10-Q 1 d143716d10q.htm FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

Commission file number 0-10792

HORIZON BANCORP

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Large Accelerated Filer |  | ☐ |  | Accelerated Filer |  | ☒
Non-accelerated Filer |  | ☐ (Do not check if smaller reporting company) |  | Smaller Reporting Company |  | ☐
Emerging growth company |  | ☐ |  |  |  |

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 22,195,715 shares of Common Stock, no par value, at May 8, 2017.

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HORIZON BANCORP

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION |  |  |  |
Item 1. |  | Financial Statements (Unaudited) |  |  |  |
|  | Condensed Consolidated Balance Sheets |  |  | 3 |
|  | Condensed Consolidated Statements of Income |  |  | 4 |
|  | Condensed Consolidated Statements of Comprehensive Income |  |  | 5 |
|  | Condensed Consolidated Statement of Stockholders’ Equity |  |  | 6 |
|  | Condensed Consolidated Statements of Cash Flows |  |  | 7 |
|  | Notes to Condensed Consolidated Financial Statements |  |  | 8 |
Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  |  | 45 |
Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk |  |  | 58 |
Item 4. |  | Controls and Procedures |  |  | 58 |
PART II. OTHER INFORMATION |  |  |  |
Item 1. |  | Legal Proceedings |  |  | 59 |
Item 1A. |  | Risk Factors |  |  | 59 |
Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds |  |  | 59 |
Item 3. |  | Defaults Upon Senior Securities |  |  | 59 |
Item 4. |  | Mine Safety Disclosures |  |  | 59 |
Item 5. |  | Other Information |  |  | 59 |
Item 6. |  | Exhibits |  |  | 60 |
Signatures |  |  | 61 |
Index To Exhibits |  |  | 62 |

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PART 1 — FINANCIAL INFORMATION

| ITEM 1. | FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

|  | March 31 |  |  | December 31 |
|  | 2017 |  |  | 2016 |
|  | (Unaudited) |  |  |  |
Assets |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 60,280 |  |  | $ | 70,832 |
Investment securities, available for sale |  |  | 474,222 |  |  |  | 439,831 |
Investment securities, held to maturity (fair value of $200,482 and $194,086) |  |  | 198,868 |  |  |  | 193,194 |
Loans held for sale |  |  | 1,789 |  |  |  | 8,087 |
Loans, net of allowance for loan losses of $15,054 and $14,837 |  |  | 2,131,899 |  |  |  | 2,121,149 |
Premises and equipment, net |  |  | 66,314 |  |  |  | 66,357 |
Federal Reserve and Federal Home Loan Bank stock |  |  | 24,090 |  |  |  | 23,932 |
Goodwill |  |  | 77,644 |  |  |  | 76,941 |
Other intangible assets |  |  | 9,450 |  |  |  | 9,366 |
Interest receivable |  |  | 12,581 |  |  |  | 12,713 |
Cash value of life insurance |  |  | 74,598 |  |  |  | 74,134 |
Other assets |  |  | 37,908 |  |  |  | 44,620 |
Total assets |  | $ | 3,169,643 |  |  | $ | 3,141,156 |
Liabilities |  |  |  |  |  |  |  |
Deposits |  |  |  |  |  |  |  |
Non-interest bearing |  | $ | 502,400 |  |  | $ | 496,248 |
Interest bearing |  |  | 1,941,299 |  |  |  | 1,974,962 |
Total deposits |  |  | 2,443,699 |  |  |  | 2,471,210 |
Borrowings |  |  | 319,993 |  |  |  | 267,489 |
Subordinated debentures |  |  | 37,516 |  |  |  | 37,456 |
Interest payable |  |  | 523 |  |  |  | 472 |
Other liabilities |  |  | 19,337 |  |  |  | 23,674 |
Total liabilities |  |  | 2,821,068 |  |  |  | 2,800,301 |
Commitments and contingent liabilities |  |  |  |  |  |  |  |
Stockholders’ Equity |  |  |  |  |  |  |  |
Preferred stock, Authorized, 1,000,000 shares |  |  |  |  |  |  |  |
Issued 0 and 0 shares |  |  | — |  |  |  | — |
Common stock, no par value |  |  |  |  |  |  |  |
Authorized 66,000,000 shares(1) |  |  |  |  |  |  |  |
Issued, 22,195,715 and 22,192,530 shares(1) |  |  |  |  |  |  |  |
Outstanding, 22,176,465 and 22,171,596 shares(1) |  |  | — |  |  |  | — |
Additional paid-in capital |  |  | 182,402 |  |  |  | 182,326 |
Retained earnings |  |  | 169,950 |  |  |  | 164,173 |
Accumulated other comprehensive loss |  |  | (3,777 | ) |  |  | (5,644 | )
Total stockholders’ equity |  |  | 348,575 |  |  |  | 340,855 |
Total liabilities and stockholders’ equity |  | $ | 3,169,643 |  |  | $ | 3,141,156 |

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

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

|  | Three Months Ended |
|  | March 31 |
|  | 2017 |  |  | 2016 |
|  | (Unaudited) |  |  | (Unaudited) |
Interest Income |  |  |  |  |  |  |  |
Loans receivable |  | $ | 24,791 |  |  | $ | 19,747 |
Investment securities |  |  |  |  |  |  |  |
Taxable |  |  | 2,406 |  |  |  | 2,544 |
Tax exempt |  |  | 1,637 |  |  |  | 1,237 |
Total interest income |  |  | 28,834 |  |  |  | 23,528 |
Interest Expense |  |  |  |  |  |  |  |
Deposits |  |  | 1,753 |  |  |  | 1,491 |
Borrowed funds |  |  | 937 |  |  |  | 1,759 |
Subordinated debentures |  |  | 576 |  |  |  | 504 |
Total interest expense |  |  | 3,266 |  |  |  | 3,754 |
Net Interest Income |  |  | 25,568 |  |  |  | 19,774 |
Provision for loan losses |  |  | 330 |  |  |  | 532 |
Net Interest Income after Provision for Loan Losses |  |  | 25,238 |  |  |  | 19,242 |
Non-interest Income |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 1,400 |  |  |  | 1,288 |
Wire transfer fees |  |  | 150 |  |  |  | 121 |
Interchange fees |  |  | 1,176 |  |  |  | 931 |
Fiduciary activities |  |  | 1,922 |  |  |  | 1,635 |
Gain on sale of investment securities (includes $35 and $108 for the three months ended March 31, 2017 and 2016 related to accumulated other comprehensive earnings reclassifications) |  |  | 35 |  |  |  | 108 |
Gain on sale of mortgage loans |  |  | 1,914 |  |  |  | 2,114 |
Mortgage servicing income net of impairment |  |  | 447 |  |  |  | 447 |
Increase in cash value of bank owned life insurance |  |  | 464 |  |  |  | 345 |
Other income |  |  | 51 |  |  |  | 398 |
Total non-interest income |  |  | 7,559 |  |  |  | 7,387 |
Non-interest Expense |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 11,709 |  |  |  | 10,065 |
Net occupancy expenses |  |  | 2,452 |  |  |  | 1,936 |
Data processing |  |  | 1,307 |  |  |  | 1,105 |
Professional fees |  |  | 613 |  |  |  | 831 |
Outside services and consultants |  |  | 1,222 |  |  |  | 1,099 |
Loan expense |  |  | 1,107 |  |  |  | 1,195 |
FDIC insurance expense |  |  | 263 |  |  |  | 405 |
Other losses |  |  | 50 |  |  |  | 267 |
Other expense |  |  | 2,798 |  |  |  | 2,367 |
Total non-interest expense |  |  | 21,521 |  |  |  | 19,270 |
Income Before Income Tax |  |  | 11,276 |  |  |  | 7,359 |
Income tax expense (includes $12 and $38 for the three months ended March 31, 2017 and 2016, respectively, related to income tax expense from reclassification items) |  |  | 3,052 |  |  |  | 1,978 |
Net Income |  |  | 8,224 |  |  |  | 5,381 |
Preferred stock dividend |  |  | — |  |  |  | (42 | )
Net Income Available to Common Shareholders |  | $ | 8,224 |  |  | $ | 5,339 |
Basic Earnings Per Share |  | $ | 0.37 |  |  | $ | 0.30 |
Diluted Earnings Per Share |  |  | 0.37 |  |  |  | 0.30 |

