Horizon Bancorp (HBNC) SEC Quarterly Report (10-Q) for Q3 2017

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

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 ☒ 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 ☒ 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," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 25,482,438 shares of Common Stock, no par value, at November 7, 2017.

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	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	50

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69

Item 4.	Controls and Procedures	69

PART II. OTHER INFORMATION		70

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3.	Defaults Upon Senior Securities	70

Item 4.	Mine Safety Disclosures	70

Item 5.	Other Information	70

Item 6.	Exhibits	71

Signatures		72

Table of Contents

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)


	September 30			December 31
	2017			2016
	(Unaudited)
Assets
Cash and due from banks	$	72,662		$	70,832
Investment securities, available for sale		509,844			439,831
Investment securities, held to maturity (fair value of $202,222 and $194,086)		198,605			193,194
Loans held for sale		3,616			8,087
Loans, net of allowance for loan losses of $15,586 and $14,837		2,410,239			2,121,149
Premises and equipment, net		73,743			66,357
Federal Reserve and Federal Home Loan Bank stock		15,340			23,932
Goodwill		93,750			76,941
Other intangible assets		9,494			9,366
Interest receivable		14,880			12,713
Cash value of life insurance		75,480			74,134
Other assets		41,848			44,620

Total assets	$	3,519,501		$	3,141,156

Liabilities
Deposits
Non-interest bearing	$	563,536		$	496,248
Interest bearing		2,044,739			1,974,962

Total deposits		2,608,275			2,471,210
Borrowings		458,152			267,489
Subordinated debentures		37,607			37,456
Interest payable		700			472
Other liabilities		22,712			23,674

Total liabilities		3,127,446			2,800,301

Commitments and contingent liabilities
Stockholders' Equity
Preferred stock, Authorized, 1,000,000 shares
Issued 0 and 0 shares		-			-
Common stock, no par value
Authorized 66,000,000 shares (1)
Issued, 23,344,709 and 22,192,530 shares (1)
Outstanding, 23,325,459 and 22,171,596 shares (1)		-			-
Additional paid-in capital		212,436			182,326
Retained earnings		181,396			164,173
Accumulated other comprehensive loss		(1,777	)		(5,644	)

Total stockholders' equity		392,055			340,855

Total liabilities and stockholders' equity	$	3,519,501		$	3,141,156

(1)	Adjusted for 3:2 stock split on November 14, 2016

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				Nine Months Ended
	September 30				September 30
	2017		2016		2017		2016
Interest Income
Loans receivable	$	28,113	$	25,313	$	79,699	$	65,854
Investment securities
Taxable		2,167		2,498		6,817		7,703
Tax exempt		1,790		1,151		5,193		3,583

Total interest income		32,070		28,962		91,709		77,140

Interest Expense
Deposits		1,841		1,875		5,315		4,923
Borrowed funds		1,753		2,128		4,028		5,608
Subordinated debentures		597		549		1,721		1,556

Total interest expense		4,191		4,552		11,064		12,087

Net Interest Income		27,879		24,410		80,645		65,053
Provision for loan losses		710		455		1,370		1,219

Net Interest Income after Provision for Loan Losses		27,169		23,955		79,275		63,834

Non-interest Income
Service charges on deposit accounts		1,672		1,605		4,638		4,310
Wire transfer fees		175		292		503		588
Interchange fees		1,251		1,156		3,809		3,065
Fiduciary activities		1,887		1,653		5,752		4,753
Gains (losses) on sale of investment securities (includes $6 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $38 and $875 for the nine months ended September 30, 2017 and 2016, respectively, related to accumulated other comprehensive earnings reclassifications)		6		-		38		875
Gain on sale of mortgage loans		1,950		3,528		5,918		9,171
Mortgage servicing income net of impairment		369		409		1,175		1,356
Increase in cash value of bank owned life insurance		474		449		1,346		1,145
Other income		237		226		613		708

Total non-interest income		8,021		9,318		23,792		25,971

Non-interest Expense
Salaries and employee benefits		12,911		12,210		37,086		32,592
Net occupancy expenses		2,400		2,174		7,048		6,011
Data processing		1,502		1,616		4,311		3,855
Professional fees		649		612		1,797		2,190
Outside services and consultants		2,504		2,686		4,991		5,983
Loan expense		1,215		1,482		3,572		4,086
FDIC insurance expense		270		465		776		1,279
Other losses		58		107		186		510
Other expense		3,004		2,730		8,755		7,798

Total non-interest expense		24,513		24,082		68,522		64,304

Income Before Income Tax		10,677		9,191		34,545		25,501
Income tax expense (includes $2 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $13 and $306 for the nine months ended September 30, 2017 and 2016, respectively, related to income tax expense from reclassification items)		2,506		2,589		9,078		7,192

Net Income		8,171		6,602		25,467		18,309
Preferred stock dividend		-		-		-		(42	)

Net Income Available to Common Shareholders	$	8,171	$	6,602	$	25,467	$	18,267

Basic Earnings Per Share	$	0.36	$	0.31	$	1.14	$	0.95
Diluted Earnings Per Share		0.36		0.30		1.13		0.94

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)


	Three Months Ended September 30						Nine Months Ended September 30
	2017			2016			2017			2016
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net Income	$	8,171		$	6,602		$	25,467		$	18,309

Other Comprehensive Income (Loss)
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period		297			803			743			158
Income tax effect		(104	)		(281	)		(260	)		(55	)

Changes from derivative instruments		193			522			483			103

Change in securities:
Unrealized appreciation (depreciation) for the period on AFS securities		(791	)		(1,927	)		5,444			6,712
Amortization from transfer of securities from available for sale to held to maturity securities		(54	)		(83	)		(200	)		(560	)
Reclassification adjustment for securities (gains) losses realized in income		(6	)		-			(38	)		(875	)
Income tax effect		297			704			(1,822	)		(1,848	)

Unrealized gains (losses) on securities		(554	)		(1,306	)		3,384			3,429

Other Comprehensive Income (Loss), Net of Tax		(361	)		(784	)		3,867			3,532

Comprehensive Income	$	7,810		$	5,818		$	29,334		$	21,841

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, 2017	$	-	$	182,326	$	164,173		$	(5,644	)	$	340,855
Net income						25,467						25,467
Other comprehensive income, net of tax									3,867			3,867
Amortization of unearned compensation				103								103
Exercise of stock options				616								616
Stock option expense				238								238
Stock issued in Lafayette acquisition				29,153								29,153
Cash dividends on common stock ($0.37 per share)						(8,244	)					(8,244	)

Balances, September 30, 2017	$	-	$	212,436	$	181,396		$	(1,777	)	$	392,055

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)


	Nine Months Ended September 30
	2017			2016
	(Unaudited)			(Unaudited)
Operating Activities
Net income	$	25,467		$	18,309
Items not requiring (providing) cash
Provision for loan losses		1,370			1,219
Depreciation and amortization		4,303			3,790
Share based compensation		238			247
Mortgage servicing rights net impairment		75			840
Premium amortization on securities available for sale, net		4,476			4,389
Gain on sale of investment securities		(38	)		(875	)
Gain on sale of mortgage loans		(5,918	)		(9,171	)
Proceeds from sales of loans		174,271			246,435
Loans originated for sale		(163,882	)		(236,719	)
Change in cash value of life insurance		(1,346	)		(1,145	)
Gain on sale of other real estate owned		12			118
Net change in
Interest receivable		(1,811	)		(687	)
Interest payable		180			275
Other assets		2,215			(16,641	)
Other liabilities		(2,335	)		1,015

Net cash provided by operating activities		37,277			11,399

Investing Activities
Purchases of securities available for sale		(127,752	)		(152,283	)
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale		67,416			88,330
Purchases of securities held to maturity		(20,152	)		(35,598	)
Proceeds from maturities of securities held to maturity		4,883			14,654
Change in Federal Reserve and FHLB stock		8,987			(2,443	)
Net change in loans		(154,038	)		(26,920	)
Proceeds on the sale of OREO and repossessed assets		2,125			1,524
Change in premises and equipment, net		(2,667	)		(1,719	)
Acquisition of Kosciusko, net of cash received		-			30,437
Acquisition of LaPorte, net of cash received		-			116,521
Acquisition of branch, net of cash received		11,000			-
Acquisition of Lafayette, net of cash received		20,425			-

Net cash provided by (used in) investing activities		(189,773	)		32,503

Financing Activities
Net change in
Deposits		(28,860	)		(37,495	)
Borrowings		190,814			46,846
Redemption of preferred stock		-			(12,500	)
Proceeds from issuance of stock		616			286
Dividends paid on common shares		(8,244	)		(5,926	)
Dividends paid on preferred shares		-			(42	)

Net cash provided by financing activities		154,326			(8,831	)

Net Change in Cash and Cash Equivalents		1,830			35,071
Cash and Cash Equivalents, Beginning of Period		70,832			48,650

Cash and Cash Equivalents, End of Period	$	72,662		$	83,721

(continued)

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(Dollar Amounts in Thousands)


Additional Supplemental Information
Interest paid	$	10,836	$	11,579
Income taxes paid		10,350		7,310
Transfer of loans to other real estate owned		1,717		3,035
The Company purchased all of the capital stock of Lafayette for $34,529 on September 1, 2017. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		186,659		-
Less: common stock issued		30,108		-
Cash paid for the capital stock		4,421		-
Liabilities assumed		152,130		-
Acquisition of LaPorte, measurement period adjustments		703
The Company purchased all of the capital stock of LaPorte Bancorp for $98,634 on July 18, 2016. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		-		546,770
Less: common stock issued		-		60,306
Cash paid for the capital stock		-		38,328
Liabilities assumed		-		448,136
The Company purchased all of the capital stock of Kosciusko for $22,983 on June 1, 2016. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		-		155,873
Less: common stock issued		-		14,470
Cash paid for the capital stock		-		8,513
Liabilities assumed		-		132,890

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 ("Horizon Bank" or the "Bank"). Horizon Bank (formerly known as "Horizon Bank, N.A.") was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. All inter-company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2017 and September 30, 2016 are not necessarily indicative of the operating results for the full year of 2017 or 2016. 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 2016 filed with the Securities and Exchange Commission on February 28, 2017. The condensed consolidated balance sheet of Horizon as of December 31, 2016 has been derived from the audited balance sheet as of that date.

On October 18, 2016, the Board of Directors of the Company approved a three-for-two stock split of the Company's authorized common stock, no par value. All share and per share amounts in the condensed consolidated financial statements and notes thereto have been retroactively adjusted, where necessary, to reflect this three-for-two stock split. The effect of the three-for-two stock split on the outstanding common shares is that shareholders of record as of the close of business on October 31, 2016, the record date, received an additional half share of common stock held, with shareholders receiving cash in lieu of any fractional shares. The additional shares issued in the stock split were issued on November 14, 2016, and the common shares began trading on a split-adjusted basis on or about November 15, 2016.

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.

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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 computation of basic and diluted earnings per share.


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2017		2016		2017		2016
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Basic earnings per share
Net income	$	8,171	$	6,602	$	25,467	$	18,309
Less: Preferred stock dividends		-		-		-		42

Net income available to common shareholders	$	8,171	$	6,602	$	25,467	$	18,267
Weighted average common shares outstanding (1)		22,580,160		21,538,752		22,326,454		19,252,295
Basic earnings per share	$	0.36	$	0.31	$	1.14	$	0.95

Diluted earnings per share
Net income available to common shareholders	$	8,171	$	6,602	$	25,467	$	18,267
Weighted average common shares outstanding (1)		22,580,160		21,538,752		22,326,454		19,252,295
Effect of dilutive securities:
Restricted stock		36,749		33,650		33,791		27,590
Stock options		98,364		79,551		95,553		66,491

Weighted average shares outstanding		22,715,273		21,651,953		22,455,798		19,346,376
Diluted earnings per share	$	0.36	$	0.30	$	1.13	$	0.94

(1)	Adjusted for 3:2 stock split on November 14, 2016

There were zero shares for the three and nine months ended September 30, 2017 and 2016 which were not included in the computation of diluted earnings per share because they were non-dilutive.

