HORIZON BANCORP INC /IN/ - FORM 10-Q

HORIZON BANCORP INC /IN/ - FORM 10-Q - November 9, 2015

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HORIZON BANCORP

FORM 10-Q

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

Commission file number 0-10792

HORIZON BANCORP

(Exact name of registrant as specified in its charter)


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

515 Franklin Square, Michigan City, Indiana		46360
(Address of principal executive offices)		(Zip Code)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 11,932,887 shares of Common Stock, no par value, at November 9, 2015.

HORIZON BANCORP

FORM 10-Q

INDEX


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statement of Stockholders’ Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	57

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Mine Safety Disclosures	58

Item 5.	Other Information	58

Item 6.	Exhibits	59

Signatures		60

Index To Exhibits		61

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)


	September 30 2015		December 31 2014
	(Unaudited)
Assets
Cash and due from banks	$	48,155	$	43,476
Investment securities, available for sale		435,673		323,764
Investment securities, held to maturity (fair value of $188,574 and $169,904)		182,187		165,767
Loans held for sale		5,583		6,143
Loans, net of allowance for loan losses of $16,168 and $16,501		1,710,322		1,362,053
Premises and equipment, net		60,700		52,461
Federal Reserve and Federal Home Loan Bank stock		13,823		11,348
Goodwill		49,600		28,176
Other intangible assets		7,648		3,965
Interest receivable		10,862		8,246
Cash value of life insurance		54,148		39,382
Other assets		29,213		32,141

Total assets	$	2,607,914	$	2,076,922

Liabilities
Deposits
Non-interest bearing	$	338,436	$	267,667
Interest bearing		1,574,639		1,214,652

Total deposits		1,913,075		1,482,319
Borrowings		373,901		351,198
Subordinated debentures		32,758		32,642
Interest payable		490		497
Other liabilities		22,952		15,852

Total liabilities		2,343,176		1,882,508

Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 12,500 shares		12,500		12,500
Common stock, no par value Authorized, 22,500,000 shares Issued, 11,987,424 and 9,278,916 shares Outstanding, 11,931,987 and 9,213,036 shares		—		—
Additional paid-in capital		106,083		45,916
Retained earnings		144,344		134,477
Accumulated other comprehensive income		1,811		1,521

Total stockholders’ equity		264,738		194,414

Total liabilities and stockholders’ equity	$	2,607,914	$	2,076,922

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)


	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest Income
Loans receivable	$	20,297		$	16,403		$	55,140		$	45,988
Investment securities
Taxable		2,156			2,339			6,377			7,124
Tax exempt		1,125			1,109			3,281			3,328

Total interest income		23,578			19,851			64,798			56,440

Interest Expense
Deposits		1,566			1,352			4,035			3,984
Borrowed funds		1,729			1,593			4,747			4,493
Subordinated debentures		507			506			1,504			1,503

Total interest expense		3,802			3,451			10,286			9,980

Net Interest Income		19,776			16,400			54,512			46,460
Provision for loan losses		300			1,741			2,820			2,080

Net Interest Income after Provision for Loan Losses		19,476			14,659			51,692			44,380

Non-interest Income
Service charges on deposit accounts		1,359			1,076			3,443			3,037
Wire transfer fees		160			151			493			408
Interchange fees		1,625			1,223			4,093			3,436
Fiduciary activities		1,520			1,131			4,033			3,378
Gain on sale of investment securities (includes $0 for the three months ended and $124 for the nine months ended September 30, 2015 and $988 for the three and nine months ended September 30, 2014, related to accumulated other comprehensive earnings reclassifications)		—			988			124			988
Gain on sale of mortgage loans		2,794			2,153			7,815			6,101
Mortgage servicing income net of impairment		246			116			725			556
Increase in cash value of bank owned life insurance		374			296			889			781
Death benefit on bank owned life insurance		—			—			145			—
Other income		322			256			892			854

Total non-interest income		8,400			7,390			22,652			19,539

Non-interest Expense
Salaries and employee benefits		10,652			8,215			27,541			23,991
Net occupancy expenses		1,723			1,404			4,649			4,188
Data processing		1,281			907			3,170			2,714
Professional fees		409			358			1,596			1,385
Outside services and consultants		3,209			595			4,753			2,554
Loan expense		1,351			1,202			3,975			3,489
FDIC insurance expense		423			313			1,099			854
Other losses		246			(35	)		351			98
Other expense		2,941			2,394			7,819			7,002

Total non-interest expense		22,235			15,353			54,953			46,275

Income Before Income Tax		5,641			6,696			19,391			17,644
Income tax expense (includes $0 for the three months ended and $43 for the nine months ended September 30, 2015 and $346 for the three and nine months ended September 30, 2014, related to income tax expense from reclassification items)		1,353			1,738			5,017			4,491

Net Income		4,288			4,958			14,374			13,153
Preferred stock dividend		(31	)		(40	)		(94	)		(102	)

Net Income Available to Common Shareholders	$	4,257		$	4,918		$	14,280		$	13,051

Basic Earnings Per Share	$	0.37		$	0.53		$	1.42		$	1.45
Diluted Earnings Per Share		0.36			0.51			1.37			1.39

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)


	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net Income	$	4,288		$	4,958		$	14,374		$	13,153

Other Comprehensive Income (Loss)
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period		(516	)		373			(334	)		(169	)
Income tax effect		181			(131	)		117			59

Changes from derivative instruments		(335	)		242			(217	)		(110	)

Change in securities:
Unrealized appreciation (depreciation) for the period on AFS securities		1,781			(6,039	)		1,131			723
Unrealized depreciation for the period on held-to-maturity		(203	)		2,283			(475	)		2,175
Reclassification adjustment for securities gains realized in income		—			988			124			988
Income tax effect		(552	)		969			(273	)		(1,360	)

Unrealized gains (losses) on securities		1,026			(1,799	)		507			2,526

Other Comprehensive Income (Loss), Net of Tax		691			(1,557	)		290			2,416

Comprehensive Income	$	4,979		$	3,401		$	14,664		$	15,569

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)


	Preferred Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total
Balances, January 1, 2015	$	12,500	$	45,916	$	134,477		$	1,521	$	194,414
Net income						14,374					14,374
Other comprehensive income, net of tax									290		290
Amortization of unearned compensation				267							267
Exercise of stock options				319							319
Exercise of stock warrants				3,751							3,751
Tax benefit related to stock options				108							108
Stock option expense				216							216
Stock issued from acquisition				55,506							55,506
Cash dividends on preferred stock (1.00%)						(94	)				(94	)
Cash dividends on common stock ($.43 per share)						(4,413	)				(4,413	)

Balances, September 30, 2015	$	12,500	$	106,083	$	144,344		$	1,811	$	264,738

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)


	Nine Months Ended September 30
	2015			2014
	(Unaudited)			(Unaudited)
Operating Activities
Net income	$	14,374		$	13,153
Items not requiring (providing) cash
Provision for loan losses		2,820			2,080
Depreciation and amortization		3,020			2,806
Share based compensation		216			145
Mortgage servicing rights net (recovery) impairment		389			(28	)
Premium amortization on securities available for sale, net		2,192			1,733
Gain on sale of investment securities		(124	)		(988	)
Gain on sale of mortgage loans		(7,815	)		(6,101	)
Proceeds from sales of loans		247,512			169,858
Loans originated for sale		(239,137	)		(164,643	)
Change in cash value of life insurance		(868	)		(745	)
Gain on sale of other real estate owned		(214	)		(176	)
Net change in
Interest receivable		(1,337	)		(563	)
Interest payable		(28	)		(50	)
Other assets		(61	)		2,251
Other liabilities		1,020			327

Net cash provided by operating activities		21,959			19,059

Investing Activities
Purchases of securities available for sale		(170,391	)		(77,164	)
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale		61,785			99,805
Purchases of securities held to maturity		(26,128	)		(4,839	)
Proceeds from maturities of securities held to maturity		7,155			7,900
Purchase of Federal Reserve Bank stock		—			(592	)
Proceeds from the sale of FHLB stock		268			—
Net change in loans		(123,326	)		(154,677	)
Proceeds on the sale of OREO and repossessed assets		2,425			2,378
Purchases of premises and equipment		(4,757	)		(4,086	)
Acquisition of SCB		—			7,894
Acquisition of Peoples		182,413			—
Purchase of Mortgage Company		—			(735	)

Net cash used in investing activities		(70,556	)		(124,116	)

Financing Activities
Net change in
Deposits		79,669			37,124
Borrowings		(26,064	)		76,944
Proceeds from issuance of stock		4,178			128
Dividends paid on common shares		(4,413	)		(3,440	)
Dividends paid on preferred shares		(94	)		(102	)

Net cash provided by financing activities		53,276			110,654

Net Change in Cash and Cash Equivalents		4,679			5,597
Cash and Cash Equivalents, Beginning of Period		43,476			31,721

Cash and Cash Equivalents, End of Period	$	48,155		$	37,318

Additional Supplemental Information
Interest paid	$	10,292		$	10,009
Income taxes paid		4,900			1,600
Transfer of loans to other real estate owned		2,825			3,078
Transfer of available-for -sale securities to held-to-maturity		—			167,047
The Company purchased all of the capital stock of Peoples for $78,147 on July 1, 2015 and of Summit for $18,896 on April 3, 2014. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		485,077			158,585
Cash paid to retire debt		—			1,029
Cash paid for the capital stock		22,641			6,207
Less: common stock issued		55,506			12,689
Liabilities assumed		406,930			138,660

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 – Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2015 and September 30, 2014 are not necessarily indicative of the operating results for the full year of 2015 or 2014. 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 2014 filed with the Securities and Exchange Commission on March 13, 2015. The condensed consolidated balance sheet of Horizon as of December 31, 2014 has been derived from the audited balance sheet as of that date.