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 March 31 |
|  | 2017 |  |  | 2016 |
|  | (Unaudited) |  |  | (Unaudited) |
Net Income |  | $ | 8,224 |  |  | $ | 5,381 |
Other Comprehensive Income (Loss) |  |  |  |  |  |  |  |
Change in fair value of derivative instruments: |  |  |  |  |  |  |  |
Change in fair value of derivative instruments for the period |  |  | 400 |  |  |  | (562 | )
Income tax effect |  |  | (140 | ) |  |  | 197 |
Changes from derivative instruments |  |  | 260 |  |  |  | (365 | )
Change in securities: |  |  |  |  |  |  |  |
Unrealized appreciation (depreciation) for the period on AFS securities |  |  | 2,597 |  |  |  | 5,946 |
Amortization from transfer of securities from available for sale to held to maturity securities |  |  | (88 | ) |  |  | (229 | )
Reclassification adjustment for securities gains realized in income |  |  | (35 | ) |  |  | 108 |
Income tax effect |  |  | (867 | ) |  |  | (2,039 | )
Unrealized gains (losses) on securities |  |  | 1,607 |  |  |  | 3,786 |
Other Comprehensive Income (Loss), Net of Tax |  |  | 1,867 |  |  |  | 3,421 |
Comprehensive Income |  | $ | 10,091 |  |  | $ | 8,802 |

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

|  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |
|  |  |  |  | Additional |  |  |  |  |  | Other |  |  |  |
|  | Preferred |  |  | Paid-in |  |  | Retained |  |  | Comprehensive |  |  |  |
|  | Stock |  |  | Capital |  |  | Earnings |  |  | Income (Loss) |  |  | Total |
Balances, January 1, 2017 |  | $ | — |  |  | $ | 182,326 |  |  | $ | 164,173 |  |  | $ | (5,644 | ) |  | $ | 340,855 |
Net income |  |  |  |  |  |  |  |  |  |  | 8,224 |  |  |  |  |  |  |  | 8,224 |
Other comprehensive income, net of tax |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1,867 |  |  |  | 1,867 |
Amortization of unearned compensation |  |  |  |  |  |  | (34 | ) |  |  |  |  |  |  |  |  |  |  | (34 | )
Exercise of stock options |  |  |  |  |  |  | 34 |  |  |  |  |  |  |  |  |  |  |  | 34 |
Stock option expense |  |  |  |  |  |  | 76 |  |  |  |  |  |  |  |  |  |  |  | 76 |
Cash dividends on common stock ($0.11 per share) |  |  |  |  |  |  |  |  |  |  | (2,447 | ) |  |  |  |  |  |  | (2,447 | )
Balances, March 31, 2017 |  | $ | — |  |  | $ | 182,402 |  |  | $ | 169,950 |  |  | $ | (3,777 | ) |  | $ | 348,575 |

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)

|  | Three Months Ended March 31 |
|  | 2017 |  |  | 2016 |
|  | (Unaudited) |  |  | (Unaudited) |
Operating Activities |  |  |  |  |  |  |  |
Net income |  | $ | 8,224 |  |  | $ | 5,381 |
Items not requiring (providing) cash |  |  |  |  |  |  |  |
Provision for loan losses |  |  | 330 |  |  |  | 532 |
Depreciation and amortization |  |  | 1,401 |  |  |  | 1,183 |
Share based compensation |  |  | 76 |  |  |  | 68 |
Mortgage servicing rights net impairment |  |  | 6 |  |  |  | 1 |
Premium amortization on securities available for sale, net |  |  | 1,477 |  |  |  | 1,187 |
Gain on sale of investment securities |  |  | (35 | ) |  |  | (108 | )
Gain on sale of mortgage loans |  |  | (1,914 | ) |  |  | (2,114 | )
Proceeds from sales of loans |  |  | 58,151 |  |  |  | 62,022 |
Loans originated for sale |  |  | (49,939 | ) |  |  | (55,162 | )
Change in cash value of life insurance |  |  | (464 | ) |  |  | (345 | )
Gain (Loss) on sale of other real estate owned |  |  | 261 |  |  |  | (100 | )
Net change in |  |  |  |  |  |  |  |
Interest receivable |  |  | 151 |  |  |  | 59 |
Interest payable |  |  | 45 |  |  |  | 73 |
Other assets |  |  | 5,784 |  |  |  | (1,730 | )
Other liabilities |  |  | (4,527 | ) |  |  | (1,532 | )
Net cash provided by operating activities |  |  | 19,027 |  |  |  | 9,415 |
Investing Activities |  |  |  |  |  |  |  |
Purchases of securities available for sale |  |  | (50,201 | ) |  |  | (33,716 | )
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale |  |  | 23,302 |  |  |  | 26,663 |
Purchases of securities held to maturity |  |  | (13,151 | ) |  |  | (8,677 | )
Proceeds from maturities of securities held to maturity |  |  | 1,015 |  |  |  | 10,319 |
Change in FHLB stock |  |  | (158 | ) |  |  | — |
Net change in loans |  |  | (8,684 | ) |  |  | 29,354 |
Proceeds on the sale of OREO and repossessed assets |  |  | 510 |  |  |  | 663 |
Change in premises and equipment, net |  |  | (1,025 | ) |  |  | (237 | )
Acquisition of branch, net of cash received |  |  | 11,000 |  |  |  | — |
Net cash provided by (used in) investing activities |  |  | (37,392 | ) |  |  | 24,369 |
Financing Activities |  |  |  |  |  |  |  |
Net change in |  |  |  |  |  |  |  |
Deposits |  |  | (42,338 | ) |  |  | (1,674 | )
Borrowings |  |  | 52,564 |  |  |  | (18,801 | )
Redemption of preferred stock |  |  | — |  |  |  | (12,500 | )
Proceeds from issuance of stock |  |  | 34 |  |  |  | — |
Dividends paid on common shares |  |  | (2,447 | ) |  |  | (1,805 | )
Dividends paid on preferred shares |  |  | — |  |  |  | (42 | )
Net cash provided by (used in) financing activities |  |  | 7,813 |  |  |  | (34,822 | )
Net Change in Cash and Cash Equivalents |  |  | (10,552 | ) |  |  | (1,038 | )
Cash and Cash Equivalents, Beginning of Period |  |  | 70,832 |  |  |  | 48,650 |
Cash and Cash Equivalents, End of Period |  | $ | 60,280 |  |  | $ | 47,612 |
Additional Supplemental Information |  |  |  |  |  |  |  |
Interest paid |  | $ | 3,215 |  |  | $ | 3,681 |
Income taxes paid |  |  | 1,050 |  |  |  | 1,250 |
Transfer of loans to other real estate owned |  |  | 714 |  |  |  | 1,379 |
Acquisition of LaPorte, measurement period adjustments |  |  | 703 |  |  |  | — |

See notes to condensed consolidated financial statements

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 - Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Horizon Bank” or the “Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended March 31, 2017 and March 31, 2016 are not necessarily indicative of the operating results for the full year of 2017 or 2016. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.

Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10-K for 2016 filed with the Securities and Exchange Commission on February 28, 2017. The condensed consolidated balance sheet of Horizon as of December 31, 2016 has been derived from the audited balance sheet as of that date.

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

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table shows computation of basic and diluted earnings per share.

|  | Three Months Ended |
|  | March 31 |
|  | 2017 |  |  | 2016 |
|  | (Unaudited) |  |  | (Unaudited) |
Basic earnings per share |  |  |  |  |  |  |  |
Net income |  | $ | 8,224 |  |  | $ | 5,381 |
Less: Preferred stock dividends |  |  | — |  |  |  | 42 |
Net income available to common shareholders |  | $ | 8,224 |  |  | $ | 5,339 |
Weighted average common shares outstanding(1) |  |  | 22,175,526 |  |  |  | 17,924,124 |
Basic earnings per share |  | $ | 0.37 |  |  | $ | 0.30 |
Diluted earnings per share |  |  |  |  |  |  |  |
Net income available to common shareholders |  | $ | 8,224 |  |  | $ | 5,339 |
Weighted average common shares outstanding(1) |  |  | 22,175,526 |  |  |  | 17,924,124 |
Effect of dilutive securities: |  |  |  |  |  |  |  |
Restricted stock |  |  | 36,336 |  |  |  | 31,550 |
Stock options |  |  | 114,209 |  |  |  | 57,053 |
Weighted average shares outstanding |  |  | 22,326,071 |  |  |  | 18,012,726 |
Diluted earnings per share |  | $ | 0.37 |  |  | $ | 0.30 |

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

There were zero shares for the three months ended March 31, 2017 and 2016 which were not included in the computation of diluted earnings per share because they were non-dilutive.

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

Reclassifications

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

Note 2 – Acquisitions

Kosciusko Financial, Inc.

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

transaction has an implied valuation of approximately $23.0 million. The Company has had approximately $1.6 million in costs related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Kosciusko acquisition is detailed in the following table. The final valuation numbers were received in September 2016 which changed the goodwill estimate from $6.9 million to $6.4 million.

ASSETS |  |  |  |
Cash and due from banks |  | $ | 38,950 |
Investment securities, available for sale |  |  | 1,191 |
Commercial |  |  | 70,006 |
Residential mortgage |  |  | 26,244 |
Consumer |  |  | 6,319 |
Total loans |  |  | 102,569 |
Premises and equipment, net |  |  | 1,466 |
FRB and FHLB stock |  |  | 582 |
Goodwill |  |  | 6,443 |
Core deposit intangible |  |  | 526 |
Interest receivable |  |  | 636 |
Cash value of life insurance |  |  | 2,745 |
Other assets |  |  | 765 |
Total assets purchased |  | $ | 155,873 |
Common shares issued |  | $ | 14,470 |
Cash paid |  |  | 8,513 |
Total estimated purchase price |  | $ | 22,983 |

LIABILITIES |  |  |  |
Deposits |  |  |  |
Non-interest bearing |  | $ | 27,871 |
NOW accounts |  |  | 35,213 |
Savings and money market |  |  | 26,953 |
Certificates of deposits |  |  | 32,771 |
Total deposits |  |  | 122,808 |
Borrowings |  |  | 9,038 |
Interest payable |  |  | 55 |
Other liabilities |  |  | 989 |
Total liabilities assumed |  | $ | 132,890 |

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

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

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

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

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of June 1, 2016.

Contractually required principal and interest at acquisition |  | $ | 2,682 |
Contractual cash flows not expected to be collected (nonaccretable differences) |  |  | 25 |
Expected cash flows at acquisition |  |  | 2,657 |
Interest component of expected cash flows (accretable discount) |  |  | 634 |
Fair value of acquired loans accounted for under ASC 310-30 |  | $ | 2,023 |

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

LaPorte Bancorp, Inc. On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and Horizon Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.9435 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte Bancorp stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, less the consideration used to pay off LaPorte’s ESOP loan receivable, the transaction has an implied valuation of approximately $98.6 million. The Company has had approximately $4.0 million in costs related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the LaPorte Bancorp acquisition is detailed in the following table.

ASSETS |  |  |  |
Cash and due from banks |  | $ | 154,849 |
Investment securities, available for sale |  |  | 23,779 |
Commercial |  |  | 153,750 |
Residential mortgage |  |  | 42,603 |
Consumer |  |  | 16,801 |
Mortgage Warehousing |  |  | 99,752 |
Total loans |  |  | 312,906 |
Premises and equipment, net |  |  | 6,022 |
FHLB stock |  |  | 4,029 |
Goodwill |  |  | 20,993 |
Core deposit intangible |  |  | 2,514 |
Interest receivable |  |  | 844 |
Cash value of life insurance |  |  | 15,267 |
Other assets |  |  | 8,334 |
Total assets purchased |  | $ | 549,537 |
Common shares issued |  | $ | 60,306 |
Cash paid |  |  | 38,328 |
Total estimated purchase price |  | $ | 98,634 |

LIABILITIES |  |  |  |
Deposits |  |  |  |
Non-interest bearing |  | $ | 66,733 |
NOW accounts |  |  | 99,346 |
Savings and money market |  |  | 117,688 |
Certificates of deposits |  |  | 87,605 |
Total deposits |  |  | 371,372 |
Borrowings |  |  | 64,793 |
Interest payable |  |  | 178 |
Subordinated debt |  |  | 4,504 |
Other liabilities |  |  | 10,056 |
Total liabilities assumed |  | $ | 450,903 |

Of the total estimated purchase price of $98.6 million, $2.5 million has been allocated to core deposit intangible. Additionally, $21.0 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over ten years on a straight line basis.

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

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

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

Contractually required principal and interest at acquisition |  | $ | 12,545 |
Contractual cash flows not expected to be collected (nonaccretable differences) |  |  | 4,492 |
Expected cash flows at acquisition |  |  | 8,053 |
Interest component of expected cash flows (accretable discount) |  |  | 1,258 |
Fair value of acquired loans accounted for under ASC 310-30 |  | $ | 6,795 |

Final estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. Goodwill was increased by $703,000 as of March 31, 2017 due to measurement period adjustments.