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2016 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2016 condensed consolidated financial statements to be comparable to 2017. These reclassifications had no effect on net income.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 2 – Acquisitions

Kosciusko Financial, Inc.

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 4.5183 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 consisted 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 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 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 non-interest 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 was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs 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. The final valuation numbers were received in September 2016 which changed the goodwill estimate from $6.9 million to $6.4 million.


ASSETS			LIABILITIES
Cash and due from banks	$	38,950	Deposits
Investment securities, available for sale		1,191	Non-interest bearing	$	27,871
			NOW accounts	35,213
Commercial		70,006	Savings and money market		26,953
Residential mortgage		26,244	Certificates of deposits		32,771

Consumer		6,319	Total deposits		122,808

Total loans		102,569
			Borrowings	9,038
Premises and equipment, net		1,466	Interest payable		55
FRB and FHLB stock		582	Other liabilities		989
Goodwill		6,443
Core deposit intangible		526
Interest receivable		636
Cash value of life insurance		2,745
Other assets		765

Total assets purchased	$	155,873	Total liabilities assumed	$	132,890

Common shares issued	$	14,470
Cash paid		8,513

Total estimated purchase price	$	22,983

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Of the total estimated purchase price of $23.0 million, $526,000 has been allocated to core deposit intangible. Additionally, $6.4 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over ten years on a straight line basis.

The Company acquired various loans in the acquisition that 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.

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 June 1, 2016.


Contractually required principal and interest at acquisition	$	2,682
Contractual cash flows not expected to be collected (nonaccretable differences)		25

Expected cash flows at acquisition		2,657
Interest component of expected cash flows (accretable discount)		634

Fair value of acquired loans accounted for under ASC 310-30	$	2,023

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.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

LaPorte Bancorp, Inc.

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 0.9435 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 consisted of 65% stock and 35% cash. As a result of LaPorte Bancorp stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, less the consideration used to pay off LaPorte's ESOP loan receivable, the transaction has an implied valuation of approximately $98.6 million. The Company has had approximately $4.0 million in costs related to the acquisition. These expenses are classified in the non-interest 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 was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs 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 LaPorte Bancorp acquisition is detailed in the following table.


ASSETS			LIABILITIES
Cash and due from banks	$	154,849	Deposits
Investment securities, available for sale		23,779	Non-interest bearing	$	66,733
			NOW accounts	99,346
Commercial		153,750	Savings and money market		117,688
Residential mortgage		42,603	Certificates of deposits		87,605

Consumer		16,801	Total deposits		371,372
Mortgage Warehousing		99,752

Total loans		312,906
			Borrowings	64,793
Premises and equipment, net		6,022	Interest payable		178
FHLB stock		4,029	Subordinated debt		4,504
Goodwill		20,993	Other liabilities		10,056
Core deposit intangible		2,514
Interest receivable		844
Cash value of life insurance		15,267
Other assets		8,334

Total assets purchased	$	549,537	Total liabilities assumed	$	450,903

Common shares issued	$	60,306
Cash paid		38,328

Total estimated purchase price	$	98,634

Of the total estimated purchase price of $98.6 million, $2.5 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 ten years on a straight line basis.

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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 details an estimate of the acquired loans that are accounted for in accordance with ASC 310-30 as of July 18, 2016.


Contractually required principal and interest at acquisition	$	12,545
Contractual cash flows not expected to be collected (nonaccretable differences)		4,492

Expected cash flows at acquisition		8,053
Interest component of expected cash flows (accretable discount)		1,258

Fair value of acquired loans accounted for under ASC 310-30	$	6,795

CNB Bancorp

On November 7, 2016, Horizon completed the acquisition of CNB Bancorp, an Indiana corporation headquartered in Attica, Indiana ("CNB") and the Bank's acquisition of The Central National Bank and Trust Company ("Central National Bank & Trust"), through mergers effective November 7, 2016. Under terms of the acquisition, shareholders of CNB received merger consideration in the form of cash. The total value of the consideration for the acquisition was $5.3 million.

Under the acquisition method of accounting, the total estimated purchase price is allocated to CNB's 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 the 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 CNB acquisition is allocated as follows:

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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


ASSETS			LIABILITIES
Cash and due from banks	$	27,860	Deposits
Investment securities, available for sale		16,393	Non-interest bearing	$	24,079
			NOW accounts	9,038
Commercial		2,267	Savings and money market		13,829

Residential mortgage		6,624	Certificates of deposits		3,342
Consumer		1,579	Total deposits		50,288

Total loans		10,470
			Borrowings	459
Premises and equipment, net		444	Interest payable		7
FHLB stock		50	Other liabilities		154
Goodwill		609
Core deposit intangible		190
Interest receivable		154
Other assets		49

Total assets purchased	$	56,219	Total liabilities assumed	$	50,908

Cash paid		5,311

Total estimated purchase price	$	5,311

Of the total purchase price of $5.3 million, $190,000 has been allocated to core deposit intangible. Additionally, $609,000 has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over 10 years on a straight line basis.

The Company acquired the $10.8 million performing loan portfolio with an estimated fair value of $10.5 million. No loans were purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected or which are considered to be credit impaired.

Bargersville Branch Purchase

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction of $3.4 million and a 3.0% premium on deposits. Customer deposit balances were recorded at $14.8 million and a core deposit intangible of $463,000 was recorded in the transaction, which will be amortized over ten years on a straight line basis. There was no goodwill generated in the transaction.

Lafayette Community Bancorp

On September 1, 2017, Horizon completed the acquisition of Lafayette Community Bancorp, an Indiana corporation ("Lafayette") and Horizon Bank's acquisition of Lafayette Community Bank, a state-chartered bank and wholly-owned subsidiary of Lafayette, through mergers effective September 1, 2017. Under the terms of the Merger Agreement, shareholders of Lafayette received 0.5878 shares of Horizon common stock and $1.73 in cash for each outstanding share of Lafayette common stock. Lafayette shareholders owning fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,091,259. Based upon the August 31, 2017 closing price of $26.17 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million. The Company has had approximately $1.5 million in costs

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and are 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.

Horizon held a 5% ownership in Lafayette immediately preceding the merger date. In accordance with ASC 805-10 – Business Combinations, Horizon was required to remeasure the equity interest in Lafayette's common stock and recognize the resulting gain or loss, if any, in earnings. Since Lafayette was traded in the OTC market, the remeasurement was based on the closing price of Lafayette's common stock immediately prior to the acquisition announcement and immediately prior to Horizon taking control of Lafayette. A control premium was calculated which is not indicative of the fair value of Horizon's equity ownership interest immediately preceding the acquisition announcement. The control premium was immaterial to the financial statements taken as a whole.

The purchase price allocated to net tangible and intangible assets was made based upon provisional amounts as the initial accounting was not complete as of September 30, 2017. 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 Lafayette acquisition is detailed in the following table. Prior to the end of the one year measurement period for finalizing 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.


ASSETS				LIABILITIES
Cash and due from banks	$	24,846		Deposits
Investment securities, available for sale		6		Non-interest bearing	$	34,990
				NOW accounts	30,174
Commercial		98,011		Savings and money market		53,663
Residential mortgage		30,997		Certificates of deposits		32,271

Consumer		5,345		Total deposits		151,098

Total loans		134,353
				Borrowings	-
Premises and equipment, net		7,818		Interest payable		42
FHLB stock		395		Other liabilities		990
Goodwill		16,106
Core deposit intangible		777
Interest receivable		338
Other assets		2,020

Total assets purchased	$	186,659		Total liabilities assumed	$	152,130

Common shares issued	$	30,108	(1)
Cash paid		4,421

Total estimated purchase price	$	34,529

(1)	This includes $955,000 of common shares previously held by Horizon.

Of the total estimated purchase price of $34.5 million, $777,000 has been allocated to core deposit intangible. Additionally, $16.1 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over ten years on a straight-line basis.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 $134.4 million loan portfolio at an estimated fair value discount of $3.4 million. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided. When completed, 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 310-30.

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

The results of operations of Lafayette, CNB, LaPorte Bancorp and Kosciusko have been included in the Company's consolidated financial statements since the acquisition dates. The following schedule includes pro-forma results for the three and nine months ended September 30, 2017 and 2016 as if the Lafayette, CNB, LaPorte Bancorp and Kosciusko acquisitions had occurred as of the beginning of the comparable prior reporting periods.


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2017		2016		2017		2016
Summary of Operations:
Net Interest Income	$	28,856	$	26,628	$	84,471	$	80,515
Provision for Loan Losses		725		455		1,438		1,219
Net Interest Income after Provision for Loan Losses		28,131	$	26,173		83,033		79,296
Non-interest Income		8,077		10,534		24,175		32,547
Non-Interest Expense		26,523		32,400		73,003		86,781
Income before Income Taxes		9,685		4,307		34,205		25,062
Income Tax Expense		2,394		1,997		9,260		8,328
Net Income		7,291		2,310		24,945		16,734
Net Income Available to Common Shareholders	$	7,291	$	2,310	$	24,945	$	16,692
Basic Earnings Per Share	$	0.32	$	0.11	$	1.12	$	0.87
Diluted Earnings Per Share	$	0.32	$	0.11	$	1.11	$	0.86
		22,580,160		21,538,752		22,326,454		19,252,295
		22,715,273		21,651,953		22,455,798		19,346,376

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 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.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Wolverine Bancorp, Inc.

On October 17, 2017, Horizon completed the acquisition of Wolverine Bancorp, Inc., a Maryland corporation ("Wolverine") and Horizon Bank's acquisition of Wolverine Bank, a federally-chartered savings bank and wholly-owned subsidiary of Wolverine, through mergers effective October 17, 2017. Under the terms of the Merger Agreement, shareholders of Wolverine received 1.0152 shares of Horizon common stock and $14.00 in cash for each outstanding share of Wolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331, and the shares of Horizon common stock issued to Wolverine shareholders totaled 2,161,610. Based upon the October 16, 2017 closing price of $29.06 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $95.1 million.

As of October 17, 2017, Wolverine had total assets of approximately $363.2 million, total deposits of approximately $256.5 million and total net loans of approximately $308.1 million.

Utilizing September 30, 2017 financials for both Horizon and Wolverine and an estimate of the fair market value adjustments associated with the merger, Horizon would have total assets of approximately $3.9 billion, total deposits of approximately $2.9 billion and total net loans of approximately $2.7 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.

