 -   1,060 147

Gross losses

(185 -   (185 (23

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 4  Loans

June 30 December 31
2016 2015

Commercial

Working capital and equipment

$ 416,205 $ 381,245

Real estate, including agriculture

424,300 391,668

Tax exempt

11,458 8,674

Other

22,617 23,408

Total

874,580 804,995

Real estate

1–4 family

489,133 433,015

Other

4,493 4,129

Total

493,626 437,144

Consumer

Auto

162,172 168,397

Recreation

5,005 5,365

Real estate/home improvement

50,121 47,015

Home equity

130,017 127,113

Unsecured

4,175 4,120

Other

12,430 10,290

Total

363,920 362,300

Mortgage warehouse

205,699 144,692

Total loans

1,937,825 1,749,131

Allowance for loan losses

(14,226 (14,534

Loans, net

$ 1,923,599 $ 1,734,597

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.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Real Estate and Consumer

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

Mortgage Warehousing

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

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table shows the recorded investment of individual loan categories.

Loan Deferred Recorded
June 30, 2016 Balance Interest Due Fees / (Costs) Investment

Owner occupied real estate

$ 298,481 $ 1,068 $ 1,134 $ 300,683

Non owner occupied real estate

343,360 346 566 344,272

Residential spec homes

7,660 13 13 7,686

Development & spec land loans

23,171 58 16 23,245

Commercial and industrial

199,933 1,419 246 201,598

Total commercial

872,605 2,904 1,975 877,484

Residential mortgage

473,563 1,434 2,277 477,274

Residential construction

17,786 36 -   17,822

Mortgage warehouse

205,699 480 -   206,179

Total real estate

697,048 1,950 2,277 701,275

Direct installment

59,105 164 (383 58,886

Direct installment purchased

131 -   -   131

Indirect installment

144,935 300 -   145,235

Home equity

160,955 621 (823 160,753

Total consumer

365,126 1,085 (1,206 365,005

Total loans

1,934,779 5,939 3,046 1,943,764

Allowance for loan losses

(14,226 -   -   (14,226

Net loans

$ 1,920,553 $ 5,939 $ 3,046 $ 1,929,538

Loan Deferred Recorded
December 31, 2015 Balance Interest Due Fees / (Costs) Investment

Owner occupied real estate

$ 268,281 $ 613 $ 1,328 $ 270,222

Non owner occupied real estate

326,399 306 497 327,202

Residential spec homes

5,018 9 17 5,044

Development & spec land loans

18,183 33 26 18,242

Commercial and industrial

184,911 1,246 335 186,492

Total commercial

802,792 2,207 2,203 807,202

Residential mortgage

414,924 1,275 2,470 418,669

Residential construction

19,751 34 -   19,785

Mortgage warehouse

144,692 480 -   145,172

Total real estate

579,367 1,789 2,470 583,626

Direct installment

54,341 168 (359 54,150

Direct installment purchased

153 -   -   153

Indirect installment

151,523 323 -   151,846

Home equity

157,164 628 (522 157,270

Total consumer

363,181 1,119 (881 363,419

Total loans

1,745,340 5,115 3,792 1,754,247

Allowance for loan losses

(14,534 -   -   (14,534

Net loans

$ 1,730,806 $ 5,115 $ 3,792 $ 1,739,713

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 5 – Accounting for Certain Loans Acquired in a Transfer

The Company acquired loans in acquisitions and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds. Amounts for Kosciusko were estimated as of June 30, 2016 as the final analysis of loans with deterioration was not completed.

The carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:

June 30 June 30 June 30 June 30 June 30
2016 2016 2016 2016 2016
Heartland Summit Peoples Kosciusko Total

Commercial

$ 1,243 $ 5,409 $ 750 $ 7,576 $ 14,978

Real estate

641 1,181 281 316 2,419

Consumer

1 9 -   22 32

Outstanding balance

$ 1,885 $ 6,599 $ 1,031 $ 7,914 $ 17,429

Carrying amount, net of allowance of $0

$ 17,429

December 31 December 31 December 31 December 31 December 31
2015 2015 2015 2015 2015
Heartland Summit Peoples Kosciusko Total

Commercial

$ 1,633 $ 5,567 $ 1,061 $ -   $ 8,261

Real estate

693 1,216 179 -   2,088

Consumer

6 35 -   -   41

Outstanding balance

$ 2,332 $ 6,818 $ 1,240 $ -   $ 10,390

Carrying amount, net of allowance of $63

$ 10,327

Accretable yield, or income expected to be collected for the six months ended June 30, is as follows:

Six Months Ended June 30, 2016
Heartland Summit Peoples Kosciusko Total

Balance at January 1

$ 795 $ 708 $ 555 $ -   $ 2,058

Additions

-   -   -   950 950

Accretion

(89 (103 (69 -   (261

Reclassification from nonaccretable difference

-   -   -   -   -  

Disposals

(24 (4 (58 -   (86

Balance at June 30

$ 682 $ 601 $ 428 $ 950 $ 2,661

Six Months Ended June 30, 2015
Heartland Summit Peoples Kosciusko Total

Balance at January 1

$ 2,400 $ 1,268 $ -   $ -   $ 3,668

Additions

-   -   -   -   -  

Accretion

(205 (180 -   -   (385

Reclassification from nonaccretable difference

-   -   -   -   -  

Disposals

(117 (49 -   -   (166

Balance at June 30

$ 2,078 $ 1,039 $ -   $ -   $ 3,117

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

During the six months ended June 30, 2016 and 2015, the Company decreased the allowance for loan losses on purchased loans by a recovery to the income statement of $0 and $76,000, respectively.

Note 6 – Allowance for Loan Losses

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes the five-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.

Three Months Ended Six Months Ended
June 30 June 30
2016 2015 2016 2015
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Balance at beginning of the period

$ 14,236 $ 16,634 $ 14,534 $ 16,501

Loans charged-off:

Commercial

Owner occupied real estate

31 1,422 178 1,422

Non owner occupied real estate

173 -   472 16

Residential development

-   -   -   -  

Development & Spec Land Loans

-   -   -   -  

Commercial and industrial

-   253 39 253

Total commercial

204 1,675 689 1,691

Real estate

Residential mortgage

-   164 115 186

Residential construction

-   -   -   -  

Mortgage warehouse

-   -   -   -  

Total real estate

-   164 115 186

Consumer

Direct Installment

46 96 104 155

Direct Installment Purchased

-   -   -   -  

Indirect Installment

279 196 555 565

Home Equity

64 304 239 504

Total consumer

389 596 898 1,224

Total loans charged-off

593 2,435 1,702 3,101

Recoveries of loans previously charged-off:

Commercial

Owner occupied real estate

4 78 29 86

Non owner occupied real estate

31 -   54 -  

Residential development

2 -   4 -  

Development & Spec Land Loans

-   -   -   -  

Commercial and industrial

63 14 95 33

Total commercial

100 92 182 119

Real estate

Residential mortgage

31 3 63 5

Residential construction

-   -   -   -  

Mortgage warehouse

-   -   -   -  

Total real estate

31 3 63 5

Consumer

Direct Installment

28 47 44 76

Direct Installment Purchased

-   -   -   -  

Indirect Installment

146 134 240 235

Home Equity

46 40 101 66

Total consumer

220 221 385 377

Total loan recoveries

351 316 630 501

Net loans charged-off (recovered)

242 2,119 1,072 2,600

Provision charged to operating expense

Commercial

(305 2,093 (639 2,048

Real estate

343 (29 (249 904

Consumer

194 (158 1,652 (432

Total provision charged to operating expense

232 1,906 764 2,520

Balance at the end of the period

$ 14,226 $ 16,421 $ 14,226 $ 16,421

19

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Certain loans are individually evaluated for impairment, and the Company's general practice is to proactively charge down impaired loans to the fair value, which is the appraised value less estimated selling costs, of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company's policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower's ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is 90 days past due, and charges down to the net realizable value other secured loans when they are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:

June 30, 2016 Commercial Real Estate Mortgage
Warehousing
Consumer Total

Allowance For Loan Losses

Ending allowance balance attributable to loans:

Individually evaluated for impairment

$ 500 $ -   $ -   $ -   $ 500

Collectively evaluated for impairment

5,551 2,102 1,080 4,993 13,726

Loans acquired with deteriorated credit quality

-   -   -   -   -  

Total ending allowance balance

$ 6,051 $ 2,102 $ 1,080 $ 4,993 $ 14,226

Loans:

Individually evaluated for impairment

$ 4,344 $ -   $ -   $ -   $ 4,344

Collectively evaluated for impairment

873,140 495,096 206,179 365,005 1,939,420

Loans acquired with deteriorated credit quality

-   -   -   -   -  

Total ending loans balance

$ 877,484 $ 495,096 $ 206,179 $ 365,005 $ 1,943,764

December 31, 2015 Commercial Real Estate Mortgage
Warehousing
Consumer Total

Allowance For Loan Losses

Ending allowance balance attributable to loans:

Individually evaluated for impairment

$ 202 $ -   $ -   $ -   $ 202

Collectively evaluated for impairment

6,739 2,476 1,007 3,856 14,078

Loans acquired with deteriorated credit quality

254 -   -   -   254

Total ending allowance balance

$ 7,195 $ 2,476 $ 1,007 $ 3,856 $ 14,534

Loans:

Individually evaluated for impairment

$ 7,019 $ -   $ -   $ -   $ 7,019

Collectively evaluated for impairment

798,454 438,454 145,172 363,419 1,745,499

Loans acquired with deteriorated credit quality

1,729 -   -   -   1,729

Total ending loans balance

$ 807,202 $ 438,454 $ 145,172 $ 363,419 $ 1,754,247

20

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 7 – Non-performing Loans and Impaired Loans

The following table presents the non-accrual, loans past due over 90 days still on accrual, and troubled debt restructured ("TDRs") by class of loans:

June 30, 2016 Non-accrual Loans Past
Due Over 90
Days Still
Accruing
Non-
Performing
TDRs
Performing
TDRs
Total Non-
Performing
Loans

Commercial

Owner occupied real estate

$ 1,054 $ -   $ -   $ -   $ 1,054

Non owner occupied real estate

2,901 -   243 60 3,204

Residential development

-   -   -   -   -  

Development & Spec Land Loans

-   -   -   -   -  

Commercial and industrial

71 -   -   -   71

Total commercial

4,026 -   243 60 4,329

Real estate

Residential mortgage

3,664 1 803 950 5,418

Residential construction

-   -   242 -   242

Mortgage warehouse

-   -   -   -   -  

Total real estate

3,664 1 1,045 950 5,660

Consumer

Direct Installment

345 -   -   -   345

Direct Installment Purchased

-   -   -   -   -  

Indirect Installment

837 23 -   -   860

Home Equity

1,554 -   178 246 1,978

Total Consumer

2,736 23 178 246 3,183

Total

$ 10,426 $ 24 $ 1,466 $ 1,256 $ 13,172

December 31, 2015 Non-accrual Loans Past
Due Over 90
Days Still
Accruing
Non-
Performing
TDRs
Performing
TDRs
Total Non-
Performing
Loans

Commercial

Owner occupied real estate

$ 1,749 $ -   $ -   $ -   $ 1,749

Non owner occupied real estate

3,034 -   1,915 60 5,009

Residential development

-   -   -   -   -  

Development & Spec Land Loans

71 -   -   -   71

Commercial and industrial

176 -   -   -   176

Total commercial

5,030 -   1,915 60 7,005

Real estate

Residential mortgage

4,354 1 824 808 5,987

Residential construction

-   -   250 -   250

Mortgage warehouse

-   -   -   -   -  

Total real estate

4,354 1 1,074 808 6,237

Consumer

Direct Installment

541 -   -   -   541

Direct Installment Purchased

-   -   -   -   -  

Indirect Installment

601 27 -   -   628

Home Equity

1,736 -   183 350 2,269

Total Consumer

2,878 27 183 350 3,438

Total

$ 12,262 $ 28 $ 3,172 $ 1,218 $ 16,680

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Included in the $10.4 million of non-accrual loans and the $1.5 million of non-performing TDRs at June 30, 2016 were $2.1 million and $94,000, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management's policy to convert the loan from an "earning asset" to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management's policy to generally place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Operations Officer or the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

The Company's TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 2016, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of June 30, 2016, the Company had $2.7 million in TDRs and $1.3 million were performing according to the restructured terms and zero TDRs were returned to accrual status during the first six months of 2016. There was $107,000 of specific reserves allocated to TDRs at June 30, 2016 based on the discounted cash flows or when appropriate the fair value of the collateral.

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents commercial loans individually evaluated for impairment by class of loan:

Three Months Ending Six Months Ending
June 30, 2016 Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Loss
Allocated
Average
Balance in
Impaired
Loans
Cash/Accrual
Interest
Income
Recognized
Average
Balance in
Impaired
Loans
Cash/Accrual
Interest
Income
Recognized

With no recorded allowance

Commercial

Owner occupied real estate

$ 1,054 $ 1,054 $ -   $ 1,062 $ -   $ 1,079 $ -  

Non owner occupied real estate

476 480 -   600 1 1,331 2

Residential development

-   -   -   -   -   -   -  

Development & Spec Land Loans

-   -   -   -   -   -   -  

Commercial and industrial

71 71 -   320 -   325 -  

Total commercial

1,601 1,605 -   1,982 1 2,735 2

With an allowance recorded

Commercial

Owner occupied real estate

-   -   -   -   -   -   -  

Non owner occupied real estate

2,729 2,739 500 2,747 -   2,757 -  

Residential development

-   -   -   -   -   -   -  

Development & Spec Land Loans

-   -   -   -   -   -   -  

Commercial and industrial

-   -   -   -   -   -   -  

Total commercial

2,729 2,739 500 2,747 -   2,757 -  

Total

$ 4,330 $ 4,344 $ 500 $ 4,729 $ 1 $ 5,492 $ 2

Three Months Ending Six Months Ending
June 30, 2015 Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Loss
Allocated
Average
Balance in
Impaired
Loans
Cash/Accrual
Interest
Income
Recognized
Average
Balance in
Impaired
Loans
Cash/Accrual
Interest
Income
Recognized

With no recorded allowance

Commercial

Owner occupied real estate

$ 1,605 $ 1,606 $ -   $ 1,350 $ 17 $ 1,118 $ 17

Non owner occupied real estate

2,820 2,824 -   3,168 7 3,270 14

Residential development

-   -   -   -   -   -   -  

Development & Spec Land Loans

-   -   -   -   -   -   -  

Commercial and industrial

379 379 -   639 -   599 -  

Total commercial

4,804 4,809 -   5,157 24 4,987 31

With an allowance recorded

Commercial

Owner occupied real estate

2,991 2,991 593 4,366 54 1,992 54

Non owner occupied real estate

1,590 1,590 200 1,590 -   1,590 -  

Residential development

-   -   -   -   -   -   -  

Development & Spec Land Loans

-   -   -   -   -   -   -  

Commercial and industrial

884 884 498 1,008 -   974 -  

Total commercial

5,465 5,465 1,291 6,964 54 4,556 54

Total

$ 10,269 $ 10,274 $ 1,291 $ 12,121 $ 78 $ 9,543 $ 85

23

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents the payment status by class of loan:

June 30, 2016 30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater than 90
Days Past Due
Total Past Due Loans Not Past
Due
Total

Commercial

Owner occupied real estate

$ 98 $ 437 $ -   $ 535 $ 297,946 $ 298,481

Non owner occupied real estate

20 -   -   20 343,340 343,360

Residential development

-   -   -   -   7,660 7,660

Development & Spec Land Loans

2 -   -   2 23,169 23,171

Commercial and industrial

-   91 -   91 199,842 199,933

Total commercial

120 528 -   648 871,957 872,605

Real estate

Residential mortgage

1,023 300 1 1,324 472,239 473,563

Residential construction

-   271 -   271 17,515 17,786

Mortgage warehouse

-   -   -   -   205,699 205,699

Total real estate

1,023 571 1 1,595 695,453 697,048

Consumer

Direct Installment

155 16 -   171 58,934 59,105

Direct Installment Purchased

-   -   -   -   131 131

Indirect Installment

493 75 23 591 144,344 144,935

Home Equity

310 134 -   444 160,511 160,955

Total consumer

958 225 23 1,206 363,920 365,126

Total

$ 2,101 $ 1,324 $ 24 $ 3,449 $ 1,931,330 $ 1,934,779

Percentage of total loans

0.11 0.07 0.00 0.18 99.82
December 31, 2015 30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater than 90
Days Past Due
Total Past Due Loans Not Past
Due
Total

Commercial

Owner occupied real estate

$ 481 $ 18 $ -   $ 499 $ 267,782 $ 268,281

Non owner occupied real estate

49 -   -   49 326,350 326,399

Residential development

-   -   -   -   5,018 5,018

Development & Spec Land Loans

-   -   -   -   18,183 18,183

Commercial and industrial

32 -   -   32 184,879 184,911

Total commercial

562 18 -   580 802,212 802,792

Real estate

Residential mortgage

1,121 344 1 1,466 413,458 414,924

Residential construction

-   -   -   -   19,751 19,751

Mortgage warehouse

-   -   -   -   144,692 144,692

Total real estate

1,121 344 1 1,466 577,901 579,367

Consumer

Direct Installment

106 10 -   116 54,225 54,341

Direct Installment Purchased

-   -   -   -   153 153

Indirect Installment

1,186 268 27 1,481 150,042 151,523

Home Equity

1,193 203 -   1,396 155,768 157,164

Total consumer

2,485 481 27 2,993 360,188 363,181

Total

$ 4,168 $ 843 $ 28 $ 5,039 $ 1,740,301 $ 1,745,340

Percentage of total loans

0.24 0.05 0.00 0.29 99.71

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.