CNB Bancorp

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

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

ASSETS |  |  |  |
Cash and due from banks |  | $ | 27,860 |
Investment securities, available for sale |  |  | 16,393 |
Commercial |  |  | 2,267 |
Residential mortgage |  |  | 6,624 |
Consumer |  |  | 1,579 |
Total loans |  |  | 10,470 |
Premises and equipment, net |  |  | 444 |
FHLB stock |  |  | 50 |
Goodwill |  |  | 609 |
Core deposit intangible |  |  | 190 |
Interest receivable |  |  | 154 |
Other assets |  |  | 49 |
Total assets purchased |  | $ | 56,219 |
Cash paid |  |  | 5,311 |
Total estimated purchase price |  | $ | 5,311 |

LIABILITIES |  |  |  |
Deposits |  |  |  |
Non-interest bearing |  | $ | 24,079 |
NOW accounts |  |  | 9,038 |
Savings and money market |  |  | 13,829 |
Certificates of deposits |  |  | 3,342 |
Total deposits |  |  | 50,288 |
Borrowings |  |  | 459 |
Interest payable |  |  | 7 |
Other liabilities |  |  | 154 |
Total liabilities assumed |  | $ | 50,908 |

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Notes to Condensed Consolidated Financial Statements

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

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

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

The results of operations of CNB, LaPorte Bancorp and Kosciusko have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro-forma results for the three months ended March 31, 2017 and 2016 as if the CNB, LaPorte Bancorp and Kosciusko acquisitions had occurred as of the beginning of the comparable prior reporting periods.

|  | Three Months Ended |
|  | March 31 |  |  | March 31 |
|  | 2017 |  |  | 2016 |
Summary of Operations: |  |  |  |  |  |  |  |
Net Interest Income |  | $ | 25,568 |  |  | $ | 25,497 |
Provision for Loan Losses |  |  | 330 |  |  |  | 532 |
Net Interest Income after Provision for Loan Losses |  |  | 25,238 |  |  | $ | 24,965 |
Non-interest Income |  |  | 7,559 |  |  |  | 8,473 |
Non-Interest Expense |  |  | 21,521 |  |  |  | 24,908 |
Income before Income Taxes |  |  | 11,276 |  |  |  | 8,530 |
Income Tax Expense |  |  | 3,052 |  |  |  | 2,385 |
Net Income |  |  | 8,224 |  |  |  | 6,145 |
Net Income Available to Common Shareholders |  | $ | 8,224 |  |  | $ | 6,103 |
Basic Earnings Per Share |  | $ | 0.37 |  |  | $ | 0.34 |
Diluted Earnings Per Share |  | $ | 0.37 |  |  | $ | 0.34 |

The pro-forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects.

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

Bargersville Branch Purchase

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, in Bargersville, Indiana. Net cash of $10.9 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction of $3.4 million and a 3.0% premium on deposits. Customer deposit balances were recorded at $14.8 million and a core deposit intangible of $463,000 was recorded in the transaction, which will be amortized over ten years on a straight line basis. There was no goodwill generated in the transaction.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 3 – Securities

The fair value of securities is as follows:

March 31, 2017 |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 13,546 |  |  | $ | 2 |  |  | $ | (68 | ) |  | $ | 13,480 |
State and municipal |  |  | 127,108 |  |  |  | 656 |  |  |  | (659 | ) |  |  | 127,105 |
Federal agency collateralized mortgage obligations |  |  | 137,815 |  |  |  | 241 |  |  |  | (1,867 | ) |  |  | 136,189 |
Federal agency mortgage-backed pools |  |  | 196,064 |  |  |  | 1,194 |  |  |  | (3,547 | ) |  |  | 193,711 |
Private labeled mortgage-backed pools |  |  | 1,901 |  |  |  | — |  |  |  | (19 | ) |  |  | 1,882 |
Corporate notes |  |  | 1,236 |  |  |  | 619 |  |  |  | — |  |  |  | 1,855 |
Total available for sale investment securities |  | $ | 477,670 |  |  | $ | 2,712 |  |  | $ | (6,160 | ) |  | $ | 474,222 |
Held to maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal |  | $ | 176,631 |  |  | $ | 3,317 |  |  | $ | (1,948 | ) |  | $ | 178,000 |
Federal agency collateralized mortgage obligations |  |  | 6,297 |  |  |  | 30 |  |  |  | (65 | ) |  |  | 6,262 |
Federal agency mortgage-backed pools |  |  | 15,940 |  |  |  | 449 |  |  |  | (169 | ) |  |  | 16,220 |
Total held to maturity investment securities |  | $ | 198,868 |  |  | $ | 3,796 |  |  | $ | (2,182 | ) |  | $ | 200,482 |
December 31, 2016 |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 8,051 |  |  | $ | 2 |  |  | $ | (64 | ) |  | $ | 7,989 |
State and municipal |  |  | 117,327 |  |  |  | 324 |  |  |  | (1,059 | ) |  |  | 116,592 |
Federal agency collateralized mortgage obligations |  |  | 139,040 |  |  |  | 254 |  |  |  | (2,099 | ) |  |  | 137,195 |
Federal agency mortgage-backed pools |  |  | 180,183 |  |  |  | 251 |  |  |  | (3,707 | ) |  |  | 176,726 |
Corporate notes |  |  | 1,238 |  |  |  | 91 |  |  |  | — |  |  |  | 1,329 |
Total available for sale investment securities |  | $ | 445,839 |  |  | $ | 922 |  |  | $ | (6,929 | ) |  | $ | 439,831 |
Held to maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
State and municipal |  |  | 165,607 |  |  |  | 2,700 |  |  |  | (2,485 | ) |  |  | 165,822 |
Federal agency collateralized mortgage obligations |  |  | 6,530 |  |  |  | 31 |  |  |  | (71 | ) |  |  | 6,490 |
Federal agency mortgage-backed pools |  |  | 21,057 |  |  |  | 897 |  |  |  | (180 | ) |  |  | 21,774 |
Total held to maturity investment securities |  | $ | 193,194 |  |  | $ | 3,628 |  |  | $ | (2,736 | ) |  | $ | 194,086 |

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

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At March 31, 2017, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

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

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Notes to Condensed Consolidated Financial Statements

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

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 March 31, 2017.

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2017 and December 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

|  | March 31, 2017 |  |  | December 31, 2016 |
|  | Amortized Cost |  |  | Fair Value |  |  | Amortized Cost |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year |  | $ | 8,277 |  |  | $ | 8,311 |  |  | $ | 7,455 |  |  | $ | 7,480 |
One to five years |  |  | 40,343 |  |  |  | 40,404 |  |  |  | 37,483 |  |  |  | 37,479 |
Five to ten years |  |  | 28,390 |  |  |  | 28,380 |  |  |  | 21,112 |  |  |  | 20,984 |
After ten years |  |  | 64,880 |  |  |  | 65,345 |  |  |  | 60,566 |  |  |  | 59,967 |
|  |  | 141,890 |  |  |  | 142,440 |  |  |  | 126,616 |  |  |  | 125,910 |
Federal agency collateralized mortgage obligations |  |  | 137,815 |  |  |  | 136,189 |  |  |  | 139,040 |  |  |  | 137,195 |
Federal agency mortgage-backed pools |  |  | 196,064 |  |  |  | 193,711 |  |  |  | 180,183 |  |  |  | 176,726 |
Private labeled mortgage-backed pools |  |  | 1,901 |  |  |  | 1,882 |  |  |  | — |  |  |  | — |
Total available for sale investment securities |  | $ | 477,670 |  |  | $ | 474,222 |  |  | $ | 445,839 |  |  | $ | 439,831 |
Held to maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Within one year |  | $ | 9,941 |  |  | $ | 9,941 |  |  | $ | — |  |  | $ | — |
One to five years |  |  | 30,869 |  |  |  | 31,892 |  |  |  | 24,594 |  |  |  | 25,271 |
Five to ten years |  |  | 86,470 |  |  |  | 87,885 |  |  |  | 87,645 |  |  |  | 88,805 |
After ten years |  |  | 49,351 |  |  |  | 48,282 |  |  |  | 53,368 |  |  |  | 51,746 |
|  |  | 176,631 |  |  |  | 178,000 |  |  |  | 165,607 |  |  |  | 165,822 |
Federal agency collateralized mortgage obligations |  |  | 6,297 |  |  |  | 6,262 |  |  |  | 6,530 |  |  |  | 6,490 |
Federal agency mortgage-backed pools |  |  | 15,940 |  |  |  | 16,220 |  |  |  | 21,057 |  |  |  | 21,774 |
Total held to maturity investment securities |  | $ | 198,868 |  |  | $ | 200,482 |  |  | $ | 193,194 |  |  | $ | 194,086 |