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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
September 30, 2017	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale
U.S. Treasury and federal agencies	$	17,996	$	3	$	(114	)	$	17,885
State and municipal		141,751		2,288		(556	)		143,483
Federal agency collateralized mortgage obligations		135,511		131		(1,440	)		134,202
Federal agency mortgage-backed pools		213,071		496		(1,516	)		212,051
Private labeled mortgage-backed pools		1,841		-		(11	)		1,830
Corporate notes		275		118		-			393

Total available for sale investment securities	$	510,445	$	3,036	$	(3,637	)	$	509,844

Held to maturity
State and municipal	$	177,473	$	4,249	$	(862	)	$	180,860
Federal agency collateralized mortgage obligations		5,902		25		(31	)		5,896
Federal agency mortgage-backed pools		15,230		307		(71	)		15,466

Total held to maturity investment securities	$	198,605	$	4,581	$	(964	)	$	202,222


			Gross		Gross
December 31, 2016	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale
U.S. Treasury and federal agencies	$	8,051	$	2	$	(64	)	$	7,989
State and municipal		117,327		324		(1,059	)		116,592
Federal agency collateralized mortgage obligations		139,040		254		(2,099	)		137,195
Federal agency mortgage-backed pools		180,183		251		(3,707	)		176,726
Corporate notes		1,238		91		-			1,329

Total available for sale investment securities	$	445,839	$	922	$	(6,929	)	$	439,831

Held to maturity
State and municipal	$	165,607	$	2,700	$	(2,485	)	$	165,822
Federal agency collateralized mortgage obligations		6,530		31		(71	)		6,490
Federal agency mortgage-backed pools		21,057		897		(180	)		21,774

Total held to maturity investment securities	$	193,194	$	3,628	$	(2,736	)	$	194,086

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 September 30, 2017, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 September 30, 2017.

The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2017 and December 31, 2016, 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.


	September 30, 2017				December 31, 2016
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Available for sale
Within one year	$	9,772	$	9,784	$	7,455	$	7,480
One to five years		44,771		44,811		37,483		37,479
Five to ten years		44,163		44,851		21,112		20,984
After ten years		61,316		62,315		60,566		59,967

		160,022		161,761		126,616		125,910
Federal agency collateralized mortgage obligations		135,511		134,202		139,040		137,195
Federal agency mortgage-backed pools		213,071		212,051		180,183		176,726
Private labeled mortgage-backed pools		1,841		1,830		-		-

Total available for sale investment securities	$	510,445	$	509,844	$	445,839	$	439,831

Held to maturity
Within one year	$	7,383	$	7,373	$	-	$	-
One to five years		37,402		38,645		24,594		25,271
Five to ten years		88,399		90,371		87,645		88,805
After ten years		44,289		44,471		53,368		51,746

		177,473		180,860		165,607		165,822
Federal agency collateralized mortgage obligations		5,902		5,896		6,530		6,490
Federal agency mortgage-backed pools		15,230		15,466		21,057		21,774

Total held to maturity investment securities	$	198,605	$	202,222	$	193,194	$	194,086

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
September 30, 2017	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury and federal agencies	$	15,233	$	(71	)	$	1,372	$	(43	)	$	16,605	$	(114	)
State and municipal		41,995		(483	)		28,127		(935	)		70,122		(1,418	)
Federal agency collateralized mortgage obligations		61,135		(480	)		47,213		(991	)		108,348		(1,471	)
Federal agency mortgage-backed pools		81,397		(567	)		61,624		(1,020	)		143,021		(1,587	)
Private labeled mortgage-backed pools		1,830		(11	)		-		-			1,830		(11	)

Total temporarily impaired securities	$	201,590	$	(1,612	)	$	138,336	$	(2,989	)	$	339,926	$	(4,601	)


	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2016	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury and federal agencies	$	6,987	$	(64	)	$	-	$	-		$	6,987	$	(64	)
State and municipal		142,466		(3,544	)		-		-			142,466		(3,544	)
Federal agency collateralized mortgage obligations		112,414		(1,918	)		10,199		(252	)		122,613		(2,170	)
Federal agency mortgage-backed pools		163,768		(3,887	)		-		-			163,768		(3,887	)

Total temporarily impaired securities	$	425,635	$	(9,413	)	$	10,199	$	(252	)	$	435,834	$	(9,665	)

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Information regarding security proceeds, gross gains and gross losses are presented below.


	Three Months Ended September 30				Nine Months Ended September 30
	2017		2016		2017			2016
Sales of securities available for sale (Unaudited)
Proceeds	$	387	$	-	$	5,490		$	25,077
Gross gains		6		-		151			1,060
Gross losses		-		-		(113	)		(185	)

Note 4 – Loans


	September 30 2017			December 31 2016
Commercial
Working capital and equipment	$	599,427		$	539,403
Real estate, including agriculture		624,009			485,620
Tax exempt		20,987			15,486
Other		29,367			29,447

Total		1,273,790			1,069,956
Real estate
1–4 family		563,993			526,024
Other		7,069			5,850

Total		571,062			531,874
Consumer
Auto		230,976			174,773
Recreation		8,969			5,669
Real estate/home improvement		59,641			53,898
Home equity		163,205			144,508
Unsecured		3,614			3,875
Other		19,085			15,706

Total		485,490			398,429
Mortgage warehouse		95,483			135,727

Total loans		2,425,825			2,135,986
Allowance for loan losses		(15,586	)		(14,837	)

Loans, net	$	2,410,239		$	2,121,149

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

properties securing the Company's commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Real Estate and Consumer

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

Mortgage Warehousing

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

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.


September 30, 2017	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	403,184		$	1,371	$	880		$	405,435
Non owner occupied real estate		531,560			656		2,202			534,418
Residential spec homes		4,031			11		-			4,042
Development & spec land loans		43,299			100		84			43,483
Commercial and industrial		288,086			2,475		464			291,025

Total commercial		1,270,160			4,613		3,630			1,278,403
Residential mortgage		553,451			1,814		2,786			558,051
Residential construction		14,825			29		-			14,854
Mortgage warehouse		95,483			480		-			95,963

Total real estate		663,759			2,323		2,786			668,868
Direct installment		85,726			249		(566	)		85,409
Direct installment purchased		88			-		-			88
Indirect installment		207,293			437		173			207,903
Home equity		194,050			795		(1,274	)		193,571

Total consumer		487,157			1,481		(1,667	)		486,971

Total loans		2,421,076			8,417		4,749			2,434,242
Allowance for loan losses		(15,586	)		-		-			(15,586	)

Net loans	$	2,405,490		$	8,417	$	4,749		$	2,418,656


December 31, 2016	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	337,548		$	899	$	1,022		$	339,469
Non owner occupied real estate		461,897			624		2,176			464,697
Residential spec homes		5,006			8		(2	)		5,012
Development & spec land loans		31,228			56		119			31,403
Commercial and industrial		230,520			1,906		442			232,868

Total commercial		1,066,199			3,493		3,757			1,073,449
Residential mortgage		508,233			1,492		3,030			512,755
Residential construction		20,611			33		-			20,644
Mortgage warehouse		135,727			480		-			136,207

Total real estate		664,571			2,005		3,030			669,606
Direct installment		71,150			199		(385	)		70,964
Direct installment purchased		119			-		-			119
Indirect installment		153,204			345		-			153,549
Home equity		175,126			703		(785	)		175,044

Total consumer		399,599			1,247		(1,170	)		399,676

Total loans		2,130,369			6,745		5,617			2,142,731
Allowance for loan losses		(14,837	)		-		-			(14,837	)

Net loans	$	2,115,532		$	6,745	$	5,617		$	2,127,894

Table of Contents

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.

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


	September 30		September 30		September 30		September 30		September 30		September 30
	2017		2017		2017		2017		2017		2017
	Heartland		Summit		Peoples		Kosciusko		LaPorte		Total
Commercial	$	521	$	4,657	$	398	$	962	$	1,086	$	7,624
Real estate		241		895		139		411		1,017		2,703
Consumer		-		-		-		-		35		35

Outstanding balance	$	762	$	5,552	$	537	$	1,373	$	2,138	$	10,362

Carrying amount, net of allowance of $71											$	10,291


	December 31		December 31		December 31		December 31		December 31		December 31
	2016		2016		2016		2016		2016		2016
	Heartland		Summit		Peoples		Kosciusko		LaPorte		Total
Commercial	$	774	$	5,245	$	692	$	1,652	$	3,200	$	11,563
Real estate		534		967		165		457		1,114		3,237
Consumer		2		-		-		-		41		43

Outstanding balance	$	1,310	$	6,213	$	856	$	2,109	$	4,355	$	14,843

Carrying amount, net of allowance of $0											$	14,843

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


	Nine Months Ended September 30, 2017
	Heartland			Summit			Peoples			Kosciusko			LaPorte			Total
Balance at January 1	$	557		$	502		$	389		$	530		$	1,479		$	3,457
Additions		-			-			-			-			-			-
Accretion		(99	)		(268	)		(388	)		(80	)		(194	)		(1,029	)
Reclassification from nonaccretable difference		-			-			-			-			-			-
Disposals		(6	)		(2	)		(1	)		(42	)		(264	)		(315	)

Balance at September 30	$	452		$	232		$	-		$	408		$	1,021		$	2,113


	Nine Months Ended September 30, 2016
	Heartland			Summit			Peoples			Kosciusko			LaPorte			Total
Balance at January 1	$	795		$	708		$	555		$	-		$	-		$	2,058
Additions		-			-			-			634			1,736			2,370
Accretion		(127	)		(139	)		(92	)		(38	)		-			(396	)
Reclassification from nonaccretable difference		-			-			-			-			-			-
Disposals		(74	)		(35	)		(59	)		(23	)		-			(191	)

Balance at September 30	$	594		$	534		$	404		$	573		$	-		$	3,841

During the nine months ended September 30, 2017 and 2016, the Company increased the allowance for loan losses on purchased loans by a charge to the income statement of $71,000 and $0, respectively.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 September 30						Nine Months Ended September 30
	2017			2016			2017			2016
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Balance at beginning of the period	$	15,027		$	14,226		$	14,837		$	14,534
Loans charged-off:
Commercial
Owner occupied real estate		12			4			12			182
Non owner occupied real estate		20			(1	)		20			471
Residential development		-			-			-			-
Development & Spec Land Loans		-			-			1			-
Commercial and industrial		232			8			273			47

Total commercial		264			11			306			700
Real estate
Residential mortgage		37			12			89			127
Residential construction		-			-			-			-
Mortgage warehouse		-			-			-			-

Total real estate		37			12			89			127
Consumer
Direct Installment		84			55			331			159
Direct Installment Purchased		-			-			-			-
Indirect Installment		254			296			862			851
Home Equity		24			32			95			271

Total consumer		362			383			1,288			1,281

Total loans charged-off		663			406			1,683			2,108
Recoveries of loans previously charged-off:
Commercial
Owner occupied real estate		7			2			8			31
Non owner occupied real estate		4			1			29			55
Residential development		2			2			6			6
Development & Spec Land Loans		-			-			-			-
Commercial and industrial		82			12			204			107

Total commercial		95			17			247			199
Real estate
Residential mortgage		13			12			35			75
Residential construction		-			-			-			-
Mortgage warehouse		-			-			-			-

Total real estate		13			12			35			75
Consumer
Direct Installment		260			26			311			70
Direct Installment Purchased		-			-			-			-
Indirect Installment		119			160			384			400
Home Equity		25			34			85			135

Total consumer		404			220			780			605

Total loan recoveries		512			249			1,062			879

Net loans charged-off (recovered)		151			157			621			1,229

Provision charged to operating expense
Commercial		429			165			1,357			(471	)
Real estate		361			102			(113	)		(147	)
Consumer		(80	)		188			126			1,837

Total provision charged to operating expense		710			455			1,370			1,219

Balance at the end of the period	$	15,586		$	14,524		$	15,586		$	14,524

Table of Contents

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 contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 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.