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.

24

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

For new and renewed commercial loans, the Bank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $2,500,000) are validated by the Loan Committee, which is chaired by the Chief Credit Officer (CCO).

Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the CCO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCO, however, lenders must present their factual information to either the Loan Committee or the CCO when recommending an upgrade.

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

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

Horizon Bank employs a nine-grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The 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; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2: Good (Pass)

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

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.

25

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

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

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

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

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

Risk Grade 4 Satisfactory/Monitored:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank's minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.

Risk Grade 4W Management Watch:

Loans in this category are considered to be of acceptable quality, 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.

Risk Grade 5: Special Mention

Loans which possess some 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.

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.

26

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

Unusual courses of action are needed to maintain a high probability of repayment.

The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

The lender is forced into a subordinated or unsecured position due to flaws in documentation.

Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

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.

Risk Grade 8: Loss

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

27

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents loans by credit grades.

June 30, 2016 Pass Special
Mention
Substandard Doubtful Total

Commercial

Owner occupied real estate

$ 282,204 $ 8,716 $ 7,561 $ -   $ 298,481

Non owner occupied real estate

336,897 3,033 3,430 -   343,360

Residential development

7,660 -   -   -   7,660

Development & Spec Land Loans

23,171 -   -   -   23,171

Commercial and industrial

188,713 2,342 8,878 -   199,933

Total commercial

838,645 14,091 19,869 -   872,605

Real estate

Residential mortgage

468,145 -   5,418 -   473,563

Residential construction

17,544 -   242 -   17,786

Mortgage warehouse

205,699 -   -   -   205,699

Total real estate

691,388 -   5,660 -   697,048

Consumer

Direct Installment

58,760 -   345 -   59,105

Direct Installment Purchased

131 -   -   -   131

Indirect Installment

144,075 -   860 -   144,935

Home Equity

158,977 -   1,978 -   160,955

Total Consumer

361,943 -   3,183 -   365,126

Total

$ 1,891,976 $ 14,091 $ 28,712 $ -   $ 1,934,779

Percentage of total loans

97.79 0.73 1.48 0.00
December 31, 2015 Pass Special
Mention
Substandard Doubtful Total

Commercial

Owner occupied real estate

$ 257,181 $ 4,954 $ 6,146 $ -   $ 268,281

Non owner occupied real estate

320,216 585 5,598 -   326,399

Residential development

5,018 -   -   -   5,018

Development & Spec Land Loans

18,112 -   71 -   18,183

Commercial and industrial

180,581 693 3,637 -   184,911

Total commercial

781,108 6,232 15,452 -   802,792

Real estate

Residential mortgage

408,937 -   5,987 -   414,924

Residential construction

19,501 -   250 -   19,751

Mortgage warehouse

144,692 -   -   -   144,692

Total real estate

573,130 -   6,237 -   579,367

Consumer

Direct Installment

53,800 -   541 -   54,341

Direct Installment Purchased

153 -   -   -   153

Indirect Installment

150,895 -   628 -   151,523

Home Equity

154,895 -   2,269 -   157,164

Total Consumer

359,743 -   3,438 -   363,181

Total

$ 1,713,981 $ 6,232 $ 25,127 $ -   $ 1,745,340

Percentage of total loans

98.20 0.36 1.44 0.00

28

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 8 – Repurchase Agreements

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

The following table shows repurchase agreements accounted for as secured borrowings (in thousands):

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

$ 50,348 $ 25,000 $ 60,000 $ 10,000 $ -   $ -   $ 145,348

Securities lending transactions

U.S. Treasury and federal agencies

$ 4,038 $ -   $ -   $ -   $ -   $ -   $ 4,038

Federal agency collateralized mortgage obligations

44,521 -   388 173 21,541 30,301 96,924

Federal agency mortgage-backed pools

15,003 -   110 2,404 21,304 28,396 67,217

Total

63,562 -   498 2,577 42,845 58,697 168,179

Total borrowings

$ (13,214 $ 25,000 $ 59,502 $ 7,423 $ (42,845 $ (58,697 $ (22,831

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 month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at June 30, 2016 and December 31, 2015. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At June 30, 2016, the Company's cash flow hedge was effective and is not expected to have a significant impact on the Company's net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At June 30, 2016, 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.

29

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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 agreements being hedged were $121.7 million at June 30, 2016 and $117.3 million at December 31, 2015.

Other Derivative Instruments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At June 30, 2016, the Company's fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company's net income.

The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company's gain on sale of loans.

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

Asset Derivatives Liability Derivatives
June 30, 2016 June 30, 2016
Derivatives designated as hedging instruments (Unaudited) Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair Value

Interest rate contracts

Loans $ - Other liabilities $ 5,393

Interest rate contracts

Other Assets 5,393 Other liabilities 3,786

Total derivatives designated as hedging instruments

5,393 9,179

Derivatives not designated as hedging instruments

Mortgage loan contracts

Other assets 1,111 Other liabilities -  

Total derivatives not designated as hedging instruments

1,111 -  

Total derivatives

$ 6,504 $ 9,179

Asset Derivatives Liability Derivatives
December 31, 2015 December 31, 2015
Derivatives designated as hedging instruments (Unaudited) Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair Value

Interest rate contracts

Loans $ - Other liabilities $ 1,782

Interest rate contracts

Other Assets 1,782 Other liabilities 3,141

Total derivatives designated as hedging instruments

1,782 4,923

Derivatives not designated as hedging instruments

Mortgage loan contracts

Other assets 642 Other liabilities -  

Total derivatives not designated as hedging instruments

642 -  

Total derivatives

$ 2,424 $ 4,923

30

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

Amount of Loss Recognized in Other
Comprehensive Income on Derivative

(Effective Portion)

Amount of Loss Recognized in Other
Comprehensive Income on Derivative
(Effective Portion)
Three Months Ended June 30 Six Months Ended June 30
Derivative in cash flow 2016 2015 2016 2015

hedging relationship

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Interest rate contracts

$ (54 $ 332 $ (419 $ 118

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.

Amount of Gain (Loss) Recognized on Derivative Amount of Gain (Loss) Recognized on Derivative
Three Months Ended June 30 Six Months Ended June 30
Derivative in fair value Location of gain (loss) 2016 2015 2016 2015

hedging relationship

recognized on derivative

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Interest rate contracts

Interest income - loans

$ 1,110 $ (1,186 $ 3,611 $ (186

Interest rate contracts

Interest income - loans

(1,110 1,186 (3,611 186

Total

$ -   $ -   $ -   $ -  

Amount of Gain (Loss) Recognized on Derivative

Three Months Ended June 30

Amount of Gain (Loss) Recognized on Derivative

Six Months Ended June 30

Derivative not designated Location of gain (loss) 2016 2015 2016 2015

as hedging relationship

recognized on derivative

(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Mortgage contracts

Other income - gain on sale of loans

$ 468 $ 83 $ 471 $ 272

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 June 30, 2016. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

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Notes to Condensed Consolidated Financial Statements

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

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage-backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond's terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.

