10-Q 1 d398671d10q.htm FORM 10-Q

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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, 2012

Commission file number 0-10792

HORIZON BANCORP

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,693,741 shares of Common Stock, no par value, at November 8, 2012.

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HORIZON BANCORP

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION |  |  |  |
Item 1. |  | Financial Statements |  |  |  |
|  | 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 |  |  | 37 |
Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk |  |  | 51 |
Item 4. |  | Controls and Procedures |  |  | 51 |
PART II. OTHER INFORMATION |  |  |  |
Item 1. |  | Legal Proceedings |  |  | 52 |
Item 1A. |  | Risk Factors |  |  | 52 |
Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds |  |  | 52 |
Item 3. |  | Defaults Upon Senior Securities |  |  | 52 |
Item 4. |  | Mine Safety Disclosures |  |  | 52 |
Item 5. |  | Other Information |  |  | 52 |
Item 6. |  | Exhibits |  |  | 53 |
Signatures |  |  | 54 |
Index To Exhibits |  |  | 55 |

2

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PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

|  | September 30 2012 (Unaudited) |  |  | December 31 2011 |
Assets |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 41,562 |  |  | $ | 20,447 |
Investment securities, available for sale |  |  | 497,704 |  |  |  | 431,045 |
Investment securities, held to maturity |  |  | 6,100 |  |  |  | 7,100 |
Loans held for sale |  |  | 18,163 |  |  |  | 14,090 |
Loans, net of allowance for loan losses of $18,568 and $18,882 |  |  | 1,136,480 |  |  |  | 964,311 |
Premises and equipment |  |  | 40,297 |  |  |  | 34,665 |
Federal Reserve and Federal Home Loan Bank stock |  |  | 13,333 |  |  |  | 12,390 |
Goodwill |  |  | 19,748 |  |  |  | 5,910 |
Other intangible assets |  |  | 4,295 |  |  |  | 2,292 |
Interest receivable |  |  | 8,248 |  |  |  | 6,671 |
Cash value life insurance |  |  | 34,929 |  |  |  | 30,190 |
Other assets |  |  | 25,917 |  |  |  | 18,051 |
Total assets |  | $ | 1,846,776 |  |  | $ | 1,547,162 |
Liabilities |  |  |  |  |  |  |  |
Deposits |  |  |  |  |  |  |  |
Non-interest bearing |  | $ | 211,935 |  |  | $ | 130,673 |
Interest bearing |  |  | 1,095,036 |  |  |  | 879,192 |
Total deposits |  |  | 1,306,971 |  |  |  | 1,009,865 |
Borrowings |  |  | 333,150 |  |  |  | 370,111 |
Subordinated debentures |  |  | 32,282 |  |  |  | 30,676 |
Interest payable |  |  | 579 |  |  |  | 596 |
Other liabilities |  |  | 17,932 |  |  |  | 14,449 |
Total liabilities |  |  | 1,690,914 |  |  |  | 1,425,697 |
Commitments and contingent liabilities |  |  |  |  |  |  |  |
Stockholders’ Equity |  |  |  |  |  |  |  |
Preferred stock, $.01 par value, $1,000 liquidation value Authorized, 1,000,000 Series B shares Issued 12,500 and 12,500 shares |  |  | 12,500 |  |  |  | 12,500 |
Common stock, no par value Authorized, 22,500,000 shares Issued, 8,685,490 and 7,450,794 shares Outstanding, 8,617,735 and 7,421,544 shares |  |  | — |  |  |  | — |
Additional paid-in capital |  |  | 31,894 |  |  |  | 11,736 |
Retained earnings |  |  | 101,267 |  |  |  | 89,387 |
Accumulated other comprehensive income |  |  | 10,201 |  |  |  | 7,842 |
Total stockholders’ equity |  |  | 155,862 |  |  |  | 121,465 |
Total liabilities and stockholders’ equity |  | $ | 1,846,776 |  |  | $ | 1,547,162 |

See notes to condensed consolidated financial statements

3

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

|  | Nine Months Ended September 30 |  |  | Three Months Ended September 30 |
|  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |  |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |
Interest Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans receivable |  | $ | 15,527 |  |  | $ | 12,481 |  |  | $ | 42,386 |  |  | $ | 36,260 |
Investment securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 2,178 |  |  |  | 2,542 |  |  |  | 6,738 |  |  |  | 7,828 |
Tax exempt |  |  | 1,014 |  |  |  | 988 |  |  |  | 2,944 |  |  |  | 3,066 |
Total interest income |  |  | 18,719 |  |  |  | 16,011 |  |  |  | 52,068 |  |  |  | 47,154 |
Interest Expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,638 |  |  |  | 1,978 |  |  |  | 4,803 |  |  |  | 6,510 |
Borrowed funds |  |  | 1,597 |  |  |  | 1,583 |  |  |  | 4,635 |  |  |  | 4,760 |
Subordinated debentures |  |  | 485 |  |  |  | 459 |  |  |  | 1,427 |  |  |  | 1,363 |
Total interest expense |  |  | 3,720 |  |  |  | 4,020 |  |  |  | 10,865 |  |  |  | 12,633 |
Net Interest Income |  |  | 14,999 |  |  |  | 11,991 |  |  |  | 41,203 |  |  |  | 34,521 |
Provision for loan losses |  |  | 1,041 |  |  |  | 1,564 |  |  |  | 1,809 |  |  |  | 4,444 |
Net Interest Income after Provision for Loan Losses |  |  | 13,958 |  |  |  | 10,427 |  |  |  | 39,394 |  |  |  | 30,077 |
Other Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 1,002 |  |  |  | 802 |  |  |  | 2,477 |  |  |  | 2,422 |
Wire transfer fees |  |  | 248 |  |  |  | 167 |  |  |  | 643 |  |  |  | 412 |
Interchange fees |  |  | 885 |  |  |  | 721 |  |  |  | 2,227 |  |  |  | 1,905 |
Fiduciary activities |  |  | 971 |  |  |  | 1,016 |  |  |  | 2,928 |  |  |  | 2,911 |
Gain on sale of securities |  |  | 2 |  |  |  | 1,115 |  |  |  | 2 |  |  |  | 1,754 |
Gain on sale of mortgage loans |  |  | 4,436 |  |  |  | 2,145 |  |  |  | 10,121 |  |  |  | 3,986 |
Mortgage servicing income net of impairment |  |  | (355 | ) |  |  | (172 | ) |  |  | (95 | ) |  |  | 691 |
Increase in cash value of bank owned life insurance |  |  | 300 |  |  |  | 245 |  |  |  | 760 |  |  |  | 661 |
Death benefit on officer life insurance |  |  | — |  |  |  | 453 |  |  |  | — |  |  |  | 453 |
Other income |  |  | 221 |  |  |  | 46 |  |  |  | 344 |  |  |  | 105 |
Total other income |  |  | 7,710 |  |  |  | 6,538 |  |  |  | 19,407 |  |  |  | 15,300 |
Other Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 7,905 |  |  |  | 6,081 |  |  |  | 20,407 |  |  |  | 16,912 |
Net occupancy expenses |  |  | 1,186 |  |  |  | 1,056 |  |  |  | 3,216 |  |  |  | 3,176 |
Data processing |  |  | 754 |  |  |  | 549 |  |  |  | 1,883 |  |  |  | 1,450 |
Professional fees |  |  | 366 |  |  |  | 359 |  |  |  | 1,483 |  |  |  | 1,039 |
Outside services and consultants |  |  | 624 |  |  |  | 454 |  |  |  | 1,621 |  |  |  | 1,221 |
Loan expense |  |  | 1,311 |  |  |  | 820 |  |  |  | 2,879 |  |  |  | 2,276 |
FDIC insurance expense |  |  | 291 |  |  |  | 254 |  |  |  | 798 |  |  |  | 944 |
Other losses |  |  | 309 |  |  |  | 1,088 |  |  |  | 501 |  |  |  | 1,365 |
Other expenses |  |  | 2,094 |  |  |  | 1,652 |  |  |  | 5,392 |  |  |  | 4,675 |
Total other expenses |  |  | 14,840 |  |  |  | 12,313 |  |  |  | 38,180 |  |  |  | 33,058 |
Income Before Income Tax |  |  | 6,828 |  |  |  | 4,652 |  |  |  | 20,621 |  |  |  | 12,319 |
Income tax expense |  |  | 1,978 |  |  |  | 1,235 |  |  |  | 6,248 |  |  |  | 3,044 |
Net Income |  |  | 4,850 |  |  |  | 3,417 |  |  |  | 14,373 |  |  |  | 9,275 |
Preferred stock dividend and discount accretion |  |  | (63 | ) |  |  | (710 | ) |  |  | (325 | ) |  |  | (1,263 | )
Net Income Available to Common Shareholders |  | $ | 4,787 |  |  | $ | 2,707 |  |  | $ | 14,048 |  |  | $ | 8,012 |
Basic Earnings Per Share |  | $ | 0.56 |  |  | $ | 0.37 |  |  | $ | 1.81 |  |  | $ | 1.08 |
Diluted Earnings Per Share |  |  | 0.54 |  |  |  | 0.36 |  |  |  | 1.75 |  |  |  | 1.05 |

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

|  | Three Months Ended September 30 |  |  | Nine Months Ended September 30 |
|  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |  |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |
Net Income |  | $ | 4,850 |  |  | $ | 3,417 |  |  | $ | 14,373 |  |  | $ | 9,275 |
Other Comprehensive Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in fair value of derivative instruments, net of taxes of $(92) and $(317) for three and nine months ended 2012 and $(1,051) and $(1,221), for three and nine months ended 2011, respectively |  |  | (170 | ) |  |  | (1,951 | ) |  |  | (589 | ) |  |  | (2,268 | )
Unrealized appreciation on available-for-sale securities, net of taxes of $860 and $1,588, for three and nine months ended 2012 and $1,856 and $4,852 for the three and nine months ended 2011, respectively |  |  | 1,597 |  |  |  | 3,447 |  |  |  | 2,949 |  |  |  | 9,011 |
Less: reclassification adjustment for realized gains included in net income, net of taxes of $1 for three and nine months ended 2012, and $390 and $614, for three and nine months ended 2011, respectively |  |  | 1 |  |  |  | 725 |  |  |  | 1 |  |  |  | 1,140 |
|  |  | 1,426 |  |  |  | 771 |  |  |  | 2,359 |  |  |  | 5,603 |
Comprehensive Income |  | $ | 6,276 |  |  | $ | 4,188 |  |  | $ | 16,732 |  |  | $ | 14,878 |

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

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

|  | Preferred Stock |  |  | Additional Paid-in Capital |  |  | Retained Earnings |  |  | Accumulated Other Comprehensive Income |  |  | Total |
Balances, January 1, 2012 |  | $ | 12,500 |  |  | $ | 11,736 |  |  | $ | 89,387 |  |  | $ | 7,842 |  |  | $ | 121,465 |
Net income |  |  |  |  |  |  |  |  |  |  | 14,373 |  |  |  |  |  |  |  | 14,373 |
Other comprehensive income, net of tax |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2,359 |  |  |  | 2,359 |
Amortization of unearned compensation |  |  |  |  |  |  | 124 |  |  |  |  |  |  |  |  |  |  |  | 124 |
Issuance of restricted shares |  |  |  |  |  |  | 115 |  |  |  |  |  |  |  |  |  |  |  | 115 |
Exercise of stock options |  |  |  |  |  |  | 226 |  |  |  |  |  |  |  |  |  |  |  | 226 |
Stock option expense |  |  |  |  |  |  | 25 |  |  |  |  |  |  |  |  |  |  |  | 25 |
Stock issued from acquisition |  |  |  |  |  |  | 19,668 |  |  |  |  |  |  |  |  |  |  |  | 19,668 |
Cash dividends on preferred stock |  |  |  |  |  |  |  |  |  |  | (325 | ) |  |  |  |  |  |  | (325 | )
Cash dividends on common stock ($.27 per share) |  |  |  |  |  |  |  |  |  |  | (2,168 | ) |  |  |  |  |  |  | (2,168 | )
Balances, September 30, 2012 |  | $ | 12,500 |  |  | $ | 31,894 |  |  | $ | 101,267 |  |  | $ | 10,201 |  |  | $ | 155,862 |