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


					Mortgage
September 30, 2017	Commercial		Real Estate		Warehousing		Consumer		Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		7,877		2,129		1,048		4,532		15,586
Loans acquired with deteriorated credit quality		-		-		-		-		-

Total ending allowance balance	$	7,877	$	2,129	$	1,048	$	4,532	$	15,586

Loans:
Individually evaluated for impairment	$	3,451	$	-	$	-	$	-	$	3,451
Collectively evaluated for impairment		1,274,952		572,905		95,963		486,971		2,430,791
Loans acquired with deteriorated credit quality		-		-		-		-		-

Total ending loans balance	$	1,278,403	$	572,905	$	95,963	$	486,971	$	2,434,242


					Mortgage
December 31, 2016	Commercial		Real Estate		Warehousing		Consumer		Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	4	$	-	$	-	$	-	$	4
Collectively evaluated for impairment		6,575		2,090		1,254		4,914		14,833
Loans acquired with deteriorated credit quality		-		-		-		-		-

Total ending allowance balance	$	6,579	$	2,090	$	1,254	$	4,914	$	14,837

Loans:
Individually evaluated for impairment	$	2,250	$	-	$	-	$	-	$	2,250
Collectively evaluated for impairment		1,071,199		533,399		136,207		399,676		2,140,481
Loans acquired with deteriorated credit quality		-		-		-		-		-

Total ending loans balance	$	1,073,449	$	533,399	$	136,207	$	399,676	$	2,142,731

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:


September 30, 2017	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non- Performing TDRs		Performing TDRs		Total Non- Performing Loans
Commercial
Owner occupied real estate	$	894	$	-	$	29	$	-	$	923
Non owner occupied real estate		218		-		483		-		701
Residential development		-		-		-		-		-
Development & Spec Land Loans		102		-		-		-		102
Commercial and industrial		1,707		-		-		-		1,707

Total commercial		2,921		-		512		-		3,433
Real estate
Residential mortgage		3,269		119		460		1,473		5,321
Residential construction		-		-		-		224		224
Mortgage warehouse		-		-		-		-		-

Total real estate		3,269		119		460		1,697		5,545
Consumer
Direct Installment		310		-		-		-		310
Direct Installment Purchased		-		-		-		-		-
Indirect Installment		1,019		15		-		-		1,034
Home Equity		1,546		28		220		318		2,112

Total Consumer		2,875		43		220		318		3,456

Total	$	9,065	$	162	$	1,192	$	2,015	$	12,434


December 31, 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	$	1,532	$	183	$	-	$	-	$	1,715
Non owner occupied real estate		440		-		-		-		440
Residential development		-		-		-		-		-
Development & Spec Land Loans		118		-		-		-		118
Commercial and industrial		159		-		-		-		159

Total commercial		2,249		183		-		-		2,432
Real estate
Residential mortgage		2,959		-		576		1,254		4,789
Residential construction		-		-		233		-		233
Mortgage warehouse		-		-		-		-		-

Total real estate		2,959		-		809		1,254		5,022
Consumer
Direct Installment		512		-		-		-		512
Direct Installment Purchased		-		-		-		-		-
Indirect Installment		659		49		-		-		708
Home Equity		1,557		9		205		238		2,009

Total Consumer		2,728		58		205		238		3,229

Total	$	7,936	$	241	$	1,014	$	1,492	$	10,683

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Included in the $9.1 million of non-accrual loans and the $1.2 million of non-performing TDRs at September 30, 2017 were $4.3 million and $339,000, 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 Credit Officer and/or the Chief Operations 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 the three methods described above.

The Company's TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At September 30, 2017, 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 September 30, 2017, the Company had $3.2 million in TDRs and $2.0 million were performing according to the restructured terms and $298,000 in TDRs were returned to accrual status during the first nine months of 2017. There were zero specific reserves allocated to TDRs at September 30, 2017 based on the discounted cash flows or when appropriate the fair value of the collateral.

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				Nine Months Ending
September 30, 2017	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	$	923	$	934	$	-	$	1,167	$	4	$	1,033	$	4
Non owner occupied real estate		701		701		-		468		-		308		2
Residential development		-		-		-		-		-		-		-
Development & Spec Land Loans		102		102		-		222		-		230		-
Commercial and industrial		1,707		1,714		-		2,066		3		1,071		19

Total commercial		3,433		3,451		-		3,923		7		2,642		25
With an allowance recorded
Commercial
Owner occupied real estate		-		-		-		-		-		-		-
Non owner occupied real estate		-		-		-		-		-		-		-
Residential development		-		-		-		-		-		-		-
Development & Spec Land Loans		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-

Total commercial		-		-		-		-		-		-		-

Total	$	3,433	$	3,451	$	-	$	3,923	$	7 $		2,642	$	25


							Three Months Ending				Nine Months Ending
September 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	$	994	$	995	$	-	$	1,029	$	-	$	1,062	$	-
Non owner occupied real estate		3,106		3,120		-		3,150		1		3,776		3
Residential development		-		-		-		-		-		-		-
Development & Spec Land Loans		-		-		-		-		-		-		-
Commercial and industrial		1,740		1,740		-		1,984		-		878		-

Total commercial		5,840		5,855		-		6,163		1		5,716		3
With an allowance recorded
Commercial
Owner occupied real estate		-		-		-		-		-		-		-
Non owner occupied real estate		-		-		-		-		-		-		-
Residential development		-		-		-		-		-		-		-
Development & Spec Land Loans		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-

Total commercial		-		-		-		-		-		-		-

Total	$	5,840	$	5,855	$	-	$	6,163	$	1	$	5,716	$	3

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 the payment status by class of loan:


							90 Days or
	30-59 Days			60-89 Days			Greater Past			Total Past			Loans Not
September 30, 2017	Past Due			Past Due			Due			Due			Past Due			Total
Commercial
Owner occupied real estate	$	2,282		$	-		$	-		$	2,282		$	400,902		$	403,184
Non owner occupied real estate		132			-			-			132			531,428			531,560
Residential development		135			-			-			135			3,896			4,031
Development & Spec Land Loans		-			-			-			-			43,299			43,299
Commercial and industrial		255			166			-			421			287,665			288,086

Total commercial		2,804			166			-			2,970			1,267,190			1,270,160
Real estate
Residential mortgage		1,012			167			119			1,298			552,153			553,451
Residential construction		-			-			-			-			14,825			14,825
Mortgage warehouse		-			-			-			-			95,483			95,483

Total real estate		1,012			167			119			1,298			662,461			663,759
Consumer
Direct Installment		67			-			-			67			85,659			85,726
Direct Installment Purchased		-			-			-			-			88			88
Indirect Installment		1,192			181			15			1,388			205,905			207,293
Home Equity		611			84			28			723			193,327			194,050

Total consumer		1,870			265			43			2,178			484,979			487,157

Total	$	5,686		$	598		$	162		$	6,446		$	2,414,630		$	2,421,076

Percentage of total loans		0.23	%		0.02	%		0.01	%		0.27	%		99.73	%

							90 Days or
	30-59 Days			60-89 Days			Greater Past			Total Past			Loans Not
December 31, 2016	Past Due			Past Due			Due			Due			Past Due			Total
Commercial
Owner occupied real estate	$	1,068		$	-		$	183		$	1,251		$	336,297		$	337,548
Non owner occupied real estate		357			-			-			357			461,540			461,897
Residential development		-			-			-			-			5,006			5,006
Development & Spec Land Loans		1			-			-			1			31,227			31,228
Commercial and industrial		982			-			-			982			229,538			230,520

Total commercial		2,408			-			183			2,591			1,063,608			1,066,199
Real estate
Residential mortgage		886			123			-			1,009			507,224			508,233
Residential construction		-			-			-			-			20,611			20,611
Mortgage warehouse		-			-			-			-			135,727			135,727

Total real estate		886			123			-			1,009			663,562			664,571
Consumer
Direct Installment		139			4			-			143			71,007			71,150
Direct Installment Purchased		-			-			-			-			119			119
Indirect Installment		1,339			237			49			1,625			151,579			153,204
Home Equity		912			267			9			1,188			173,938			175,126

Total consumer		2,390			508			58			2,956			396,643			399,599

Total	$	5,684		$	631		$	241		$	6,556		$	2,123,813		$	2,130,369

Percentage of total loans		0.27	%		0.03	%		0.01	%		0.31	%		99.69	%

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.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

•

For new and renewed commercial loans, the Bank's Credit Department, which acts independently of the loan officer, assigns the credit quality grade 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 $3,500,000) 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.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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. 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.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Risk Grade 6: Substandard

One or more of the following characteristics may be exhibited in loans classified Substandard:

•

Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

•

Loans are inadequately protected by the current net worth and paying capacity of the obligor.

•

The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

•

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

•

Unusual courses of action are 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.

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.


				Special
September 30, 2017	Pass			Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	386,856		$	5,776		$	10,552		$	-		$	403,184
Non owner occupied real estate		523,831			1,008			6,721			-			531,560
Residential development		4,031			-			-			-			4,031
Development & Spec Land Loans		43,066			-			233			-			43,299
Commercial and industrial		272,622			4,969			10,495			-			288,086

Total commercial		1,230,406			11,753			28,001			-			1,270,160
Real estate
Residential mortgage		548,249			-			5,202			-			553,451
Residential construction		14,601			-			224			-			14,825
Mortgage warehouse		95,483			-			-			-			95,483

Total real estate		658,333			-			5,426			-			663,759
Consumer
Direct Installment		85,416			-			310			-			85,726
Direct Installment Purchased		88			-			-			-			88
Indirect Installment		206,259			-			1,034			-			207,293
Home Equity		191,938			-			2,112			-			194,050

Total Consumer		483,701			-			3,456			-			487,157

Total	$	2,372,439		$	11,753		$	36,883		$	-		$	2,421,076

Percentage of total loans		97.99	%		0.49	%		1.52	%		0.00	%

				Special
December 31, 2016	Pass			Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	322,924		$	4,960		$	9,664		$	-		$	337,548
Non owner occupied real estate		455,648			341			5,908			-			461,897
Residential development		5,006			-			-			-			5,006
Development & Spec Land Loans		31,057			-			171			-			31,228
Commercial and industrial		220,424			3,728			6,368			-			230,520

Total commercial		1,035,059			9,029			22,111			-			1,066,199
Real estate
Residential mortgage		503,444			-			4,789			-			508,233
Residential construction		20,378			-			233			-			20,611
Mortgage warehouse		135,727			-			-			-			135,727

Total real estate		659,549			-			5,022			-			664,571
Consumer
Direct Installment		70,638			-			512			-			71,150
Direct Installment Purchased		119			-			-			-			119
Indirect Installment		152,496			-			708			-			153,204
Home Equity		173,117			-			2,009			-			175,126

Total Consumer		396,370			-			3,229			-			399,599

Total	$	2,090,978		$	9,029		$	30,362		$	-		$	2,130,369

Percentage of total loans		98.15	%		0.42	%		1.43	%		0.00	%

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:


September 30, 2017	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	$	63,081	$	-	$	-	$	-	$	-	$	-	$	63,081

Securities pledged for Repurchase Agreements
U.S. Treasury and federal agencies		-		-		-		-		-		-		-
Federal agency collateralized mortgage obligations		40,740		-		-		-		-		-		40,740
Federal agency mortgage-backed pools		38,476		-		-		-		-		-		38,476

Total	$	79,216	$	-	$	-	$	-	$	-	$	-	$	79,216

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 September 30, 2017 and December 31, 2016. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 2.31% on a notional amount of $30.0 million at September 30, 2017 and December 31, 2016. 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 September 30, 2017, 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 September 30, 2017, 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.

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 $152.2 million at September 30, 2017 and $122.4 million at December 31, 2016.