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

|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
March 31, 2017 |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
U.S. Treasury and federal agencies |  | $ | 13,158 |  |  | $ | (68 | ) |  | $ | — |  |  | $ | — |  |  | $ | 13,158 |  |  | $ | (68 | )
State and municipal |  |  | 107,096 |  |  |  | (2,607 | ) |  |  | — |  |  |  | — |  |  |  | 107,096 |  |  |  | (2,607 | )
Federal agency collateralized mortgage obligations |  |  | 105,289 |  |  |  | (1,700 | ) |  |  | 9,626 |  |  |  | (232 | ) |  |  | 114,916 |  |  |  | (1,932 | )
Federal agency mortgage-backed pools |  |  | 162,271 |  |  |  | (3,716 | ) |  |  | — |  |  |  | — |  |  |  | 162,271 |  |  |  | (3,716 | )
Private labeled mortgage-backed pools |  |  | 1,882 |  |  |  | (19 | ) |  |  | — |  |  |  | — |  |  |  | 1,882 |  |  |  | (19 | )
Total temporarily impaired securities |  | $ | 389,696 |  |  | $ | (8,110 | ) |  | $ | 9,626 |  |  | $ | (232 | ) |  | $ | 399,323 |  |  | $ | (8,342 | )
|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
December 31, 2016 |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
U.S. Treasury and federal agencies |  | $ | 6,987 |  |  | $ | (64 | ) |  | $ | — |  |  | $ | — |  |  | $ | 6,987 |  |  | $ | (64 | )
State and municipal |  |  | 142,466 |  |  |  | (3,544 | ) |  |  | — |  |  |  | — |  |  |  | 142,466 |  |  |  | (3,544 | )
Federal agency collateralized mortgage obligations |  |  | 112,414 |  |  |  | (1,918 | ) |  |  | 10,199 |  |  |  | (252 | ) |  |  | 122,613 |  |  |  | (2,170 | )
Federal agency mortgage-backed pools |  |  | 163,768 |  |  |  | (3,887 | ) |  |  | — |  |  |  | — |  |  |  | 163,768 |  |  |  | (3,887 | )
Total temporarily impaired securities |  | $ | 425,635 |  |  | $ | (9,413 | ) |  | $ | 10,199 |  |  | $ | (252 | ) |  | $ | 435,834 |  |  | $ | (9,665 | )

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Notes to Condensed Consolidated Financial Statements

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

|  | Three Months Ended March 31 |
|  | 2017 |  |  | 2016 |
Sales of securities available for sale (Unaudited) |  |  |  |  |  |  |  |
Proceeds |  | $ | 2,090 |  |  | $ | 7,297 |
Gross gains |  |  | 35 |  |  |  | 108 |
Gross losses |  |  | — |  |  |  | — |

Note 4 – Loans

|  | March 31 2017 |  |  | December 31 2016 |
Commercial |  |  |  |  |  |  |  |
Working capital and equipment |  | $ | 559,733 |  |  | $ | 539,403 |
Real estate, including agriculture |  |  | 499,009 |  |  |  | 485,620 |
Tax exempt |  |  | 16,399 |  |  |  | 15,486 |
Other |  |  | 31,330 |  |  |  | 29,447 |
Total |  |  | 1,106,471 |  |  |  | 1,069,956 |
Real estate |  |  |  |  |  |  |  |
1–4 family |  |  | 527,994 |  |  |  | 526,024 |
Other |  |  | 5,652 |  |  |  | 5,850 |
Total |  |  | 533,646 |  |  |  | 531,874 |
Consumer |  |  |  |  |  |  |  |
Auto |  |  | 188,601 |  |  |  | 174,773 |
Recreation |  |  | 7,264 |  |  |  | 5,669 |
Real estate/home improvement |  |  | 54,414 |  |  |  | 53,898 |
Home equity |  |  | 147,528 |  |  |  | 144,508 |
Unsecured |  |  | 3,536 |  |  |  | 3,875 |
Other |  |  | 16,133 |  |  |  | 15,706 |
Total |  |  | 417,476 |  |  |  | 398,429 |
Mortgage warehouse |  |  | 89,360 |  |  |  | 135,727 |
Total loans |  |  | 2,146,953 |  |  |  | 2,135,986 |
Allowance for loan losses |  |  | (15,054 | ) |  |  | (14,837 | )
Loans, net |  | $ | 2,131,899 |  |  | $ | 2,121,149 |

Commercial

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

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

Real Estate and Consumer

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

Mortgage Warehousing

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

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

March 31, 2017 |  | Loan Balance |  |  | Interest Due |  |  | Deferred Fees / (Costs) |  |  | Recorded Investment |
Owner occupied real estate |  | $ | 339,341 |  |  | $ | 813 |  |  | $ | 951 |  |  | $ | 341,105 |
Non owner occupied real estate |  |  | 475,766 |  |  |  | 596 |  |  |  | 2,340 |  |  |  | 478,702 |
Residential spec homes |  |  | 6,437 |  |  |  | 15 |  |  |  | — |  |  |  | 6,452 |
Development & spec land loans |  |  | 35,395 |  |  |  | 58 |  |  |  | 114 |  |  |  | 35,567 |
Commercial and industrial |  |  | 245,702 |  |  |  | 1,732 |  |  |  | 425 |  |  |  | 247,859 |
Total commercial |  |  | 1,102,641 |  |  |  | 3,214 |  |  |  | 3,830 |  |  |  | 1,109,685 |
Residential mortgage |  |  | 508,645 |  |  |  | 1,461 |  |  |  | 3,058 |  |  |  | 513,164 |
Residential construction |  |  | 21,943 |  |  |  | 43 |  |  |  | — |  |  |  | 21,986 |
Mortgage warehouse |  |  | 89,360 |  |  |  | 480 |  |  |  | — |  |  |  | 89,840 |
Total real estate |  |  | 619,948 |  |  |  | 1,984 |  |  |  | 3,058 |  |  |  | 624,990 |
Direct installment |  |  | 74,195 |  |  |  | 201 |  |  |  | (423 | ) |  |  | 73,973 |
Direct installment purchased |  |  | 99 |  |  |  | — |  |  |  | — |  |  |  | 99 |
Indirect installment |  |  | 166,802 |  |  |  | 355 |  |  |  | 182 |  |  |  | 167,339 |
Home equity |  |  | 177,551 |  |  |  | 691 |  |  |  | (930 | ) |  |  | 177,312 |
Total consumer |  |  | 418,647 |  |  |  | 1,247 |  |  |  | (1,171 | ) |  |  | 418,723 |
Total loans |  |  | 2,141,236 |  |  |  | 6,445 |  |  |  | 5,717 |  |  |  | 2,153,398 |
Allowance for loan losses |  |  | (15,054 | ) |  |  | — |  |  |  | — |  |  |  | (15,054 | )
Net loans |  | $ | 2,126,182 |  |  | $ | 6,445 |  |  | $ | 5,717 |  |  | $ | 2,138,344 |
December 31, 2016 |  | Loan Balance |  |  | Interest Due |  |  | Deferred Fees / (Costs) |  |  | Recorded Investment |
Owner occupied real estate |  | $ | 337,548 |  |  | $ | 899 |  |  | $ | 1,022 |  |  | $ | 339,469 |
Non owner occupied real estate |  |  | 461,897 |  |  |  | 624 |  |  |  | 2,176 |  |  |  | 464,697 |
Residential spec homes |  |  | 5,006 |  |  |  | 8 |  |  |  | (2 | ) |  |  | 5,012 |
Development & spec land loans |  |  | 31,228 |  |  |  | 56 |  |  |  | 119 |  |  |  | 31,403 |
Commercial and industrial |  |  | 230,520 |  |  |  | 1,906 |  |  |  | 442 |  |  |  | 232,868 |
Total commercial |  |  | 1,066,199 |  |  |  | 3,493 |  |  |  | 3,757 |  |  |  | 1,073,449 |
Residential mortgage |  |  | 508,233 |  |  |  | 1,492 |  |  |  | 3,030 |  |  |  | 512,755 |
Residential construction |  |  | 20,611 |  |  |  | 33 |  |  |  | — |  |  |  | 20,644 |
Mortgage warehouse |  |  | 135,727 |  |  |  | 480 |  |  |  | — |  |  |  | 136,207 |
Total real estate |  |  | 664,571 |  |  |  | 2,005 |  |  |  | 3,030 |  |  |  | 669,606 |
Direct installment |  |  | 71,150 |  |  |  | 199 |  |  |  | (385 | ) |  |  | 70,964 |
Direct installment purchased |  |  | 119 |  |  |  | — |  |  |  | — |  |  |  | 119 |
Indirect installment |  |  | 153,204 |  |  |  | 345 |  |  |  | — |  |  |  | 153,549 |
Home equity |  |  | 175,126 |  |  |  | 703 |  |  |  | (785 | ) |  |  | 175,044 |
Total consumer |  |  | 399,599 |  |  |  | 1,247 |  |  |  | (1,170 | ) |  |  | 399,676 |
Total loans |  |  | 2,130,369 |  |  |  | 6,745 |  |  |  | 5,617 |  |  |  | 2,142,731 |
Allowance for loan losses |  |  | (14,837 | ) |  |  | — |  |  |  | — |  |  |  | (14,837 | )
Net loans |  | $ | 2,115,532 |  |  | $ | 6,745 |  |  | $ | 5,617 |  |  | $ | 2,127,894 |