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

|  | Nine Months Ended September 30 |
|  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |
Operating Activities |  |  |  |  |  |  |  |
Net income |  | $ | 14,373 |  |  | $ | 9,275 |
Items not requiring (providing) cash |  |  |  |  |  |  |  |
Provision for loan losses |  |  | 1,809 |  |  |  | 4,444 |
Depreciation and amortization |  |  | 1,988 |  |  |  | 1,868 |
Share based compensation |  |  | 25 |  |  |  | 27 |
Mortgage servicing rights impairment (recovery) |  |  | 369 |  |  |  | (464 | )
Premium amortization on securities available for sale, net |  |  | 2,387 |  |  |  | 1,612 |
Gain on sale of investment securities |  |  | (2 | ) |  |  | (1,754 | )
Gain on sale of mortgage loans |  |  | (10,121 | ) |  |  | (3,986 | )
Proceeds from sales of loans |  |  | 293,909 |  |  |  | 178,239 |
Loans originated for sale |  |  | (283,788 | ) |  |  | (174,253 | )
Change in cash value of life insurance |  |  | (727 | ) |  |  | 236 |
(Gain) loss on sale of other real estate owned |  |  | (5 | ) |  |  | 126 |
Net change in |  |  |  |  |  |  |  |
Interest receivable |  |  | (757 | ) |  |  | (132 | )
Interest payable |  |  | (107 | ) |  |  | (199 | )
Other assets |  |  | 217 |  |  |  | (1,590 | )
Other liabilities |  |  | (2,112 | ) |  |  | 1,416 |
Net cash provided by operating activities |  |  | 17,458 |  |  |  | 14,865 |
Investing Activities |  |  |  |  |  |  |  |
Purchases of securities available for sale |  |  | (96,713 | ) |  |  | (170,689 | )
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale |  |  | 92,734 |  |  |  | 134,583 |
Purchase of securities held to maturity |  |  | — |  |  |  | (2,437 | )
Proceeds from maturities of securities held to maturity |  |  | 4,177 |  |  |  | 1,400 |
(Purchase) proceeds from the sale of Federal Home Loan Bank stock |  |  | — |  |  |  | 1,274 |
Net change in loans |  |  | (66,596 | ) |  |  | (44,766 | )
Proceeds on the sale of OREO and repossessed assets |  |  | 2,661 |  |  |  | 2,008 |
Purchases of premises and equipment |  |  | (4,520 | ) |  |  | (1,548 | )
Purchases of bank owned life insurance |  |  | — |  |  |  | (3,000 | )
Acquisition of Heartland |  |  | 26,283 |  |  |  | — |
Net cash used in by investing activities |  |  | (41,974 | ) |  |  | (83,175 | )
Financing Activities |  |  |  |  |  |  |  |
Net change in |  |  |  |  |  |  |  |
Deposits |  |  | 85,861 |  |  |  | 4,251 |
Borrowings |  |  | (38,078 | ) |  |  | 75,423 |
Redemption of preferred stock |  |  | — |  |  |  | (18,750 | )
Issuance of preferred stock |  |  | — |  |  |  | 12,500 |
Proceeds from issuance of stock |  |  | 341 |  |  |  | 115 |
Tax benefit from issuance of stock |  |  | — |  |  |  | 8 |
Dividends paid on common shares |  |  | (2,168 | ) |  |  | (1,728 | )
Dividends paid on preferred shares |  |  | (325 | ) |  |  | (730 | )
Net cash provided by financing activities |  |  | 45,631 |  |  |  | 71,089 |
Net Change in Cash and Cash Equivalent |  |  | 21,115 |  |  |  | 2,779 |
Cash and Cash Equivalents, Beginning of Period |  |  | 20,447 |  |  |  | 15,683 |
Cash and Cash Equivalents, End of Period |  | $ | 41,562 |  |  | $ | 18,462 |
Additional Cash Flows Information |  |  |  |  |  |  |  |
Interest paid |  | $ | 10,882 |  |  | $ | 12,832 |
Income taxes paid |  |  | 3,925 |  |  |  | 2,100 |
Transfer of loans to other real estate owned |  |  | 3,486 |  |  |  | 4,273 |

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 – Accounting Policies

The accompanying 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, 2012 and September 30, 2011 are not necessarily indicative of the operating results for the full year of 2012 or 2011. 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 2011 filed with the Securities and Exchange Commission on March 12, 2012. The consolidated condensed balance sheet of Horizon as of December 31, 2011 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 September 30 |  |  | Nine months ended September 30 |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
|  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |
Basic earnings per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 4,850 |  |  | $ | 3,417 |  |  | $ | 14,373 |  |  | $ | 9,275 |
Less: Preferred stock dividends and accretion of discount |  |  | 63 |  |  |  | 710 |  |  |  | 325 |  |  |  | 1,263 |
Net income available to common shareholders |  | $ | 4,787 |  |  | $ | 2,707 |  |  | $ | 14,048 |  |  | $ | 8,012 |
Weighted average common shares outstanding(1)(2) |  |  | 8,503,475 |  |  |  | 7,414,043 |  |  |  | 7,758,537 |  |  |  | 7,402,300 |
Basic earnings per share |  | $ | 0.56 |  |  | $ | 0.37 |  |  | $ | 1.81 |  |  | $ | 1.08 |
Diluted earnings per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income available to common shareholders |  | $ | 4,787 |  |  | $ | 2,707 |  |  | $ | 14,048 |  |  | $ | 8,012 |
Weighted average common shares outstanding(1)(2) |  |  | 8,503,475 |  |  |  | 7,414,043 |  |  |  | 7,758,537 |  |  |  | 7,402,300 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants |  |  | 269,432 |  |  |  | 163,325 |  |  |  | 231,038 |  |  |  | 167,668 |
Restricted stock |  |  | 30,971 |  |  |  | 4,399 |  |  |  | 19,317 |  |  |  | 13,676 |
Stock options |  |  | 34,782 |  |  |  | 14,803 |  |  |  | 26,105 |  |  |  | 15,307 |
Weighted average shares outstanding |  |  | 8,838,659 |  |  |  | 7,596,569 |  |  |  | 8,034,996 |  |  |  | 7,598,950 |
Diluted earnings per share |  | $ | 0.54 |  |  | $ | 0.36 |  |  | $ | 1.75 |  |  | $ | 1.05 |

(1) | Adjusted for 3:2 stock split announced on October 16, 2012 payable November 9, 2012

(2) | Includes average shares issued for the Heartland acquisition for the three and nine months ending September 30, 2012

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

At September 30, 2012 and 2011, there were no shares and 66,551 for the three months ended and 12,750 shares and 73,359 shares for the nine months ended, respectively that were not included in the computation of diluted earnings per share because they were non-dilutive.

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2011 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2011 consolidated financial statements to be comparable to 2012. These reclassifications had no effect on net income.

Note 2 – Acquisition

On July 17, 2012 Horizon closed its acquisition of Heartland Bancshares, Inc. and Horizon Bank N.A.’s acquisition of Heartland Community Bank, through mergers effective July 17, 2012. Under the final terms of the acquisition, the exchange ratio was 0.54 shares of Horizon’s common stock for each share of Heartland common stock outstanding. Heartland shares outstanding at the closing were 1,442,449, and the shares of HBNC common stock issued to Heartland shareholders totaled 778,922. Horizon’s stock price was $25.25 per share at the close of business on July 17, 2012. Based upon these numbers, the total value of the consideration, including the retirement of TARP, for the acquisition was $26.9 million. For the nine months ended September 30, 2012, the Company had approximately $1.5 million is costs related to the acquisition. These expenses are classified in the other expense section of the income statement 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 Heartland’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 preliminary purchase price for the Heartland acquisition is allocated as follows (in thousands):

ASSETS |  |  |  |  |  | LIABILITIES |  |  |  |
Cash and due from banks |  | $ | 33,531 |  |  | Deposits |  |  |  |
Investment securities, available for sale |  |  | 63,707 |  |  | Non-interest bearing |  | $ | 59,350 |
|  |  |  |  |  | NOW accounts |  |  | 42,681 |
Commercial |  |  | 70,343 |  |  | Savings and money market |  |  | 61,465 |
Residential mortgage |  |  | 20,838 |  |  | Certificates of deposits |  |  | 47,749 |
Consumer |  |  | 23,423 |  |  | Total deposits |  |  | 211,245 |
Total loans |  |  | 114,604 |  |  |  |  |  |  |
|  |  |  |  |  | Borrowings |  |  | 1,186 |
Premises and equipment |  |  | 2,647 |  |  | Subordinated debentures |  |  | 1,537 |
FRB and FHLB stock |  |  | 943 |  |  | Interest payable |  |  | 90 |
Goodwill |  |  | 13,838 |  |  | Other liabilities |  |  | 4,670 |
Core deposit intangible |  |  | 2,332 |  |  |  |  |  |  |
Interest receivable |  |  | 820 |  |  |  |  |  |  |
Cash value life insurance |  |  | 4,012 |  |  |  |  |  |  |
Other assets |  |  | 9,210 |  |  |  |  |  |  |
Total assets purchased |  | $ | 245,644 |  |  | Total liabilities assumed |  | $ | 218,728 |
Common shares issued |  | $ | 19,668 |  |  |  |  |  |  |
Retirement of TARP preferred shares |  |  | 7,248 |  |  |  |  |  |  |
Total estimated purchase price |  | $ | 26,916 |  |  |  |  |  |  |

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Prior to the end of the measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.

Of the total estimated purchase price of $26.9 million, $2.3 million has been allocated to core deposit intangible. Additionally, $13.8 million has been allocated to goodwill and $10.8 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 loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

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

The Company acquired the $131.1 million loan portfolio at a fair value discount of $16.5 million. The performing portion of the portfolio, $95.4 million, had an estimated fair value or $91.6 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.

Preliminary estimates of certain loans, those for which specific credit-related deterioration, since origination, was identified 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. Many of the acquired loans deemed impaired and considered collateral dependent, with the timing of a sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 (formerly Statement of Position “SOP” 03-3) as of July 17, 2012.

Contractually required principal and interest at acquisition |  | $ | 35,574 |
Contractual cash flows not expected to be collected (nonaccretable differences) |  |  | 9,747 |
Expected cash flows at acquisition |  |  | 25,827 |
Interest component of expected cash flows (accretable discount) |  |  | 2,886 |
Fair value of acquired loans accounted for under ASC 310-30 |  | $ | 22,941 |

Pro-forma statements were determined to be impracticable due to the materiality of the transaction.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 3 – Securities

The fair value of securities is as follows:

September 30, 2012 |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 46,982 |  |  | $ | 394 |  |  | $ | — |  |  | $ | 47,376 |
State and municipal |  |  | 163,407 |  |  |  | 11,476 |  |  |  | (62 | ) |  |  | 174,821 |
Federal agency collateralized mortgage obligations |  |  | 97,534 |  |  |  | 1,621 |  |  |  | (114 | ) |  |  | 99,041 |
Federal agency mortgage-backed pools |  |  | 166,029 |  |  |  | 8,114 |  |  |  | (6 | ) |  |  | 174,137 |
Private labeled mortgage-backed pools |  |  | 2,207 |  |  |  | 81 |  |  |  | — |  |  |  | 2,288 |
Corporate notes |  |  | 32 |  |  |  | 9 |  |  |  | — |  |  |  | 41 |
Total available for sale investment securities |  | $ | 476,191 |  |  | $ | 21,695 |  |  | $ | (182 | ) |  | $ | 497,704 |
Held to maturity, State and Municipal |  | $ | 6,100 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,100 |

December 31, 2011 |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 12,693 |  |  | $ | 329 |  |  | $ | — |  |  | $ | 13,022 |
State and municipal |  |  | 135,011 |  |  |  | 8,950 |  |  |  | (71 | ) |  |  | 143,890 |
Federal agency collateralized mortgage obligations |  |  | 89,016 |  |  |  | 2,106 |  |  |  | — |  |  |  | 91,122 |
Federal agency mortgage-backed pools |  |  | 173,797 |  |  |  | 5,669 |  |  |  | (115 | ) |  |  | 179,351 |
Private labeled mortgage-backed pools |  |  | 3,518 |  |  |  | 118 |  |  |  | — |  |  |  | 3,636 |
Corporate notes |  |  | 32 |  |  |  | — |  |  |  | (8 | ) |  |  | 24 |
Total available for sale investment securities |  | $ | 414,067 |  |  | $ | 17,172 |  |  | $ | (194 | ) |  | $ | 431,045 |
Held to maturity, State and Municipal |  | $ | 7,100 |  |  | $ | 34 |  |  | $ | — |  |  | $ | 7,134 |

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, 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, 2012, 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, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2012.

The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2012 and December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

|  | September 30, 2012 |  |  | December 31, 2011 |
|  | Amortized Cost |  |  | Fair Value |  |  | Amortized Cost |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year |  | $ | 4,232 |  |  | $ | 4,245 |  |  | $ | 931 |  |  | $ | 940 |
One to five years |  |  | 45,096 |  |  |  | 46,420 |  |  |  | 30,796 |  |  |  | 31,910 |
Five to ten years |  |  | 97,217 |  |  |  | 102,990 |  |  |  | 51,476 |  |  |  | 55,053 |
After ten years |  |  | 63,876 |  |  |  | 68,583 |  |  |  | 64,533 |  |  |  | 69,033 |
|  |  | 210,421 |  |  |  | 222,238 |  |  |  | 147,736 |  |  |  | 156,936 |
Federal agency collateralized mortgage obligations |  |  | 97,534 |  |  |  | 99,041 |  |  |  | 89,016 |  |  |  | 91,122 |
Federal agency mortgage-backed pools |  |  | 166,029 |  |  |  | 174,137 |  |  |  | 173,797 |  |  |  | 179,351 |
Private labeled mortgage-backed pools |  |  | 2,207 |  |  |  | 2,288 |  |  |  | 3,518 |  |  |  | 3,636 |
Total available for sale investment securities |  | $ | 476,191 |  |  | $ | 497,704 |  |  | $ | 414,067 |  |  | $ | 431,045 |
Held to maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year |  | $ | 6,100 |  |  | $ | 6,100 |  |  | $ | 7,100 |  |  | $ | 7,134 |
One to five years |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total held to maturity investment securities |  | $ | 6,100 |  |  | $ | 6,100 |  |  | $ | 7,100 |  |  | $ | 7,134 |

The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
September 30, 2012 |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
State and municipal |  | $ | 9,535 |  |  | $ | (62 | ) |  | $ | — |  |  | $ | — |  |  | $ | 9,535 |  |  | $ | (62 | )
Federal agency collateralized mortgage obligations |  |  | 19,284 |  |  |  | (114 | ) |  |  | — |  |  |  | — |  |  |  | 19,284 |  |  |  | (114 | )
Federal agency mortgage-backed pools |  |  | 4,479 |  |  |  | (6 | ) |  |  | — |  |  |  | — |  |  |  | 4,479 |  |  |  | (6 | )
Total temporarily impaired securities |  | $ | 33,298 |  |  | $ | (182 | ) |  | $ | — |  |  | $ | — |  |  | $ | 33,298 |  |  | $ | (182 | )
|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
December 31, 2011 |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
State and municipal |  | $ | 1,550 |  |  | $ | (44 | ) |  | $ | 1,948 |  |  | $ | (27 | ) |  | $ | 3,498 |  |  | $ | (71 | )
Federal agency mortgage-backed pools |  |  | 23,442 |  |  |  | (115 | ) |  |  | 23 |  |  |  | — |  |  |  | 23,465 |  |  |  | (115 | )
Corporate notes |  |  | 24 |  |  |  | (8 | ) |  |  | — |  |  |  | — |  |  |  | 24 |  |  |  | (8 | )
Total temporarily impaired securities |  | $ | 25,016 |  |  | $ | (167 | ) |  | $ | 1,971 |  |  | $ | (27 | ) |  | $ | 26,987 |  |  | $ | (194 | )

|  | Three months ended September 30 |  |  | Nine months ended September 30 |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Sales of securities available for sale (Unaudited) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Proceeds |  | $ | 14,991 |  |  | $ | 153,299 |  |  | $ | 14,991 |  |  | $ | 170,689 |
Gross gains |  |  | 3 |  |  |  | 1,115 |  |  |  | 3 |  |  |  | 1,754 |
Gross losses |  |  | (1 | ) |  |  | — |  |  |  | (1 | ) |  |  | — |