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 September 30, 2017, 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
	September 30, 2017				September 30, 2017
Derivatives designated as hedging instruments (Unaudited)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Interest rate contracts		Loans	$	-		Other liabilities	$	429
Interest rate contracts		Other Assets		429		Other liabilities		2,390

Total derivatives designated as hedging instruments				429				2,819

Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets		286		Other liabilities		31

Total derivatives not designated as hedging instruments				286				31

Total derivatives			$	715			$	2,850


	Asset Derivatives				Liability Derivatives
	December 31, 2016				December 31, 2016
Derivatives designated as hedging instruments	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Interest rate contracts		Loans	$	-		Other liabilities	$	6
Interest rate contracts		Other Assets		6		Other liabilities		3,132

Total derivatives designated as hedging instruments				6				3,138

Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets		602		Other liabilities		22

Total derivatives not designated as hedging instruments				602				22

Total derivatives			$	608			$	3,160

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-month and nine-month periods ending September 30 is as follows:

Comprehensive Income on Derivative

(Effective Portion)

Three Months Ended September 30

Nine Months Ended September 30

Derivative in cash flow

2017

2016

2017

2016

hedging relationship

(Unaudited)

Interest rate contracts

193

522

483

103

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
		Three Months Ended September 30						Nine Months Ended September 30
Derivative in fair value	Location of gain (loss)	2017			2016			2017			2016
hedging relationship	recognized on derivative	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest rate contracts	Interest income-loans	$	(4	)	$	(830	)	$	423		$	2,781
Interest rate contracts	Interest income-loans		4			830			(423	)		(2,781	)

Total		$	-		$	-		$	-		$	-


		Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended September 30						Nine Months Ended September 30
Derivative not designated	Location of gain (loss)	2017			2016			2017			2016
as hedging relationship	recognized on derivative	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Mortgage contracts	Other income-gain on sale of loans	$	(112	)	$	(324	)	$	(324	)	$	145

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

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 September 30, 2017. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

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

Hedged loans

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

Interest rate swap agreements

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

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 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:


				Quoted Prices in		Significant
				Active Markets		Other			Significant
				for Identical		Observable			Unobservable
				Assets		Inputs			Inputs
	Fair Value			(Level 1)		(Level 2)			(Level 3)
September 30, 2017
Available-for-sale securities
U.S. Treasury and federal agencies	$	17,885		$	-	$	17,885		$	-
State and municipal		143,483			-		143,483			-
Federal agency collateralized mortgage obligations		134,202			-		134,202			-
Federal agency mortgage-backed pools		212,051			-		212,051			-
Private labeled mortgage-backed pools		1,830			-		1,830			-
Corporate notes		393			-		393			-

Total available-for-sale securities		509,844			-		509,844			-
Hedged loans		152,216			-		152,216			-
Forward sale commitments		286			-		286			-
Interest rate swap agreements		(2,819	)		-		(2,819	)		-
Commitments to originate loans		(31	)		-		(31	)		-
December 31, 2016
Available-for-sale securities
U.S. Treasury and federal agencies	$	7,989		$	-	$	7,989		$	-
State and municipal		116,592			-		116,592			-
Federal agency collateralized mortgage obligations		137,195			-		137,195			-
Federal agency mortgage-backed pools		176,726			-		176,726			-
Corporate notes		1,329			-		1,329			-

Total available-for-sale securities		439,831			-		439,831			-
Hedged loans		122,345			-		122,345			-
Forward sale commitments		602			-		602			-
Interest rate swap agreements		(3,138	)		-		(3,138	)		-
Commitments to originate loans		(22	)		-		(22	)		-

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 September 30						Nine Months Ended September 30
Non Interest Income	2017			2016			2017			2016
Total gains and losses from:	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Hedged loans	$	(4	)	$	(830	)	$	423		$	2,781
Fair value interest rate swap agreements		4			830			(423	)		(2,781	)
Derivative loan commitments		(112	)		(324	)		(324	)		145

	$	(112	)	$	(324	)	$	(324	)	$	145

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2017
Impaired loans	$	3,433	$	-	$	-	$	3,433
Mortgage servicing rights		11,485		-		-		11,485
December 31, 2016
Impaired loans	$	2,246	$	-	$	-	$	2,246
Mortgage servicing rights		11,174		-		-		11,174

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 $75,000 during the first nine months of 2017 and decreased by $193,000 during the first nine months of 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 following table presents qualitative information about unobservable inputs used in recurring and non-recurring Level 3 fair value measurements, other than goodwill.


	Fair Value at		Valuation		Range (Weighted
	September 30, 2017		Technique	Unobservable Inputs	Average)
				Discount to reflect current market conditions and ultimate
Impaired loans	$	3,433	Collateral based measurement	collectability		11% - 17% (14%	)
				Discount rate, Constant		11% - 17% (14%	),
				prepayment rate, Probability of		4% - 8% (5.1%	),
Mortgage servicing rights	$	11,485	Discounted cashflows	default		1% - 11% (5.0%	)

	Fair Value at		Valuation		Range (Weighted
	December 31, 2016		Technique	Unobservable Inputs	Average)
				Discount to reflect current
				market conditions and ultimate
Impaired loans	$	2,246	Collateral based measurement	collectability		10% - 16% (13%	)
				Discount rate, Constant		10% - 16% (13%	),
				prepayment rate, Probability of		4% - 7% (4.6%	),
Mortgage servicing rights	$	11,174	Discounted cashflows	default		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.

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 September 30, 2017 and December 31, 2016. 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.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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.

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).


	September 30, 2017
			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	$	72,662	$	72,662	$	-	$	-
Investment securities, held to maturity		198,605		-		202,222		-
Loans held for sale		3,616		-		-		3,616
Loans excluding loan level hedges, net		2,258,023		-		-		2,205,681
Stock in FHLB and FRB		15,340		-		15,340		-
Interest receivable		14,880		-		14,880		-
Liabilities
Non-interest bearing deposits	$	563,536	$	563,536	$	-	$	-
Interest-bearing deposits		2,044,739		-		1,948,765		-
Borrowings		458,152		-		453,303		-
Subordinated debentures		37,607		-		36,241		-
Interest payable		700		-		700		-

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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


	December 31, 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	$	70,832	$	70,832	$	-	$	-
Investment securities, held to maturity		193,194		-		194,086		-
Loans held for sale		8,087		-		-		8,087
Loans excluding loan level hedges, net		1,998,804		-		-		1,965,928
Stock in FHLB and FRB		23,932		-		23,932		-
Interest receivable		12,713		-		12,713		-
Liabilities
Non-interest bearing deposits	$	496,248	$	496,248	$	-	$	-
Interest-bearing deposits		1,974,962		-		1,839,167		-
Borrowings		267,489		-		261,141		-
Subordinated debentures		37,456		-		36,371		-
Interest payable		472		-		472		-

Note 12 – Accumulated Other Comprehensive Income


	September 30			December 31
	2017			2016
	(Unaudited)
Unrealized gain (loss) on securities available for sale	$	(601	)	$	(6,007	)
Unamortized gain on securities held to maturity, previously transferred from AFS		256			456
Unrealized loss on derivative instruments		(2,390	)		(3,132	)
Tax effect		958			3,039

Total accumulated other comprehensive income (loss)	$	(1,777	)	$	(5,644	)

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 September 30, 2017, 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.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (September 30, 2017) and Tier I leverage ratios as set forth in the table below. As of September 30, 2017 and December 31, 2016, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the third quarter of 2017 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 September 30, 2017 and December 31, 2016 were as follows:


	Actual					Required For Capital 1 Adequacy Purposes					Required For Capital 1 Adequacy Purposes with Capital Buffer					Well Capitalized Under Prompt 1 Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2017
Total capital 1 (to risk-weighted assets)
Consolidated	$	347,601		13.22	%		210,274		8.00	%		226,833		8.63	%		N/ A		N/ A
Bank		339,596		12.93	%		210,162		8.00	%		226,713		8.63	%	$	262,703		10.00	%
Tier 1 capital 1 (to risk-weighted assets)
Consolidated		331,962		12.63	%		157,705		6.00	%		174,264		6.63	%		N/ A		N/ A
Bank		323,957		12.33	%		157,622		6.00	%		174,172		6.63	%		210,162		8.00	%
Common equity tier 1 capital 1 (to risk-weighted assets)
Consolidated		293,499		11.17	%		118,279		4.50	%		134,838		5.13	%		N/ A		N/ A
Bank		323,957		12.33	%		118,216		4.50	%		134,766		5.13	%		170,757		6.50	%
Tier 1 capital 1 (to average assets)
Consolidated		331,962		10.11	%		131,319		4.00	%		131,319		4.00	%		N/ A		N/ A
Bank		323,957		9.90	%		130,877		4.00	%		130,877		4.00	%		163,596		5.00	%
As of December 31, 2016
Total capital 1 (to risk-weighted assets)
Consolidated	$	316,576		13.87	%	$	182,596		8.00	%	$	196,976		8.63	%		N/ A		N/ A
Bank		319,013		13.98	%		182,541		8.00	%		196,916		8.63	%	$	228,176		10.00	%
Tier 1 capital 1 (to risk-weighted assets)
Consolidated		301,739		13.22	%		136,947		6.00	%		151,326		6.63	%		N/ A		N/ A
Bank		304,176		13.33	%		136,905		6.00	%		151,280		6.63	%		182,540		8.00	%
Common equity tier 1 capital 1 (to risk-weighted assets)
Consolidated		263,313		11.50	%		103,036		4.50	%		117,460		5.13	%		N/ A		N/ A
Bank		304,176		13.33	%		102,679		4.50	%		117,054		5.13	%		148,314		6.50	%
Tier 1 capital 1 (to average assets)
Consolidated		301,739		10.44	%		115,609		4.00	%		115,609		4.00	%		N/ A		N/ A
Bank		304,176		9.93	%		122,521		4.00	%		122,521		4.00	%		153,151		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.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 15 – Future Accounting Matters

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities . The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The amendments in this ASU also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. For public entities, the new guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the ASU. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).

FASB Accounting Standards Update No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The amendments in this update were adopted on January 1, 2017 and did not have a material impact on the consolidated financial statements.

FASB Accounting Standards Updates No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

The FASB has issued Accounting Standards Update (ASU) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

FASB Accounting Standards Updates No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business

The FASB has issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The amendments in this update became effective on January 1, 2017 and did not have a material impact on the consolidated financial statements.

FASB Accounting Standards Updates No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The FASB has issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment 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 enhance their credit loss estimates. The amendment 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. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption will be permitted beginning after December 15, 2018. We have formed a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

FASB Accounting Standards Updates No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Acounting

The FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. The amendments in this update became effective on January 1, 2017 and resulted in a tax benefit of $208,000 and $227,000 for the three and nine months ended September 30, 2017, respectively.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

FASB Accounting Standards Updates No. 2016-02, Leases (Topic 842)

The FASB has issued Accounting Standards Update (ASU) No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding as of December 31, 2016, we do not expect the new standard to have a material impact on our balance sheet or income statement.

FASB Accounting Standards Updates No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

The FASB has issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.

The new guidance makes targeted improvements to existing U.S. GAAP by:

•

Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;

•

Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;

•

Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;

•

Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;

•

Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and

•

Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. Adoption of the ASU is not expected to have a significant effect on the Company's consolidated financial statements.