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


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2015		2014		2015		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Basic earnings per share
Net income	$	4,288	$	4,958	$	14,374	$	13,153
Less: Preferred stock dividends		31		40		94		102

Net income available to common shareholders	$	4,257	$	4,918	$	14,280	$	13,051
Weighted average common shares outstanding		11,605,976		9,208,707		10,029,419		9,009,663
Basic earnings per share	$	0.37	$	0.53	$	1.42	$	1.45

Diluted earnings per share
Net income available to common shareholders	$	4,257	$	4,918	$	14,280	$	13,051
Weighted average common shares outstanding		11,605,976		9,208,707		10,029,419		9,009,663
Effect of dilutive securities:
Warrants		214,592		309,790		290,669		308,647
Restricted stock		33,471		36,387		30,728		37,127
Stock options		39,215		33,448		36,297		33,922

Weighted average shares outstanding		11,893,254		9,588,332		10,387,113		9,389,359
Diluted earnings per share	$	0.36	$	0.51	$	1.37	$	1.39

There were 2,500 shares for both the three and nine months ended September 30, 2015, respectively, and 46,766 shares for both the three and nine months ended September 30, 2014 which were not included in the computation of diluted earnings per share because they were non-dilutive.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2014 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2014 condensed consolidated financial statements to be comparable to 2015. These reclassifications had no effect on net income.

Note 2 – Acquisitions

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and Horizon Bank N.A.’s acquisition of Peoples Federal Savings Bank of DeKalb County (“Peoples FSB”), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon’s stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. The Company had approximately $4.4 million in costs related to the acquisition as of September 30, 2015. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

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

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	$	205,054	Deposits
Investment securities, held to maturity		2,038	Non-interest bearing	$	28,251
			NOW accounts		65,771
Commercial		67,435	Savings and money market		125,176
Residential mortgage		137,331	Certificates of deposits		131,889

Consumer		19,593	Total deposits		351,087

Total loans		224,359
			Borrowings		48,884
Premises and equipment, net		5,524	Interest payable		21
FRB and FHLB stock		2,743	Other liabilities		6,938
Goodwill		21,424
Core deposit intangible		4,394
Interest receivable		1,279
Cash value of life insurance		13,898
Other assets		4,364

Total assets purchased	$	485,077	Total liabilities assumed	$	406,930

Common shares issued	$	55,506
Cash paid		22,641

Total estimated purchase price	$	78,147

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

The Company acquired the $229.1 million loan portfolio at a fair value discount of $4.8 million. The performing portion of the portfolio, $223.4 million, had an estimated fair value of $220.0 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

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

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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


Contractually required principal and interest at acquisition	$	5,730
Contractual cash flows not expected to be collected (nonaccretable differences)		715

Expected cash flows at acquisition		5,015
Interest component of expected cash flows (accretable discount)		647

Fair value of acquired loans accounted for under ASC 310-30	$	4,368

The results of operations of Peoples and Peoples FSB have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended September 30, 2015 and December 31, 2014 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.


(in thousands except per share data)	December 31,		Nine Months Ended September 30,
	2014		2015		2014
Summary of Operations:
Net Interest Income	$	75,442	$	60,466	$	55,850
Provision for Loan Losses		3,443		2,880		2,420
Net Interest Income after Provision for Loan Losses		71,999		57,586		53,430
Non-interest Income		29,928		24,545		22,458
Non-Interest Expense		74,010		61,192		55,489
Income before Income Taxes		27,917		20,939		20,399
Income Tax Expense		6,561		5,164		4,846
Net Income		21,356		15,776		15,553
Net Income Available to Common Shareholders	$	21,223	$	15,682	$	15,562

Per Share Data
Net Income	$	1.82	$	1.33	$	1.32

The pro forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro forma information for the nine months ended 2015 includes $1.3 million, net of tax, of operating revenue from Peoples since the acquisition and approximately $3.0 million, net of tax, of non-recurring expenses directly attributable to the Peoples acquisition.

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

On April 3, 2014, Horizon closed its acquisition of SCB Bancorp, Inc. (“Summit”) and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt). The Company had approximately $1.3 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

Under the purchase method of accounting, the total estimated purchase price is allocated to Summit’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 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 Summit acquisition is allocated as follows:


ASSETS			LIABILITIES
Cash and due from banks	$	15,161	Deposits
			Non-interest bearing	$	27,274
Commercial		70,441	NOW accounts		16,332
Residential mortgage		43,448	Savings and money market		35,045
Consumer		10,192	Certificates of deposits		42,368

Total loans		124,081	Total deposits		121,019
Premises and equipment, net		2,548	Borrowings		16,990
FRB and FHLB stock		2,136	Interest payable		52
Goodwill		8,428	Other liabilities		599
Core deposit intangible		822
Interest receivable		347
Cash value of life insurance		2,185
Other assets		2,877

Total assets purchased	$	158,585	Total liabilities assumed	$	138,660

Common shares issued	$	12,689
Cash paid		6,207
Retirement of Holding Company Debt		1,029

Total estimated purchase price	$	19,925

Of the total purchase price of $19.9 million, $822,000 has been allocated to core deposit intangible. Additionally, $8.4 million has been allocated to goodwill and $4.4 million of the purchase price is deductible and was assigned to the business assets. The core deposit intangible will be amortized over seven years on a straight line basis.

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 April 3, 2014.


Contractually required principal and interest at acquisition	$	14,460
Contractual cash flows not expected to be collected (nonaccretable differences)		3,146

Expected cash flows at acquisition		11,314
Interest component of expected cash flows (accretable discount)		1,688

Fair value of acquired loans accounted for under ASC 310-30	$	9,626

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

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, 2015	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale
U.S. Treasury and federal agencies	$	24,724	$	45	$	(14	)	$	24,755
State and municipal		58,467		1,349		(35	)		59,781
Federal agency collateralized mortgage obligations		134,494		1,426		(353	)		135,567
Federal agency mortgage-backed pools		212,718		3,179		(381	)		215,516
Corporate notes		32		22		—			54

Total available for sale investment securities	$	430,435	$	6,021	$	(783	)	$	435,673

Held to maturity
U.S. Treasury and federal agencies	$	5,852	$	136	$	—		$	5,988
State and municipal		142,763		5,262		(177	)		147,848
Federal agency collateralized mortgage obligations		9,356		59		(12	)		9,403
Federal agency mortgage-backed pools		24,216		1,208		(89	)		25,335

Total held to maturity investment securities	$	182,187	$	6,665	$	(278	)	$	188,574


			Gross		Gross
December 31, 2014	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for sale
U.S. Treasury and federal agencies	$	26,996	$	56	$	(229	)	$	26,823
State and municipal		46,535		1,462		(45	)		47,952
Federal agency collateralized mortgage obligations		122,930		975		(1,045	)		122,860
Federal agency mortgage-backed pools		122,583		3,172		(360	)		125,395
Private labeled mortgage-backed pools		670		19		—			689
Corporate notes		32		13		—			45

Total available for sale investment securities	$	319,746	$	5,697	$	(1,679	)	$	323,764

Held to maturity
U.S. Treasury and federal agencies	$	9,804	$	82	$	—		$	9,886
State and municipal		129,595		3,398		(106	)		132,887
Federal agency collateralized mortgage obligations		4,039		35		(1	)		4,073
Federal agency mortgage-backed pools		22,329		729		—			23,058

Total held to maturity investment securities	$	165,767	$	4,244	$	(107	)	$	169,904

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, 2015, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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, 2015.

The Company elected to transfer 319 available-for-sale (“AFS”) securities with an aggregate fair value of $167.1 million to a classification of held-to-maturity (“HTM”) on April 1, 2014. In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $1.3 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income, with the associated pre-tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at April 1, 2014, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2015 and December 31, 2014, 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, 2015				December 31, 2014
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Available for sale
Within one year	$	7,335	$	7,365	$	6,098	$	6,169
One to five years		51,574		52,460		44,720		45,093
Five to ten years		16,991		17,343		16,147		16,768
After ten years		7,323		7,422		6,598		6,790

		83,223		84,590		73,563		74,820
Federal agency collateralized mortgage obligations		134,494		135,567		122,930		122,860
Federal agency mortgage-backed pools		212,718		215,516		122,583		125,395
Private labeled mortgage-backed pools		—		—		670		689

Total available for sale investment securities	$	430,435	$	435,673	$	319,746	$	323,764

Held to maturity
Within one year	$	—	$	—	$	—	$	—
One to five years		14,682		15,285		592		593
Five to ten years		101,152		105,151		99,225		101,323
After ten years		32,781		33,400		39,582		40,857

		148,615		153,836		139,399		142,773
Federal agency collateralized mortgage obligations		9,356		9,403		4,039		4,073
Federal agency mortgage-backed pools		24,216		25,335		22,329		23,058

Total held to maturity investment securities	$	182,187	$	188,574	$	165,767	$	169,904

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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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


	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2015	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury and federal agencies	$	5,995	$	(2	)	$	7,979	$	(12	)	$	13,973	$	(14	)
State and municipal		19,967		(207	)		736		(4	)		20,704		(212	)
Federal agency collateralized mortgage obligations		10,178		(54	)		27,071		(311	)		37,250		(365	)
Federal agency mortgage-backed pools		31,473		(328	)		24,005		(142	)		55,478		(470	)

Total temporarily impaired securities	$	67,613	$	(591	)	$	59,791	$	(469	)	$	127,405	$	(1,061	)


	Less than 12 Months					12 Months or More					Total
December 31, 2014	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury and federal agencies	$	2,993	$	(7	)	$	20,762	$	(222	)	$	23,755	$	(229	)
State and municipal		10,287		(121	)		2,050		(30	)		12,337		(151	)
Federal agency collateralized mortgage obligations		15,013		(88	)		39,801		(957	)		54,814		(1,045	)
Federal agency mortgage-backed pools		5,993		(9	)		28,044		(351	)		34,037		(360	)

Total temporarily impaired securities	$	34,286	$	(225	)	$	90,657	$	(1,560	)	$	124,943	$	(1,785	)


	Three Months Ended September 30					Nine Months Ended September 30
	2015		2014			2015			2014
Sales of securities available for sale (Unaudited)
Proceeds	$	—	$	45,228		$	13,332		$	45,228
Gross gains		—		1,001			147			1,001
Gross losses		—		(13	)		(23	)		(13	)