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 4 – Loans

|  | September 30 2012 |  |  | December 31 2011 |
Commercial |  |  |  |  |  |  |  |
Working capital and equipment |  | $ | 193,671 |  |  | $ | 170,325 |
Real estate, including agriculture |  |  | 242,212 |  |  |  | 172,910 |
Tax exempt |  |  | 4,719 |  |  |  | 3,818 |
Other |  |  | 6,812 |  |  |  | 5,323 |
Total |  |  | 447,414 |  |  |  | 352,376 |
Real estate |  |  |  |  |  |  |  |
1–4 family |  |  | 172,770 |  |  |  | 153,039 |
Other |  |  | 3,783 |  |  |  | 4,102 |
Total |  |  | 176,553 |  |  |  | 157,141 |
Consumer |  |  |  |  |  |  |  |
Auto |  |  | 137,490 |  |  |  | 134,686 |
Recreation |  |  | 5,005 |  |  |  | 4,737 |
Real estate/home improvement |  |  | 30,905 |  |  |  | 27,729 |
Home equity |  |  | 105,960 |  |  |  | 92,249 |
Unsecured |  |  | 4,435 |  |  |  | 3,183 |
Other |  |  | 3,053 |  |  |  | 2,793 |
Total |  |  | 286,848 |  |  |  | 265,377 |
Mortgage warehouse |  |  | 244,233 |  |  |  | 208,299 |
Total loans |  |  | 1,155,048 |  |  |  | 983,193 |
Allowance for loan losses |  |  | (18,568 | ) |  |  | (18,882 | )
Loans, net |  | $ | 1,136,480 |  |  | $ | 964,311 |

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

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Real Estate and Consumer

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

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage 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 their 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.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

September 30, 2012 |  | Loan Balance |  |  | Interest Due |  |  | Deferred Fees / (Costs) |  |  | Recorded Investment |
Owner occupied real estate |  | $ | 168,015 |  |  | $ | 614 |  |  | $ | 20 |  |  | $ | 168,649 |
Non owner occupied real estate |  |  | 187,953 |  |  |  | 547 |  |  |  | 55 |  |  |  | 188,555 |
Residential spec homes |  |  | 1,130 |  |  |  | 2 |  |  |  | — |  |  |  | 1,132 |
Development & spec land loans |  |  | 6,645 |  |  |  | 19 |  |  |  | — |  |  |  | 6,664 |
Commercial and industrial |  |  | 83,589 |  |  |  | 390 |  |  |  | 7 |  |  |  | 83,986 |
Total commercial |  |  | 447,332 |  |  |  | 1,572 |  |  |  | 82 |  |  |  | 448,986 |
Residential mortgage |  |  | 164,720 |  |  |  | 646 |  |  |  | 91 |  |  |  | 165,457 |
Residential construction |  |  | 11,742 |  |  |  | 19 |  |  |  | — |  |  |  | 11,761 |
Mortgage warehouse |  |  | 244,233 |  |  |  | 427 |  |  |  | — |  |  |  | 244,660 |
Total real estate |  |  | 420,695 |  |  |  | 1,092 |  |  |  | 91 |  |  |  | 421,878 |
Direct installment |  |  | 30,247 |  |  |  | 116 |  |  |  | (346 | ) |  |  | 30,017 |
Direct installment purchased |  |  | 518 |  |  |  | — |  |  |  | — |  |  |  | 518 |
Indirect installment |  |  | 128,502 |  |  |  | 373 |  |  |  | — |  |  |  | 128,875 |
Home equity |  |  | 128,671 |  |  |  | 620 |  |  |  | (744 | ) |  |  | 128,547 |
Total consumer |  |  | 287,938 |  |  |  | 1,109 |  |  |  | (1,090 | ) |  |  | 287,957 |
Total loans |  |  | 1,155,965 |  |  |  | 3,773 |  |  |  | (917 | ) |  |  | 1,158,821 |
Allowance for loan losses |  |  | (18,568 | ) |  |  | — |  |  |  | — |  |  |  | (18,568 | )
Net loans |  | $ | 1,137,397 |  |  | $ | 3,773 |  |  | $ | (917 | ) |  | $ | 1,140,253 |
December 31, 2011 |  | Loan Balance |  |  | Interest Due |  |  | Deferred Fees / (Costs) |  |  | Recorded Investment |
Owner occupied real estate |  | $ | 131,893 |  |  | $ | 383 |  |  | $ | 30 |  |  | $ | 132,306 |
Non owner occupied real estate |  |  | 142,269 |  |  |  | 360 |  |  |  | 94 |  |  |  | 142,723 |
Residential spec homes |  |  | 3,574 |  |  |  | 6 |  |  |  | — |  |  |  | 3,580 |
Development & spec land loans |  |  | 8,739 |  |  |  | 16 |  |  |  | — |  |  |  | 8,755 |
Commercial and industrial |  |  | 65,774 |  |  |  | 169 |  |  |  | 3 |  |  |  | 65,946 |
Total commercial |  |  | 352,249 |  |  |  | 934 |  |  |  | 127 |  |  |  | 353,310 |
Residential mortgage |  |  | 150,893 |  |  |  | 513 |  |  |  | 68 |  |  |  | 151,474 |
Residential construction |  |  | 6,181 |  |  |  | 8 |  |  |  | — |  |  |  | 6,189 |
Mortgage warehouse |  |  | 208,299 |  |  |  | 427 |  |  |  | — |  |  |  | 208,726 |
Total real estate |  |  | 365,373 |  |  |  | 948 |  |  |  | 68 |  |  |  | 366,389 |
Direct installment |  |  | 24,252 |  |  |  | 94 |  |  |  | (360 | ) |  |  | 23,986 |
Direct installment purchased |  |  | 981 |  |  |  | — |  |  |  | — |  |  |  | 981 |
Indirect installment |  |  | 127,751 |  |  |  | 420 |  |  |  | (56 | ) |  |  | 128,115 |
Home equity |  |  | 113,561 |  |  |  | 559 |  |  |  | (752 | ) |  |  | 113,368 |
Total consumer |  |  | 266,545 |  |  |  | 1,073 |  |  |  | (1,168 | ) |  |  | 266,450 |
Total loans |  |  | 984,167 |  |  |  | 2,955 |  |  |  | (973 | ) |  |  | 986,149 |
Allowance for loan losses |  |  | (18,882 | ) |  |  | — |  |  |  | — |  |  |  | (18,882 | )
Net loans |  | $ | 965,285 |  |  | $ | 2,955 |  |  | $ | (973 | ) |  | $ | 967,267 |

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 5 – 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 two-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.

|  | Three Months Ended September 30 |  |  | Nine Months Ended September 30 |
|  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |  |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |
Balance at beginning of the period |  | $ | 18,374 |  |  | $ | 18,586 |  |  | $ | 18,882 |  |  | $ | 19,064 |
Loans charged-off: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | 92 |  |  |  | 65 |  |  |  | 95 |  |  |  | 189 |
Non owner occupied real estate |  |  | 81 |  |  |  | 196 |  |  |  | 109 |  |  |  | 310 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial and industrial |  |  | 221 |  |  |  | 17 |  |  |  | 548 |  |  |  | 227 |
Total commercial |  |  | 394 |  |  |  | 278 |  |  |  | 752 |  |  |  | 726 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 247 |  |  |  | 86 |  |  |  | 451 |  |  |  | 837 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 247 |  |  |  | 86 |  |  |  | 451 |  |  |  | 837 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 90 |  |  |  | 78 |  |  |  | 261 |  |  |  | 480 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Indirect Installment |  |  | 313 |  |  |  | 494 |  |  |  | 922 |  |  |  | 1,280 |
Home Equity |  |  | 123 |  |  |  | 359 |  |  |  | 1,010 |  |  |  | 1,888 |
Total consumer |  |  | 526 |  |  |  | 931 |  |  |  | 2,193 |  |  |  | 3,648 |
Total loans charged-off |  |  | 1,167 |  |  |  | 1,295 |  |  |  | 3,396 |  |  |  | 5,211 |
Recoveries of loans previously charged-off: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | — |  |  |  | — |  |  |  | 352 |  |  |  | 18 |
Non owner occupied real estate |  |  | — |  |  |  | — |  |  |  | 7 |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial and industrial |  |  | 61 |  |  |  | 9 |  |  |  | 114 |  |  |  | 14 |
Total commercial |  |  | 61 |  |  |  | 9 |  |  |  | 473 |  |  |  | 32 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 42 |  |  |  | — |  |  |  | 74 |  |  |  | 10 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 42 |  |  |  | — |  |  |  | 74 |  |  |  | 10 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 28 |  |  |  | 16 |  |  |  | 63 |  |  |  | 83 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Indirect Installment |  |  | 173 |  |  |  | 179 |  |  |  | 563 |  |  |  | 568 |
Home Equity |  |  | 16 |  |  |  | 51 |  |  |  | 100 |  |  |  | 120 |
Total consumer |  |  | 217 |  |  |  | 246 |  |  |  | 726 |  |  |  | 771 |
Total loan recoveries |  |  | 320 |  |  |  | 255 |  |  |  | 1,273 |  |  |  | 813 |
Net loans charged-off |  |  | 847 |  |  |  | 1,040 |  |  |  | 2,123 |  |  |  | 4,398 |
Provision charged to operating expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 625 |  |  |  | 1,341 |  |  |  | 320 |  |  |  | 1,290 |
Real estate |  |  | 254 |  |  |  | 815 |  |  |  | 900 |  |  |  | 968 |
Consumer |  |  | 162 |  |  |  | (592 | ) |  |  | 589 |  |  |  | 2,186 |
Total provision charged to operating expense |  |  | 1,041 |  |  |  | 1,564 |  |  |  | 1,809 |  |  |  | 4,444 |
Balance at the end of the period |  | $ | 18,568 |  |  | $ | 19,110 |  |  | $ | 18,568 |  |  | $ | 19,110 |

16

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Certain loans are individually evaluated for impairment, and the Company’s general practice is to proactively charge down impaired loans to the fair value 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, 2012 |  | Commercial |  |  | Real Estate |  |  | Mortgage Warehousing |  |  | Consumer |  |  | Total |
Allowance For Loan Losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 2,403 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,403 |
Collectively evaluated for impairment |  |  | 5,655 |  |  |  | 2,974 |  |  |  | 1,716 |  |  |  | 5,820 |  |  |  | 16,165 |
Total ending allowance balance |  | $ | 8,058 |  |  | $ | 2,974 |  |  | $ | 1,716 |  |  | $ | 5,820 |  |  | $ | 18,568 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 12,865 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 12,865 |
Collectively evaluated for impairment |  |  | 436,121 |  |  |  | 177,218 |  |  |  | 244,660 |  |  |  | 287,957 |  |  |  | 1,145,956 |
Total ending loans balance |  | $ | 448,986 |  |  | $ | 177,218 |  |  | $ | 244,660 |  |  | $ | 287,957 |  |  | $ | 1,158,821 |
December 31, 2011 |  | Commercial |  |  | Real Estate |  |  | Mortgage Warehousing |  |  | Consumer |  |  | Total |
Allowance For Loan Losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 2,136 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,136 |
Collectively evaluated for impairment |  |  | 5,881 |  |  |  | 2,472 |  |  |  | 1,695 |  |  |  | 6,698 |  |  |  | 16,746 |
Total ending allowance balance |  | $ | 8,017 |  |  | $ | 2,472 |  |  | $ | 1,695 |  |  | $ | 6,698 |  |  | $ | 18,882 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 7,960 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 7,960 |
Collectively evaluated for impairment |  |  | 345,350 |  |  |  | 157,663 |  |  |  | 208,726 |  |  |  | 266,450 |  |  |  | 978,189 |
Total ending loans balance |  | $ | 353,310 |  |  | $ | 157,663 |  |  | $ | 208,726 |  |  | $ | 266,450 |  |  | $ | 986,149 |

17

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 6 – Non-performing Loans and Impaired Loans

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

September 30, 2012 |  | Nonaccrual |  |  | Loans Past Due Over 90 Days Still Accruing |  |  | Non Performing TDR’s |  |  | Performing TDR’s |  |  | Total Non- Performing Loans |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 3,887 |  |  | $ | — |  |  | $ | 1,472 |  |  | $ | — |  |  | $ | 5,359 |
Non owner occupied real estate |  |  | 3,754 |  |  |  | — |  |  |  | 375 |  |  |  | — |  |  |  | 4,129 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 789 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 789 |
Commercial and industrial |  |  | 492 |  |  |  | 9 |  |  |  | 801 |  |  |  | — |  |  |  | 1,302 |
Total commercial |  |  | 8,922 |  |  |  | 9 |  |  |  | 2,648 |  |  |  | — |  |  |  | 11,579 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 4,266 |  |  |  | 57 |  |  |  | 2,361 |  |  |  | 1,857 |  |  |  | 8,541 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 292 |  |  |  | 292 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 4,266 |  |  |  | 57 |  |  |  | 2,361 |  |  |  | 2,149 |  |  |  | 8,833 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 97 |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | 98 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Indirect Installment |  |  | 923 |  |  |  | 42 |  |  |  | — |  |  |  | — |  |  |  | 965 |
Home Equity |  |  | 1,679 |  |  |  | — |  |  |  | 52 |  |  |  | 832 |  |  |  | 2,563 |
Total Consumer |  |  | 2,699 |  |  |  | 43 |  |  |  | 52 |  |  |  | 832 |  |  |  | 3,626 |
Total |  | $ | 15,887 |  |  | $ | 109 |  |  | $ | 5,061 |  |  | $ | 2,981 |  |  | $ | 24,038 |

December 31, 2011 |  | Nonaccrual |  |  | Loans Past Due Over 90 Days Still Accruing |  |  | Non Performing TDR’s |  |  | Performing TDR’s |  |  | Total Non- Performing Loans |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 2,515 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,515 |
Non owner occupied real estate |  |  | 3,970 |  |  |  | — |  |  |  | 152 |  |  |  | — |  |  |  | 4,122 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 90 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 90 |
Commercial and industrial |  |  | 330 |  |  |  | — |  |  |  | 901 |  |  |  | — |  |  |  | 1,231 |
Total commercial |  |  | 6,905 |  |  |  | — |  |  |  | 1,053 |  |  |  | — |  |  |  | 7,958 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 4,550 |  |  |  | — |  |  |  | 1,120 |  |  |  | 2,389 |  |  |  | 8,059 |
Residential construction |  |  | 144 |  |  |  | — |  |  |  | — |  |  |  | 293 |  |  |  | 437 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 4,694 |  |  |  | — |  |  |  | 1,120 |  |  |  | 2,682 |  |  |  | 8,496 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 256 |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | 257 |
Direct Installment Purchased |  |  | — |  |  |  | 4 |  |  |  | — |  |  |  | — |  |  |  | 4 |
Indirect Installment |  |  | 926 |  |  |  | 29 |  |  |  | — |  |  |  | — |  |  |  | 955 |
Home Equity |  |  | 1,587 |  |  |  | 3 |  |  |  | 25 |  |  |  | 858 |  |  |  | 2,473 |
Total Consumer |  |  | 2,769 |  |  |  | 37 |  |  |  | 25 |  |  |  | 858 |  |  |  | 3,689 |
Total |  | $ | 14,368 |  |  | $ | 37 |  |  | $ | 2,198 |  |  | $ | 3,540 |  |  | $ | 20,143 |

18

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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 Operating 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. Nonaccrual 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 nonaccrual 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, 2012, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of September 30, 2012, the Company had $8.4 million in TDRs and $3.4 million were performing according to the restructured terms. The financial statement impact of non-performing TDRs was not material for the three and nine months ending September 30, 2012. There was $1.3 million of specific reserves allocated to TDRs at September 30, 2012 based on the collateral deficiencies.