FASB Accounting Standards Updates No. 2014-09, Revenue from Contracts with Customers (Topic 606)

The FASB has issued Accounting Standards Update (ASU) No. 2014-09 creating, Revenue from Contracts with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We do not expect the new standard, or any of the amendments detailed below, to result in a material change from our current accounting for revenue, as recognition of interest income and the larger sources of non-interest income from Horizon's current financial instruments would not be impacted by the guidance. Additional disclosures regarding the composition of Horizon's revenue sources will be required.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and some practical expedients.

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 16 – 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 Nine Months ended September 30, 2017 and 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;

•

loss of fee income, as new technologies take a greater market share of the payment systems;

•

estimates of fair value of certain of Horizon's assets and liabilities;

•

volatility and disruption in financial markets;

•

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

•

sources of liquidity;

•

potential risk of environmental liability related to lending activities;

•

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

•

legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular, 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 possible impact of whole or partial dismantling of provisions of the Dodd-Frank Act under the administration of President Donald J. Trump;

•

the potential for changes in tax laws, particularly corporate income tax reform, that may affect current returns, Horizon's deferred tax assets and liabilities, the ability to utilize federal and state net operating loss carryforwards, and the market's perception on overall value;

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

•

the impact of the 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;

•

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 us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see "Risk Factors" in Item 1A of Part I of our 2016 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, Southwestern and Central Michigan and Central Ohio 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 originally chartered as a national banking association in 1873 and has operated continuously since that time and converted to an Indiana state-chartered bank effective on June 23, 2017. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

On October 17, 2017, Horizon completed the acquisition of Wolverine Bancorp, Inc., a Maryland corporation ("Wolverine") and Horizon Bank's acquisition of Wolverine Bank, a federally-chartered savings bank and wholly-owned subsidiary of Wolverine, through mergers effective October 17, 2017. Under the terms of the Merger Agreement, shareholders of Wolverine received 1.0152 shares of Horizon common stock and $14.00 in cash for each outstanding share of Wolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331 and the shares of Horizon common stock issued to Wolverine shareholders totaled 2,161,610. Based upon the October 16, 2017 closing price of $29.06 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $95.1 million.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,091,259. Based upon the August 31, 2017 closing price of $26.17 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million.

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, located in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction and a premium on deposits assumed in the transaction.

On November 7, 2016, Horizon completed the acquisition of CNB Bancorp, an Indiana corporation headquartered in Attica, Indiana ("CNB") and the Bank's acquisition of The Central National Bank and Trust Company ("Central National Bank & Trust"), through mergers effective November 7, 2016. Under the terms of the acquisition, shareholders of CNB received merger consideration in the form of cash. The total value of the consideration for the acquisition was $5.3 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 4.5183 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 consisted 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 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million.

Following are some highlights of Horizon's financial performance through the third quarter of 2017:

•

Net income for the third quarter of 2017 increased 23.8% to $8.2 million or $0.36 diluted earnings per share compared to $6.6 million or $0.30 diluted earnings per share for the third quarter of 2016.

•

Net income, excluding acquisition-related expenses, gain on sale of investment securities and purchase accounting adjustments ("core net income"), for the third quarter of 2017 increased 10.3% to $9.2 million or $0.41 diluted earnings per share compared to $8.4 million or $0.39 diluted earnings per share for the same period of 2016.

•

Net income for the first nine months of 2017 was $25.5 million or $1.13 diluted earnings per share compared to $18.3 million or $0.94 diluted earnings per share for the same period in 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

•

Core net income for the first nine months of 2017 increased 22.5% to $25.4 million or $1.13 diluted earnings per share compared to $20.7 million or $1.07 diluted earnings per share for the same period of 2016.

•

Return on average assets was 0.96% for the third quarter of 2017 compared to 0.80% for the same period in 2016.

•

Return on average assets, excluding acquisition-related expenses, gain on sale of investment securities and purchase accounting adjustments ("core return on average assets"), for the third quarter of 2017 was 1.09% compared to 1.02% for the same period of 2016.

•

Commercial loans, excluding acquired commercial loans, increased by an annualized rate of 12.8%, or $103.1 million, during the first nine months of 2017.

•

Consumer loans, excluding acquired consumer loans, increased by an annualized rate of 27.2%, or $81.2 million, during the first nine months of 2017.

•

Total loans, excluding acquired loans, increased by an annualized rate of 9.2%, or $147.7 million, during the first nine months of 2017.

•

Net interest income for the third quarter of 2017 increased $3.5 million, or 14.2%, compared to the same period in 2016.

•

Net interest margin was 3.71% for the third quarter of 2017 compared to 3.84% for the prior quarter and 3.37% for the third quarter of 2016. The improvement in net interest margin from the prior year was due to Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016, an increase in average interest-earning assets and an increase in loan yields.

•

Net interest margin, excluding the impact of purchase accounting adjustments ("core net interest margin"), was 3.63% for the third quarter of 2017 compared to 3.71% for the prior quarter and 3.31% for the same period in 2016.

•

Horizon's tangible book value per share rose to $12.38 at September 30, 2017, compared to $11.48 at December 31, 2016.

•

On September 1, 2017, Horizon closed the acquisition of Lafayette Community Bancorp ("Lafayette") and its wholly-owned subsidiary, Lafayette Community Bank, headquartered in Lafayette, Indiana. The system integration of Lafayette was successfully completed on September 22, 2017.

•

On October 17, 2017, Horizon closed the acquisition of Wolverine Bancorp, Inc. ("Wolverine") and its wholly-owned subsidiary, Wolverine Bank, headquartered in Midland, Michigan. The system integration of Wolverine is scheduled for November 2017.

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 2016 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.

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

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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 September 30, 2017, Horizon had core deposit intangibles of $9.5 million subject to amortization and $93.8 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 September 30, 2017 was $29.17 per share compared to a book value of $16.81 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.

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

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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 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.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

Financial Condition

On September 30, 2017, Horizon's total assets were $3.5 billion, an increase of approximately $378.3 million compared to December 31, 2016. The increase was primarily in net loans of $289.1 million, investment securities available for sale of $70.0 million, goodwill of $16.8 million and investment securities held to maturity of $5.4 million which were offset by decreases in Federal Reserve Bank stock of $8.6 million, other assets of $2.8 million and loans held for sale of $4.5 million.

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


	September 30, 2017				December 31, 2016
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Available for sale
U.S. Treasury and federal agencies	$	17,996	$	17,885	$	8,051	$	7,989
State and municipal		141,751		143,483		117,327		116,592
Federal agency collateralized mortgage obligations		135,511		134,202		139,040		137,195
Federal agency mortgage-backed pools		213,071		212,051		180,183		176,726
Private labeled mortgage-backed pools		1,841		1,830		-		-
Corporate notes		275		393		1,238		1,329

Total available for sale investment securities	$	510,445	$	509,844	$	445,839	$	439,831

Held to maturity
State and municipal	$	177,473	$	180,860	$	165,607	$	165,822
Federal agency collateralized mortgage obligations		5,902		5,896		6,530		6,490
Federal agency mortgage-backed pools		15,230		15,466		21,057		21,774

Total held to maturity investment securities	$	198,605	$	202,222	$	193,194	$	194,086

Total investment securities increased by approximately $75.4 million at September 30, 2017 compared to December 31, 2016, primarily due to the investing of cash received from the Bargersville branch purchase and the CNB merger and increasing earning assets due to lower mortgage warehouse balances.

Total loans increased $285.4 million since December 31, 2016 to $2.4 billion as of September 30, 2017. This increase was the result of an increase in commercial loans of $203.8 million, consumer loans of $87.1 million and residential mortgage loans of $39.2 million, offset by a decrease in mortgage warehouse loans of $40.2 million and a decrease in loans held for sale of $4.5 million. Total loans increased $134.4 million as a result of the acquisition of Lafayette during the third quarter of 2017. The growth markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo contributed total loan growth of $120.1 million during the first nine months of 2017 leading to the increase in commercial loans. The addition of a seasoned consumer loan portfolio manager during the fourth quarter of 2016 and an increased focus on the management of direct consumer loans are the main drivers for the increase in consumer loans.

Total deposits increased $137.1 million since December 31, 2016 to $2.6 billion as of September 30, 2017. Non-interest bearing transaction accounts, interest bearing transaction accounts and time deposits increased $67.3 million, $37.0 million and $32.7 million, respectively, during the nine months ended September 30, 2017. The increase in deposits is primarily attributable to the acquisition of $151.1 million in deposits from Lafayette during the third quarter of 2017.

The Company's borrowings increased $190.7 million from December 31, 2016 to $458.2 million as of September 30, 2017. At September 30, 2017, the Company had $320.3 million in short-term funds borrowed compared to $189.0 million at December 31, 2016. The increase in borrowings was utilized to fund loan growth of $285.4 million since December 31, 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

Stockholders' equity totaled $392.1 million at September 30, 2017 compared to $340.9 million at December 31, 2016. The increase in stockholders' equity during the period was the result of the acquisition of Lafayette, generation of net income, net of dividends declared. At September 30, 2017, the ratio of average stockholders' equity to average assets was 10.74% compared to 10.59% at December 31, 2016. Book value per common share at September 30, 2017 increased to $16.81 compared to $15.37 at December 31, 2016.

Results of Operations

Overview

Consolidated net income for the three-month period ended September 30, 2017 was $8.2 million compared to $6.6 million for the same period in 2016. Earnings per common share for the three months ended September 30, 2017 were $0.36 basic and diluted, compared to $0.31 basic and $0.30 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 of $3.5 million, partially offset by a decrease in non-interest income of $1.3 million and increases in provision for loan losses of $255,000, non-interest expense of $431,000 and the diluted shares outstanding primarily due to the stock issued in the Kosciusko and LaPorte Bancorp acquisitions. Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses and other expense. Excluding acquisition-related expenses, gain/losses on sale of investment securities and purchase accounting adjustments, net income for the third quarter of 2017 was $9.2 million or $0.41 diluted earnings per share compared to $8.4 million or $0.39 diluted earnings per share in the same period of 2016.

Consolidated net income for the nine-month period ended September 30, 2017 was $25.5 million compared to $18.3 million for the same period in 2016. Earnings per common share for the nine months ended September 30, 2017 were $1.14 basic and $1.13 diluted, compared to $0.95 basic and $0.94 diluted for the same nine-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 of $15.6 million, partially offset by a decrease in non-interest income of $2.2 million and increases in non-interest expense of $4.2 million, income tax expense of $1.9 million and the diluted shares outstanding primarily due to the stock issued in the Kosciusko and LaPorte Bancorp acquisitions. Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing expense and other expense. Excluding acquisition-related expenses, gains/losses on sale of investment securities and purchase accounting adjustments, net income for the nine months ended September 30, 2017 was $25.4 million or $1.13 diluted earnings per share compared to $20.7 million or $1.07 diluted earnings per share in the same period of 2016.

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 September 30, 2017 was $27.9 million, an increase of $3.5 million from the $24.4 million earned during the same period in 2016. Yields on the Company's interest-earning assets increased by 34 basis points to 3.71% for the three months ending September 30, 2017 from 3.37% for the three months ended September 30, 2016. Interest income increased $3.1 million from $29.0 million for the three months ended September 30, 2016 to $32.1 million for the same period in 2017. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $661,000 for the three months ending September 30, 2017 compared to $459,000 for the same period of 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

Rates paid on interest-bearing liabilities decreased by 6 basis points for the three-month period ended September 30, 2017 compared to the same period in 2016 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense decreased $361,000 compared to the three-month period ended September 30, 2016 to $4.2 million for the same period in 2017. This decrease was due to lower average balances of borrowings in addition to lower rates paid on borrowings, partially offset by higher average balances of interest-bearing deposits. The rates paid on borrowings decreased as a result of Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016.