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 5 – Accounting for Certain Loans Acquired in a Transfer

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

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

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

|  | March 31 2017 Heartland |  |  | March 31 2017 Summit |  |  | March 31 2017 Peoples |  |  | March 31 2017 Kosciusko |  |  | March 31 2017 LaPorte |  |  | March 31 2017 Total |
Commercial |  | $ | 724 |  |  | $ | 4,900 |  |  | $ | 624 |  |  | $ | 1,632 |  |  | $ | 2,401 |  |  | $ | 10,281 |
Real estate |  |  | 433 |  |  |  | 946 |  |  |  | 155 |  |  |  | 447 |  |  |  | 1,102 |  |  |  | 3,083 |
Consumer |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 38 |  |  |  | 38 |
Outstanding balance |  | $ | 1,157 |  |  | $ | 5,846 |  |  | $ | 779 |  |  | $ | 2,079 |  |  | $ | 3,541 |  |  | $ | 13,402 |
Carrying amount, net of allowance of $71 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 13,331 |
|  | December 31 2016 Heartland |  |  | December 31 2016 Summit |  |  | December 31 2016 Peoples |  |  | December 31 2016 Kosciusko |  |  | December 31 2016 LaPorte |  |  | December 31 2016 Total |
Commercial |  | $ | 774 |  |  | $ | 5,245 |  |  | $ | 692 |  |  | $ | 1,652 |  |  | $ | 3,200 |  |  | $ | 11,563 |
Real estate |  |  | 534 |  |  |  | 967 |  |  |  | 165 |  |  |  | 457 |  |  |  | 1,114 |  |  |  | 3,237 |
Consumer |  |  | 2 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 41 |  |  |  | 43 |
Outstanding balance |  | $ | 1,310 |  |  | $ | 6,213 |  |  | $ | 856 |  |  | $ | 2,109 |  |  | $ | 4,355 |  |  | $ | 14,843 |
Carrying amount, net of allowance of $0 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 14,843 |

Accretable yield, or income expected to be collected for the three months ended March 31, is as follows:

|  | Three Months Ended March 31, 2017 |
|  | Heartland |  |  | Summit |  |  | Peoples |  |  | Kosciusko |  |  | LaPorte |  |  | Total |
Balance at January 1 |  | $ | 557 |  |  | $ | 502 |  |  | $ | 389 |  |  | $ | 530 |  |  | $ | 1,479 |  |  | $ | 3,457 |
Additions |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Accretion |  |  | (34 | ) |  |  | (93 | ) |  |  | (194 | ) |  |  | (31 | ) |  |  | (81 | ) |  |  | (433 | )
Reclassification from nonaccretable difference |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Disposals |  |  | (6 | ) |  |  | (2 | ) |  |  | (1 | ) |  |  | — |  |  |  | (110 | ) |  |  | (119 | )
Balance at March 31 |  | $ | 517 |  |  | $ | 407 |  |  | $ | 194 |  |  | $ | 499 |  |  | $ | 1,288 |  |  | $ | 2,905 |
|  | Three Months Ended March 31, 2016 |
|  | Heartland |  |  | Summit |  |  | Peoples |  |  | Kosciusko |  |  | LaPorte |  |  | Total |
Balance at January 1 |  | $ | 795 |  |  | $ | 708 |  |  | $ | 555 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,058 |
Additions |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Accretion |  |  | (36 | ) |  |  | (55 | ) |  |  | (42 | ) |  |  | — |  |  |  | — |  |  |  | (133 | )
Reclassification from nonaccretable difference |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Disposals |  |  | (10 | ) |  |  | (4 | ) |  |  | (30 | ) |  |  | — |  |  |  | — |  |  |  | (44 | )
Balance at March 31 |  | $ | 749 |  |  | $ | 649 |  |  | $ | 483 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,881 |

During the three months ended March 31, 2017, the Company increased the allowance for loan losses on purchased loans by a charge to the income statement of $71,000. During the three months ended March 31, 2016, the Company decreased the allowance for loans losses on purchased loans by a recovery to the income statement of $63,000.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 6 – Allowance for Loan Losses