Note 4 – Loans


	September 30			December 31
	2015			2014
Commercial
Working capital and equipment	$	369,575		$	300,940
Real estate, including agriculture		393,837			343,455
Tax exempt		8,829			8,595
Other		23,030			21,324

Total		795,271			674,314
Real estate
1–4 family		426,952			250,799
Other		3,975			3,826

Total		430,927			254,625
Consumer
Auto		170,032			154,538
Recreation		5,660			5,673
Real estate/home improvement		44,608			38,288
Home equity		128,498			112,426
Unsecured		4,051			3,613
Other		8,449			5,921

Total		361,298			320,459
Mortgage warehouse		138,974			129,156

Total loans		1,726,470			1,378,554
Allowance for loan losses		(16,168	)		(16,501	)

Loans, net	$	1,710,302		$	1,362,053

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Commercial

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

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

Real Estate and Consumer

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

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage 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 repurchases the loan under its option within the agreement. Due to the repurchase 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 repurchase 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 repurchase 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 repurchase its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

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, 2015	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	273,820		$	944	$	1,385		$	276,149
Non owner occupied real estate		314,680			278		474			315,432
Residential spec homes		3,049			7		18			3,074
Development & spec land loans		18,394			34		28			18,456
Commercial and industrial		183,060			3,288		363			186,711

Total commercial		793,003			4,551		2,268			799,822
Residential mortgage		408,360			1,318		2,499			412,177
Residential construction		20,069			37		—			20,106
Mortgage warehouse		138,974			480		—			139,454

Total real estate		567,403			1,835		2,499			571,737
Direct installment		50,410			158		(370	)		50,198
Direct installment purchased		171			—		—			171
Indirect installment		153,786			307		—			154,093
Home equity		157,705			625		(404	)		157,926

Total consumer		362,072			1,090		(774	)		362,388

Total loans		1,722,478			7,476		3,993			1,733,947
Allowance for loan losses		(16,168	)		—		—			(16,168	)

Net loans	$	1,706,310		$	7,476	$	3,993		$	1,717,779


December 31, 2014	Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	228,380		$	385	$	680		$	229,445
Non owner occupied real estate		297,299			309		506			298,114
Residential spec homes		2,027			2		—			2,029
Development & spec land loans		12,097			28		30			12,155
Commercial and industrial		133,256			859		39			134,154

Total commercial		673,059			1,583		1,255			675,897
Residential mortgage		242,521			737		599			243,857
Residential construction		11,505			21		—			11,526
Mortgage warehouse		129,156			480		—			129,636

Total real estate		383,182			1,238		599			385,019
Direct installment		40,137			129		(375	)		39,891
Direct installment purchased		219			—		—			219
Indirect installment		141,868			314		(163	)		142,019
Home equity		139,007			568		(234	)		139,341

Total consumer		321,231			1,011		(772	)		321,470

Total loans		1,377,472			3,832		1,082			1,382,386
Allowance for loan losses		(16,501	)		—		—			(16,501	)

Net loans	$	1,360,971		$	3,832	$	1,082		$	1,365,885

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 5 – Accounting for Certain Loans Acquired in a Transfer

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

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

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
	2015		2015		2015		2015
	Heartland		Summit		Peoples		Total
Commercial	$	2,283	$	5,742	$	1,841	$	9,866
Real estate		759		1,427		584		2,770
Consumer		8		37		—		45

Outstanding balance	$	3,050	$	7,206	$	2,425	$	12,681

Carrying amount, net of allowance of $272							$	12,409


	December 31		December 31		December 31		December 31
	2014		2014		2014		2014
	Heartland		Summit		Peoples		Total
Commercial	$	5,492	$	7,725	$	—	$	13,217
Real estate		900		1,458		—		2,358
Consumer		8		43		—		51

Outstanding balance	$	6,400	$	9,226	$	—	$	15,626

Carrying amount, net of allowance of $359							$	15,267

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


	Nine Months Ended September 30, 2015
	Heartland			Summit			Peoples		Total
Balance at January 1	$	2,400		$	1,268		$	—	$	3,668
Additions		—			—			647		647
Accretion		(272	)		(254	)		—		(526	)
Reclassification from nonaccretable difference		—			—			—		—
Disposals		(1,210	)		(237	)		—		(1,447	)

Balance at September 30	$	918		$	777		$	647	$	2,342


	Nine Months Ended September 30, 2014
	Heartland			Summit		Peoples		Total
Balance at January 1	$	3,185		$	—	$	—	$	3,185
Additions		—			1,758		—		1,758
Accretion		(288	)		—		—		(288	)
Reclassification from nonaccretable difference		—			—		—		—
Disposals		(95	)		—		—		(95	)

Balance at September 30	$	2,802		$	1,758	$	—	$	4,560

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

During the nine months ended September 30, 2015 and 2014, the Company decreased the allowance for loan losses on purchased loans by a recovery to the income statement of $87,000 and $0, respectively.

Note 6 – Allowance for Loan Losses

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


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2015			2014			2015			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Balance at beginning of the period	$	16,421		$	15,660		$	16,501		$	15,992
Loans charged-off:
Commercial
Owner occupied real estate		56			—			1,478			—
Non owner occupied real estate		—			—			16			22
Residential development		—			—			—			—
Development & Spec Land Loans		—			—			—			173
Commercial and industrial		38			1,093			291			1,220

Total commercial		94			1,093			1,785			1,415
Real estate
Residential mortgage		101			31			287			225
Residential construction		—			—			—			—
Mortgage warehouse		—			—			—			—

Total real estate		101			31			287			225
Consumer
Direct Installment		51			74			206			151
Direct Installment Purchased		—			—			—			—
Indirect Installment		218			306			783			874
Home Equity		262			37			766			468

Total consumer		531			417			1,755			1,493

Total loans charged-off		726			1,541			3,827			3,133
Recoveries of loans previously charged-off:
Commercial
Owner occupied real estate		8			4			94			10
Non owner occupied real estate		1			10			1			85
Residential development		—			—			—			—
Development & Spec Land Loans		—			55			—			55
Commercial and industrial		8			18			41			435

Total commercial		17			87			136			585
Real estate
Residential mortgage		5			12			10			19
Residential construction		—			—			—			—
Mortgage warehouse		—			—			—			—

Total real estate		5			12			10			19
Consumer
Direct Installment		15			10			91			49
Direct Installment Purchased		—			—			—			—
Indirect Installment		112			165			347			431
Home Equity		24			26			90			137

Total consumer		151			201			528			617

Total loan recoveries		173			300			674			1,221

Net loans charged-off (recovered)		553			1,241			3,153			1,912

Provision charged to operating expense
Commercial		532			1,563			2,580			1,682
Real estate		(955	)		697			(51	)		(290	)
Consumer		723			(519	)		291			688

Total provision charged to operating expense		300			1,741			2,820			2,080

Balance at the end of the period	$	16,168		$	16,160		$	16,168		$	16,160

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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


September 30, 2015	Commercial		Real Estate		Mortgage Warehousing		Consumer		Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,599	$	—	$	—	$	—	$	1,599
Collectively evaluated for impairment		6,989		2,297		1,015		4,014		14,315
Loans acquired with deteriorated credit quality		254		—		—		—		254

Total ending allowance balance	$	8,842	$	2,297	$	1,015	$	4,014	$	16,168

Loans:
Individually evaluated for impairment	$	10,848	$	—	$	—	$	—	$	10,848
Collectively evaluated for impairment		787,245		432,283		139,454		362,388		1,721,370
Loans acquired with deteriorated credit quality		1,729		—		—		—		1,729

Total ending loans balance	$	799,822	$	432,283	$	139,454	$	362,388	$	1,733,947


December 31, 2014	Commercial		Real Estate		Mortgage Warehousing		Consumer		Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,589	$	—	$	—	$	—	$	1,589
Collectively evaluated for impairment		5,827		2,508		1,132		4,951		14,418
Loans acquired with deteriorated credit quality		494		—		—		—		494

Total ending allowance balance	$	7,910	$	2,508	$	1,132	$	4,951	$	16,501

Loans:
Individually evaluated for impairment	$	11,055	$	—	$	—	$	—	$	11,055
Collectively evaluated for impairment		664,251		255,383		129,636		321,470		1,370,740
Loans acquired with deteriorated credit quality		591		—		—		—		591

Total ending loans balance	$	675,897	$	255,383	$	129,636	$	321,470	$	1,382,386

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, 2015	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non- Performing TDRs		Performing TDRs		Total Non- Performing Loans
Commercial
Owner occupied real estate	$	4,165	$	—	$	—	$	38	$	4,203
Non owner occupied real estate		3,211		—		2,334		69		5,614
Residential development		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—
Commercial and industrial		456		—		559		—		1,015

Total commercial		7,832		—		2,893		107		10,832
Real estate
Residential mortgage		3,123		36		627		2,275		6,061
Residential construction		—		—		254		—		254
Mortgage warehouse		—		—		—		—		—

Total real estate		3,123		36		881		2,275		6,315
Consumer
Direct Installment		571		37		—		—		608
Direct Installment Purchased		—		—		—		—		—
Indirect Installment		631		27		—		—		658
Home Equity		1,799		—		220		566		2,585

Total Consumer		3,001		64		220		566		3,851

Total	$	13,956	$	100	$	3,994	$	2,948	$	20,998


December 31, 2014	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non- Performing TDRs		Performing TDRs		Total Non- Performing Loans
Commercial
Owner occupied real estate	$	1,773	$	—	$	—	$	44	$	1,817
Non owner occupied real estate		7,439		—		217		566		8,222
Residential development		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—
Commercial and industrial		812		—		1,004		—		1,816

Total commercial		10,024		—		1,221		610		11,855
Real estate
Residential mortgage		2,297		40		765		2,526		5,628
Residential construction		—		—		266		—		266
Mortgage warehouse		—		—		—		—		—

Total real estate		2,297		40		1,031		2,526		5,894
Consumer
Direct Installment		227		10		—		—		237
Direct Installment Purchased		—		—		—		—		—
Indirect Installment		557		47		—		—		604
Home Equity		2,207		18		391		1,236		3,852

Total Consumer		2,991		75		391		1,236		4,693

Total	$	15,312	$	115	$	2,643	$	4,372	$	22,442

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Included in the $14.0 million of non-accrual loans and the $4.0 million of non-performing TDRs at September 30, 2015 were $1.9 million and $98,000, 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 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 or the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.