The net interest margin increased 34 basis points from 3.37% for the three-month period ended September 30, 2016 to 3.71% for the same period in 2017. The increase in the margin for the three-month period ended September 30, 2017 compared to the same period in 2016 was due to an increase in the yield on interest-earning assets and a reduction in the cost on interest-bearing liabilities. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.63% for the three-month period ending September 30, 2017 compared to 3.31% for the same period in 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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


	Three Months Ended								Three Months Ended
	September 30, 2017								September 30, 2016
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets
Federal funds sold	$	6,770		$	24		1.41	%	$	35,492		$	20		0.22	%
Interest-earning deposits		20,157			49		0.96	%		55,047			32		0.23	%
Investment securities - taxable		426,145			2,094		1.95	%		530,228			2,446		1.84	%
Investment securities - non-taxable (1)		296,716			1,790		3.36	%		186,074			1,151		3.73	%
Loans receivable (2)(3)		2,328,823			28,113		4.82	%		2,151,103			25,313		4.69	%

Total interest-earning assets (1)		3,078,611			32,070		4.25	%		2,957,944			28,962		3.98	%
Non-interest-earning assets
Cash and due from banks		41,465								39,875
Allowance for loan losses		(15,135	)							(14,301	)
Other assets		278,721								290,100

	$	3,383,662							$	3,273,618

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits	$	1,961,998		$	1,841		0.37	%	$	1,896,156		$	1,875		0.39	%
Borrowings		460,878			1,753		1.51	%		510,738			2,128		1.66	%
Subordinated debentures		36,386			597		6.51	%		37,092			549		5.89	%

Total interest-bearing liabilities		2,459,262			4,191		0.68	%		2,443,986			4,552		0.74	%
Non-interest-bearing liabilities
Demand deposits		540,109								462,253
Accrued interest payable and other liabilities		20,915								34,144
Stockholders' equity		363,376								333,235

	$	3,383,662							$	3,273,618

Net interest income/ spread				$	27,879		3.58	%				$	24,410		3.24	%

Net interest income as a percent of average interest earning assets (1)							3.71	%							3.37	%

(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 nine months ended September 30, 2017 was $80.6 million, an increase of $15.6 million from the $65.1 million earned during the same period in 2016. Yields on the Company's interest-earning assets increased by 34 basis points to 3.77% for the nine months ending September 30, 2017 from 3.43% for the nine months ended September 30, 2016. Interest income increased $14.6 million from $77.1 million for the nine months ended September 30, 2016 to $91.7 million for the same period in 2017. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $2.6 million for the nine months ending September 30, 2017 compared to $1.4 million for the same period of 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

Rates paid on interest-bearing liabilities decreased by 12 basis points for the nine-month period ended September 30, 2017 compared to the same period in 2016 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense decreased $1.0 million compared to the nine-month period ended September 30, 2016 to $11.1 million for the same period in 2017. This decrease was due to lower average balances of borrowings in addition to lower rates paid on borrowings, partially offset by higher average balances of interest-bearing deposits. The rates paid on borrowings decreased as a result of Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016.

The net interest margin increased 34 basis points from 3.43% for the nine-month period ended September 30, 2016 to 3.77% for the same period in 2017. The increase in the margin for the nine-month period ended September 30, 2017 compared to the same period in 2016 was due to an increase in the yield on interest-earning assets and a reduction in the cost on interest-bearing liabilities. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.65% for the nine-month period ending September 30, 2017 compared to 3.36% for the same period in 2016.

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


	Nine Months Ended								Nine Months Ended
	September 30, 2017								September 30, 2016
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets
Federal funds sold	$	3,857		$	35		1.21	%	$	13,812		$	23		0.22	%
Interest-earning deposits		24,177			201		1.11	%		34,624			59		0.23	%
Investment securities - taxable		416,323			6,581		2.11	%		486,374			7,621		2.09	%
Investment securities - non-taxable (1)		286,007			5,193		3.39	%		183,142			3,583		3.63	%
Loans receivable (2)(3)		2,210,295			79,699		4.83	%		1,873,614			65,854		4.70	%

Total interest-earning assets (1)		2,940,659			91,709		4.27	%		2,591,566			77,140		4.05	%
Non-interest-earning assets
Cash and due from banks		42,004								36,220
Allowance for loan losses		(15,069	)							(14,334	)
Other assets		279,706								243,021

	$	3,247,300							$	2,856,473

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits	$	1,967,457		$	5,315		0.36	%	$	1,680,560		$	4,923		0.39	%
Borrowings		357,932			4,028		1.50	%		438,324			5,608		1.71	%
Subordinated debentures		36,339			1,721		6.33	%		34,144			1,556		6.09	%

Total interest-bearing liabilities		2,361,728			11,064		0.63	%		2,153,028			12,087		0.75	%
Non-interest-bearing liabilities
Demand deposits		510,230								387,768
Accrued interest payable and other liabilities		20,220								26,397
Stockholders' equity		355,121								289,280

	$	3,247,299							$	2,856,473

Net interest income/spread				$	80,645		3.64	%				$	65,053		3.30	%

Net interest income as a percent of average interest earning assets (1)							3.77	%							3.43	%

(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.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 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 September 30, 2017, a provision of $710,000 was required to adequately fund the ALLL compared to $455,000 for the same period of 2016. Commercial loan net charge-offs during the three-month period ended September 30, 2017 were $169,000, residential mortgage loan net charge-offs were $24,000 and consumer loan net charge-offs were negative $42,000. The increase in the provision for loan losses in the third quarter of 2017 compared to the same period of 2016 was due to increased additional allocations to loans originated in new markets and an increase in allocation for agricultural economic factors. The ALLL balance at September 30, 2017 was $15.6 million or 0.64% of total loans. This compares to an ALLL balance of $14.8 million at December 31, 2016 or 0.69% of total loans. The decrease in the ratio at September 30, 2017 compared to December 31, 2016 was due to an increase in loan balances, excluding acquired loans and loans held for sale, of $187.9 million.

For the nine-month period ended September 30, 2017, the provision for loan losses totaled $1.4 million compared to $1.2 million in the same period of 2016. The higher provision for loan losses for the nine months ended September 30, 2017 compared to the same period of 2016 was due to an increase in loan balances, along with additional allocations to loans originated in new markets and an increase in allocation for agricultural economic factors.

Horizon's loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 0.82% as of September 30, 2017. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was 1.24% as of September 30, 2017. The table below illustrates Horizon's loan loss reserve ratio composition as of September 30, 2017.

Non-GAAP Allowance for Loan and Lease Loss Detail

As of September 30, 2017

(Dollars in Thousands, Unaudited)


	Horizon
	Legacy			Heartland			Summit			Peoples			Kosciusko			LaPorte			CNB			Lafayette			Total
Pre-discount loan balance	$	1,903,322		$	12,861		$	44,649		$	123,332		$	64,450		$	158,099		$	7,694		$	125,981		$	2,440,388
Allowance for loan losses (ALLL)		15,515			71			-			-			-			-			-			-			15,586
Loan discount		N/A			846			2,365			2,944			810			4,036			206			3,356			14,563

ALLL+ loan discount		15,515			917			2,365			2,944			810			4,036			206			3,356			30,149

Loans, net	$	1,887,807		$	11,944		$	42,284		$	120,388		$	63,640		$	154,063		$	7,488		$	122,625		$	2,410,239

ALLL/ pre-discount loan balance		0.82	%		0.55	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.64	%
Loan discount/ pre-discount loan balance		N/A			6.58	%		5.30	%		2.39	%		1.26	%		2.55	%		2.68	%		2.66	%		0.60	%
ALLL+ loan discount/ pre-discount loan balance		0.82	%		7.13	%		5.30	%		2.39	%		1.26	%		2.55	%		2.68	%		2.66	%		1.24	%

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 September 30, 2017.

Non-performing loans totaled $12.4 million as of September 30, 2017, up from $10.7 million as of December 31, 2016. Non-performing commercial, real estate and consumer loans increased by $1.0 million, $523,000 and $227,000, respectively, at September 30, 2017 compared to December 31, 2016.

Other Real Estate Owned (OREO) totaled $1.8 million at September 30, 2017 compared to $3.2 million on December 31, 2016 and $3.7 million on September 30, 2016.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

Non-interest Income

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


	Three Months Ended
	September 30		September 30		Amount			Percent
	2017		2016		Change			Change
Non-interest Income
Service charges on deposit accounts	$	1,672	$	1,605	$	67			4.2	%
Wire transfer fees		175		292		(117	)		-40.1	%
Interchange fees		1,251		1,156		95			8.2	%
Fiduciary activities		1,887		1,653		234			14.2	%
Gain on sale of investment securities		6		-		6			NM
Gain on sale of mortgage loans		1,950		3,528		(1,578	)		-44.7	%
Mortgage servicing net of impairment		369		409		(40	)		-9.8	%
Increase in cash surrender value of bank owned life insurance		474		449		25			5.6	%
Other income		237		226		11			4.9	%

Total non-interest income	$	8,021	$	9,318	$	(1,297	)		-13.9	%

Total non-interest income was $1.3 million lower during the third quarter of 2017 compared to the same period of 2016. Service charges on deposit accounts increased $67,000, interchange fees increased by $95,000, and fiduciary activities increased $234,000 primarily due to overall company growth and increased volume. Residential mortgage loan activity during the third quarter of 2017 generated $1.9 million of income from the gain on sale of mortgage loans, down $1.6 million from the same period in 2016. The decrease in the gain on sale of mortgage loans was due to a decrease in the volume of mortgage loans sold from $98.3 million in the third quarter of 2016 to $56.4 million in the same period of 2017. Wire transfer fee income decreased $117,000 during the third quarter of 2017 when compared to the same period of 2016 due to a decrease in mortgage warehouse activity and related wire transfer fees.

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


	Nine Months Ended
	September 30		September 30		Amount			Percent
	2017		2016		Change			Change
Non-interest Income
Service charges on deposit accounts	$	4,638	$	4,310	$	328			7.6	%
Wire transfer fees		503		588		(85	)		-14.5	%
Interchange fees		3,809		3,065		744			24.3	%
Fiduciary activities		5,752		4,753		999			21.0	%
Gain on sale of investment securities		38		875		(837	)		-95.7	%
Gain on sale of mortgage loans		5,918		9,171		(3,253	)		-35.5	%
Mortgage servicing net of impairment		1,175		1,356		(181	)		-13.3	%
Increase in cash surrender value of bank owned life insurance		1,346		1,145		201			17.6	%
Other income		613		708		(95	)		-13.4	%

Total non-interest income	$	23,792	$	25,971	$	(2,179	)		-8.4	%

Total non-interest income was $2.2 million lower in the first nine months of 2017 when compared to the same period of 2016. Service charges on deposit accounts increased $328,000, interchange fees increased $744,000 and fiduciary activities increased $999,000, primarily due to overall company growth and increased volume. Gain on sale of investment securities decreased $837,000 due to gains realized in the first nine months of 2016 as a result of an analysis that determined market conditions provided the opportunity to add

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

gains to capital without negatively impacting loan-term earnings. Residential mortgage loan activity during the first nine months of 2017 generated $5.9 million from the gain on sale of mortgage loans, down $3.3 million from the same period in 2016. The decrease in the gain on sale of mortgage loans was due to a decrease in the volume of mortgage loans sold from $236.7 million in the first nine months of 2016 to $163.9 million in the same period of 2017.