Hedged loans

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

Interest rate swap agreements

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

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:

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Notes to Condensed Consolidated Financial Statements

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

Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Fair Value (Level 1) (Level 2) (Level 3)

June 30, 2016

Available-for-sale securities

U.S. Treasury and federal agencies

$ 18,470 $ -   $ 18,470 $ -  

State and municipal

62,611 -   62,611 -  

Federal agency collateralized mortgage obligations

154,263 -   154,263 -  

Federal agency mortgage-backed pools

219,823 -   219,823 -  

Corporate notes

72 -   72 -  

Total available-for-sale securities

455,239 -   455,239 -  

Hedged loans

116,338 -   116,338 -  

Forward sale commitments

1,111 -   1,111 -  

Interest rate swap agreements

(9,179 -   (9,179 -  

Commitments to originate loans

-   -   -   -  

December 31, 2015

Available-for-sale securities

U.S. Treasury and federal agencies

$ 5,926 $ -   $ 5,926 $ -  

State and municipal

75,095 -   75,095 -  

Federal agency collateralized mortgage obligations

156,203 -   156,203 -  

Federal agency mortgage-backed pools

207,704 -   207,704 -  

Corporate notes

54 -   54 -  

Total available-for-sale securities

444,982 -   444,982 -  

Hedged loans

115,472 -   115,472 -  

Forward sale commitments

642 -   642 -  

Interest rate swap agreements

(4,923 -   (4,923 -  

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 June 30 Six Months Ended June 30
Non Interest Income 2016 2015 2016 2015
Total gains and losses from: (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Hedged loans

$ 1,110 $ (1,186 $ 3,611 $ (186

Fair value interest rate swap agreements

(1,110 1,186 (3,611 186

Derivative loan commitments

468 83 471 272

$ 468 $ 83 $ 471 $ 272

Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Fair Value (Level 1) (Level 2) (Level 3)

June 30, 2016

Impaired loans

$ 3,830 $ -   $ -   $ 3,830

Mortgage servicing rights

9,714 -   -   9,714

December 31, 2015

Impaired loans

$ 6,803 $ -   $ -   $ 6,803

Mortgage servicing rights

8,874 -   -   8,874

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Notes to Condensed Consolidated Financial Statements

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

Impaired (collateral dependent):  Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is 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.

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

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company's month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs' fair value due to impairment decreased by $46,000 during the first six months of 2016 and decreased by $18,000 during the first six months of 2015.

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

Fair Value at Valuation Range (Weighted
June 30, 2016 Technique Unobservable Inputs Average)

Impaired loans

$ 3,830 Collateral based measurement Discount to reflect current market
conditions and ultimate
collectability
10% - 15% (12%)

Mortgage servicing rights

$ 9,714 Discounted cashflows Discount rate, Constant
prepayment rate, Probability of
default
10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)
Fair Value at Valuation Range (Weighted
December 31, 2015 Technique Unobservable Inputs Average)

Impaired loans

$ 6,803 Collateral based measurement Discount to reflect current market
conditions and ultimate
collectability
10% - 15% (12%)

Mortgage servicing rights

$ 8,874 Discounted cashflows Discount rate, Constant
prepayment rate, Probability of
default
10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)

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.

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Notes to Condensed Consolidated Financial Statements

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

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon's significant financial instruments at June 30, 2016 and December 31, 2015. 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.

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 portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.

FHLB and FRB Stock - Fair value of FHLB and FRB stock is based on the price at which it may be resold to the FHLB and FRB.

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 Debentures - Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.

Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value.

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Notes to Condensed Consolidated Financial Statements

(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 (unaudited).

June 30, 2016
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Carrying Assets Inputs Inputs
Amount (Level 1) (Level 2) (Level 3)

Assets

Cash and due from banks

$ 109,224 $ 109,224 $ -   $ -  

Investment securities, held to maturity

173,696 -   180,059 -  

Loans held for sale

7,812 -   -   7,812

Loans excluding loan level hedges, net

1,807,261 -   -   1,798,943

Stock in FHLB and FRB

16,636 -   16,636 -  

Interest receivable

11,526 -   11,526 -  

Liabilities

Non-interest bearing deposits

$ 397,412 $ 397,412 $ -   $ -  

Interest-bearing deposits

1,684,849 -   1,656,009 -  

Borrowings

492,883 -   491,538 -  

Subordinated debentures

32,874 -   33,000 -  

Interest payable

961 -   961 -  
December 31, 2015
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Carrying Assets Inputs Inputs
Amount (Level 1) (Level 2) (Level 3)

Assets

Cash and due from banks

$ 48,650 $ 48,650 $ -   $ -  

Investment securities, held to maturity

187,629 -   193,703 -  

Loans held for sale

7,917 -   -   7,917

Loans excluding loan level hedges, net

1,619,125 -   -   1,703,506

Stock in FHLB and FRB

13,823 -   13,823 -  

Interest receivable

10,535 -   10,535 -  

Liabilities

Non-interest bearing deposits

$ 335,955 $ 335,955 $ -   $ -  

Interest-bearing deposits

1,544,198 -   1,461,314 -  

Borrowings

449,347 -   441,547 -  

Subordinated debentures

32,797 -   32,996 -  

Interest payable

507 -   507 -  

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Notes to Condensed Consolidated Financial Statements

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

Note 12 – Accumulated Other Comprehensive Income

June 30
2016
December 31
2015

Unrealized gain on securities available for sale

$ 8,681 $ 920

Unamortized gain on securities held to maturity, previously transferred from AFS

632 1,109

Unrealized loss on derivative instruments

(3,786 (3,141

Tax effect

(1,934 389

Total accumulated other comprehensive income (loss)

$ 3,593 $ (723

Note 13 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the 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 Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For June 30, 2016, Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined). Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital.

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (June 30, 2016) and Tier I leverage ratios as set forth in the table below. As of June 30, 2016 and December 31, 2015, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the second quarter of 2016 that management believes have changed the Bank's classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

Horizon and the Bank's actual and required capital ratios as of June 30, 2016 and December 31, 2015 were as follows:

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Notes to Condensed Consolidated Financial Statements

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

Required For Capital 1 Well Capitalized Under Prompt 1
Actual Adequacy Purposes Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio

As of June 30, 2016

Total capital 1 (to risk-weighted assets)

Consolidated

$ 267,414 12.56 $ 183,703 8.63 N/A N/A

Bank

257,203 12.45 178,286 8.63 $ 206,589 10.00

Tier 1 capital 1 (to risk-weighted assets)

Consolidated

253,188 11.89 141,130 6.63 N/A N/A

Bank

242,977 11.77 136,868 6.63 165,150 8.00

Common equity tier 1 capital 1 (to risk-weighted assets) Consolidated

220,120 10.34 109,200 5.13 N/A N/A

Bank

242,977 11.77 105,902 5.13 134,184 6.50

Tier 1 capital 1 (to average assets)

Consolidated

253,188 9.55 106,069 4.00 N/A N/A

Bank

242,977 9.18 105,872 4.00 132,340 5.00

As of December 31, 2015

Total capital 1 (to risk-weighted assets)

Consolidated

$ 264,452 13.99 $ 151,223 8.00 N/A N/A

Bank

237,348 12.57 151,057 8.00 $ 188,821 10.00

Tier 1 capital 1 (to risk-weighted assets)

Consolidated

249,918 13.22 113,427 6.00 N/A N/A

Bank

222,814 11.80 113,295 6.00 151,060 8.00

Common equity tier 1 capital 1 (to risk-weighted assets) Consolidated

204,350 10.81 85,067 4.50 N/A N/A

Bank

222,814 11.80 84,971 4.50 122,737 6.50

Tier 1 capital 1 (to average assets)

Consolidated

249,918 9.82 101,800 4.00 N/A N/A

Bank

222,814 8.77 101,626 4.00 127,032 5.00

1 As defined by regulatory agencies

Note 14 – Preferred Stock Redemption

On February 1, 2016, Horizon completed the redemption (the "Redemption") of all 12,500 outstanding shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the "SBLF Preferred Stock") which were held by the U.S. Department of Treasury and issued pursuant to its Small Business Lending Fund ("SBLF"). The SBLF Preferred Stock was redeemed at its liquidation value of $1,000 per share, plus accrued dividends, for a total Redemption price of $12,510,416.67. Horizon funded the Redemption using cash on hand without borrowing and without a special dividend from the Bank. Following the Redemption, Horizon does not have any shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series B outstanding. The Redemption terminates Horizon's participation in the SBLF.

Note 15 – Business Combinations

On July 12, 2016, Horizon announced the acquisition of CNB Bancorp, parent company of The Central National Bank and Trust Company ("Central National Bank & Trust"). Under the terms of the Merger Agreement, stockholders of CNB Bancorp will receive cash consideration consisting of a special dividend calculated as capital in excess of 8% of CNB Bancorp's total assets, less certain after tax transaction costs and an amount to be paid by Horizon equal to 120% of remaining capital. These amounts will be determined as of the end of the month prior to the closing of the merger. These amounts are dependent on CNB Bancorp's earnings and other factors, but if the cash consideration for the stockholders were calculated as of March 31, 2016, the stockholders would receive, in the aggregate, a $6.7 million special dividend and a $5.3 million payment from Horizon. As of June 30, 2016, CNB Bancorp had total assets of approximately $56.4 million.