19

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Loans transferred and classified as troubled debt restructuring during the nine months ended September 30, 2012 and 2011, segregated by class, are shown in the table below.

|  | September 30, 2012 |  |  | September 30, 2011 |
|  | Number of Defaults |  |  | Unpaid Principal Balance |  |  | Number of Defaults |  |  | Unpaid Principal Balance |
Commercial |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | 3 |  |  | $ | 1,472 |  |  |  | — |  |  | $ | — |
Non owner occupied real estate |  |  | 3 |  |  |  | 637 |  |  |  | — |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial and industrial |  |  | — |  |  |  | — |  |  |  | 1 |  |  |  | 841 |
Total commercial |  |  | 6 |  |  |  | 2,109 |  |  |  | 1 |  |  |  | 841 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 1 |  |  |  | 582 |  |  |  | 2 |  |  |  | 174 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 1 |  |  |  | 582 |  |  |  | 2 |  |  |  | 174 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Indirect Installment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Home Equity |  |  | — |  |  |  | — |  |  |  | 8 |  |  |  | 724 |
Total Consumer |  |  | — |  |  |  | — |  |  |  | 8 |  |  |  | 724 |
Total |  |  | 7 |  |  | $ | 2,691 |  |  |  | 11 |  |  | $ | 1,739 |

Troubled debt restructured loans which had payment defaults during the nine months ended September 30, 2012 and 2011, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or has been transferred to nonaccrual.

|  | September 30, 2012 |  |  | September 30, 2011 |
|  | Number of Defaults |  |  | Unpaid Principal Balance |  |  | Number of Defaults |  |  | Unpaid Principal Balance |
Commercial |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | 3 |  |  | $ | 1,473 |  |  |  | — |  |  | $ | — |
Non owner occupied real estate |  |  | 2 |  |  |  | 261 |  |  |  | — |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial and industrial |  |  | — |  |  |  | — |  |  |  | 2 |  |  |  | 361 |
Total commercial |  |  | 5 |  |  |  | 1,734 |  |  |  | 2 |  |  |  | 361 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 2 |  |  |  | 677 |  |  |  | 2 |  |  |  | 1,143 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 2 |  |  |  | 677 |  |  |  | 2 |  |  |  | 1,143 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Indirect Installment |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Home Equity |  |  | — |  |  |  | — |  |  |  | 2 |  |  |  | 65 |
Total Consumer |  |  | — |  |  |  | — |  |  |  | 2 |  |  |  | 65 |
Total |  |  | 7 |  |  | $ | 2,411 |  |  |  | 6 |  |  | $ | 1,569 |

20

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

|  |  |  |  |  |  |  |  |  |  | Three Months Ending |  |  | Nine Months Ending |
September 30, 2012 |  | 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 |  | $ | 4,457 |  |  | $ | 4,460 |  |  | $ | — |  |  | $ | 3,810 |  |  | $ | — |  |  | $ | 1,978 |  |  | $ | 3 |
Non owner occupied real estate |  |  | 2,521 |  |  |  | 2,542 |  |  |  | — |  |  |  | 2,429 |  |  |  | 70 |  |  |  | 1,920 |  |  |  | 72 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 131 |  |  |  | 131 |  |  |  | — |  |  |  | 109 |  |  |  | (0 | ) |  |  | 37 |  |  |  | — |
Commercial and industrial |  |  | 456 |  |  |  | 471 |  |  |  | — |  |  |  | 382 |  |  |  | — |  |  |  | 129 |  |  |  | — |
Total commercial |  |  | 7,565 |  |  |  | 7,604 |  |  |  | — |  |  |  | 6,730 |  |  |  | 69 |  |  |  | 4,064 |  |  |  | 75 |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | 903 |  |  |  | 903 |  |  |  | 450 |  |  |  | 910 |  |  |  | (0 | ) |  |  | 1,109 |  |  |  | 1 |
Non owner occupied real estate |  |  | 2,938 |  |  |  | 2,938 |  |  |  | 1,065 |  |  |  | 2,943 |  |  |  | — |  |  |  | 2,843 |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 658 |  |  |  | 658 |  |  |  | 615 |  |  |  | 660 |  |  |  | — |  |  |  | 523 |  |  |  | 6 |
Commercial and industrial |  |  | 801 |  |  |  | 801 |  |  |  | 273 |  |  |  | 801 |  |  |  | — |  |  |  | 807 |  |  |  | — |
Total commercial |  |  | 5,300 |  |  |  | 5,300 |  |  |  | 2,403 |  |  |  | 5,314 |  |  |  | (0 | ) |  |  | 5,282 |  |  |  | 7 |
Total |  | $ | 12,865 |  |  | $ | 12,904 |  |  | $ | 2,403 |  |  | $ | 12,044 |  |  | $ | 69 |  |  | $ | 9,346 |  |  | $ | 82 |
|  |  |  |  |  |  |  |  |  |  | Three Months Ending |  |  | Nine Months Ending |
September 30, 2011 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance For Loan Loss Allocated |  |  | Average Balance in Impaired Loans |  |  | Interest Income Recognized |  |  | Average Balance in Impaired Loans |  |  | Interest Income Recognized |
With no recorded allowance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 1,315 |  |  | $ | 1,314 |  |  | $ | — |  |  | $ | 1,224 |  |  | $ | 31 |  |  | $ | 856 |  |  | $ | 32 |
Non owner occupied real estate |  |  | 2,403 |  |  |  | 2,625 |  |  |  | — |  |  |  | 1,683 |  |  |  | 85 |  |  |  | 985 |  |  |  | 89 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9 |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | 111 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 69 |  |  |  | — |
Commercial and industrial |  |  | 1,154 |  |  |  | 1,156 |  |  |  | — |  |  |  | 1,091 |  |  |  | 47 |  |  |  | 1,099 |  |  |  | 47 |
Total commercial |  |  | 4,872 |  |  |  | 5,206 |  |  |  | — |  |  |  | 3,998 |  |  |  | 163 |  |  |  | 3,018 |  |  |  | 168 |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | 1,420 |  |  |  | 1,420 |  |  |  | 460 |  |  |  | 1,449 |  |  |  | — |  |  |  | 1,234 |  |  |  | — |
Non owner occupied real estate |  |  | 5,499 |  |  |  | 5,538 |  |  |  | 996 |  |  |  | 4,943 |  |  |  | — |  |  |  | 4,859 |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 90 |  |  |  | 90 |  |  |  | 125 |  |  |  | 90 |  |  |  | — |  |  |  | 179 |  |  |  | — |
Commercial and industrial |  |  | 234 |  |  |  | 308 |  |  |  | 225 |  |  |  | 284 |  |  |  | — |  |  |  | 393 |  |  |  | — |
Total commercial |  |  | 7,243 |  |  |  | 7,356 |  |  |  | 1,806 |  |  |  | 6,766 |  |  |  | — |  |  |  | 6,665 |  |  |  | — |
Total |  | $ | 12,115 |  |  | $ | 12,562 |  |  | $ | 1,806 |  |  | $ | 10,764 |  |  | $ | 163 |  |  | $ | 9,683 |  |  | $ | 168 |

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

September 30, 2012 |  | 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 |  | $ | 1,008 |  |  | $ | 110 |  |  | $ | — |  |  | $ | 1,118 |  |  | $ | 166,897 |  |  | $ | 168,015 |
Non owner occupied real estate |  |  | — |  |  |  | 123 |  |  |  | — |  |  |  | 123 |  |  |  | 187,830 |  |  |  | 187,953 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,130 |  |  |  | 1,130 |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,645 |  |  |  | 6,645 |
Commercial and industrial |  |  | 433 |  |  |  | 2,373 |  |  |  | 9 |  |  |  | 2,815 |  |  |  | 80,774 |  |  |  | 83,589 |
Total commercial |  |  | 1,441 |  |  |  | 2,606 |  |  |  | 9 |  |  |  | 4,056 |  |  |  | 443,276 |  |  |  | 447,332 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 1,300 |  |  |  | 197 |  |  |  | 57 |  |  |  | 1,554 |  |  |  | 163,166 |  |  |  | 164,720 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 11,742 |  |  |  | 11,742 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 244,233 |  |  |  | 244,233 |
Total real estate |  |  | 1,300 |  |  |  | 197 |  |  |  | 57 |  |  |  | 1,554 |  |  |  | 419,141 |  |  |  | 420,695 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 162 |  |  |  | 243 |  |  |  | 1 |  |  |  | 406 |  |  |  | 29,841 |  |  |  | 30,247 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 518 |  |  |  | 518 |
Indirect Installment |  |  | 1,124 |  |  |  | 101 |  |  |  | 42 |  |  |  | 1,267 |  |  |  | 127,235 |  |  |  | 128,502 |
Home Equity |  |  | 1,038 |  |  |  | 139 |  |  |  | — |  |  |  | 1,177 |  |  |  | 127,494 |  |  |  | 128,671 |
Total consumer |  |  | 2,324 |  |  |  | 483 |  |  |  | 43 |  |  |  | 2,850 |  |  |  | 285,088 |  |  |  | 287,938 |
Total |  | $ | 5,065 |  |  | $ | 3,286 |  |  | $ | 109 |  |  | $ | 8,460 |  |  | $ | 1,147,505 |  |  | $ | 1,155,965 |
December 31, 2011 |  | 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 |  | $ | 89 |  |  | $ | 168 |  |  | $ | — |  |  | $ | 257 |  |  | $ | 131,636 |  |  | $ | 131,893 |
Non owner occupied real estate |  |  | 228 |  |  |  | — |  |  |  | — |  |  |  | 228 |  |  |  | 142,041 |  |  |  | 142,269 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,574 |  |  |  | 3,574 |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,739 |  |  |  | 8,739 |
Commercial and industrial |  |  | 34 |  |  |  | 22 |  |  |  | — |  |  |  | 56 |  |  |  | 65,718 |  |  |  | 65,774 |
Total commercial |  |  | 351 |  |  |  | 190 |  |  |  | — |  |  |  | 541 |  |  |  | 351,708 |  |  |  | 352,249 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 411 |  |  |  | — |  |  |  | — |  |  |  | 411 |  |  |  | 150,482 |  |  |  | 150,893 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,181 |  |  |  | 6,181 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 208,299 |  |  |  | 208,299 |
Total real estate |  |  | 411 |  |  |  | — |  |  |  | — |  |  |  | 411 |  |  |  | 364,962 |  |  |  | 365,373 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 164 |  |  |  | 22 |  |  |  | 1 |  |  |  | 187 |  |  |  | 24,065 |  |  |  | 24,252 |
Direct Installment Purchased |  |  | 7 |  |  |  | 14 |  |  |  | 4 |  |  |  | 25 |  |  |  | 956 |  |  |  | 981 |
Indirect Installment |  |  | 1,333 |  |  |  | 335 |  |  |  | 29 |  |  |  | 1,697 |  |  |  | 126,054 |  |  |  | 127,751 |
Home Equity |  |  | 363 |  |  |  | 92 |  |  |  | 3 |  |  |  | 458 |  |  |  | 113,103 |  |  |  | 113,561 |
Total consumer |  |  | 1,867 |  |  |  | 463 |  |  |  | 37 |  |  |  | 2,367 |  |  |  | 264,178 |  |  |  | 266,545 |
Total |  | $ | 2,629 |  |  | $ | 653 |  |  | $ | 37 |  |  | $ | 3,319 |  |  | $ | 980,848 |  |  | $ | 984,167 |

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.

• |  | 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 of $500,000 or greater are validated by the Loan Committee, which is chaired by the Chief Operating Officer (COO).

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

| • |  | The COO 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, and collateral 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 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 an eight-grade rating system to determine the credit quality of commercial loans. The first four 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. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

| • |  | 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 (Pass)

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. Loans that normally fall into this grade include construction of commercial real estate buildings, land development and subdivisions, and rental properties that have not attained stabilization.

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.

| • |  | 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.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

| • |  | The 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.

25

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents loans by credit grades.