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

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

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

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At September 30, 2015, 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 nine consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of September 30, 2015, the Company had $6.9 million in TDRs and $2.9 million were performing according to the restructured terms and four TDR,s were returned to accrual status during the first nine months of 2015. There was $631,000 of specific reserves allocated to TDRs at September 30, 2015 based on the discounted cash flows or when appropriate the fair value of the collateral.

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, 2015	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Loss Allocated		Average Balance in Impaired Loans		Cash/ Accrual Interest Income Recognized		Average Balance in Impaired Loans		Cash/ Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate	$	1,235	$	1,238	$	—	$	1,262	$	1	$	1,041	$	10
Non owner occupied real estate		2,798		2,801		—		2,815		1		2,846		4
Residential development		—		—		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—		—		—
Commercial and industrial		239		239		—		583		4		415		4

Total commercial		4,272		4,278		—		4,660		6		4,302		18
With an allowance recorded
Commercial
Owner occupied real estate		2,967		2,966		598		2,968		—		2,191		55
Non owner occupied real estate		2,817		2,828		550		2,858		—		2,942		—
Residential development		—		—		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—		—		—
Commercial and industrial		776		776		451		776		—		836		—

Total commercial		6,560		6,570		1,599		6,602		—		5,969		55

Total	$	10,832	$	10,848	$	1,599	$	11,262	$	6	$	10,271	$	73


							Three Months Ending				Nine Months Ending
September 30, 2014	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	$	2,851	$	2,854	$	—	$	2,126	$	85	$	1,525	$	129
Non owner occupied real estate		3,232		3,235		—		3,257		43		3,274		141
Residential development		—		—		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—		—		—
Commercial and industrial		281		281		—		367		—		433		—

Total commercial		6,364		6,370		—		5,750		128		5,232		270
With an allowance recorded
Commercial
Owner occupied real estate		403		403		13		406		—		274		6
Non owner occupied real estate		333		333		150		335		—		343		—
Residential development		—		—		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—		—		—
Commercial and industrial		1,391		1,391		1,012		1,560		—		1,567		2

Total commercial		2,127		2,127		1,175		2,301		—		2,184		8

Total	$	8,491	$	8,497	$	1,175	$	8,051	$	128	$	7,416	$	278

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:


September 30, 2015	30 - 59 Days Past Due			60 - 89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Loans Not Past Due			Total
Commercial
Owner occupied real estate	$	329		$	15		$	—		$	344		$	273,476		$	273,820
Non owner occupied real estate		—			—			—			—			314,680			314,680
Residential development		—			—			—			—			3,049			3,049
Development & Spec Land Loans		—			—			—			—			18,394			18,394
Commercial and industrial		40			18			—			58			183,002			183,060

Total commercial		369			33			—			402			792,601			793,003
Real estate
Residential mortgage		1,879			205			36			2,120			406,240			408,360
Residential construction		—			—			—			—			20,069			20,069
Mortgage warehouse		—			—			—			—			138,974			138,974

Total real estate		1,879			205			36			2,120			565,283			567,403
Consumer
Direct Installment		133			31			37			201			50,209			50,410
Direct Installment Purchased		—			—			—			—			171			171
Indirect Installment		908			129			27			1,064			152,722			153,786
Home Equity		888			293			—			1,181			156,524			157,705

Total consumer		1,929			453			64			2,446			359,626			362,072

Total	$	4,177		$	691		$	100		$	4,968		$	1,717,510		$	1,722,478

Percentage of total loans		0.24	%		0.04	%		0.01	%		0.29	%		99.71	%


December 31, 2014	30 - 59 Days Past Due			60 - 89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Loans Not Past Due			Total
Commercial
Owner occupied real estate	$	103		$	645		$	—		$	748		$	227,632		$	228,380
Non owner occupied real estate		413			—			—			413			296,886			297,299
Residential development		—			—			—			—			2,027			2,027
Development & Spec Land Loans		—			—			—			—			12,097			12,097
Commercial and industrial		19			1			—			20			133,236			133,256

Total commercial		535			646			—			1,181			671,878			673,059
Real estate
Residential mortgage		1,033			193			40			1,266			241,255			242,521
Residential construction		—			—			—			—			11,505			11,505
Mortgage warehouse		—			—			—			—			129,156			129,156

Total real estate		1,033			193			40			1,266			381,916			383,182
Consumer
Direct Installment		113			4			10			127			40,010			40,137
Direct Installment Purchased		—			—			—			—			219			219
Indirect Installment		1,042			243			47			1,332			140,536			141,868
Home Equity		1,084			189			18			1,291			137,716			139,007

Total consumer		2,239			436			75			2,750			318,481			321,231

Total	$	3,807		$	1,275		$	115		$	5,197		$	1,372,275		$	1,377,472

Percentage of total loans		0.28	%		0.09	%		0.01	%		0.38	%		99.62	%

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

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

•

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

•

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

•

The CCO, or his designee, meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.

•

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

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

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

Risk Grade 1: Excellent (Pass)

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2: Good (Pass)

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

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

•

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

•

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

•

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

•

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

Risk Grade 4 Satisfactory/Monitored:

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

Risk Grade 4W Management Watch:

Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.

Risk Grade 5: Special Mention

Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.

Risk Grade 6: Substandard

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

•

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

•

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

•

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

Risk Grade 7: Doubtful

One or more of the following characteristics may be present in loans classified Doubtful:

•

Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

•

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

•

The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8: Loss

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

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.


September 30, 2015	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	262,753		$	4,080		$	6,987		$	—		$	273,820
Non owner occupied real estate		306,709			1,657			6,314			—			314,680
Residential development		3,049			—			—			—			3,049
Development & Spec Land Loans		18,323			71			—			—			18,394
Commercial and industrial		178,926			1,528			2,606			—			183,060

Total commercial		769,760			7,336			15,907			—			793,003
Real estate
Residential mortgage		402,299			—			6,061			—			408,360
Residential construction		19,815			—			254			—			20,069
Mortgage warehouse		138,974			—			—			—			138,974

Total real estate		561,088			—			6,315			—			567,403
Consumer
Direct Installment		49,802			—			608			—			50,410
Direct Installment Purchased		171			—			—			—			171
Indirect Installment		153,128			—			658			—			153,786
Home Equity		155,120			—			2,585			—			157,705

Total Consumer		358,221			—			3,851			—			362,072

Total	$	1,689,069		$	7,336		$	26,073		$	—		$	1,722,478

Percentage of total loans		98.06	%		0.43	%		1.51	%		0.00	%

December 31, 2014	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	215,874		$	7,623		$	4,883		$	—		$	228,380
Non owner occupied real estate		283,518			4,458			9,323			—			297,299
Residential development		2,027			—			—			—			2,027
Development & Spec Land Loans		12,018			79			—			—			12,097
Commercial and industrial		128,589			1,799			2,868			—			133,256

Total commercial		642,026			13,959			17,074			—			673,059
Real estate
Residential mortgage		236,893			—			5,628			—			242,521
Residential construction		11,239			—			266			—			11,505
Mortgage warehouse		129,156			—			—			—			129,156

Total real estate		377,288			—			5,894			—			383,182
Consumer
Direct Installment		39,900			—			237			—			40,137
Direct Installment Purchased		219			—			—			—			219
Indirect Installment		141,264			—			604			—			141,868
Home Equity		135,155			—			3,852			—			139,007

Total Consumer		316,538			—			4,693			—			321,231

Total	$	1,335,853		$	13,959		$	27,661		$	—		$	1,377,472

Percentage of total loans		96.98	%		1.01	%		2.01	%		0.00	%

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 8 – Repurchase Agreements

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

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


	Remaining Contractual Maturity of the Agreements
September 30, 2015	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	$	56,418		$	—	$	35,000	$	60,000	$	—		$	—		$	151,418
Securities lending transactions
U.S. Treasury and federal agencies	$	6,950		$	—	$	—	$	—	$	—		$	—		$	6,950
Federal agency collateralized mortgage obligations	$	45,279			—		76		886		6,904			44,401			97,545
Federal agency mortgage-backed pools	$	14,523			—		79		401		11,396			40,744			67,144

Total		66,752			—		155		1,287		18,300			85,145			171,639

Total borrowings	$	(10,334	)	$	—	$	34,845	$	58,713	$	(18,300	)	$	(85,145	)	$	(20,221	)

Gross amount of recognized liabilities for repurchase agreements and securities lending																$	151,418

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, 2015 and December 31, 2014. 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, 2015, 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, 2015, 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.

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 $113.9 million at September 30, 2015 and $102.7 million at December 31, 2014.