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Notes to Condensed Consolidated Financial Statements

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

Note 16 – Future Accounting Matters

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting . The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.

The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.

The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements . Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

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Notes to Condensed Consolidated Financial Statements

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

Note 17 – 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 AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

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 ("Horizon" or the "Company") and Horizon Bank, N.A. (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:

economic conditions and their impact on Horizon and its customers;

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

rising interest rates 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;

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, including the effects resulting from the reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the adoption of regulations by regulatory bodies under the Dodd-Frank Act;

the impact of the new Basel III capital rules;

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;

rapid technological developments and changes;

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

the risks presented by cyber terrorism and data security breaches;

containing costs and expenses;

the slowing or failure of economic recovery;

the ability of the U.S. federal government to manage federal debt limits; 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 or on behalf of us. 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 2015 Annual Report on Form 10-K and in the subsequent reports we file with the SEC.

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 Southwestern and Central Michigan through its bank subsidiary. 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 chartered as a national banking association in 1873 and has operated continuously since that time. 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.

On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation ("LaPorte Bancorp") and Horizon Bank's acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.629 shares of Horizon common stock for each share of LaPorte Bancorp's common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consists of 65% stock and 35% cash. LaPorte Bancorp shareholders owning fewer than 100 shares of common stock received $17.50 in cash for each common share. As a result of LaPorte stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 2,280,992 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $27.54 per share of Horizon common stock, the transaction has an implied valuation of approximately $101.7 million.

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation ("Kosciusko") and Horizon Bank's acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 3.0122 shares of Horizon common stock, or a combination of both, for each share of Kosciusko's common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consists of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 582,287 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $24.85 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million.

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation ("Peoples") and Horizon Bank's acquisition of Peoples Federal Savings Bank of DeKalb County, a federally-chartered stock savings bank and wholly owned subsidiary of Peoples, through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock (the "Exchange Ratio") and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon's stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million.

Following are some highlights of Horizon's financial performance through the second quarter of 2016:

Net income for the second quarter of 2016 was $6.3 million or $.52 diluted earnings per share.

Excluding acquisition-related expenses and gain on sale of investment securities, net income for the second quarter of 2016 increased 38.9% compared to the same period of 2015 to $7.2 million or $.59 diluted earnings per share.

Net income for the first six months of 2016 was $11.7 million or $.96 diluted earnings per share.

Excluding acquisition-related expenses, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the first six months of 2016 increased 24.1% compared to the same period of 2015 to $13.0 million or $1.07 diluted earnings per share.

Total loans, excluding mortgage warehouse loans, increased 8.1% on an annualized basis during the second quarter of 2016.

Net interest income for the first six months of 2016 increased 17.0% or $5.9 million compared to the same period in 2015.

Net interest margin, excluding the impact of acquisitions ("core net interest margin"), was 3.42% for the second quarter of 2016 compared to 3.36% for the prior quarter and 3.51% for the same period in 2015.

Non-interest income for the first six months of 2016 increased 24.4% or $3.5 million compared to the same period in 2015.

Horizon's tangible book value per share rose to $17.17 at June 30, 2016, compared to $16.53 at December 31, 2015 and $17.06 at June 30, 2015.

Horizon entered Fort Wayne, Indiana in the second quarter of 2016 by establishing a loan production team that will focus on commercial lending in Indiana's second largest city.

On June 1, 2016, Horizon closed the acquisition of Kosciusko Financial, Inc. ("Kosciusko") and its wholly-owned subsidiary, Farmers State Bank, headquartered in Mentone, Indiana.

On July 18, 2016, Horizon closed the acquisition of LaPorte Bancorp, Inc. ("LaPorte Bancorp") and its wholly-owned subsidiary, The LaPorte Savings Bank, headquartered in La Porte, Indiana. LaPorte Bancorp's results are not included in Horizon's June 30, 2016 financial results.

On July 12, 2016, Horizon announced the pending acquisition of CNB Bancorp and its wholly-owned subsidiary, The Central National Bank and Trust Company, headquartered in Attica, Indiana.

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 2015 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 loan losses, intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

Allowance for Loan Losses

An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management's ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. The identification of loans that have probable incurred losses is subjective; therefore, a general reserve is maintained to cover all probable losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and address asset quality problems in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350-10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At June 30, 2016, Horizon had core deposit intangibles of $8.7 million subject to amortization and $56.5 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. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on June 30, 2016 was $25.14 per share compared to a book value of $22.35 per common share.

Horizon has concluded that, based on its own internal evaluation, the recorded value of goodwill is not impaired.

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.

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

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.

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

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon's results of operations.

Financial Condition

On June 30, 2016, Horizon's total assets were $2.9 billion, an increase of approximately $265.7 million compared to December 31, 2015. The increase was primarily in net loans of $189.0 million and cash of $60.6 million offset partially by a decrease in investment securities of $3.7 million.

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

June 30, 2016 December 31, 2015
Amortized Fair Amortized Fair
Cost Value Cost Value

Available for sale

U.S. Treasury and federal agencies

$ 18,384 $ 18,470 $ 5,940 $ 5,926

State and municipal

60,961 62,611 73,829 75,095

Federal agency collateralized mortgage obligations

151,736 154,263 157,291 156,203

Federal agency mortgage-backed pools

215,445 219,823 206,970 207,704

Corporate notes

32 72 32 54

Total available for sale investment securities

$ 446,558 $ 455,239 $ 444,062 $ 444,982

Held to maturity

U.S. Treasury and federal agencies

$ -   $ -   $ 5,859 $ 5,952

State and municipal

143,093 148,073 146,331 151,453

Federal agency collateralized mortgage obligations

8,424 8,623 9,051 8,954

Federal agency mortgage-backed pools

22,179 23,363 26,388 27,344

Total held to maturity investment securities

$ 173,696 $ 180,059 $ 187,629 $ 193,703

Total investment securities decreased by approximately $3.7 million at June 30, 2016 compared to December 31, 2015, primarily due to the cash in-flows from investment securities used to fund loan growth.

Total loans increased $188.7 million since December 31, 2015 to $1.9 billion as of June 30, 2016. This increase was the result of an increase in commercial loans of $69.6 million, mortgage warehouse loans of $61.0 million, residential mortgage loans of $56.5 million and consumer loans of $1.6 million. The growth in total loans during the six months ended June 30, 2015 is the direct result of increased calling efforts to increase Horizon's market share within the Company's footprint and market expansion as well as the loans added through the Kosciusko acquisition.

Total deposits increased $202.1 million since December 31, 2015 to $2.1 billion as of June 30, 2016. Non-interest bearing deposit accounts increased by $61.5 million, interest-bearing transaction accounts decreased by $36.0 million and time deposits increased by $104.6 million during the six months ended June 30, 2016.

The Company's borrowings increased $43.5 million from December 31, 2015 to $492.9 million as of June 30, 2016. At June 30, 2016, the Company had $192.0 million in short-term funds borrowed compared to $206.0 million at December 31, 2015. The Company's current balance sheet strategy is to utilize a reasonable level of short-term borrowings during extended low rate environments along with seasonal increases in municipal deposits to fund an increase in mortgage warehouse loans.

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

Stockholders' equity totaled $281.0 million at June 30, 2016 compared to $266.8 million at December 31, 2015. The increase in stockholders' equity during the period was the result of the generation of net income, net of dividends declared, as well as the stock issued in the Kosciusko acquisition. At June 30, 2016, the ratio of average stockholders' equity to average assets was 9.94% compared to 10.32% at December 31, 2015 due to the growth in earning assets. Book value per common share at June 30, 2016 increased to $22.35 compared to $21.30 at December 31, 2015.

Results of Operations

Overview

Consolidated net income for the three-month period ended June 30, 2016 was $6.3 million compared to $4.7 million for the same period in 2015. Earnings per common share for the three months ended June 30, 2016 were $0.52 basic and $0.52 diluted, compared to $0.51 basic and $0.49 diluted for the same three-month period in the previous year. The increase in net income and earnings per share from the previous year reflects an increase in net interest income and non-interest income of $3.0 million and $2.7 million, respectively, and a decrease in the provision for loan losses of $1.7 million, partially offset by increases in non-interest expense of $4.9 million, income tax expense of $873,000 and the diluted shares outstanding primarily due to the stock issued in the Peoples and Kosciusko acquisitions. Non-interest expenses increased primarily due to an increase in salaries and employee benefits and expenses related to outside services and consultants. Excluding acquisition-related expenses and purchase accounting adjustments, gain on sale of investment securities, net income for the second quarter of 2016 was $6.9 million or $.57 diluted earnings per share compared to $4.6 million or $.49 diluted earnings per share in the same period of 2015.