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

|  | Three Months Ended |
|  | March 31 |
|  | 2017 |  |  | 2016 |
|  | (Unaudited) |  |  | (Unaudited) |
Balance at beginning of the period |  | $ | 14,837 |  |  | $ | 14,534 |
Loans charged-off: |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | — |  |  |  | 147 |
Non owner occupied real estate |  |  | — |  |  |  | 299 |
Residential development |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |
Commercial and industrial |  |  | — |  |  |  | 39 |
Total commercial |  |  | — |  |  |  | 485 |
Real estate |  |  |  |  |  |  |  |
Residential mortgage |  |  | 51 |  |  |  | 115 |
Residential construction |  |  | — |  |  |  | — |
Mortgage warehouse |  |  | — |  |  |  | — |
Total real estate |  |  | 51 |  |  |  | 115 |
Consumer |  |  |  |  |  |  |  |
Direct Installment |  |  | 25 |  |  |  | 58 |
Direct Installment Purchased |  |  | — |  |  |  | — |
Indirect Installment |  |  | 285 |  |  |  | 276 |
Home Equity |  |  | 50 |  |  |  | 175 |
Total consumer |  |  | 360 |  |  |  | 509 |
Total loans charged-off |  |  | 411 |  |  |  | 1,109 |
Recoveries of loans previously charged-off: |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | — |  |  |  | 25 |
Non owner occupied real estate |  |  | 22 |  |  |  | 23 |
Residential development |  |  | 2 |  |  |  | 2 |
Development & Spec Land Loans |  |  | — |  |  |  | — |
Commercial and industrial |  |  | 110 |  |  |  | 32 |
Total commercial |  |  | 134 |  |  |  | 82 |
Real estate |  |  |  |  |  |  |  |
Residential mortgage |  |  | 13 |  |  |  | 32 |
Residential construction |  |  | — |  |  |  | — |
Mortgage warehouse |  |  | — |  |  |  | — |
Total real estate |  |  | 13 |  |  |  | 32 |
Consumer |  |  |  |  |  |  |  |
Direct Installment |  |  | 17 |  |  |  | 16 |
Direct Installment Purchased |  |  | — |  |  |  | — |
Indirect Installment |  |  | 113 |  |  |  | 94 |
Home Equity |  |  | 21 |  |  |  | 55 |
Total consumer |  |  | 151 |  |  |  | 165 |
Total loan recoveries |  |  | 298 |  |  |  | 279 |
Net loans charged-off (recovered) |  |  | 113 |  |  |  | 830 |
Provision charged to operating expense |  |  |  |  |  |  |  |
Commercial |  |  | 887 |  |  |  | (332 | )
Real estate |  |  | (567 | ) |  |  | (592 | )
Consumer |  |  | 10 |  |  |  | 1,456 |
Total provision charged to operating expense |  |  | 330 |  |  |  | 532 |
Balance at the end of the period |  | $ | 15,054 |  |  | $ | 14,236 |

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

March 31, 2017 |  | Commercial |  |  | Real Estate |  |  | Mortgage Warehousing |  |  | Consumer |  |  | Total |
Allowance For Loan Losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Collectively evaluated for impairment |  |  | 7,600 |  |  |  | 1,697 |  |  |  | 1,042 |  |  |  | 4,715 |  |  |  | 15,054 |
Loans acquired with deteriorated credit quality |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total ending allowance balance |  | $ | 7,600 |  |  | $ | 1,697 |  |  | $ | 1,042 |  |  | $ | 4,715 |  |  | $ | 15,054 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 1,379 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,379 |
Collectively evaluated for impairment |  |  | 1,108,306 |  |  |  | 535,150 |  |  |  | 89,840 |  |  |  | 418,723 |  |  |  | 2,152,019 |
Loans acquired with deteriorated credit quality |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total ending loans balance |  | $ | 1,109,685 |  |  | $ | 535,150 |  |  | $ | 89,840 |  |  | $ | 418,723 |  |  | $ | 2,153,398 |
December 31, 2016 |  | Commercial |  |  | Real Estate |  |  | Mortgage Warehousing |  |  | Consumer |  |  | Total |
Allowance For Loan Losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 4 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 4 |
Collectively evaluated for impairment |  |  | 6,575 |  |  |  | 2,090 |  |  |  | 1,254 |  |  |  | 4,914 |  |  |  | 14,833 |
Loans acquired with deteriorated credit quality |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total ending allowance balance |  | $ | 6,579 |  |  | $ | 2,090 |  |  | $ | 1,254 |  |  | $ | 4,914 |  |  | $ | 14,837 |
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 2,250 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,250 |
Collectively evaluated for impairment |  |  | 1,071,199 |  |  |  | 533,399 |  |  |  | 136,207 |  |  |  | 399,676 |  |  |  | 2,140,481 |
Loans acquired with deteriorated credit quality |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total ending loans balance |  | $ | 1,073,449 |  |  | $ | 533,399 |  |  | $ | 136,207 |  |  | $ | 399,676 |  |  | $ | 2,142,731 |

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 7 – Non-performing Loans and Impaired Loans

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

March 31, 2017 |  | Non-accrual |  |  | Loans Past Due Over 90 Days Still Accruing |  |  | Non- Performing TDRs |  |  | Performing TDRs |  |  | Total Non- Performing Loans |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 760 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 760 |
Non owner occupied real estate |  |  | 387 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 387 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 112 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 112 |
Commercial and industrial |  |  | 121 |  |  |  | 150 |  |  |  | — |  |  |  | — |  |  |  | 271 |
Total commercial |  |  | 1,380 |  |  |  | 150 |  |  |  | — |  |  |  | — |  |  |  | 1,530 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 2,904 |  |  |  | — |  |  |  | 567 |  |  |  | 1,356 |  |  |  | 4,827 |
Residential construction |  |  | — |  |  |  | — |  |  |  | 230 |  |  |  | — |  |  |  | 230 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 2,904 |  |  |  | — |  |  |  | 797 |  |  |  | 1,356 |  |  |  | 5,057 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 489 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 489 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Indirect Installment |  |  | 690 |  |  |  | 69 |  |  |  | — |  |  |  | — |  |  |  | 759 |
Home Equity |  |  | 1,481 |  |  |  | 26 |  |  |  | 201 |  |  |  | 291 |  |  |  | 1,999 |
Total Consumer |  |  | 2,660 |  |  |  | 95 |  |  |  | 201 |  |  |  | 291 |  |  |  | 3,247 |
Total |  | $ | 6,944 |  |  | $ | 245 |  |  | $ | 998 |  |  | $ | 1,647 |  |  | $ | 9,834 |
December 31, 2016 |  | Non-accrual |  |  | Loans Past Due Over 90 Days Still Accruing |  |  | Non- Performing TDRs |  |  | Performing TDRs |  |  | Total Non- Performing Loans |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 1,532 |  |  | $ | 183 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,715 |
Non owner occupied real estate |  |  | 440 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 440 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 118 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 118 |
Commercial and industrial |  |  | 159 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 159 |
Total commercial |  |  | 2,249 |  |  |  | 183 |  |  |  | — |  |  |  | — |  |  |  | 2,432 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 2,959 |  |  |  | — |  |  |  | 576 |  |  |  | 1,254 |  |  |  | 4,789 |
Residential construction |  |  | — |  |  |  | — |  |  |  | 233 |  |  |  | — |  |  |  | 233 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total real estate |  |  | 2,959 |  |  |  | — |  |  |  | 809 |  |  |  | 1,254 |  |  |  | 5,022 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 512 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 512 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Indirect Installment |  |  | 659 |  |  |  | 49 |  |  |  | — |  |  |  | — |  |  |  | 708 |
Home Equity |  |  | 1,557 |  |  |  | 9 |  |  |  | 205 |  |  |  | 238 |  |  |  | 2,009 |
Total Consumer |  |  | 2,728 |  |  |  | 58 |  |  |  | 205 |  |  |  | 238 |  |  |  | 3,229 |
Total |  | $ | 7,936 |  |  | $ | 241 |  |  | $ | 1,014 |  |  | $ | 1,492 |  |  | $ | 10,683 |

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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)

Included in the $6.9 million of non-accrual loans and the $998,000 of non-performing TDRs at March 31, 2017 were $2.2 million and $17,000, respectively, of loans acquired for which accretable yield was recognized.

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

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

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

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include the three methods described above.