Non-interest Expense

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


	Three Months Ended
	September 30		September 30		Amount			Percent
	2017		2016		Change			Change
Non-interest expense
Salaries	$	9,245	$	8,349	$	896			10.7	%
Commission and bonuses		1,413		1,799		(386	)		-21.5	%
Employee benefits		2,253		2,062		191			9.3	%
Net occupancy expenses		2,400		2,174		226			10.4	%
Data processing		1,502		1,616		(114	)		-7.1	%
Professional fees		649		612		37			6.0	%
Outside services and consultants		2,504		2,686		(182	)		-6.8	%
Loan expense		1,215		1,482		(267	)		-18.0	%
FDIC deposit insurance		270		465		(195	)		-41.9	%
Other losses		58		107		(49	)		-45.8	%
Other expense		3,004		2,730		274			10.0	%

Total non-interest expense	$	24,513	$	24,082	$	431			1.8	%

Total non-interest expense was $431,000 higher in the third quarter of 2017 compared to the same period of 2016. Excluding merger-related expenses of $2.0 million and $3.0 million recorded during the three months ended September 30, 2017 and 2016, respectively, total non-interest expense increased $1.4 million, or 6.5%. Salaries increased by $896,000 due to a larger employee base. Net occupancy expense increased $226,000 due to Horizon's investment in growth markets and the LaPorte Bancorp, CNB and Lafayette acquisitions. Other expense increased $274,000 primarily due to higher amortization expense related to core deposit intangibles. Outside service and consultant, professional fees and other expense decreased $182,000 in the third quarter of 2017 when compared to the same period of 2016 primarily due to lower merger-related expenses. FDIC insurance expense was $195,000 lower in the third quarter of 2017 when compared to the same period of 2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and during 2017. Loan expenses decreased $267,000 primarily due to a decrease in loan collection expenses. Data processing expense decreased $114,000 in the third quarter of 2017 when compared to the same period in 2016.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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


	Nine Months Ended
	September 30		September 30		Amount			Percent
	2017		2016		Change			Change
Non-interest Expense
Salaries	$	26,867	$	22,485	$	4,382			19.5	%
Commission and bonuses		3,863		4,064		(201	)		-4.9	%
Employee benefits		6,356		6,043		313			5.2	%
Net occupancy expenses		7,048		6,011		1,037			17.3	%
Data processing		4,311		3,855		456			11.8	%
Professional fees		1,797		2,190		(393	)		-17.9	%
Outside services and consultants		4,991		5,983		(992	)		-16.6	%
Loan expense		3,572		4,086		(514	)		-12.6	%
FDIC deposit insurance		776		1,279		(503	)		-39.3	%
Other losses		186		510		(324	)		-63.5	%
Other expense		8,755		9,616		(861	)		-9.0	%

Total non-interest expense	$	68,522	$	66,122	$	2,400			3.6	%

Total non-interest expense was $2.4 million higher for the nine months ended September 30, 2017 compared to the same period of 2016. Excluding merger-related expenses of $2.2 million and $5.5 million recorded during the nine months of September 30, 2017 and 2016, respectively, total non-interest expense increased $5.7 million, or 9.3%. Salaries increased by $4.4 million due to a larger employee base. Net occupancy expenses increased $1.0 million due to Horizon's investment in growth markets and the Kosciusko, LaPorte Bancorp, CNB and Lafayette acquisitions. Data processing expenses increased $456,000 primarily due to company growth. Outside services and consultants, professional fees and other expenses decreased $992,000, $393,000 and $861,000, respectively, for the nine months ended September 30, 2017 compared to the same period of 2016 primarily due to one-time expenses related to the Kosciusko and LaPorte Bancorp acquisitions. FDIC deposit insurance expense was $503,000 lower for the first nine months of 2017 when compared to the same period in 2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and in 2017. Other losses decreased $324,000 for the nine months ended September 30, 2017 when compared to the same period in 2016, primarily due to a decrease in debit card related expense. Loan expense decreased $514,000 as loan collection expenses were lower during the first nine months of 2017 when compared to the same period of 2016.

Income Taxes

Income tax expense for the third quarter of 2017 was $2.5 million compared to $2.6 million for the same period of 2016. The effective tax rate for the third quarter of 2017 was 23.5% compared to 28.2% in the same period of 2016. The decrease in the effective tax rate for the third quarter of 2017 was primarily due to tax benefits related to the exercise of stock options.

Income tax expense for the nine months ended September 30, 2017 was $9.1 million compared to $7.2 million for the same period of 2016. The effective tax rate for the first nine months of 2017 was 26.3% compared to 28.2% in the same period of 2016. The decrease in the effective tax rate for the nine months ended September 30, 2017 was primarily due to tax benefits related to the exercise of stock options.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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 nine months ended September 30, 2017, cash and cash equivalents increased by approximately $1.8 million. At September 30, 2017, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $236.3 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $453.9 million at December 31, 2016 and $278.2 million at September 30, 2016.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for "well capitalized" banks at September 30, 2017. Stockholders' equity totaled $392.1 million as of September 30, 2017, compared to $340.9 million as of December 31, 2016. For the nine months ended September 30, 2017, the ratio of average stockholders' equity to average assets was 10.94% compared to 10.22% for the twelve months ended December 31, 2016. 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 Lafayette acquisition.

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.

Horizon declared common stock dividends in the amount of $0.37 per share during the first nine months of 2017 and $0.30 per share for the same period of 2016. The dividend payout ratio (dividends as a percent of basic earnings per share) was 32.4% and 31.6% for the first nine months of 2017 and 2016, respectively. For additional information regarding dividends, see Horizon's Annual Report on Form 10-K for 2016.

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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

(Dollars in Thousands, Unaudited)


	Three Months Ended									Nine Months Ended
	September 30			June 30			September 30			September 30
	2017			2017			2016			2017			2016
Net Interest Margin As Reported
Net interest income	$	27,879		$	27,198		$	24,410		$	80,645		$	65,053
Average interest-earning assets		3,078,611			2,943,627			2,957,944			2,940,659			2,591,566
Net interest income as a percent of average interest-earning assets ("Net Interest Margin")		3.71	%		3.84	%		3.37	%		3.77	%		3.43	%
Impact of Acquisitions
Interest income from acquisition-related purchase accounting adjustments	$	(661	)	$	(939	)	$	(459	)	$	(2,616	)	$	(1,404	)
Excluding Impact of Prepayment Penalties and Acquisitions
Net interest income	$	27,218		$	26,259		$	23,951		$	78,029		$	63,649
Average interest-earning assets		3,078,611			2,943,627			2,957,944			2,940,659			2,591,566
Core Net Interest Margin		3.63	%		3.71	%		3.31	%		3.65	%		3.36	%

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

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

(Dollars in Thousands Except per Share Data)


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2017			2016			2017			2016
	(Unaudited)						(Unaudited)
Non-GAAP Reconciliation of Net Income
Net income as reported	$	8,171		$	6,602		$	25,467		$	18,309
Merger expenses		2,013			2,953			2,213			5,472
Tax effect		(516	)		(886	)		(586	)		(1,582	)

Net income excluding merger expenses		9,668			8,669			27,094			22,199
Gain on sale of investment securities		(6	)		-			(38	)		(875	)
Tax effect		2			-			13			306

Net income excluding gain on sale of investment securities		9,664			8,669			27,069			21,630
Acquisition-related purchase accounting adjustments ("PAUs")		(661	)		(459	)		(2,616	)		(1,404	)
Tax effect		231			161			916			491

Net income excluding PAUs	$	9,234		$	8,371		$	25,369		$	20,717

Non-GAAP Reconciliation of Diluted Earnings per Share
Diluted earnings per share as reported	$	0.36		$	0.30		$	1.13		$	0.94
Merger expenses		0.09			0.14			0.10			0.28
Tax effect		(0.02	)		(0.04	)		(0.02	)		(0.08	)

Diluted earnings per share excluding merger expenses		0.43			0.40			1.21			1.14
Gain on sale of investment securities		(0.00	)		-			(0.00	)		(0.05	)
Tax effect		0.00			-			0.00			0.02

Net income excluding gain on sale of investment securities		0.43			0.40			1.21			1.11
Acquisition-related PAUs		(0.03	)		(0.02	)		(0.12	)		(0.07	)
Tax effect		0.01			0.01			0.04			0.03

Diluted earnings per share excluding PAUs	$	0.41		$	0.39		$	1.13		$	1.07

Non-GAAP Reconciliation of Tangible Stockholders' Equity and Tangible Book Value per Share

(Dollars in Thousands Except per Share Data)


	September 30		June 30		March 31		December 31		September 30
	2017		2017		2017		2016		2016
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Total stockholders' equity	$	392,055	$	357,259	$	348,575	$	340,855	$	345,736
Less: Intangible assets		103,244		86,726		87,094		86,307		83,891

Total tangible stockholders' equity	$	288,811	$	270,533	$	261,481	$	254,548	$	261,845

Common shares outstanding		23,325,459		22,176,465		22,176,465		22,171,596		22,143,228
Tangible book value per common share	$	12.38	$	12.20	$	11.79	$	11.48	$	11.83

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

Non-GAAP Reconciliation of Return on Average Assets

(Dollars in Thousands)


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2017			2016			2017			2016
	(Unaudited)						(Unaudited)
Non-GAAP Reconciliation of Net Income
Average Assets	$	3,383,662		$	3,273,618		$	3,247,300		$	2,856,473
Net income as reported		8,171			6,602			25,467			18,309
Merger expenses		2,013			2,953			2,213			5,472
Tax effect		(516	)		(886	)		(586	)		(1,582	)

Net income excluding merger expenses		9,668			8,669			27,094			22,199
Gain on sale of investment securities		(6	)		-			(38	)		(875	)
Tax effect		2			-			13			306

Net income excluding gain on sale of investment securities		9,664			8,669			27,069			21,630
Acquisition-related purchase accounting adjustments ("PAUs")		(661	)		(459	)		(2,616	)		(1,404	)
Tax effect		231			161			916			491

Net income excluding PAUs	$	9,234		$	8,371		$	25,369		$	20,717

Non-GAAP Reconciliation Return on Average Assets
Return on average assets as reported		0.96	%		0.80	%		1.05	%		0.86	%
Merger expenses		0.24	%		0.37	%		0.09	%		0.25	%
Tax effect		-0.06	%		-0.11	%		-0.03	%		-0.07	%

Return on average assets excluding merger expenses		1.14	%		1.06	%		1.11	%		1.04	%
Gain on sale of investment securities		0.00	%		0.00	%		0.00	%		-0.04	%
Tax effect		0.00	%		0.00	%		0.00	%		0.01	%

Return on average assets excluding gain on sale of investment securities		1.14	%		1.06	%		1.11	%		1.01	%
Acquisition-related PAUs		-0.08	%		-0.06	%		-0.11	%		-0.06	%
Tax effect		0.03	%		0.02	%		0.04	%		0.02	%

Return on average assets excluding PAUs		1.09	%		1.02	%		1.04	%		0.97	%

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three and Nine Months ended September 30, 2017 and 2016

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon's 2016 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 2016 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 September 30, 2017, 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 September 30, 2017, 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 Nine Months ended September 30, 2017 and 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 2016.

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 Nine Months ended September 30, 2017 and 2016

ITEM 6.

EXHIBITS

(a) Exhibits


Exhibit No.		Description
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:	November 8, 2017	/s/ Craig M. Dwight
		Craig M. Dwight
		Chief Executive Officer

Dated:	November 8, 2017	/s/ Mark E. Secor
		Mark E. Secor
		Chief Financial Officer