Consolidated net income for the six-month period ended June 30, 2016 was $11.7 million compared to $10.1 million for the same period in 2015. Earnings per common share for the six months ended June 30, 2016 were $.97 basic and $.96 diluted, compared to $1.09 basic and $1.04 diluted for the same period of 2015. The increase in net income from the previous year reflects an increase in net interest income and non-interest income of $5.9 million and $3.5 million, respectively, and a decrease in the provision for loan losses of $1.8 million, partially offset by increases in non-interest expense of $8.6 million and income tax expense of $939,000. The decrease in diluted earnings per share compared to the same period of 2015 was due to an increase in the diluted shares outstanding primarily due to the stock issued in the Peoples and Kosciusko acquisitions. Non-interest expenses increased primarily due to an increase in salaries and employee benefits and expenses related to outside services and consultants. Excluding acquisition-related expenses and purchase accounting adjustments, and gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the six months ended June 30, 2016 was $12.3 million or $1.01 diluted earnings per share compared to $9.2 million or $.95 diluted earnings per share in the same period of 2015.

Net Interest Income

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

Net interest income during the three months ended June 30, 2016 was $20.9 million, an increase of $3.0 million from the $17.9 million earned during the same period in 2015. Yields on the Company's interest-earning assets decreased by 23 basis points to 4.10% for the three months ending June 30, 2016 from 4.33% for the three months ended June 30, 2015. Interest income increased $3.5 million from $21.1 million for the

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

three months ended June 30, 2015 to $24.7 million for the same period in 2016. This increase was due to an increase in interest-earning assets, a $415,000 prepayment penalty received on an investment security during the second quarter, partially offset by lower yields on loans and investment securities and a decrease in interest income from acquisition-related purchase accounting adjustments from $797,000 for the three months ending June 30, 2015 to $397,000 for the same period of 2016.

Rates paid on interest-bearing liabilities decreased by 5 basis points for the three-month period ended June 30, 2016 compared to the same period in 2015 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense increased $504,000 compared to the three-month period ended June 30, 2015 to $3.8 million for the same period in 2016. This increase was due to higher average balances of interest-bearing deposits and borrowings and higher rates on borrowings, partially offset by lower rates paid on interest-bearing deposits. The net interest margin decreased 19 basis points from 3.67% for the three-month period ended June 30, 2015 to 3.48% for the same period in 2016. The decrease in the margin for the three-month period ended June 30, 2016 compared to the same period in 2015 was due to a reduction in the yield on interest-earning assets and a decrease of approximately $400,000 of interest income from acquisition-related purchase accounting adjustments. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.42% for the three-month period ending June 30, 2016 compared to 3.51% for the same period in 2015.

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

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

Three Months Ended Three Months Ended
June 30, 2016 June 30, 2015
Average Average Average Average
Balance Interest Rate Balance Interest Rate

ASSETS

Interest-earning assets

Federal funds sold

$ 3,309 $ 4 0.49 $ 3,597 $ 2 0.22

Interest-earning deposits

28,045 59 0.85 8,608 5 0.23

Investment securities - taxable

469,925 2,598 2.22 363,919 2,060 2.27

Investment securities - non-taxable (1)

182,886 1,195 3.70 141,784 1,079 4.24

Loans receivable (2)(3)

1,787,189 20,794 4.69 1,490,283 17,981 4.87

Total interest-earning assets (1)

2,471,354 24,650 4.10 2,008,191 21,127 4.33

Non-interest-earning assets

Cash and due from banks

35,435 31,783

Allowance for loan losses

(14,350 (16,756

Other assets

223,258 157,795

$ 2,715,697 $ 2,181,013

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities

Interest-bearing deposits

$ 1,625,024 $ 1,557 0.39 $ 1,255,123 $ 1,237 0.40

Borrowings

400,585 1,721 1.73 381,782 1,539 1.62

Subordinated debentures

32,854 503 6.16 32,699 501 6.15

Total interest-bearing liabilities

2,058,463 3,781 0.74 1,669,604 3,277 0.79

Non-interest-bearing liabilities

Demand deposits

364,822 294,425

Accrued interest payable and other liabilities

22,574 13,770

Stockholders' equity

269,838 203,214

$ 2,715,697 $ 2,181,013

Net interest income/spread

$ 20,869 3.36 $ 17,850 3.54

Net interest income as a percent of average interest earning assets (1)

3.48 3.67

(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. Interest rate is presented on a tax equivalent basis.
(2) Includes loan fees and late fees. The inclusion of these fees does not have a material effect on the average interest rate.
(3) Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

Net interest income during the six months ended June 30, 2016 was $40.6 million, an increase of $5.9 million from the $34.7 million earned during the same period in 2015. Yields on the Company's interest-earning assets decreased by 25 basis points to 4.10% for the six months ending June 30, 2016 from 4.35% for the six months ended June 30, 2015. Interest income increased $7.0 million from $41.2 million for the six months ended June 30, 2015 to $48.2 million for the same period in 2016. This increase was due to an increase in interest-earning assets, a $415,000 prepayment penalty received on an investment security during the second quarter, partially offset by lower yields on loans and investment securities and a decrease in interest income from acquisition-related purchase accounting adjustments from $1.9 million for the six months ending June 30, 2015 to $944,000 for the same period of 2016.

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Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

Rates paid on interest-bearing liabilities decreased by 4 basis points for the six-month period ended June 30, 2016 compared to the same period in 2015 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense increased $1.1 million compared to the six-month period ended June 30, 2015 to $7.5 million for the same period in 2016. This increase was due to higher average balances of interest-bearing deposits and borrowings and higher rates on borrowings, partially offset by lower rates paid on interest-bearing deposits. The net interest margin decreased 21 basis points from 3.68% for the six-month period ended June 30, 2015 to 3.47% for the same period in 2016. The decrease in the margin for the six-month period ended June 30, 2016 compared to the same period in 2015 was due to a reduction in the yield on interest-earning assets and a decrease of approximately $936,000 of interest income from acquisition-related purchase accounting adjustments. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.40% for the six-month period ending June 30, 2016 compared to 3.49% for the same period in 2015.

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

Six Months Ended Six Months Ended
June 30, 2016 June 30, 2015
Average Average Average Average
Balance Interest Rate Balance Interest Rate

ASSETS

Interest-earning assets

Federal funds sold

$ 2,853 $ 4 0.28 $ 4,198 $ 11 0.53

Interest-earning deposits

24,300 109 0.90 9,684 10 0.21

Investment securities - taxable

464,209 5,092 2.21 362,250 4,200 2.34

Investment securities - non-taxable (1)

181,660 2,432 3.64 141,269 2,156 4.27

Loans receivable (2)(3)

1,733,446 40,541 4.71 1,436,886 34,843 4.90

Total interest-earning assets (1)

2,406,468 48,178 4.10 1,954,287 41,220 4.35

Non-interest-earning assets

Cash and due from banks

34,246 30,396

Allowance for loan losses

(14,350 (16,623

Other assets

217,797 157,669

$ 2,644,161 $ 2,125,729

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities

Interest-bearing deposits

$ 1,571,579 $ 3,048 0.39 $ 1,235,601 $ 2,469 0.40

Borrowings

401,594 3,480 1.74 359,436 3,018 1.69

Subordinated debentures

32,653 1,007 6.20 32,678 997 6.15

Total interest-bearing liabilities

2,005,826 7,535 0.76 1,627,715 6,484 0.80

Non-interest-bearing liabilities

Demand deposits

350,157 282,796

Accrued interest payable and other liabilities

22,465 14,374

Stockholders' equity

265,713 200,844

$ 2,644,161 $ 2,125,729

Net interest income/spread

$ 40,643 3.34 $ 34,736 3.55

Net interest income as a percent of average interest earning assets (1)

3.47 3.68

(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. Interest rate is presented on a tax equivalent basis.
(2) Includes loan fees and late fees. The inclusion of these fees does not have a material effect on the average interest rate.
(3) Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

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And Results of Operations

For the Three and Six Months ended June 30, 2016

Provision for Loan Losses

Horizon assesses the adequacy of its Allowance for Loan and Lease Losses ("ALLL") by regularly reviewing the performance of its loan portfolio. During the three-month period ended June 30, 2016, a provision of $232,000 was required to adequately fund the ALLL compared to $1.9 million for the same period of 2015. Commercial loan net charge-offs during the three-month period ended June 30, 2016 were $104,000, residential mortgage loan net charge-offs were negative $31,000 and consumer loan net charge-offs were $169,000. The lower provision for loan losses in the second quarter of 2016 compared to the same period of 2015 was due to the improvement of non-performing loans. The ALLL balance at June 30, 2016 was $14.2 million or 0.73% of total loans. This compares to an ALLL balance of $14.5 million at December 31, 2015 or 0.83% of total loans. The decrease in the ratio at June 30, 2016 compared to December 31, 2015 was due to an increase in total loans of $188.7 million, the increase in loans from the Kosciusko merger and improving credit trends.