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, 2015, 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 Derivative			Liability Derivatives
	September 30, 2015			September 30, 2015
Derivatives designated as hedging instruments (Unaudited)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate contracts	Loans	$	—	Other liabilities	$	1,787
Interest rate contracts	Other Assets		1,787	Other liabilities		3,671

Total derivatives designated as hedging instruments			1,787			5,458

Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		643	Other liabilities		—

Total derivatives not designated as hedging instruments			643			—

Total derivatives		$	2,430		$	5,458


	Asset Derivative			Liability Derivatives
	December 31, 2014			December 31, 2014
Derivatives designated as hedging instruments (Unaudited)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate contracts	Loans	$	—	Other liabilities	$	1,208
Interest rate contracts	Other Assets		1,208	Other liabilities		3,339

Total derivatives designated as hedging instruments			1,208			4,547

Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		447	Other liabilities		—

Total derivatives not designated as hedging instruments			447			—

Total derivatives		$	1,655		$	4,547

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 statement of income for the three and nine-month periods ending September 30 is as follows:


	Comprehensive Income on Derivative (Effective Portion)					Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended September 30					Nine Months Ended September 30
Derivative in cash flow	2015			2014		2015			2014
hedging relationship	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Interest rate contracts	$	(335	)	$	242	$	(217	)	$	(110	)

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


		Amount of Gain (Loss) Recognized on Derivative						Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended September 30						Nine Months Ended September 30
Derivative in fair value	Location of gain (loss)	2015			2014			2015			2014
hedging relationship	recognized on derivative	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest rate contracts	Interest income - loans	$	765		$	(326	)	$	579		$	425
Interest rate contracts	Interest income - loans		(765	)		326			(579	)		(425	)

Total		$	—		$	—		$	—		$	—


		Amount of Gain (Loss) Recognized on Derivative						Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended September 30						Nine Months Ended September 30
Derivative not designated	Location of gain (loss)	2015			2014			2015			2014
as hedging relationship	recognized on derivative	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Mortgage contracts	Other income -gain on sale of loans	$	(77	)	$	(22	)	$	196		$	(1	)

Note 10 – Disclosures about Fair Value of Assets and Liabilities

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

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

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

Level 3

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2015. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, private-label mortgage-backed pools and corporate notes. Level 2 securities are valued by a first 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 first party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

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


				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
	Fair Value			(Level 1)		(Level 2)			(Level 3)
September 30, 2015
Available-for-sale securities
U.S. Treasury and federal agencies	$	24,755		$	—	$	24,755		$	—
State and municipal		59,781			—		59,781			—
Federal agency collateralized mortgage obligations		135,567			—		135,567			—
Federal agency mortgage-backed pools		215,516			—		215,516			—
Corporate notes		54			—		54			—

Total available-for-sale securities		435,673			—		435,673			—
Hedged loans		112,089			—		112,089			—
Forward sale commitments		643			—		643			—
Interest rate swap agreements		(5,458	)		—		(5,458	)		—
Commitments to originate loans		—			—		—			—
December 31, 2014
Available-for-sale securities
U.S. Treasury and federal agencies	$	26,823		$	—	$	26,823		$	—
State and municipal		47,952			—		47,952			—
Federal agency collateralized mortgage obligations		122,860			—		122,860			—
Federal agency mortgage-backed pools		125,395			—		125,395			—
Private labeled mortgage-backed pools		689			—		689			—
Corporate notes		45			—		45			—

Total available-for-sale securities		323,764			—		323,764			—
Hedged loans		101,445			—		101,445			—
Forward sale commitments		447			—		447			—
Interest rate swap agreements		(4,547	)		—		(4,547	)		—

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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	2015			2014			2015			2014
Total gains and losses from:	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Hedged loans	$	765		$	(326	)	$	579		$	425
Fair value interest rate swap agreements		(765	)		326			(579	)		(425	)
Derivative loan commitments		(77	)		(22	)		196			(1	)

	$	(77	)	$	(22	)	$	196		$	(1	)

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


			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2015
Impaired loans	$	9,233	$	—	$	—	$	9,233
Mortgage servicing rights		9,100		—		—		9,100
December 31, 2014
Impaired loans	$	9,464	$	—	$	—	$	9,464
Mortgage servicing rights		7,642		—		—		7,642

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 $51,000 during the first nine months of 2015 and increased by $28,000 during the first nine months of 2014.

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 nonrecurring Level 3 fair value measurements, other than goodwill.


	Fair Value at September 30, 2015		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans	$	9,233	Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	10% - 15% (12%)
Mortgage servicing rights	$	9,100	Discounted cashflows	Discount rate, Constant prepayment rate, Probability of default	10% - 15% (12%), 4% - 7% (4.6%), 1% - 10% (4.5%)

	Fair Value at December 31, 2014		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans	$	9,464	Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	10% - 15% (12%)
Mortgage servicing rights	$	7,642	Discounted cashflows	Discount rate, Constant prepayment rate, Probability of default	10% - 15% (12%), 4% - 7% (4.6%), 1% - 10% (4.5%)

Note 11 – Fair Value of Financial Instruments

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

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, 2015 and December 31, 2014. 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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

Interest Receivable/Payable — The carrying amounts approximate fair value.

Deposits — The fair value of demand deposits, savings accounts, interest-bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity.

Borrowings — Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings.

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

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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


	September 30, 2015
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and due from banks	$	48,155	$	48,155	$	—	$	—
Investment securities, held to maturity		182,187		—		188,574		—
Loans held for sale		5,583		—		—		5,583
Loans excluding loan level hedges, net		1,598,233		—		—		1,641,840
Stock in FHLB and FRB		13,823		—		13,823		—
Interest receivable		10,862		—		10,862		—
Liabilities
Non-interest bearing deposits	$	338,436	$	338,436	$	—	$	—
Interest-bearing deposits		1,574,639		—		1,494,112		—
Borrowings		373,901		—		372,971		—
Subordinated debentures		32,758		—		33,334		—
Interest payable		490		—		490		—


	December 31, 2014
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and due from banks	$	43,476	$	43,476	$	—	$	—
Investment securities, held to maturity		165,767		—		169,904		—
Loans held for sale		6,143		—		—		6,143
Loans excluding loan level hedges, net		1,260,608		—		—		1,295,133
Stock in FHLB and FRB		11,348		—		11,348		—
Interest receivable		8,246		—		8,246		—
Liabilities
Non-interest bearing deposits	$	267,667	$	267,667	$	—	$	—
Interest-bearing deposits		1,214,652		—		1,158,912		—
Borrowings		351,198		—		348,597		—
Subordinated debentures		32,642		—		32,669		—
Interest payable		497		—		497		—

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 12 – Accumulated Other Comprehensive Income


	September 30			December 31
	2015			2014
Unrealized gain on securities available for sale	$	5,238		$	4,018
Unamortized gain on securities held to maturity, previously transferred from AFS		1,219			1,658
Unrealized loss on derivative instruments		(3,671	)		(3,337	)
Tax effect		(975	)		(818	)

Total accumulated other comprehensive income	$	1,811		$	1,521

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, 2015, Interim Final 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. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

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, 2015) and Tier I leverage ratios as set forth in the table below. As of September 30, 2015 and December 31, 2014, 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 2015 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 BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Horizon and the Bank’s actual and required capital ratios as of September 30, 2015 and December 31, 2014 were as follows:


						Required For Capital¹					Well Capitalized Under Prompt¹
	Actual					Adequacy Purposes					Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2015
Total capital¹ (to risk-weighted assets)
Consolidated	$	261,858		13.83	%	$	151,472		8.00	%		N/A		N/A
Bank		246,162		13.17	%		149,529		8.00	%	$	186,911		10.00	%
Tier 1 capital¹ (to risk-weighted assets)
Consolidated		245,690		12.98	%		113,570		6.00	%		N/A		N/A
Bank		229,994		12.30	%		112,192		6.00	%		149,590		8.00	%
Common equity tier 1 capital¹ (to risk-weighted assets)
Consolidated		200,122		10.57	%		85,199		4.50	%		N/A		N/A
Bank		229,994		12.30	%		84,144		4.50	%		121,542		6.50	%
Tier 1 capital¹ (to average assets)
Consolidated		245,690		9.98	%		98,473		4.00	%		N/A		N/A
Bank		229,994		9.31	%		98,816		4.00	%		123,520		5.00	%
As of December 31, 2014
Total capital¹ (to risk-weighted assets)
Consolidated	$	212,276		14.48	%	$	117,280		8.00	%		N/A		N/A
Bank		192,604		13.08	%		117,801		8.00	%	$	147,251		10.00	%
Tier 1 capital¹ (to risk-weighted assets)
Consolidated		195,775		13.35	%		58,659		4.00	%		N/A		N/A
Bank		176,103		11.96	%		58,897		4.00	%		88,346		6.00	%
Tier 1 capital¹ (to average assets)
Consolidated		195,775		9.76	%		80,236		4.00	%		N/A		N/A
Bank		176,103		8.80	%		80,047		4.00	%		100,059		5.00	%

¹	As defined by regulatory agencies

Note 14 – Future Accounting Matters

The FASB has issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service; and (d) other similar hosting arrangements.

The amendments add guidance to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The guidance already exists in the FASB Accounting Standards Codification™ in paragraphs 985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software.

For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

The FASB has issued ASU No. 2015-02, Consolidation (Topic 810):

The amendments to the Consolidation Analysis, are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities.

In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ (Codification) and improves current GAAP by:

•

Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.

•

Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE).

•

Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

Note 15 – General Litigation

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

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, 2015

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;

•

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;

•

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;

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, 2015

•

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

•

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

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2014 Annual Report on Form 10-K and in the subsequent reports we file with the SEC.

Overview

Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northern and Central Indiana and Southwestern and Central Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

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

On April 3, 2014, Horizon completed the acquisition of SCB Bancorp, Inc., a Michigan corporation (“Summit”) and Horizon Bank’s acquisition of Summit Community Bank, a Michigan-chartered commercial bank and wholly owned subsidiary of Summit, through mergers effective April 3, 2014. Under the terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon common stock and $5.15 in cash for each outstanding share of Summit common stock. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon’s common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt).

Following are some highlights of Horizon’s financial performance through the third quarter of 2015:

•

On July 1, 2015, Horizon closed the acquisition of Peoples and its wholly-owned subsidiary, Peoples Federal Savings Bank of DeKalb County, headquartered in Auburn, Indiana.

•

The quarterly dividend was increased from $.14 to $.15 per share on September 15, 2015.

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, 2015

•

Third quarter 2015 net income was $4.3 million or $.36 diluted earnings per share.

•

Excluding merger expenses and gain on sale of investment securities, net income for the third quarter of 2015 increased 52.8% compared to the same period of 2014 to $6.7 million or $.56 diluted earnings per share.

•

Net income for the first nine months of 2015 was $14.4 million or $1.37 diluted earnings per share.

•

Excluding merger expenses, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the first nine months of 2015 increased 28.3% compared to the same period of 2014 to $17.2 million or $1.64 diluted earnings per share.