September 30, 2012 |  | Pass |  |  | Special Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 137,121 |  |  | $ | 8,826 |  |  | $ | 17,632 |  |  | $ | 4,436 |  |  | $ | 168,015 |
Non owner occupied real estate |  |  | 153,131 |  |  |  | 20,694 |  |  |  | 13,008 |  |  |  | 1,120 |  |  |  | 187,953 |
Residential development |  |  | 434 |  |  |  | — |  |  |  | 696 |  |  |  | — |  |  |  | 1,130 |
Development & Spec Land Loans |  |  | 3,637 |  |  |  | 251 |  |  |  | 2,627 |  |  |  | 130 |  |  |  | 6,645 |
Commercial and industrial |  |  | 74,279 |  |  |  | 4,339 |  |  |  | 4,715 |  |  |  | 256 |  |  |  | 83,589 |
Total commercial |  |  | 368,602 |  |  |  | 34,110 |  |  |  | 38,678 |  |  |  | 5,942 |  |  |  | 447,332 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 156,179 |  |  |  | — |  |  |  | 8,541 |  |  |  | — |  |  |  | 164,720 |
Residential construction |  |  | 11,450 |  |  |  | — |  |  |  | 292 |  |  |  | — |  |  |  | 11,742 |
Mortgage warehouse |  |  | 244,233 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 244,233 |
Total real estate |  |  | 411,862 |  |  |  | — |  |  |  | 8,833 |  |  |  | — |  |  |  | 420,695 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 30,149 |  |  |  | — |  |  |  | 98 |  |  |  | — |  |  |  | 30,247 |
Direct Installment Purchased |  |  | 518 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 518 |
Indirect Installment |  |  | 127,537 |  |  |  | — |  |  |  | 965 |  |  |  | — |  |  |  | 128,502 |
Home Equity |  |  | 126,108 |  |  |  | — |  |  |  | 2,563 |  |  |  | — |  |  |  | 128,671 |
Total Consumer |  |  | 284,312 |  |  |  | — |  |  |  | 3,626 |  |  |  | — |  |  |  | 287,938 |
Total |  | $ | 1,064,776 |  |  | $ | 34,110 |  |  | $ | 51,137 |  |  | $ | 5,942 |  |  | $ | 1,155,965 |
December 31, 2011 |  | Pass |  |  | Special Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 107,155 |  |  | $ | 4,101 |  |  | $ | 20,637 |  |  | $ | — |  |  | $ | 131,893 |
Non owner occupied real estate |  |  | 118,446 |  |  |  | 11,423 |  |  |  | 12,400 |  |  |  | — |  |  |  | 142,269 |
Residential development |  |  | 1,677 |  |  |  | 529 |  |  |  | 1,368 |  |  |  | — |  |  |  | 3,574 |
Development & Spec Land Loans |  |  | 3,778 |  |  |  | 860 |  |  |  | 4,101 |  |  |  | — |  |  |  | 8,739 |
Commercial and industrial |  |  | 55,964 |  |  |  | 3,012 |  |  |  | 6,798 |  |  |  | — |  |  |  | 65,774 |
Total commercial |  |  | 287,020 |  |  |  | 19,925 |  |  |  | 45,304 |  |  |  | — |  |  |  | 352,249 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 142,834 |  |  |  | — |  |  |  | 8,059 |  |  |  | — |  |  |  | 150,893 |
Residential construction |  |  | 5,744 |  |  |  | — |  |  |  | 437 |  |  |  | — |  |  |  | 6,181 |
Mortgage warehouse |  |  | 208,299 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 208,299 |
Total real estate |  |  | 356,877 |  |  |  | — |  |  |  | 8,496 |  |  |  | — |  |  |  | 365,373 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 23,995 |  |  |  | — |  |  |  | 257 |  |  |  | — |  |  |  | 24,252 |
Direct Installment Purchased |  |  | 977 |  |  |  | — |  |  |  | 4 |  |  |  | — |  |  |  | 981 |
Indirect Installment |  |  | 126,796 |  |  |  | — |  |  |  | 955 |  |  |  | — |  |  |  | 127,751 |
Home Equity |  |  | 111,088 |  |  |  | — |  |  |  | 2,473 |  |  |  | — |  |  |  | 113,561 |
Total Consumer |  |  | 262,856 |  |  |  | — |  |  |  | 3,689 |  |  |  | — |  |  |  | 266,545 |
Total |  | $ | 906,753 |  |  | $ | 19,925 |  |  | $ | 57,489 |  |  | $ | — |  |  | $ | 984,167 |

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 7 – 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 5.63% on a notional amount of $30.5 million at September 30, 2012. Under these 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 the 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, 2012, the Company’s cash flow hedge was effective and is not expected to have a significant impact 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 activities. 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 is recognized in current earnings. At September 30, 2012, 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.

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 $72.4 million at September 30, 2012.

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, 2012, the Company’s fair value of these derivatives was recorded and over the next 12 months, this activity is 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.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

|  | Asset Derivative September 30, 2012 |  |  | Liability Derivatives September 30, 2012 |
Derivatives designated as hedging instruments (Unaudited) |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  |  | Fair Value |
Interest rate contracts |  | Loans |  | $ | 443 |  |  |  | Other liabilities |  |  | $ | 2,523 |
Interest rate contracts |  | Other Assets |  |  | 2,080 |  |  |  | Other liabilities |  |  |  | 5,820 |
Total derivatives designated as hedging instruments |  |  |  |  | 2,523 |  |  |  |  |  |  |  | 8,343 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage loan contracts |  | Other assets |  |  | 1,262 |  |  |  | Other liabilities |  |  |  | — |
Total derivatives not designated as hedging instruments |  |  |  |  | 1,262 |  |  |  |  |  |  |  | — |
Total derivatives |  |  |  | $ | 3,785 |  |  |  |  |  |  | $ | 8,343 |

|  | Asset Derivative December 31, 2011 |  |  | Liability Derivatives December 31, 2011 |
Derivatives designated as hedging instruments (Unaudited) |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  |  | Fair Value |
Interest rate contracts |  | Loans |  | $ | 754 |  |  |  | Other liabilities |  |  | $ | 2,187 |
Interest rate contracts |  | Other Assets |  |  | 1,433 |  |  |  | Other liabilities |  |  |  | 4,914 |
Total derivatives designated as hedging instruments |  |  |  |  | 2,187 |  |  |  |  |  |  |  | 7,101 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage loan contracts |  | Other assets |  |  | 662 |  |  |  | Other liabilities |  |  |  | — |
Total derivatives not designated as hedging instruments |  |  |  |  | 662 |  |  |  |  |  |  |  | — |
Total derivatives |  |  |  | $ | 2,849 |  |  |  |  |  |  | $ | 7,101 |

The effect of the derivative instruments on the consolidated statement of income for the three and nine-month periods ending is as follows:

|  | Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion) Three Months Ended September 30 |  |  | Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion) Nine Months Ended September 30 |
Derivative in cash flow hedging relationship |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |  |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |
Interest rate contracts |  | $ | (170 | ) |  | $ | (1,951 | ) |  | $ | (589 | ) |  | $ | (2,268 | )

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.

28

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

|  |  |  | Amount of Gain (Loss) Recognized on Derivative Three Months Ended September 30 |  |  | Amount of Gain (Loss) Recognized on Derivative Nine Months Ended September 30 |
Derivative in fair value hedging relationship |  | Location of gain (loss) recognized on derivative |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |  |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |
Interest rate contracts |  | Interest income - loans |  | $ | 112 |  |  | $ | 394 |  |  | $ | 336 |  |  | $ | 335 |
Interest rate contracts |  | Interest income - loans |  |  | (112 | ) |  |  | (394 | ) |  |  | (336 | ) |  |  | (335 | )
Total |  |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
|  |  |  | Amount of Gain (Loss) Recognized on Derivative Three Months Ended September 30 |  |  | Amount of Gain (Loss) Recognized on Derivative Nine Months Ended September 30 |
Derivative not designated as hedging relationship |  | Location of gain (loss) recognized on derivative |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |  |  | 2012 (Unaudited) |  |  | 2011 (Unaudited) |
Mortgage contracts |  | Other income - gain on sale of loans |  | $ | 320 |  |  | $ | 359 |  |  | $ | 600 |  |  | $ | 1,157 |

Note 8 – 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, 2012. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

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

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Hedged loans

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

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, 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 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:

|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
September 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 47,376 |  |  | $ | — |  |  | $ | 47,376 |  |  | $ | — |
State and municipal |  |  | 174,821 |  |  |  | — |  |  |  | 174,821 |  |  |  | — |
Federal agency collateralized mortgage obligations |  |  | 99,041 |  |  |  | — |  |  |  | 99,041 |  |  |  | — |
Federal agency mortgage-backed pools |  |  | 174,137 |  |  |  | — |  |  |  | 174,137 |  |  |  | — |
Private labeled mortgage-backed pools |  |  | 2,288 |  |  |  | — |  |  |  | 2,288 |  |  |  | — |
Corporate notes |  |  | 41 |  |  |  | — |  |  |  | 41 |  |  |  | — |
Total available-for-sale securities |  |  | 497,704 |  |  |  | — |  |  |  | 497,704 |  |  |  | — |
Hedged loans |  |  | 74,947 |  |  |  | — |  |  |  | 74,947 |  |  |  | — |
Forward sale commitments |  |  | 942 |  |  |  | — |  |  |  | 942 |  |  |  | — |
Interest rate swap agreements |  |  | (7,969 | ) |  |  | — |  |  |  | (7,969 | ) |  |  | — |
Commitments to originate loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 13,022 |  |  | $ | — |  |  | $ | 13,022 |  |  | $ | — |
State and municipal |  |  | 143,890 |  |  |  | — |  |  |  | 143,890 |  |  |  | — |
Federal agency collateralized mortgage obligations |  |  | 91,122 |  |  |  | — |  |  |  | 91,122 |  |  |  | — |
Federal agency mortgage-backed pools |  |  | 179,351 |  |  |  | — |  |  |  | 179,351 |  |  |  | — |
Private labeled mortgage-backed pools |  |  | 3,636 |  |  |  | — |  |  |  | 3,636 |  |  |  | — |
Corporate notes |  |  | 24 |  |  |  | — |  |  |  | 24 |  |  |  | — |
Total available-for-sale securities |  |  | 431,045 |  |  |  | — |  |  |  | 431,045 |  |  |  | — |
Hedged loans |  |  | 54,362 |  |  |  | — |  |  |  | — |  |  |  | 54,362 |
Forward sale commitments |  |  | 662 |  |  |  | — |  |  |  | — |  |  |  | 662 |
Interest rate swap agreements |  |  | (7,102 | ) |  |  | — |  |  |  | — |  |  |  | (7,102 | )
Commitments to originate loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |

30

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Transfers between levels

Transfers between Levels 1, 2 and 3 and the reasons for those transfers are as follows:

|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Reason for Transfer |
Transfers to level: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedged loans |  | $ | — |  |  | $ | 74,947 |  |  | $ | — |  |  |  | (a | )
Forward sale commitments |  |  | — |  |  |  | 942 |  |  |  | — |  |  |  | (b | )
Interest rate swap agreements |  |  | — |  |  |  | (7,969 | ) |  |  | — |  |  |  | (a | )
Commitments to originate loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (b | )
Total transfers to level |  | $ | — |  |  | $ | 67,920 |  |  | $ | — |  |  |  |  |

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheet using significant unobservable (Level 3) inputs (Unaudited):

|  | Hedged Loans |  |  | Forward Sale Commitments |  |  | Interest Rate Swaps |  |  | Commitments to Originate Loans |
Beginning balance December 31, 2011 |  | $ | 54,362 |  |  | $ | 662 |  |  | $ | (7,101 | ) |  | $ | — |
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | (74 | ) |  |  | (152 | ) |  |  | 74 |  |  |  | (71 | )
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | 563 |  |  |  | — |
Purchases, issuances, and settlements |  |  | 6,114 |  |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (491 | ) |  |  | — |  |  |  | — |  |  |  | — |
Transfers out to Level 2 |  |  | (59,911 | ) |  |  | (510 | ) |  |  | 6,464 |  |  |  | 71 |
Ending balance September 30, 2012 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
|  | Hedged Loans |  |  | Forward Sale Commitments |  |  | Interest Rate Swaps |  |  | Commitments to Originate Loans |
Beginning balance December 31, 2010 |  | $ | 50,088 |  |  | $ | 407 |  |  | $ | (3,415 | ) |  | $ | — |
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | (410 | ) |  |  | (126 | ) |  |  | 410 |  |  |  | (56 | )
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | 451 |  |  |  | — |
Purchases, issuances, and settlements |  |  | (352 | ) |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (915 | ) |  |  | — |  |  |  | — |  |  |  | — |
Ending balance March 31, 2011 |  |  | 48,411 |  |  |  | 281 |  |  |  | (2,554 | ) |  |  | (56 | )
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | 351 |  |  |  | 174 |  |  |  | (351 | ) |  |  | (8 | )
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | (941 | ) |  |  | — |
Purchases, issuances, and settlements |  |  | 1,200 |  |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (344 | ) |  |  | — |  |  |  | — |  |  |  | — |
Ending balance June 30, 2011 |  |  | 49,618 |  |  |  | 455 |  |  |  | (3,846 | ) |  |  | (64 | )
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | 393 |  |  |  | 294 |  |  |  | (393 | ) |  |  | 64 |
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | (3,001 | ) |  |  | — |
Purchases, issuances, and settlements |  |  | 1,797 |  |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (628 | ) |  |  | — |  |  |  | — |  |  |  | — |
Ending balance September 30, 2011 |  | $ | 51,180 |  |  | $ | 749 |  |  | $ | (7,240 | ) |  | $ | — |

31

##### Table of Contents

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 |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Non Interest Income |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |
Total gains and losses from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedged loans |  | $ | 112 |  |  | $ | 394 |  |  | $ | 336 |  |  | $ | 335 |
Fair value interest rate swap agreements |  |  | (112 | ) |  |  | (394 | ) |  |  | (336 | ) |  |  | (335 | )
Derivative loan commitments |  |  | 320 |  |  |  | 359 |  |  |  | 600 |  |  |  | 1,157 |
|  | $ | 320 |  |  | $ | 359 |  |  | $ | 600 |  |  | $ | 1,157 |

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):

|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
September 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 10,462 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,462 |
Mortgage servicing rights |  |  | 4,602 |  |  |  | — |  |  |  | — |  |  |  | 4,602 |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 5,822 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,822 |
Mortgage servicing rights |  |  | 4,193 |  |  |  | — |  |  |  | — |  |  |  | 4,193 |

Impaired (collateral dependent): Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be timely collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property, including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third-party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals net of estimated costs to sell. Fair value adjustments on impaired loans were $2.5 million at September 30, 2012 and $2.1 million at December 31, 2011.