For the six-month period ended June 30, 2016, the provision for loan losses totaled $764,000 compared to $2.5 million in the same period of 2015. The lower provision for loan losses in the second quarter of 2016 compared to the same period of 2015 was due to the improvement of non-performing loans and the charge-off of one commercial credit of $1.3 million in the first six months of 2015.

Horizon's loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 0.89% as of June 30, 2016. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was 1.32% as of June 30, 2016. The table below illustrates Horizon's loan loss reserve ratio composition as of June 30, 2016.

Non- GAAP Allowance for Loan and Lease Loss Detail

As of June 30, 2016

(Dollars in Thousands, Unaudited)

Horizon
Legacy Heartland Summit Peoples Kosciusko Total

Pre-discount loan balance

$ 1,591,788 $ 19,346 $ 69,137 $ 169,224 $ 99,873 $ 1,949,368

Allowance for loan losses (ALLL)

14,226 -   -   -   -   14,226

Loan discount

N/A 1,222 2,801 3,694 3,826 11,543

ALLL+loan discount

14,226 1,222 2,801 3,694 3,826 25,769

Loans, net

$ 1,577,562 $ 18,124 $ 66,336 $ 165,530 $ 96,047 $ 1,923,599

ALLL/ pre-discount loan balance

0.89 0.00 0.00 0.00 0.00 0.73

Loan discount/ pre-discount loan balance

N/A 6.32 4.05 2.18 3.83 0.59

ALLL+loan discount/ pre-discount loan balance

0.89 6.32 4.05 2.18 3.83 1.32

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 loan losses. Horizon considers the allowance for loan losses to be appropriate to cover probable incurred losses in the loan portfolio as of June 30, 2016.

Non-performing loans totaled $13.2 million as of June 30, 2016, down from $16.7 million on December 31, 2015. Compared to December 31, 2015, non-performing commercial, real estate and consumer loans decreased by $2.7 million, $577,000 and $255,000, respectively.

Other Real Estate Owned (OREO) totaled $3.5 million at June 30, 2016 compared to $3.2 million on December 31, 2015 and $471,000 on June 30, 2015.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

Non-interest Income

The following is a summary of changes in non-interest income (three and six month table dollar amounts in thousands):

Three Months Ended
June 30 June 30 Amount Percent
2016 2015 Change Change

Non-interest Income

Service charges on deposit accounts

$ 1,335 $ 1,085 $ 250 23.0

Wire transfer fees

175 182 (7 -3.8

Interchange fees

1,663 1,366 297 21.7

Fiduciary activities

1,465 1,216 249 20.5

Gain on sale of securities

767 -   767 NM

Gain on sale of mortgage loans

3,529 2,642 887 33.6

Mortgage servicing net of impairment

500 300 200 66.7

Increase in cash surrender value of bank owned life insurance

351 257 94 36.6

Other income

84 138 (54 -39.1

Total non-interest income

$ 9,869 $ 7,186 $ 2,683 37.3

Total non-interest income was $2.7 million higher in the second quarter of 2016 compared to the same period of 2015. Service charges on deposit accounts increased $250,000, interchange fees increased by $297,000 and fiduciary activities increased $249,000, primarily due to overall company growth and increased volume. Gain on sale of securities increased $767,000 due to gains realized in the second quarter of 2016 as the result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. Residential mortgage loan activity during the second quarter of 2016 generated $3.5 million of income from the gain on sale of mortgage loans, up $887,000 from the same period in 2015. The increase in the gain on sale of mortgage loans was due to an increase in the percentage earned on the sale of these loans from 3.07% in the second quarter of 2015 to 3.68% in the same period of 2016. Mortgage servicing net of impairment increased by $200,000 during the second quarter of 2016 compared to the same period of 2015 primarily due to a larger portfolio of mortgage loans serviced.

Six Months Ended
June 30 June 30 Amount Percent
2016 2015 Change Change

Non-interest Income

Service charges on deposit accounts

$ 2,573 $ 2,084 $ 489 23.5

Wire transfer fees

296 333 (37 -11.1

Interchange fees

3,121 2,468 653 26.5

Fiduciary activities

3,100 2,513 587 23.4

Gain on sale of investment securities

875 124 751 605.6

Gain on sale of mortgage loans

5,643 5,021 622 12.4

Mortgage servicing net of impairment

947 479 468 97.7

Increase in cash surrender value of bank owned life insurance

696 515 181 35.1

Death benefit on officer life insurance

-   145 (145 100.0

Other income

482 570 (88 -15.4

Total non-interest income

$ 17,733 $ 14,252 $ 3,481 24.4

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

Total non-interest income was $3.5 million higher in the first six months of 2016 compared to the same period of 2015. Service charges on deposit accounts increased $489,000, interchange fees increased by $653,000 and fiduciary activities increased $587,000, primarily due to overall company growth and increased volume. Gain on sale of securities increased $751,000 due to gains realized in the first six months of 2016 as the result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. Residential mortgage loan activity during the first six months of 2016 generated $5.6 million of income from the gain on sale of mortgage loans, up $622,000 from the same period in 2015. The increase in the gain on sale of mortgage loans was due to an increase in the percentage earned on the sale of these loans from 3.12% in the first half of 2015 to 3.74% in the same period of 2016, partially offset by a decrease in total loans sold of $13.8 million from $152.3 million in the first half of 2015 to $138.5 million in the same period of 2016. Mortgage servicing net of impairment increased by $468,000 during the first six months of 2016 compared to the same period of 2015 primarily due to a larger portfolio of mortgage loans serviced. The cash surrender value of bank owned life insurance increased by $181,000 in the first six months of 2016 compared to the same period in 2015 due to the addition of bank owned life insurance policies as a result of the Peoples acquisition. The death benefit on bank owned life insurance decreased by $145,000 compared to the previous year due to a $145,000 death benefit on officer life insurance realized during the first six months of 2015.

Non-interest Expense

The following is a summary of changes in non-interest expense (three and six month table dollar amounts in thousands):

Three Months Ended
June 30 June 30 Amount Percent
2016 2015 Change Change

Non-interest expense

Salaries

$ 7,250 $ 5,993 $ 1,257 21.0

Commission and bonuses

1,190 1,200 (10 -0.8

Employee benefits

1,877 1,192 685 57.5

Net occupancy expenses

1,901 1,375 526 38.3

Data processing

1,134 966 168 17.4

Professional fees

747 660 87 13.2

Outside services and consultants

2,198 918 1,280 139.4

Loan expense

1,409 1,367 42 3.1

FDIC deposit insurance

409 339 70 20.6

Other losses

136 150 (14 -9.3

Other expense

3,304 2,490 814 32.7

Total non-interest expense

$ 21,555 $ 16,650 $ 4,905 29.5

Total non-interest expenses were $4.9 million higher in the first three months of 2016 compared to the same period of 2015. Salaries increased by $1.3 million and employee benefits increased by $685,000 due to a larger employee base. Net occupancy expense increased $526,000 due to Horizon's investment in growth markets and the Peoples and Kosciusko acquisitions. Data processing expenses increased $168,000 primarily due to company growth. Other expenses increased by $814,000 primarily due to company growth and one-time merger-related expenses. Outside services and consultants expense increased by $1.3 million due to the one-time fees associated with Kosciusko and LaPorte Bancorp acquisitions. One-time non-interest expense related to the Kosciusko and LaPorte Bancorp acquisitions totaled $1.9 million in the second quarter of 2016 compared to $570,000 in one-time fees associated with the Peoples acquisition in the same period of 2015.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