•

Net interest income for the first nine months of 2015 increased 17.3% or $8.1 million compared to the same period in 2014.

•

The net interest margin, excluding the impact of acquisitions (“core net interest margin”), decreased 7 basis points from the linked quarter and 3 basis points in the first nine months of 2015 compared to the same periods in 2014.

•

Non-interest income for the first nine months of 2015 increased 15.9% or $3.1 million compared to the same period in 2014.

•

Loans increased 11.9% on an annualized basis during the third quarter of 2015 excluding the Peoples acquisition, mortgage warehouse loans and loans held for sale.

•

Horizon’s tangible book value per share increased to $16.34 at September 30, 2015, compared to $16.26 at December 31, 2014 and $15.75 at September 30, 2014.

•

Horizon Bank’s capital ratios, including Tier 1 Capital to Average Assets of 9.31% and Total Capital to Risk Weighted Assets of 13.17% as of September 30, 2015, continue to be well above the regulatory standards for well-capitalized banks.

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 2014 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 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, 2015, Horizon had core deposit intangibles of $7.6 million subject to amortization and $49.6 million of

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, 2015

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, 2015 was $23.75 per share compared to a book value of $21.14 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 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

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, 2015

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.

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, 2015

Financial Condition

On September 30, 2015, Horizon’s total assets were $2.6 billion, an increase of approximately $531.0 million compared to December 31, 2014 and includes $485.1 million of purchased assets from the closing of the Peoples merger in the third quarter. The increase was primarily in net loans of $348.3 million and investment securities of $128.3 million.

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


	September 30, 2015				December 31, 2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
U.S. Treasury and federal agencies	$	24,725	$	24,755	$	26,996	$	26,823
State and municipal		58,466		59,781		46,535		47,952
Federal agency collateralized mortgage obligations		134,494		135,567		122,930		122,860
Federal agency mortgage-backed pools		212,717		215,516		122,583		125,395
Private labeled mortgage-backed pools		—		—		670		689
Corporate notes		32		54		32		45

Total available for sale investment securities	$	430,434	$	435,673	$	319,746	$	323,764

Held to maturity
U.S. Treasury and federal agencies	$	5,852	$	5,989	$	9,804	$	9,886
State and municipal		142,763		147,847		129,595		132,887
Federal agency collateralized mortgage obligations		9,356		9,403		4,039		4,073
Federal agency mortgage-backed pools		24,216		25,336		22,329		23,058

Total held to maturity investment securities	$	182,187	$	188,575	$	165,767	$	169,904

Total investment securities increased by approximately $128.3 million at September 30, 2015 compared to December 31, 2014 primarily due to the investing of cash from the closing of the Peoples merger.

Total loans increased $347.4 million since December 31, 2014 to $1.7 billion as of September 30, 2015. This increase was the result of an increase in commercial loans of $121.0 million, mortgage warehouse loans of $9.8 million, residential mortgage loans of $176.3 million and consumer loans of $40.8 million. The growth in total loans during the nine months ended September 30, 2015 is the direct result of increased calling efforts to increase Horizon’s market share within the Company’s footprint and market expansion as well as the loans added through the Peoples acquisition.

The following table presents the amount and growth rate of loans by product type for the nine months ended September 30, 2015, excluding the loans added through the Peoples acquisition.

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, 2015

Loan Growth by Type, Excluding Acquired Loans

Nine Months Ended September 30, 2015

(Dollars in Thousands)


											Excluding Acquired Loans
	September 30 2015		December 31 2014		Amount Change			Acquired Peoples Loans			Amount Change			Percent Change			Annualized Percent Change
	(Unaudited)
Commercial loans	$	795,271	$	674,314	$	120,957		$	(67,435	)	$	53,522			7.9	%		10.6	%
Residential mortgage loans		430,946		254,625		176,321			(137,331	)		38,990			15.3	%		20.5	%
Consumer loans		361,298		320,459		40,839			(19,593	)		21,246			6.6	%		8.9	%

Subtotal		1,587,515		1,249,398		338,117			(224,359	)		113,758			9.1	%		12.2	%
Held for sale loans		5,583		6,143		(560	)		—			(560	)		-9.1	%		-12.2	%
Mortgage warehouse loans		138,974		129,156		9,818			—			9,818			7.6	%		10.2	%
Total loans	$	1,732,072	$	1,384,697	$	347,375		$	(224,359	)	$	123,016			8.9	%		11.9	%

Total deposits increased $430.8 million since December 31, 2014 to $1.9 billion as of September 30, 2015. This increase was primarily the result of increased calling and marketing efforts, market expansion and the $351.1 million in deposits added through the Peoples acquisition. Non-interest bearing deposit accounts increased by $70.8 million, interest-bearing transaction accounts increased by $234.2 million and time deposits increased by $125.8 million during the nine months ended September 30, 2015.

The Company’s borrowings increased $22.7 million from December 31, 2014 primarily due to $47.8 million of long-term borrowings assumed as part of the Peoples acquisition net of maturities of long-term debt. At September 30, 2015, the Company had $133.0 million in short-term funds borrowed compared to $145.0 million at December 31, 2014. The Company’s current balance sheet strategy is to utilize a reasonable level of short-term borrowings during extended low rate environments in addition to what is needed for the fluctuations in municipal deposits and mortgage warehouse lending.

Stockholders’ equity totaled $264.7 million at September 30, 2015 compared to $194.4 million at December 31, 2014. 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 Peoples acquisition and the exercise of stock warrants. At September 30, 2015, the ratio of average stockholders’ equity to average assets was 10.38% compared to 9.56% for December 31, 2014. Book value per common share at September 30, 2015 increased to $21.14 compared to $19.75 at December 31, 2014.

Results of Operations

Overview

Consolidated net income for the three-month period ended September 30, 2015 was $4.3 million, a decrease of 13.5% from the $5.0 million for the same period in 2014. Earnings per common share for the three months ended September 30, 2015 were $0.37 basic and $0.36 diluted, compared to $0.53 basic and $0.51 diluted for the same three-month period in the previous year. The decrease in net income and earnings per share from the previous year reflects an increase in non-interest expenses of $6.9 million primarily due to an increase in salaries and employee benefits and outside services and consultants expense, partially offset by an increase in net interest income of $3.4 million, a decrease in provision for loan losses of $1.4 million and an increase in non-interest income of $1.0 million. The decrease in earnings per share also reflects an increase in diluted shares due to the Peoples acquisition. Excluding acquisition-related expenses and purchase

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, 2015

accounting adjustments and gain on sale of investment securities, net income for the third quarter of 2015 was $6.5 million or $.54 diluted earnings per share compared to $4.1 million or $.42 diluted earnings per share in the same period of 2014.

Consolidated net income for the nine-month period ended September 30, 2015 was $14.4 million, an increase of 9.3% from the $13.2 million for the same period in 2014. Earnings per common share for the nine-month period ended September 30, 2015 were $1.42 basic and $1.37 diluted, compared to $1.45 basic and $1.39 diluted for the same period in the previous year. The increase in net income from the previous year reflects an increase in net interest income of $8.1 million and an increase in non-interest income of $3.1 million, partially offset by an increase in the provision for loan losses of $740,000 and an increase in non-interest expenses of $8.7 million. The decrease in earnings per share also reflects an increase in diluted shares due to the Peoples acquisition. Excluding acquisition-related expenses and purchase accounting adjustments, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the first nine months of 2015 was $15.7 million or $1.50 diluted earnings per share compared to $12.1 million or $1.27 diluted earnings per share in the same period of 2014.

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-month period ended September 30, 2015 was $19.8 million, an increase of $3.4 million from the $16.4 million earned during the same period in 2014. Yields on the Company’s interest-earning assets decreased by 15 basis points to 4.17% for the three months ending September 30, 2015 from 4.32% for the three months ended September 30, 2014. Interest income increased $3.7 million from $19.9 million for the three months ended September 30, 2014 to $23.6 million for the same period in 2015. This increase was due to an increase in interest-earning assets, partially offset by lower yields on loans and investment securities and a decrease in interest income from acquisition-related purchase accounting adjustments from $438,000 for the three months ending September 30, 2014 to $402,000 for the same period of 2015.

Rates paid on interest-bearing liabilities decreased by 9 basis points for the three-month period ended September 30, 2015 compared to the same period in 2014 due to the continued low interest rate environment. Interest expense increased $351,000 compared to the three-month period ended September 30, 2014 to $3.8 million for the same period in 2015. This increase was due to higher average balances of interest-bearing deposits and higher interest rates paid on borrowings, partially offset by lower rates paid on interest-bearing deposits and lower average balances of borrowings. The net interest margin decreased 8 basis points from 3.59% for the three-month period ended September 30, 2014 to 3.51% for the same period in 2015. The decrease in the margin for the three-month period ended September 30, 2015 compared to the same period in 2014 was due to a reduction in the yield on interest-earning assets and a decrease of approximately $36,000 of interest income from acquisition-related purchase accounting adjustments. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.44% for the three-month period ending September 30, 2015 compared to 3.50% for the same period in 2014.