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.

32

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at September 30, 2012.

|  | Fair Value at September 30, 2012 |  |  | Valuation Technique |  | Unobservable Inputs |  | Range (Weighted Average)
Impaired loans |  |  | 10,462 |  |  | Collateral based measurement |  | Discount to reflect current market conditions and ultimate collectability |  | 0% - 50%
Mortgage servicing rights |  |  | 4,602 |  |  | Discounted cashflows |  | Discount to reflect current market conditions |  | 0% - 20%

Note 9 – 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, 2012 and December 31, 2011. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Due from Banks — The carrying amounts approximate fair value.

Held-to-Maturity Securities — For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.

Loans Held for Sale — The carrying amounts approximate fair value.

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

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

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

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

|  | September 30, 2012 |
|  | 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 |  | $ | 41,562 |  |  | $ | 41,562 |  |  | $ | — |  |  | $ | — |
Investment securities held to maturity |  |  | 6,100 |  |  |  | — |  |  |  | 6,100 |  |  |  | — |
Loans held for sale |  |  | 18,163 |  |  |  | — |  |  |  | — |  |  |  | 18,163 |
Loans, net |  |  | 1,136,480 |  |  |  | — |  |  |  | — |  |  |  | 1,166,649 |
Stock in FHLB and FRB |  |  | 13,333 |  |  |  | — |  |  |  | 13,333 |  |  |  | — |
Interest receivable |  |  | 8,248 |  |  |  | — |  |  |  | 8,248 |  |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing deposits |  | $ | 211,935 |  |  | $ | 211,935 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits |  |  | 1,095,036 |  |  |  | — |  |  |  | 1,108,316 |  |  |  | — |
Borrowings |  |  | 333,150 |  |  |  | — |  |  |  | 344,884 |  |  |  | — |
Subordinated debentures |  |  | 32,282 |  |  |  | — |  |  |  | 32,140 |  |  |  | — |
Interest payable |  |  | 579 |  |  |  | — |  |  |  | 579 |  |  |  | — |

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

|  | December 31, 2011 |
|  | 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 |  | $ | 20,447 |  |  | $ | 20,447 |  |  | $ | — |  |  | $ | — |
Investment securities held to maturity |  |  | 7,100 |  |  |  | — |  |  |  | 7,134 |  |  |  | — |
Loans held for sale |  |  | 14,090 |  |  |  | — |  |  |  | — |  |  |  | 14,090 |
Loans, net |  |  | 964,311 |  |  |  | — |  |  |  | — |  |  |  | 979,401 |
Stock in FHLB and FRB |  |  | 12,390 |  |  |  | — |  |  |  | 12,390 |  |  |  | — |
Interest receivable |  |  | 6,671 |  |  |  | — |  |  |  | 6,671 |  |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing deposits |  | $ | 130,673 |  |  | $ | 130,673 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits |  |  | 879,192 |  |  |  | — |  |  |  | 874,160 |  |  |  | — |
Borrowings |  |  | 370,111 |  |  |  | — |  |  |  | 398,789 |  |  |  | — |
Subordinated debentures |  |  | 30,676 |  |  |  | — |  |  |  | 30,083 |  |  |  | — |
Interest payable |  |  | 596 |  |  |  | — |  |  |  | 596 |  |  |  | — |

Note 10 – Other Comprehensive Income

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30 2012 (Unaudited) |  |  | September 30 2011 (Unaudited) |  |  | September 30 2012 (Unaudited) |  |  | September 30 2011 (Unaudited) |
Unrealized gains (losses) on securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized holding gains arising during the period |  | $ | 2,458 |  |  | $ | 5,303 |  |  | $ | 4,537 |  |  | $ | 13,863 |
Less: reclassification adjustment for gains realized in net income |  |  | 2 |  |  |  | 1,115 |  |  |  | 2 |  |  |  | 1,754 |
|  |  | 2,456 |  |  |  | 4,188 |  |  |  | 4,535 |  |  |  | 12,109 |
Unrealized gain (loss) on derivative instruments |  |  | (262 | ) |  |  | (3,002 | ) |  |  | (906 | ) |  |  | (3,489 | )
Net unrealized gains |  |  | 2,194 |  |  |  | 1,186 |  |  |  | 3,629 |  |  |  | 8,620 |
Tax effect |  |  | (768 | ) |  |  | (415 | ) |  |  | (1,270 | ) |  |  | (3,017 | )
Other comprehensive income |  | $ | 1,426 |  |  | $ | 771 |  |  | $ | 2,359 |  |  | $ | 5,603 |

|  | September 30 2012 |  |  | December 31 2011 |
Unrealized gain on securities available for sale |  | $ | 21,514 |  |  | $ | 16,978 |
Unrealized gain (loss) on derivative instruments |  |  | (5,820 | ) |  |  | (4,914 | )
Tax effect |  |  | (5,493 | ) |  |  | (4,222 | )
Total accumulated other comprehensive income |  | $ | 10,201 |  |  | $ | 7,842 |

Note 11 – Future accounting matters

FASB Accounting Standards Update 2011-12, Comprehensive Income. In December 2011 the FASB issued Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.

This ASU defers the changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

This ASU is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s financial statements now include separate statements of comprehensive income and additional footnote disclosures (see Note 10 – Other Comprehensive Income).

FASB Accounting Standards Update 2012-02, Intangibles – Goodwill and Other. In July 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, bases on qualitative assessment, that it is more likely than not, the indefinite-lived intangible asset is impaired.

This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted this standard on January 1, 2012 and did not have a significant impact on the Company’s financial statements.

FASB Accounting Standards Update 2012-04, Technical Corrections and Improvements. In October 2012, the FASB issued Accounting Standards Update 2012-04, Technical Corrections and Improvements. The amendments in this ASU make technical corrections, clarifications and limited-scope improvements to various Topics throughout the Codification.

This ASU is effective for public entities for fiscal periods beginning after December 15, 2012.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

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, and 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 not limited to:

| • |  | Changes to regulations governing bank capital and liquidity standards, including changes made pursuant to the Dodd-Frank Act and to the Basel III initiatives;

| • |  | the use of proceeds of future offerings of securities;

| • |  | the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;

| • |  | changes in competitive conditions;

| • |  | the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies;

| • |  | changes in customer borrowing, repayment, investment and deposit practices;

| • |  | changes in fiscal, monetary and tax policies;

| • |  | changes in financial and capital markets;

| • |  | deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration;

| • |  | capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities;

| • |  | risks of expansion through acquisitions and mergers, such as unexpected credit quality problems of the acquired loans or other assets, unexpected attrition of the customer base of the acquired institution or branches, and difficulties in integration of the acquired operations;

| • |  | factors that may cause the Company to incur impairment charges on its investment securities;

| • |  | the impact, extent and timing of technological changes

| • |  | electronic, cyber and physical security breaches;

| • |  | claims and litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future;

| • |  | actions of the Federal Reserve Board;

| • |  | changes in accounting principles and interpretations;

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

| • |  | potential increases of federal deposit insurance premium expense, and possible future special assessments of FDIC premiums, either industry wide or specific to the Company’s banking subsidiary;

| • |  | actions of the regulatory authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms;

| • |  | the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends; and

| • |  | other factors and risks described under the caption “Risk Factors” in this report and in any of our subsequent reports that we have made or make with the Securities and Exchange Commission (“SEC”).

Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. 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 2011 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 Northwestern and Central Indiana and Southwestern 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 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.

Horizon continues to operate in a challenging economic and banking environment. Within the Company’s primary market areas of Northwest and Central Indiana and Southwest Michigan, unemployment rates increased during 2009 and have remained elevated through the first nine months of 2012. This rise in unemployment has been driven by multiple factors including slowdowns in commercial industries as well as a continued lower activity in the housing and construction industries. The Company’s higher than historical levels of non-performing loans at September 30, 2012 and over the past two years can be attributed to the continued slow economy and continued high local unemployment, which have resulted in lower business revenues and increased bankruptcies. The acquisition of Heartland on July 17, 2012, further added to the non-performing credits. Despite these economic factors and events, Horizon has continued to post record positive results through the first nine months of 2012.

On July 17, 2012 Horizon completed the acquisition of Heartland Bancshares, Inc. and its wholly owned subsidiary, Heartland Community Bank, which was merged into Horizon Bank. Under the final terms of the acquisition, the exchange ratio was 0.54 shares of Horizon’s common stock for each outstanding share of Heartland common stock. Heartland shares outstanding at the closing were 1,442,449, and the shares of HBNC common stock issued to Heartland shareholders totaled 778,922. Horizon’s stock price was $25.25 per share at the close of business on July 17, 2012. Based upon these numbers, the total value of the consideration for the acquisition was $19.7 million.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

Following are some highlights of Horizon’s financial performance through the third quarter of 2012:

| • |  | Horizon’s net income of $14.4 million for the first nine months of 2012 surpasses the $12.8 million earned for the entire prior year and represents the highest first nine months of net income in the Company’s history.

| • |  | Third quarter 2012 net income was $4.9 million or $.54 diluted earnings per share, which reflects a 50% increase in diluted earnings per share compared to the same period in 2011.

| • |  | Horizon’s net income for the first nine months of 2012 was $14.4 million or $1.75 diluted earnings per share, which reflects a 67% increase in diluted earnings per share compared to the same period in 2011.

| • |  | On July 17, 2012 Horizon completed its acquisition of Heartland Bancshares, Inc. (“Heartland”). On that date Horizon recorded $229.5 million in assets and $218.7 million in liabilities.

| • |  | Total loans increased $157.9 million during the quarter, consisting of $43.3 million in organic loan growth and $114.6 million net loans acquired from Heartland.

| • |  | Total deposits increased $261.2 million during the quarter, comprising $50.0 million in organic deposit growth and $211.2 million in deposits acquired from Heartland.

| • |  | Net interest income, after provisions for loan losses, for the first nine months of 2012 was $39.4 million compared with $30.1 million for the same period in the prior year.

| • |  | The provision for loan losses decreased to $1.8 million for the first nine months of 2012 compared to $4.4 million for the same period in 2011.

| • |  | Net charge-offs for the first nine months of 2012 were $2.1 million compared to $4.4 million for the same period in 2011.

| • |  | Substandard and delinquent loans increased by $21.4 million and $4.6 million respectively over the prior quarter. The increases were primarily due to loans acquired in the Heartland merger.

| • |  | Return on average assets was 1.09% for the third quarter of 2012 and 1.21% for the first nine months of 2012.

| • |  | Return on average common equity was 13.96% for the third quarter of 2012 and 15.24% for the first nine months of 2012.

| • |  | Horizon Bank’s capital ratios 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 2011 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.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

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, 2012, Horizon had core deposit intangibles of $4.3 million subject to amortization and $19.7 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350-10 requires an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on September 30, 2012 was $19.05 per share compared to a book value of $16.64 per common share. Horizon reported record earnings for the twelfth consecutive year in 2011, and the first nine months of 2012 were the highest first nine months of net income in the Company’s history.

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

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, from time-to-time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815-10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non-interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.

Valuation Measurements

Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post-retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

Financial Condition

On September 30, 2012, Horizon’s total assets were $1.8 billion, an increase of approximately $300.0 million compared to December 31, 2011. This increase was primarily due to the addition of $245.6 million in assets from the Heartland acquisition and $57.4 million in net organic loan growth during the first nine months of 2012.

Investment securities were comprised of the following as of:

|  | September 30, 2012 |  |  | December 31, 2011 |
|  | Amortized Cost |  |  | Fair Value |  |  | Amortized Cost |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 46,982 |  |  | $ | 47,376 |  |  | $ | 12,693 |  |  | $ | 13,022 |
State and municipal |  |  | 163,407 |  |  |  | 174,821 |  |  |  | 135,011 |  |  |  | 143,890 |
Federal agency collateralized mortgage obligations |  |  | 97,534 |  |  |  | 99,041 |  |  |  | 89,016 |  |  |  | 91,122 |
Federal agency mortgage-backed pools |  |  | 166,029 |  |  |  | 174,137 |  |  |  | 173,797 |  |  |  | 179,351 |
Private labeled mortgage-backed pools |  |  | 2,207 |  |  |  | 2,288 |  |  |  | 3,518 |  |  |  | 3,636 |
Corporate notes |  |  | 32 |  |  |  | 41 |  |  |  | 32 |  |  |  | 24 |
Total available for sale investment securities |  | $ | 476,191 |  |  | $ | 497,704 |  |  | $ | 414,067 |  |  | $ | 431,045 |
Held to maturity, State and Municipal |  | $ | 6,100 |  |  | $ | 6,100 |  |  | $ | 7,100 |  |  | $ | 7,134 |

Investment securities increased by approximately $65.6 million compared to the end of 2011. This growth was primarily the result of acquiring $63.7 million of investment securities through the Heartland acquisition.

Net loans increased $172.2 million since December 31, 2011. This increase was the result of $114.6 million in net loans acquired in the Heartland acquisition and organic increases in commercial and mortgage warehouse loans of $24.7 million and $35.9 million, respectively. These organic increases were partially offset by decreases in real estate and consumer loans of $1.4 million and $2.0 million, respectively. The increase in commercial loans is the direct result of increased calling efforts and market expansion allowing opportunities to increase Horizon’s market share within the Company’s footprint. Mortgage warehouse loans increased as a result of market expansion and refinancing activity.