Six Months Ended
June 30 June 30 Amount Percent
2016 2015 Change Change

Non-interest expense

Salaries

$ 14,136 $ 11,626 $ 2,510 21.6

Commission and bonuses

2,265 2,367 (102 -4.3

Employee benefits

3,981 2,896 1,085 37.5

Net occupancy expenses

3,837 2,926 911 31.1

Data processing

2,239 1,889 350 18.5

Professional fees

1,578 1,187 391 32.9

Outside services and consultants

3,297 1,544 1,753 113.5

Loan expense

2,604 2,624 (20 -0.8

FDIC deposit insurance

814 676 138 20.4

Other losses

403 105 298 283.8

Other expense

6,148 4,878 1,270 26.0

Total non-interest expense

$ 41,302 $ 32,718 $ 8,584 26.2

Total non-interest expenses were $8.6 million higher in the first six months of 2016 compared to the same period of 2015. Salaries increased by $2.5 million and employee benefits increased by $1.1 million due to a larger employee base. Net occupancy expense increased $911,000 due to Horizon's investment in growth markets and the Peoples and Koscisuko acquisitions. Data processing expenses increased $350,000 and FDIC deposit insurance increase by $138,000 primarily due to company growth. Other losses increased by $298,000 primarily due to higher debit card losses and a trust settlement. Other expenses increased by $1.3 million primarily due to company growth and one-time merger-related expenses. Commission and bonuses decreased by $102,000 due to a decrease in loan volume and incentive pay. Outside services and consultants expense increased by $1.8 million due to the one-time fees associated with Kosciusko and LaPorte Bancorp acquisitions. One-time non-interest expense related to the Kosciusko and LaPorte Bancorp acquisitions totaled $2.5 million in the first six months of 2016 compared to $716,000 in one-time fees associated with the Peoples acquisition in the same period of 2015.

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, and borrowing relationships with correspondent banks, including the FHLB. During the six months ended June 30, 2016, cash and cash equivalents increased by approximately $60.6 million. At June 30, 2016, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $300.6 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $253.2 million at December 31, 2015 and $361.7 million at June 30, 2015.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for "well capitalized" banks at June 30, 2016. Stockholders' equity totaled $281.0 million as of June 30, 2016, compared to $266.8 million as of December 31, 2015. For the six months ended June 30, 2016, the ratio of average stockholders' equity to average assets was 9.94% compared to 10.32% for the twelve months ended December 31, 2015. The increase in stockholders' equity during the period was the result of the generation of net income, net of dividends declared, as well as the stock issued in the Kosciusko acquisition.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

On February 1, 2016, the Company paid off the $12.5 million in funds received through the Small Business Lending Fund with cash from the holding company, thereby ending its participation in the program, pursuant to which it issued preferred stock to the US Treasury. The funds were paid off due to an increase in the dividend cost that would have gone in effect at the end of February 2016. For the six months ending June 30, 2016, the dividend cost was $42,000 or 1.0% annualized and included the acceleration of interest due to the payoff.

Horizon declared common stock dividends in the amount of $0.30 per share during the first six months of 2016 compared to $0.28 per share for the same period of 2015. The dividend payout ratio (dividends as a percent of basic earnings per share) was 31.0% and 25.8% for the first six months of 2016 and 2015, respectively. For additional information regarding dividends, see Horizon's Annual Report on Form 10-K for 2015.

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 of the net interest margin and the allowance for loan and lease losses excluding the impact of acquisition-related purchase accounting adjustments and net income and diluted earnings per share excluding the impact of one-time costs related to acquisitions, acquisition-related purchase accounting adjustments and other events that are considered to be non-recurring. 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 one-time costs of acquisitions and non-core items, although 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.

Non-GAAP Reconciliation of Net Interest Margin

(dollar in thousands)

Three Months Ended Six Months Ended
June 30 March 31 June 30 June 30
2016 2016 2015 2016 2015
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)

Net Interest Margin As Reported

Net interest income

$ 20,869 $ 19,774 $ 17,850 $ 40,643 $ 34,736

Average interest-earning assets

2,471,354 2,367,250 2,008,191 2,406,468 1,954,287

Net interest income as a percent of average interest-earning assets ("Net Interest Margin")

3.48 3.45 3.67 3.47 3.68

Impact of Acquisitions

Interest income from acquisition-related purchase accounting adjustments

$ (397 $ (547 $ (797 $ (944 $ (1,880

Excluding Impact of Acquisitions

Net interest income

$ 20,472 $ 19,227 $ 17,053 $ 39,699 $ 32,856

Average interest-earning assets

2,471,354 2,367,250 2,008,191 2,406,468 1,954,287

Core Net Interest Margin

3.42 3.36 3.51 3.40 3.49

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2016

Non-GAAP Reconciliation of Net Income and Diluted Earnings per Share

(Dollars in Thousands Except per Share Data, Unaudited)

Three Months Ended Six Months Ended
June 30 June 30
2016 2015 2016 2015

Non-GAAP Reconciliation of Net Income

Net income as reported

$ 6,326 $ 4,728 $ 11,707 $ 10,086

Merger expenses

1,881 570 2,520 716

Tax effect

(531 (132 (696 (183

Net income excluding merger expenses

7,676 5,166 13,531 10,619

Gain on sale of investment securities

(767 -   (875 (124

Tax effect

268 -   306 43

Net income excluding gain on sale of investment securities

7,177 5,166 12,962 10,538

Death benefit on bank owned life insurance ("BOLI")

-   -   -   (145

Tax effect

-   -   -   51

Net income excluding death benefit on BOLI

7,177 5,166 12,962 10,444

Acquisition-related purchase accounting adjustments ("PAUs")

(397 (797 (944 (1,880

Tax effect

139 279 330 658

Net income excluding PAUs

$ 6,919 $ 4,648 $ 12,348 $ 9,222

Non-GAAP Reconciliation of Diluted Earnings per Share

Diluted earnings per share as reported

$ 0.52 $ 0.49 $ 0.96 $ 1.04

Merger expenses

0.15 0.06 0.21 0.07

Tax effect

(0.04 (0.01 (0.06 (0.02

Diluted earnings per share excluding merger expenses

0.63 0.54 1.11 1.09

Gain on sale of investment securities

(0.06 -   (0.07 (0.01

Tax effect

0.02 -   0.03 0.00

Net income excluding gain on sale of investment securities

0.59 0.54 1.07 1.09

Death benefit on BOLI

-   -   -   (0.02

Tax effect

-   -   -   0.01

Net income excluding death benefit on BOLI

0.59 0.54 1.07 1.08

Acquisition-related PAUs

(0.03 (0.08 (0.09 (0.20

Tax effect

0.01 0.03 0.03 0.07

Diluted earnings per share excluding PAUs

$ 0.57 $ 0.49 $ 1.01 $ 0.95

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HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three and Six Months ended June 30, 2016

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon's 2015 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 2015 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

Based on an evaluation of disclosure controls and procedures as of June 30, 2016, Horizon's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon's disclosure controls (as defined in Exchange Act Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon's disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes In Internal Control Over Financial Reporting

Horizon's management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended June 30, 2016, 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 AND SUBSIDIARIES

Part II – Other Information

For the Three and Six Months ended June 30, 2016

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 2015.

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

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 AND SUBSIDIARIES

Part II – Other Information

For the Three and Six Months ended June 30, 2016

ITEM 6. EXHIBITS

(a) Exhibits

Exhibit No. Description
    3.1 Amended and Restated Articles of Incorporation of Horizon Bancorp (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K filed May 10, 2016)
    3.2 Amended and Restated Bylaws of Horizon Bancorp (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K filed April 18, 2013)
    31.1 Certification of Craig M. Dwight
    31.2 Certification of Mark E. Secor
    32 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    101 Interactive Data Files

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SIGNATURES

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

HORIZON BANCORP
Dated: August 9, 2016

/s/ Craig M. Dwight

Craig M. Dwight
Chief Executive Officer
Dated: August 9, 2016

/s/ Mark E. Secor

Mark E. Secor
Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit No.

Description

Location

Exhibit 3.1 Amended and Restated Articles of Incorporation of Horizon Bancorp Incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K filed May 10, 2016
Exhibit 3.2 Amended and Restated Bylaws of Horizon Bancorp Incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K filed April 18, 2013
Exhibit 31.1 Certification of Craig M. Dwight Attached
Exhibit 31.2 Certification of Mark E. Secor Attached
Exhibit 32 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Attached
Exhibit 101 Interactive Data Files Attached

61