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, 2015

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


	Three Months Ended September 30, 2015								Three Months Ended September 30, 2014
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
ASSETS
Interest-earning assets
Federal funds sold	$	23,086		$	2		0.03	%	$	4,033		$	5		0.49	%
Interest-earning deposits		16,340			5		0.12	%		5,941			4		0.27	%
Investment securities - taxable		401,702			2,149		2.12	%		394,954			2,330		2.34	%
Investment securities - non-taxable (1)		154,050			1,125		4.39	%		146,513			1,109		4.48	%
Loans receivable (2)(3)		1,709,337			20,297		4.72	%		1,325,625			16,403		4.92	%

Total interest-earning assets (1)		2,304,515			23,578		4.17	%		1,877,066			19,851		4.32	%

Non-interest-earning assets
Cash and due from banks		31,384								27,188
Allowance for loan losses		(16,427	)							(15,706	)
Other assets		151,035								155,021

	$	2,470,507							$	2,043,569

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Interest-bearing deposits	$	1,568,777		$	1,566		0.40	%	$	1,204,122		$	1,352		0.45	%
Borrowings		303,521			1,729		2.26	%		320,676			1,593		1.97	%
Subordinated debentures		32,737			507		6.14	%		32,580			506		6.16	%

Total interest-bearing liabilities		1,905,035			3,802		0.79	%		1,557,378			3,451		0.88	%

Non-interest-bearing liabilities
Demand deposits		343,780								282,494
Accrued interest payable and other liabilities		15,149								12,979
Stockholders’ equity		206,543								190,718

	$	2,470,507							$	2,043,569

Net interest income/spread				$	19,776		3.38	%				$	16,400		3.44	%

Net interest income as a percent of average interest earning assets (1)							3.51	%							3.59	%

(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, 2015 was $54.5 million, an increase of $8.1 million from the $46.5 million earned during the same period in 2014. Yields on the Company’s interest-earning assets decreased by 12 basis points to 4.25% for the nine months ended September 30, 2015 from 4.37% for the same period in 2014. Interest income increased $8.4 million from $56.4 million for the nine months ended September 30, 2014 to $64.8 million for the same period in 2015. This increase was due to an increase in average loans balances and interest income from acquisition-related purchase accounting adjustments from $2.0 million for the nine months ending September 30, 2014 to $2.3 million for the same period of 2015, partially offset by lower yields on loans and investment securities and lower average investment securities balances.

Rates paid on interest-bearing liabilities decreased by 10 basis points for the nine months ended September 30, 2015 compared to the same period in 2014 due to the continued low interest rate environment. Interest expense increased $306,000 to $10.3 million for the nine-month period ending September 30, 2015. This increase was due to a higher volume of interest-bearing liabilities, partially offset by lower rates being paid on the Company’s interest-bearing liabilities. The net interest margin decreased 3 basis points from 3.62% for

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, 2015

the nine months ended September 30, 2014 to 3.59% for the same period in 2015. The decrease in the margin for the nine months ended September 30, 2015 compared to the same period in 2014 was due to a reduction in the yield on interest-earning assets. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.44% for the nine months ending September 30, 2015 compared to 3.47% for the same period in 2014.

The following are the average balance sheets for the nine months ending:


	Nine Months Ended September 30, 2015								Nine Months Ended September 30, 2014
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
ASSETS
Interest-earning assets
Federal funds sold	$	10,563		$	11		0.14	%	$	6,559		$	9		0.18	%
Interest-earning deposits		11,927			10		0.11	%		6,547			7		0.14	%
Investment securities - taxable		375,548			6,356		2.26	%		395,255			7,108		2.40	%
Investment securities - non-taxable (1)		145,576			3,281		3.96	%		146,643			3,328		4.33	%
Loans receivable (2)(3)		1,528,662			55,140		4.83	%		1,215,183			45,988		5.07	%

Total interest-earning assets (1)		2,072,276			64,798		4.25	%		1,770,187			56,440		4.37	%
Non-interest-earning assets
Cash and due from banks		30,729								26,736
Allowance for loan losses		(16,557	)							(15,892	)
Other assets		155,657								140,698

	$	2,242,105							$	1,921,729

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Interest-bearing deposits	$	1,347,882		$	4,035		0.40	%	$	1,171,343		$	3,984		0.45	%
Borrowings		340,593			4,747		1.86	%		274,322			4,493		2.19	%
Subordinated debentures		32,698			1,504		6.15	%		32,541			1,503		6.18	%

Total interest-bearing liabilities		1,721,173			10,286		0.80	%		1,478,206			9,980		0.90	%
Non-interest-bearing liabilities
Demand deposits		303,309								253,331
Accrued interest payable and other liabilities		14,692								12,454
Stockholders’ equity		202,931								177,738

	$	2,242,105							$	1,921,729

Net interest income/spread				$	54,512		3.45	%				$	46,460		3.47	%

Net interest income as a percent of average interest earning assets (1)							3.59	%							3.62	%

(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.

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, 2015, a provision of $300,000 was required to adequately fund the ALLL compared to $1.7 million for the same period of 2014. Commercial loan net charge-offs during the three-month period ended September 30, 2015 were $77,000, residential mortgage loan net charge-offs were $96,000 and consumer loan net charge-offs were $380,000. The lower provision for loan losses in the third quarter of 2015 compared to the same period of 2014 was

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, 2015

due to the improvement of non-performing and substandard loans and a $1.0 million charge-off associated with one commercial credit during the third quarter of 2014. The ALLL balance at September 30, 2015 was $16.2 million or 0.93% of total loans. This compares to an ALLL balance of $16.5 million at December 31, 2014 or 1.19% of total loans. The decrease in the ratio at September 30, 2015 compared to December 31, 2014 was due to improving credit trends and $223.9 million in loans added through the Peoples transaction with purchase accounting adjustments.

The provision for loan losses was $2.8 million the first nine months of 2015 compared to $2.1 million for the same period of 2014. The higher provision for loan losses in the first nine months of 2015 compared to the same period of 2014 was due to the charge-off of one commercial credit of $1.3 million in the second quarter of 2015 as well as continued loan growth. The $1.3 million commercial charge-off was a legacy workout loan that was determined to be impaired due to the borrower’s inability to make payments and a decrease in collateral value.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 1.12% as of September 30, 2015. The table below illustrates Horizon’s loan loss reserve ratio composition as of September 30, 2015.

Allowance for Loan and Lease Loss Detail

As of September 30, 2015

(Dollars in Thousands, Unaudited)


	Horizon Legacy			Heartland			Summit			Peoples			Total
Pre-discount loan balance	$	1,419,778		$	24,827		$	78,215		$	213,059		$	1,735,880

Allowance for loan losses (ALLL)		15,896			264			8			—			16,168
Loan discount		N/A			1,576			3,213			4,601			9,390

ALLL+loan discount		15,896			1,840			3,221			4,601			25,558

Loans, net	$	1,403,882		$	22,987		$	74,994		$	208,458		$	1,710,322

ALLL/ pre-discount loan balance		1.12	%		1.06	%		0.01	%		0.00	%		0.93	%
Loan discount/ pre-discount loan balance		N/A			6.35	%		4.11	%		2.16	%		0.54	%
ALLL+loan discount/ pre-discount loan balance		1.12	%		7.41	%		4.12	%		2.16	%		1.47	%

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, 2015.

Non-performing loans totaled $21.0 million as of September 30, 2015, down from $22.4 million on December 31, 2014. Compared to December 31, 2014, non-performing commercial loans and consumer loans decreased by $708,000 and $927,000, respectively, while non-performing real estate loans increased by $253,000.

At September 30, 2015, loans acquired represented $1.9 million in non-performing, $3.0 million in substandard and $0 in 90 day delinquent loans.

Other Real Estate Owned (OREO) totaled $1.3 million on September 30, 2015 compared to $1.2 million on December 31, 2014 and $1.3 million on September 30, 2014.

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, 2015

Non-interest Income

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


	Three Months Ended
	September 30 2015		September 30 2014		Amount Change			Percent Change
Non-interest Income
Service charges on deposit accounts	$	1,359	$	1,076	$	283			26.3	%
Wire transfer fees		160		151		9			6.0	%
Interchange fees		1,625		1,223		402			32.9	%
Fiduciary activities		1,520		1,131		389			34.4	%
Gain on sale of securities		—		988		(988	)		0.0	%
Gain on sale of mortgage loans		2,794		2,153		641			29.8	%
Mortgage servicing net of impairment		246		116		130			112.1	%
Increase in cash surrender value of bank owned life insurance		374		296		78			26.4	%
Other income		322		256		66			25.8	%

Total non-interest income	$	8,400	$	7,390	$	1,010			13.7	%

Total non-interest income was $1.0 million higher in the third quarter of 2015 compared to the same period of 2014. Service charges on deposit accounts increased $283,000, interchange fees increased by $402,000 and fiduciary activities increased $389,000, primarily due to overall company growth and increased volume. Residential mortgage loan activity during the third quarter of 2015 generated $2.8 million of income from the gain on sale of mortgage loans, up $641,000 from the same period in 2014. The increase in the gain on sale of mortgage loans was due to an increase in total loans sold of $16.3 million from $70.6 million in the third quarter of 2014 to $86.9 million in the same period of 2015, partially offset by a decrease in the percentage earned on the sale of these loans from 3.32% in the third quarter of 2014 to 3.30% in the same period of 2015. Mortgage servicing net of impairment increased by $130,000 during the third quarter of 2015 compared to the same period of 2014 due to a larger portfolio of mortgage loans serviced.


	Nine Months Ended				2014 - 2015
	September 30 2015		September 30 2014		Amount Change			Percent Change
Non-interest Income
Service charges on deposit accounts	$	3,443	$	3,037	$	406			13.4	%
Wire transfer fees		493		408		85			20.8	%
Interchange fees		4,093		3,436		657			19.1	%
Fiduciary activities		4,033		3,378		655			19.4	%
Gain on sale of investment securities		124		988		(864	)		100.0	%
Gain on sale of mortgage loans		7,815		6,101		1,714			28.1	%
Mortgage servicing net of impairment		725		556		169			30.4	%
Increase in cash surrender value of bank owned life insurance		889		781		108			13.8	%
Death benefit on officer life insurance		145		—		145			100.0	%
Other income		892		854		38			4.4	%

Total non-interest income	$	22,652	$	19,539	$	3,113			15.9	%

Total non-interest income was $3.1 million higher in the first nine months of 2015 compared to the same period of 2014. Service charges on deposit accounts increased $406,000, interchange fees increased by $657,000 and fiduciary activities increased $655,000, primarily due to overall company growth and increased volume. Gain on sale of securities was $864,000 lower during the first nine months of 2015 as the result of

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, 2015

an analysis that determined market conditions provided the opportunity to add gains to capital in the nine months ended September 30, 2014 without negatively impacting long-term earnings. Residential mortgage loan activity during the first nine months of 2015 generated $7.8 million of income from the gain on sale of mortgage loans, up $1.7 million from the same period in 2014. The increase in the gain on sale of mortgage loans was due to an increase in total loans sold of $74.5 million from $164.6 million in the first nine months of 2014 to $239.1 million in the same period of 2015, partially offset by a decrease in the percentage earned on the sale of these loans from 3.37% in the first nine months of 2014 to 3.19% in the same period of 2015. Mortgage servicing net of impairment increased by $169,000 during the first nine months of 2015 compared to the same period of 2014 primarily due to a larger portfolio of mortgage loans serviced. The cash surrender value of bank owned life insurance increased by $108,000 in the first nine months of 2015 compared to the same period in 2014 due to the addition of bank owned life insurance policies as a result of the Peoples acquisition. The Company also recognized a $145,000 death benefit on officer life insurance during the first nine months of 2015.