Total deposits increased $297.1 million during the first nine months of 2012. This increase was the result of $211.2 million in deposits acquired in the Heartland acquisition and organic increases $85.9 million. Organically, non-interest bearing deposit accounts increased $21.9 million due to increased calling and marketing efforts, interest bearing deposit accounts increased $125.0 million primarily due to increased municipal deposits, and time deposits decreased $61.0 million due a decrease in brokered deposits and movement of funds from consumer certificates of deposit to interest bearing deposit accounts during the first nine months of 2012.

The Company’s borrowings decreased $37.0 million from December 31, 2011. At September 30, 2012, the Company had $123.9 million in short-term funds borrowed compared to $157.0 million at December 31, 2011. The Company uses short-term borrowings to fund the increase in mortgage warehouse lending when it is determined that the loan demand may fluctuate as a result of refinancing activity. In addition, the Company’s current balance sheet strategy is to utilize a reasonable level of short-term borrowing during extended low rate environments in addition to what is needed for the fluctuations in mortgage warehouse lending.

Stockholders’ equity totaled $155.9 million at September 30, 2012 compared to $121.5 million at December 31, 2011. The increase in stockholders’ equity during the period was the result of $19.7 million from the

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

issuance of common shares in the Heartland transaction, the generation of net income and an increase in accumulated other comprehensive income, net of dividends declared. At September 30, 2012, the ratio of average stockholders’ equity to average assets was 8.45% compared to 7.96% for December 31, 2011. Book value per common share at September 30, 2012 increased to $16.64 compared to $14.68 at December 31, 2011.

Results of Operations

Overview

Consolidated net income for the three-month period ended September 30, 2012 was $4.9 million, an increase of 41.9% from the $3.4 million for the same period in 2011. Earnings per common share for the three months ended September 30, 2012 increased to $0.56 basic and $0.54 diluted, compared to $0.37 basic and $0.36 diluted for the same three-month period in 2011. Dividends paid on preferred shares reduced diluted earnings per share by $0.01 and $0.09 per share for the three-month periods ended September 30, 2012 and 2011, respectively.

Consolidated net income for the nine-month period ended September 30, 2012 was $14.4 million, an increase of 55.0% from the $9.3 million for the same period in 2011. Earnings per common share for the nine months ended September 30, 2012 increased to $1.81 basic and $1.75 diluted, compared to $1.08 basic and $1.05 diluted for the same nine-month period in 2011. Dividends paid on preferred shares reduced diluted earnings per share by $0.04 and $0.17 per share for the nine-month periods ended September 30, 2012 and 2011, respectively.

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.

The reduction in interest rates has influenced the cost of the Company’s interest bearing liabilities more significantly than the reduction in the yields received on the Company’s interest earning assets, resulting in an increase of the net interest margin. Management does not expect a significant rise in interest rates in the short term, but an increase in rates is expected at some time in the future due to the current historically low interest rate environment.

Net interest income during the three months ended September 30, 2012 was $15.0 million, an increase of $3.0 million over the $12.0 million earned during the same period in 2011. Yields on the Company’s interest-earning assets decreased by 27 basis points to 4.70% from 4.97% for the three months ended September 30, 2012 and 2011, respectively. Interest income increased $2.7 million from $16.0 million for the three months ended September 30, 2011 to $18.7 million for the same period in 2012. This increase was due to an increase in interest earning assets offset by the lower yield on new and repriced earning assets. However, the asset yields on loans receivable has not declined at the same pace as some market indices partially due to interest rate floors that are in place on approximately $456.6 million of the Company’s $618.4 million of adjustable rate loans.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

Rates paid on interest-bearing liabilities decreased by 31 basis points for the three months ended September 30, 2012 compared to the same period in 2011 due to the lower interest rate environment. Interest expense decreased $300,000 from $4.0 million for the three-months ended September 30, 2011 to $3.7 million for the same period in 2012. This decrease was due to the lower rates being paid on the Company’s interest bearing liabilities. Due to a more significant decrease in the rates paid on the Company’s interest-bearing liabilities compared to the decrease in yields received on the Company’s interest-earning assets the net interest margin increased 3 basis points from 3.76% for the three months ended September 30, 2011 to 3.79% for the same period in 2012.

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

|  | Three Months Ended September 30, 2012 |  |  | Three Months Ended September 30, 2011 |
|  | Average Balance |  |  | Interest |  |  | Average Rate |  |  | Average Balance |  |  | Interest |  |  | Average Rate |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal funds sold |  | $ | 13,854 |  |  | $ | 8 |  |  |  | 0.23 | % |  | $ | 2,265 |  |  | $ | 1 |  |  |  | 0.18 | %
Interest-earning deposits |  |  | 6,252 |  |  |  | 2 |  |  |  | 0.13 | % |  |  | 14,868 |  |  |  | 1 |  |  |  | 0.03 | %
Investment securities - taxable |  |  | 383,200 |  |  |  | 2,168 |  |  |  | 2.25 | % |  |  | 336,027 |  |  |  | 2,540 |  |  |  | 3.00 | %
Investment securities - non-taxable (1) |  |  | 121,428 |  |  |  | 1,014 |  |  |  | 5.27 | % |  |  | 109,875 |  |  |  | 988 |  |  |  | 5.41 | %
Loans receivable (2)(3)(4) |  |  | 1,112,712 |  |  |  | 15,527 |  |  |  | 5.56 | % |  |  | 855,938 |  |  |  | 12,481 |  |  |  | 5.79 | %
Total interest-earning assets (1) |  |  | 1,637,446 |  |  |  | 18,719 |  |  |  | 4.70 | % |  |  | 1,318,973 |  |  |  | 16,011 |  |  |  | 4.97 | %
Noninterest-earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  |  | 21,385 |  |  |  |  |  |  |  |  |  |  |  | 17,169 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  |  | (18,195 | ) |  |  |  |  |  |  |  |  |  |  | (18,823 | ) |  |  |  |  |  |  |  |
Other assets |  |  | 121,919 |  |  |  |  |  |  |  |  |  |  |  | 99,560 |  |  |  |  |  |  |  |  |
|  | $ | 1,762,555 |  |  |  |  |  |  |  |  |  |  | $ | 1,416,879 |  |  |  |  |  |  |  |  |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits |  | $ | 1,041,268 |  |  | $ | 1,638 |  |  |  | 0.63 | % |  | $ | 871,621 |  |  | $ | 1,978 |  |  |  | 0.90 | %
Borrowings |  |  | 324,975 |  |  |  | 1,597 |  |  |  | 1.96 | % |  |  | 259,783 |  |  |  | 1,583 |  |  |  | 2.42 | %
Subordinated debentures |  |  | 33,353 |  |  |  | 485 |  |  |  | 5.78 | % |  |  | 31,446 |  |  |  | 459 |  |  |  | 5.79 | %
Total interest-bearing liabilities |  |  | 1,399,596 |  |  |  | 3,720 |  |  |  | 1.06 | % |  |  | 1,162,850 |  |  |  | 4,020 |  |  |  | 1.37 | %
Noninterest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  |  | 196,640 |  |  |  |  |  |  |  |  |  |  |  | 121,034 |  |  |  |  |  |  |  |  |
Accrued interest payable and other liabilities |  |  | 17,435 |  |  |  |  |  |  |  |  |  |  |  | 11,158 |  |  |  |  |  |  |  |  |
Shareholders’ equity |  |  | 148,884 |  |  |  |  |  |  |  |  |  |  |  | 121,837 |  |  |  |  |  |  |  |  |
|  | $ | 1,762,555 |  |  |  |  |  |  |  |  |  |  | $ | 1,416,879 |  |  |  |  |  |  |  |  |
Net interest income/spread |  |  |  |  |  | $ | 14,999 |  |  |  | 3.64 | % |  |  |  |  |  | $ | 11,991 |  |  |  | 3.60 | %
Net interest income as a percent of average interest earning assets (1) |  |  |  |  |  |  |  |  |  |  | 3.79 | % |  |  |  |  |  |  |  |  |  |  | 3.76 | %

(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 fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.

(3) | Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

(4) | Loan fees and late fees included in interest on loans.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

Net interest income during the nine months ended September 30, 2012 was $41.2 million, an increase of $6.7 million over the $34.5 million earned during the same period in 2011. Yields on the Company’s interest-earning assets decreased by 19 basis points to 4.77% for the nine months ended September 30, 2012 from 4.96% for the same period in 2011. Interest income increased $4.9 million from $47.2 million for the nine months ended September 30, 2011 to $52.1 million for the same period in 2012. This increase was due to an increase in interest earning assets offset partially by the reduction in the yield on interest earning assets.

Rates paid on interest-bearing liabilities decreased by 33 basis points for the nine months ended September 30, 2012 compared to the same period in 2011 due to the lower interest rate environment. Interest expense decreased $1.8 million from $12.6 million for the nine-months ended September 30, 2011 to $10.9 million for the same period in 2012. This decrease was due to the lower rates being paid on the Company’s interest bearing liabilities partially offset with a higher volume of interest bearing liabilities. Due to a more significant decrease in the rates paid on the Company’s interest-bearing liabilities compared to the decrease in yields received on the Company’s interest-earning assets the net interest margin increased 13 basis points from 3.67% for the nine months ended September 30, 2011 to 3.80% for the same period in 2012.

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

|  | Nine Months Ended September 30, 2012 |  |  | Nine Months Ended September 30, 2011 |
|  | Average Balance |  |  | Interest |  |  | Average Rate |  |  | Average Balance |  |  | Interest |  |  | Average Rate |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal funds sold |  | $ | 6,870 |  |  | $ | 13 |  |  |  | 0.25 | % |  | $ | 26,448 |  |  | $ | 49 |  |  |  | 0.25 | %
Interest-earning deposits |  |  | 3,533 |  |  |  | 4 |  |  |  | 0.15 | % |  |  | 8,837 |  |  |  | 2 |  |  |  | 0.03 | %
Investment securities - taxable |  |  | 358,935 |  |  |  | 6,721 |  |  |  | 2.50 | % |  |  | 329,903 |  |  |  | 7,777 |  |  |  | 3.15 | %
Investment securities - non-taxable (1)(2) |  |  | 111,750 |  |  |  | 2,944 |  |  |  | 4.89 | % |  |  | 112,133 |  |  |  | 3,066 |  |  |  | 5.22 | %
Loans receivable (2)(3)(4) |  |  | 1,009,052 |  |  |  | 42,386 |  |  |  | 5.62 | % |  |  | 830,432 |  |  |  | 36,260 |  |  |  | 5.85 | %
Total interest-earning assets (1) |  |  | 1,490,140 |  |  |  | 52,068 |  |  |  | 4.77 | % |  |  | 1,307,753 |  |  |  | 47,154 |  |  |  | 4.96 | %
Noninterest-earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  |  | 17,708 |  |  |  |  |  |  |  |  |  |  |  | 15,756 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  |  | (18,970 | ) |  |  |  |  |  |  |  |  |  |  | (18,992 | ) |  |  |  |  |  |  |  |
Other assets |  |  | 95,986 |  |  |  |  |  |  |  |  |  |  |  | 97,540 |  |  |  |  |  |  |  |  |
|  | $ | 1,584,864 |  |  |  |  |  |  |  |  |  |  | $ | 1,402,057 |  |  |  |  |  |  |  |  |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits |  | $ | 958,651 |  |  | $ | 4,803 |  |  |  | 0.67 | % |  | $ | 889,531 |  |  | $ | 6,510 |  |  |  | 0.98 | %
Borrowings |  |  | 299,074 |  |  |  | 4,635 |  |  |  | 2.07 | % |  |  | 237,491 |  |  |  | 4,760 |  |  |  | 2.68 | %
Subordinated debentures |  |  | 31,606 |  |  |  | 1,427 |  |  |  | 6.03 | % |  |  | 31,446 |  |  |  | 1,363 |  |  |  | 5.80 | %
Total interest-bearing liabilities |  |  | 1,289,331 |  |  |  | 10,865 |  |  |  | 1.13 | % |  |  | 1,158,468 |  |  |  | 12,633 |  |  |  | 1.46 | %
Noninterest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  |  | 154,244 |  |  |  |  |  |  |  |  |  |  |  | 115,454 |  |  |  |  |  |  |  |  |
Accrued interest payable and other liabilities |  |  | 13,387 |  |  |  |  |  |  |  |  |  |  |  | 9,989 |  |  |  |  |  |  |  |  |
Shareholders’ equity |  |  | 134,820 |  |  |  |  |  |  |  |  |  |  |  | 118,146 |  |  |  |  |  |  |  |  |
|  | $ | 1,591,782 |  |  |  |  |  |  |  |  |  |  | $ | 1,402,057 |  |  |  |  |  |  |  |  |
Net interest income/spread |  |  |  |  |  | $ | 41,203 |  |  |  | 3.65 | % |  |  |  |  |  | $ | 34,521 |  |  |  | 3.50 | %
Net interest income as a percent of average interest earning assets (1) |  |  |  |  |  |  |  |  |  |  | 3.80 | % |  |  |  |  |  |  |  |  |  |  | 3.67 | %

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

| (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 fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.

| (3) | Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

| (4) | Loan fees and late fees included in interest on loans.

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 portfolios. During the third quarter of 2012, a provision for loan losses of $1.0 million was required to adequately fund the ALLL compared to a provision of $1.6 million for the third quarter of 2011. Commercial loan net charge-offs during the third quarter of 2012 were $334,000, residential mortgage loan net charge-offs were $205,000, and installment loans net charge-offs were $308,000. A single credit required a $500,000 specific reserve during the third quarter, contributing to the required provision for loan losses. The ALLL balance at September 30, 2012 was $18.6 million or 1.58% of total loans. This compares to an ALLL balance of $18.9 million at December 31, 2011 or 1.89% of total loans and $19.1 million at September 30, 2011 or 2.04% of total loans. The decrease in the ratio at September 30, 2012 was primarily due to the increase in total loans from the Heartland acquisition that were recorded at fair value with no allowance allocated to them.

For the nine months ended September 30, 2012, the provision for loan losses totaled $1.8 million compared to $4.4 million in the prior year for the same period. The commercial loans net charge-offs for the first nine months of 2012 were $280,000, real estate loans had net charge-offs of $377,000, and installment loans had net charge-offs of $1.5 million.

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, 2012.

Non-performing loans totaled $24.4 million on September 30, 2012, up from $20.8 million on June 30, 2012, and $23.6 million on September 30, 2011. The increase was due to the Heartland acquisition. Excluding Heartland, non-performing loans declined to $19.1 million from $20.8 million at June 30, 2012. As a percentage of total loans, non-performing loans were 2.08% on September 30, 2012, up from 2.07% on June 30, 2012, and 2.52% on September 30, 2011.

Other Real Estate Owned (OREO) totaled $2.6 million on September 30, 2012, up from $1.0 million on June 30, 2012, but down from $3.6 million on September 30, 2011. During the quarter, five properties with a book value of $431,000 were sold, four properties with a fair value of $405,000 were acquired from Heartland, and twelve properties with a book value of $1.6 million as of June 30, 2012 were transferred into OREO. On September 30, 2012, OREO was comprised of 21 properties. Of these, ten totaling $1.9 million were commercial real estate and twelve totaling $716,000 were residential real estate.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

Other Income

The following is a summary of changes in other income:

|  | Three Months Ended |  |  |  |  |  |  |
Other income |  | September 30 2012 |  |  | September 30 2011 |  |  | Amount Change |  |  | Percent Change |
Service charges on deposit accounts |  | $ | 1,002 |  |  | $ | 802 |  |  | $ | 200 |  |  |  | 24.9 | %
Wire transfer fees |  |  | 248 |  |  |  | 167 |  |  |  | 81 |  |  |  | 48.5 | %
Interchange fees |  |  | 885 |  |  |  | 721 |  |  |  | 164 |  |  |  | 22.7 | %
Fiduciary activities |  |  | 971 |  |  |  | 1,016 |  |  |  | (45 | ) |  |  | -4.4 | %
Gain on sale of securities |  |  | 2 |  |  |  | 1,115 |  |  |  | (1,113 | ) |  |  | -99.8 | %
Gain on sale of mortgage loans |  |  | 4,436 |  |  |  | 2,145 |  |  |  | 2,291 |  |  |  | 106.8 | %
Mortgage servicing net of impairment |  |  | (355 | ) |  |  | (172 | ) |  |  | (183 | ) |  |  | 106.4 | %
Increase in cash surrender value of bank owned life insurance |  |  | 300 |  |  |  | 245 |  |  |  | 55 |  |  |  | 22.4 | %
Death benefit on officer life insurance |  |  | — |  |  |  | 453 |  |  |  | (453 | ) |  |  | -100.0 | %
Other income |  |  | 221 |  |  |  | 46 |  |  |  | 175 |  |  |  | 380.4 | %
Total other income |  | $ | 7,710 |  |  | $ | 6,538 |  |  | $ | 1,172 |  |  |  | 17.9 | %

Service charges on deposit accounts were $200,000 higher and interchange fees were $164,000 higher during the third quarter of 2012 compared to the same period in 2011 primarily due to an increase in transaction accounts and volume. The residential mortgage loan activity during the third quarter of 2012 generated $4.4 million of income from the gain on sale of mortgage loans, up $2.3 million from the same period in 2011. This increase was primarily due to more favorable pricing on loans sold and additional volume. Loans originated for sale during the third quarter of 2012 were $105.2 million compared to $66.0 million for the same period in 2011.

|  | Nine Months Ended |  |  |  |  |  |  |
Other income |  | September 30 2012 |  |  | September 30 2011 |  |  | Amount Change |  |  | Percent Change |
Service charges on deposit accounts |  | $ | 2,477 |  |  | $ | 2,422 |  |  | $ | 55 |  |  |  | 2.3 | %
Wire transfer fees |  |  | 643 |  |  |  | 412 |  |  |  | 231 |  |  |  | 56.1 | %
Interchange fees |  |  | 2,227 |  |  |  | 1,905 |  |  |  | 322 |  |  |  | 16.9 | %
Fiduciary activities |  |  | 2,928 |  |  |  | 2,911 |  |  |  | 17 |  |  |  | 0.6 | %
Gain on sale of securities |  |  | 2 |  |  |  | 1,754 |  |  |  | (1,752 | ) |  |  | -99.9 | %
Gain on sale of mortgage loans |  |  | 10,121 |  |  |  | 3,986 |  |  |  | 6,135 |  |  |  | 153.9 | %
Mortgage servicing net of impairment |  |  | (95 | ) |  |  | 691 |  |  |  | (786 | ) |  |  | -113.7 | %
Increase in cash surrender value of bank owned life insurance |  |  | 760 |  |  |  | 661 |  |  |  | 99 |  |  |  | 15.0 | %
Death benefit on officer life insurance |  |  | — |  |  |  | 453 |  |  |  | (453 | ) |  |  | -100.0 | %
Other income |  |  | 344 |  |  |  | 105 |  |  |  | 239 |  |  |  | 227.6 | %
Total other income |  | $ | 19,407 |  |  | $ | 15,300 |  |  | $ | 4,107 |  |  |  | 26.8 | %

Service charges on deposit accounts were $55,000 higher and interchange fees were $322,000 higher during the first nine months of 2012 compared to the same period in 2011 due to an increase in transaction accounts and volume. Wire transfer fees were $231,000 higher during the first nine months of 2012 compared to the same period in 2011 due to an increase in mortgage warehouse activity. The residential mortgage loan activity during the first nine months of 2012 generated $10.1 million of income from the gain on sale of mortgage loans, up $6.1 million from the same period in 2011. This increase was primarily due to more favorable

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

pricing on loans sold and additional volume. Loans originated for sale during the first nine months of 2012 were $283.8 million compared to $178.6 million for the same period in 2011. In addition, loans originated for sale for the first nine months of 2011 included the recovery of $626,000 of impairment on the Company’s mortgage servicing asset, a gain on the sale of securities of $1.8 million and $453,000 from the death benefit on officer life insurance. In comparison, the amount for the first nine months of 2012 includes $379,000 of impairment on the Company’s mortgage servicing asset and a $2,000 gain on sales of securities for the same period in 2012.

Other Expense

The following is a summary of changes in other expense:

|  | Three Months Ended |  |  |  |  |  |  |
Other expense |  | September 30 2012 |  |  | September 30 2011 |  |  | Amount Change |  |  | Percent Change |
Salaries |  | $ | 5,191 |  |  | $ | 3,975 |  |  | $ | 1,216 |  |  |  | 30.6 | %
Commission and bonuses |  |  | 1,484 |  |  |  | 942 |  |  |  | 542 |  |  |  | 57.5 | %
Employee benefits |  |  | 1,230 |  |  |  | 1,164 |  |  |  | 66 |  |  |  | 5.7 | %
Net occupancy expenses |  |  | 1,186 |  |  |  | 1,056 |  |  |  | 130 |  |  |  | 12.3 | %
Data processing |  |  | 754 |  |  |  | 549 |  |  |  | 205 |  |  |  | 37.3 | %
Professional fees |  |  | 366 |  |  |  | 359 |  |  |  | 7 |  |  |  | 1.9 | %
Outside services and consultants |  |  | 624 |  |  |  | 454 |  |  |  | 170 |  |  |  | 37.4 | %
Loan expense |  |  | 1,311 |  |  |  | 820 |  |  |  | 491 |  |  |  | 59.9 | %
FDIC deposit insurance |  |  | 291 |  |  |  | 254 |  |  |  | 37 |  |  |  | 14.6 | %
Other losses |  |  | 309 |  |  |  | 1,088 |  |  |  | (779 | ) |  |  | -71.6 | %
Other expenses |  |  | 2,094 |  |  |  | 1,652 |  |  |  | 442 |  |  |  | 26.8 | %
Total other expense |  | $ | 14,840 |  |  | $ | 12,313 |  |  | $ | 2,527 |  |  |  | 20.5 | %

Total other expenses were $2.5 million higher in the third quarter of 2012 compared to the third quarter of 2011. Salaries, commissions and bonuses, and employee benefits increased $1.8 million compared to the same quarter in 2011. This increase is the result of annual merit pay, increase in staff due to expansion, increased employee benefits costs, commissions earned and bonus accruals. In addition, compensation expense was $412,000 higher due to one-time costs for the Heartland merger. Also included in the third quarter of 2012’s other expense were data processing costs, professional fees, fees for outside services and consultants and approximately $588,000 of additional transaction costs related to the Heartland merger. The increase in loan expense during the third quarter of 2012 compared to the prior year was related to an increase in loan volume.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

|  | Nine Months Ended |  |  |  |  |  |  |
|  | September 30 |  |  | September 30 |  |  | Amount |  |  | Percent |
Other expense |  | 2012 |  |  | 2011 |  |  | Change |  |  | Change |
Salaries |  | $ | 13,331 |  |  | $ | 11,509 |  |  | $ | 1,822 |  |  |  | 15.8 | %
Commission and bonuses |  |  | 3,450 |  |  |  | 2,158 |  |  |  | 1,292 |  |  |  | 59.9 | %
Employee benefits |  |  | 3,626 |  |  |  | 3,245 |  |  |  | 381 |  |  |  | 11.7 | %
Net occupancy expenses |  |  | 3,216 |  |  |  | 3,176 |  |  |  | 40 |  |  |  | 1.3 | %
Data processing |  |  | 1,883 |  |  |  | 1,450 |  |  |  | 433 |  |  |  | 29.9 | %
Professional fees |  |  | 1,483 |  |  |  | 1,039 |  |  |  | 444 |  |  |  | 42.7 | %
Outside services and consultants |  |  | 1,621 |  |  |  | 1,221 |  |  |  | 400 |  |  |  | 32.8 | %
Loan expense |  |  | 2,879 |  |  |  | 2,276 |  |  |  | 603 |  |  |  | 26.5 | %
FDIC deposit insurance |  |  | 798 |  |  |  | 944 |  |  |  | (146 | ) |  |  | -15.5 | %
Other losses |  |  | 501 |  |  |  | 1,365 |  |  |  | (864 | ) |  |  | -63.3 | %
Other expenses |  |  | 5,392 |  |  |  | 4,675 |  |  |  | 717 |  |  |  | 15.3 | %
Total other expense |  | $ | 38,180 |  |  | $ | 33,058 |  |  | $ | 5,122 |  |  |  | 15.5 | %

Total other expenses were $5.1 million higher in the first nine months of 2012 compared to the same period in 2011. Salaries, commissions and bonuses, and employee benefits increased $3.5 million compared to the same period in 2011. This increase is the result of annual merit pay, increase in staff due to expansion, increased employee benefits costs, commissions earned and bonus accruals. In addition, compensation expense was $412,000 higher due to one-time costs for the Heartland merger. Included in the first nine months of 2012’s other expense were data processing costs, professional fees, fees for outside services and consultants and approximately $1.1 million of transaction costs related to the Heartland merger. The increase in loan expense during the first nine months of 2012 compared to the prior year was related to an increase in loan volume. FDIC deposit insurance expense decreased during the first nine months of 2012 compared to 2011 as the assessment calculation has resulted in lower expense for the Company.

Income Taxes

Income tax expense for the third quarter of 2012 was $2.0 million compared to $1.2 million of tax expense for the third quarter of 2011. The effective tax rate for the third quarter of 2012 was 29.0% compared to 26.5% in 2011. The increase in the effective tax rate is primarily due to higher income before income tax for the third quarter of 2012 compared to the same period in 2011 with a similar level of tax exempt income.

Income tax expense for the first nine months of 2012 was $6.2 million compared to $3.0 million of tax expense for the first nine months of 2011. The effective tax rate for the first nine months of 2012 was 30.3% compared to 24.7% in 2011. The increase in the effective tax rate is primarily due to higher income before income tax for the first nine months of 2012 compared to the same period in 2011 with a similar level of tax exempt income.

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, 2012, cash and cash equivalents increased by approximately $21.1 million. At September 30, 2012, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $364.1 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $288.7 million at December 31, 2011 and $211.8 million at September 30, 2011.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months Ended September 30, 2012

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2012. Stockholders’ equity totaled $155.9 million as of September 30, 2012, compared to $121.5 million as of December 31, 2011. At September 30, 2012, the ratio of average stockholders’ equity to average assets was 8.45% compared to 7.96% at December 31, 2011. Horizon’s capital increased during the nine months as a result of the issuance of common stock in the Heartland transaction, increased earnings and an increase in accumulated other comprehensive income, net of dividends declared and the amortization of unearned compensation.

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, 2012, the dividend cost was approximately $62,500, or 2.0% annualized. For the fourth quarter of 2012, the dividend cost will be approximately $156,250, or 5.0% annualized, and for the first quarter of 2013, the dividend cost will be approximately $146,168 or 4.7% annualized. The increase in the fourth quarter’s dividend cost was due to the reduction of small business loans during the first quarter of 2012, the measurement period for the fourth quarter’s dividend cost, primarily due to the Company’s reduction in substandard loans which were small business loans. The Company plans to reserve cash for the ability to redeem this preferred stock if and when the cost of this capital exceeds other forms of capital.

Horizon declared common stock dividends in the amount of $0.27 per share during the first nine months of 2012 compared to $0.23 for the same period of 2011. The dividend payout ratio (dividends as a percent of basic earnings per share) was 15.1% and 21.4% for the first nine months of 2012 and 2011, respectively. For additional information regarding dividend, see Horizon’s Annual Report on Form 10-K for 2011.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three and Nine Months Ended September 30, 2012

ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Horizon’s 2011 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 2011 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, 2012, 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, 2012, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three and Nine Months Ended September 30, 2012

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 2011.

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

Not Applicable

ITEM 3. | DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. | MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. | OTHER INFORMATION

Not Applicable

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three and Nine Months Ended September 30, 2011

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*

* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

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

|  |  |  | HORIZON BANCORP
Dated: November 8, 2012 |  |  |  |  |  | /s/ Craig M. Dwight
|  |  |  |  |  | Craig M. Dwight
|  |  |  |  |  | Chief Executive Officer
Dated: November 8, 2012 |  |  |  |  |  | /s/ Mark E. Secor
|  |  |  |  |  | Mark E. Secor
|  |  |  |  |  | Chief Financial Officer

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##### Table of Contents

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

* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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