Non-interest Expense

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


	Three Months Ended
	September 30 2015		September 30 2014			Amount Change		Percent Change
Non-interest expense
Salaries	$	6,412	$	5,730		$	682		11.9	%
Commission and bonuses		1,958		1,239			719		58.0	%
Employee benefits		2,282		1,246			1,036		83.1	%
Net occupancy expenses		1,723		1,404			319		22.7	%
Data processing		1,281		907			374		41.2	%
Professional fees		409		358			51		14.2	%
Outside services and consultants		3,209		595			2,614		439.3	%
Loan expense		1,351		1,202			149		12.4	%
FDIC deposit insurance		423		313			110		35.1	%
Other losses		246		(35	)		281		-802.9	%
Other expense		2,941		2,394			547		22.8	%

Total non-interest expense	$	22,235	$	15,353		$	6,882		44.8	%

Total non-interest expenses were $6.9 million higher in the third quarter of 2015 compared to the same period of 2014. Salaries increased by $1.2 million and employee benefits increased by $552,000 due to a larger employee base. Commission and bonuses increased by $719,000 due to an increase in loan volume and a larger employee base. Net occupancy expense increased $319,000 due to Horizon’s investment in growth markets and the Peoples acquisition. Data processing expenses increased $374,000, FDIC deposit insurance expense increased by $110,000 and other expenses increased by $547,000 primarily due to company growth. Outside services and consultants expense increased by $2.6 million due to the one-time fees associated with Peoples acquisition. Loan expense increased $149,000 primarily due to an increase in loan origination volume. One-time non-interest expense related to the Peoples acquisition totaled $3.6 million in the third quarter of 2015.

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, 2015


	Nine Months Ended
	September 30 2015		September 30 2014		Amount Change		Percent Change
Non-interest expense
Salaries	$	18,038	$	17,088	$	950		5.6	%
Commission and bonuses		4,325		2,728		1,597		58.5	%
Employee benefits		5,178		4,175		1,003		24.0	%
Net occupancy expenses		4,649		4,188		461		11.0	%
Data processing		3,170		2,714		456		16.8	%
Professional fees		1,596		1,385		211		15.2	%
Outside services and consultants		4,753		2,554		2,199		86.1	%
Loan expense		3,975		3,489		486		13.9	%
FDIC deposit insurance		1,099		854		245		28.7	%
Other losses		351		98		253		258.2	%
Other expense		7,819		7,002		817		11.7	%

Total non-interest expense	$	54,953	$	46,275	$	8,678		18.8	%

Total non-interest expenses were $8.7 million higher in the first nine months of 2015 compared to the same period of 2014. Salaries increased by $1.4 million and employee benefits increased by $519,000 due to a larger employee base. Commission and bonuses increased by $1.6 million due to an increase in loan volume and a larger employee base. Net occupancy expense increased $461,000 due to Horizon’s investment in growth markets and the Peoples acquisition. Data processing expenses increased $456,000, FDIC deposit insurance expense increased by $245,000 and other expenses increased by $817,000 primarily due to company growth. Outside services and consultants expense increased by $2.2 million due to the one-time fees associated with the Peoples acquisition. Loan expense increased $486,000 primarily due to an increase in loan origination volume. One-time non-interest expense related to the Peoples acquisition totaled $4.4 million in the first nine months of 2015.

Liquidity

The Bank maintains a stable base of core deposits provided by long-standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, and borrowing relationships with correspondent banks, including the FHLB. During the nine months ended September 30, 2015, cash and cash equivalents increased by approximately $4.7 million. At September 30, 2015, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $328.0 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $301.4 million at December 31, 2014 and $284.0 million at September 30, 2014.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2015. Stockholders’ equity totaled $264.7 million as of September 30, 2015, compared to $194.4 million as of December 31, 2014. For the three months ended September 30, 2015, the ratio of average stockholders’ equity to average assets was 10.38% compared to 9.56% for the three months ended December 31, 2014. The increase in stockholders’ equity during the period was the result of the generation of net income and the shares issued as part of the purchase price for the Peoples acquisition, net of dividends declared.

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, 2015

The Company currently intends to continue its participation in the Small Business Lending Fund, pursuant to which it issued preferred stock to the US Treasury, since the growth in the Company’s small business lending has reduced the dividend cost. For the three months ending September 30, 2015, the dividend cost was approximately $31,000, or 1.0% annualized. Quarterly dividend payments for the third and fourth quarters of 2015 will be approximately $31,000, or 1.0% annualized. The Company plans to reserve cash so that it has the ability to redeem this preferred stock if and when the cost of this capital exceeds the cost of other forms of capital, subject to regulatory approval.

Horizon declared common stock dividends in the amount of $0.43 per share during the first nine months of 2015 compared to $0.37 per share for the same period of 2014. The dividend payout ratio (dividends as a percent of basic earnings per share) was 30.2% and 25.5% for the first nine months of 2015 and 2014, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2014.

Use of Non-GAAP Financial Measures

Certain information set forth in this quarterly report on Form 10-Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non-GAAP financial measures of the net interest margin and the allowance for loan and lease losses excluding the impact of acquisition-related purchase accounting adjustments and net income and diluted earnings per share excluding the impact of one-time costs related to acquisitions, acquisition-related purchase accounting adjustments and other events that are considered to be non-recurring. Horizon believes that these non-GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and one-time costs of acquisitions and non-core items, although these measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure.

Non-GAAP Reconciliation of Net Interest Margin

(Dollar Amounts in Thousands, Unaudited)


	Three Months Ended									Nine Months Ended
	September 30			June 30			September 30			September 30
	2015			2015			2014			2015			2014
Net Interest Margin As Reported
Net interest income	$	19,776		$	17,850		$	16,400		$	54,512		$	46,460
Average interest-earning assets		2,304,515			2,008,191			1,877,066			2,072,276			1,770,187
Net interest income as a percent of average interest-earning assets (“Net Interest Margin”)		3.51	%		3.67	%		3.59	%		3.59	%		3.62	%

Impact of Acquisitions
Interest income from acquisition-related purchase accounting adjustments (“PAUs”)	$	(402	)	$	(797	)	$	(438	)	$	(2,282	)	$	(2,027	)

Excluding Impact of Acquisitions
Net interest income	$	19,374		$	17,053		$	15,962		$	52,230		$	44,433
Average interest-earning assets		2,304,515			2,008,191			1,877,066			2,072,276			1,770,187
Core Net Interest Margin		3.44	%		3.51	%		3.50	%		3.44	%		3.47	%

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, 2015

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

(Dollar in Thousands Except per Share Data, Unaudited)


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2015			2014			2015			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Non-GAAP Reconciliation of Net Income
Net income as reported	$	4,288		$	4,958		$	14,374		$	13,153
Merger expenses		3,648			124			4,364			1,335
Tax effect		(1,219	)		(43	)		(1,402	)		(467	)

Net income excluding merger expenses		6,717			5,039			17,336			14,021

Gain on sale of investment securities		—			(988	)		(124	)		(988	)
Tax effect		—			346			43			346

Net income excluding gain on sale of investment securities		6,717			4,396			17,255			13,379

Death benefit on bank owned life insurance (“BOLI”)		—			—			(145	)		—
Tax effect		—			—			51			—

Net income excluding death benefit on BOLI		6,717			4,396			17,161			13,379

Acquisition-related PAUs		(402	)		(438	)		(2,282	)		(2,027	)
Tax effect		141			153			799			709

Net income excluding PAUs	$	6,456		$	4,112		$	15,678		$	12,061

Non-GAAP Reconciliation of Diluted Earnings per Share
Diluted earnings per share as reported	$	0.36		$	0.51		$	1.37		$	1.39
Merger expenses		0.30			0.01			0.42			0.14
Tax effect		(0.10	)		(0.00	)		(0.13	)		(0.05	)

Diluted earnings per share excluding merger expenses		0.56			0.52			1.66			1.48

Gain on sale of investment securities		—			(0.10	)		(0.01	)		(0.11	)
Tax effect		—			0.03			0.00			0.04

Net income excluding gain on sale of investment securities		0.56			0.45			1.65			1.41

Death benefit on BOLI		—			—			(0.01	)		—
Tax effect		—			—			0.00			—

Net income excluding death benefit on BOLI		0.56			0.45			1.64			1.41

Acquisition-related PAUs		(0.03	)		(0.05	)		(0.22	)		(0.22	)
Tax effect		0.01			0.02			0.08			0.08

Diluted earnings per share excluding PAUs	$	0.54		$	0.42		$	1.50		$	1.27

HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three and Nine Months ended June 30, 2015

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2014 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 2014 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, 2015, 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, 2015, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three and Nine Months ended September 30, 2015

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 2014.

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

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three and Nine Months ended September 30, 2015

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

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 9, 2015				/s/ Craig M. Dwight
				Craig M. Dwight
				Chief Executive Officer

Dated: November 9, 2015				/s/ Mark E. Secor
				Mark E. Secor
				Chief Financial Officer

INDEX TO EXHIBITS


Exhibit No.	Description	Location

Exhibit 31.1	Certification of Craig M. Dwight	Attached

Exhibit 31.2	Certification of Mark E. Secor	Attached

Exhibit 32	Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached

Exhibit 101	Interactive Data Files	Attached

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Accelerated Filer

Non-accelerated Filer

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Smaller Reporting Company