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At March 31, 2017, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of March 31, 2017, the Company had $2.6 million in TDRs and $1.6 million were performing according to the restructured terms and zero TDRs were returned to accrual status during the first three months of 2017. There were zero specific reserves allocated to TDRs at March 31, 2017 based on the discounted cash flows or when appropriate the fair value of the collateral.

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

|  |  |  |  |  |  |  |  |  |  | Three Months Ending |
March 31, 2017 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance For Loan Loss Allocated |  |  | Average Balance in Impaired Loans |  |  | Cash/ Accrual Interest Income Recognized |
With no recorded allowance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 759 |  |  | $ | 759 |  |  | $ | — |  |  | $ | 1,021 |  |  | $ | — |
Non owner occupied real estate |  |  | 387 |  |  |  | 387 |  |  |  | — |  |  |  | 393 |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | 112 |  |  |  | 112 |  |  |  | — |  |  |  | 238 |  |  |  | — |
Commercial and industrial |  |  | 121 |  |  |  | 121 |  |  |  | — |  |  |  | 350 |  |  |  | — |
Total commercial |  |  | 1,379 |  |  |  | 1,379 |  |  |  | — |  |  |  | 2,002 |  |  |  | — |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Non owner occupied real estate |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial and industrial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 1,379 |  |  | $ | 1,379 |  |  | $ | — |  |  | $ | 2,002 |  |  | $ | — |
|  |  |  |  |  |  |  |  |  |  | Three Months Ending |
March 31, 2016 |  | Unpaid Principal Balance |  |  | Recorded Investment |  |  | Allowance For Loan Loss Allocated |  |  | Average Balance in Impaired Loans |  |  | Cash/ Accrual Interest Income Recognized |
With no recorded allowance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 1,089 |  |  | $ | 1,089 |  |  | $ | — |  |  | $ | 1,106 |  |  | $ | — |
Non owner occupied real estate |  |  | 1,851 |  |  |  | 1,856 |  |  |  | — |  |  |  | 2,063 |  |  |  | 1 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial and industrial |  |  | 76 |  |  |  | 76 |  |  |  | — |  |  |  | 330 |  |  |  | — |
Total commercial |  |  | 3,016 |  |  |  | 3,021 |  |  |  | — |  |  |  | 3,499 |  |  |  | 1 |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Non owner occupied real estate |  |  | 2,757 |  |  |  | 2,767 |  |  |  | 900 |  |  |  | 2,767 |  |  |  | — |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Development & Spec Land Loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial and industrial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total commercial |  |  | 2,757 |  |  |  | 2,767 |  |  |  | 900 |  |  |  | 2,767 |  |  |  | — |
Total |  | $ | 5,773 |  |  | $ | 5,788 |  |  | $ | 900 |  |  | $ | 6,266 |  |  | $ | 1 |

26

##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

March 31, 2017 |  | 30 - 59 Days Past Due |  |  | 60 - 89 Days Past Due |  |  | 90 Days or Greater Past Due |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 1,523 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,523 |  |  | $ | 337,818 |  |  | $ | 339,341 |
Non owner occupied real estate |  |  | 103 |  |  |  | 92 |  |  |  | — |  |  |  | 195 |  |  |  | 475,571 |  |  |  | 475,766 |
Residential development |  |  | 478 |  |  |  | — |  |  |  | — |  |  |  | 478 |  |  |  | 5,959 |  |  |  | 6,437 |
Development & Spec Land Loans |  |  | 85 |  |  |  | — |  |  |  | — |  |  |  | 85 |  |  |  | 35,310 |  |  |  | 35,395 |
Commercial and industrial |  |  | 415 |  |  |  | — |  |  |  | 150 |  |  |  | 565 |  |  |  | 245,137 |  |  |  | 245,702 |
Total commercial |  |  | 2,604 |  |  |  | 92 |  |  |  | 150 |  |  |  | 2,846 |  |  |  | 1,099,795 |  |  |  | 1,102,641 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 1,072 |  |  |  | 247 |  |  |  | — |  |  |  | 1,319 |  |  |  | 507,326 |  |  |  | 508,645 |
Residential construction |  |  | 183 |  |  |  | — |  |  |  | — |  |  |  | 183 |  |  |  | 21,760 |  |  |  | 21,943 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 89,360 |  |  |  | 89,360 |
Total real estate |  |  | 1,255 |  |  |  | 247 |  |  |  | — |  |  |  | 1,502 |  |  |  | 618,446 |  |  |  | 619,948 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 26 |  |  |  | 2 |  |  |  | — |  |  |  | 28 |  |  |  | 74,167 |  |  |  | 74,195 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 99 |  |  |  | 99 |
Indirect Installment |  |  | 707 |  |  |  | 193 |  |  |  | 69 |  |  |  | 969 |  |  |  | 165,833 |  |  |  | 166,802 |
Home Equity |  |  | 326 |  |  |  | 40 |  |  |  | 26 |  |  |  | 392 |  |  |  | 177,159 |  |  |  | 177,551 |
Total consumer |  |  | 1,059 |  |  |  | 235 |  |  |  | 95 |  |  |  | 1,389 |  |  |  | 417,258 |  |  |  | 418,647 |
Total |  | $ | 4,918 |  |  | $ | 574 |  |  | $ | 245 |  |  | $ | 5,737 |  |  | $ | 2,135,499 |  |  | $ | 2,141,236 |
Percentage of total loans |  |  | 0.23 | % |  |  | 0.03 | % |  |  | 0.01 | % |  |  | 0.27 | % |  |  | 99.73 | % |  |  |  |
December 31, 2016 |  | 30 - 59 Days Past Due |  |  | 60 - 89 Days Past Due |  |  | 90 Days or Greater Past Due |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 1,068 |  |  | $ | — |  |  | $ | 183 |  |  | $ | 1,251 |  |  | $ | 336,297 |  |  | $ | 337,548 |
Non owner occupied real estate |  |  | 357 |  |  |  | — |  |  |  | — |  |  |  | 357 |  |  |  | 461,540 |  |  |  | 461,897 |
Residential development |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,006 |  |  |  | 5,006 |
Development & Spec Land Loans |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | 1 |  |  |  | 31,227 |  |  |  | 31,228 |
Commercial and industrial |  |  | 982 |  |  |  | — |  |  |  | — |  |  |  | 982 |  |  |  | 229,538 |  |  |  | 230,520 |
Total commercial |  |  | 2,408 |  |  |  | — |  |  |  | 183 |  |  |  | 2,591 |  |  |  | 1,063,608 |  |  |  | 1,066,199 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 886 |  |  |  | 123 |  |  |  | — |  |  |  | 1,009 |  |  |  | 507,224 |  |  |  | 508,233 |
Residential construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 20,611 |  |  |  | 20,611 |
Mortgage warehouse |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 135,727 |  |  |  | 135,727 |
Total real estate |  |  | 886 |  |  |  | 123 |  |  |  | — |  |  |  | 1,009 |  |  |  | 663,562 |  |  |  | 664,571 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 139 |  |  |  | 4 |  |  |  | — |  |  |  | 143 |  |  |  | 71,007 |  |  |  | 71,150 |
Direct Installment Purchased |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 119 |  |  |  | 119 |
Indirect Installment |  |  | 1,339 |  |  |  | 237 |  |  |  | 49 |  |  |  | 1,625 |  |  |  | 151,579 |  |  |  | 153,204 |
Home Equity |  |  | 912 |  |  |  | 267 |  |  |  | 9 |  |  |  | 1,188 |  |  |  | 173,938 |  |  |  | 175,126 |
Total consumer |  |  | 2,390 |  |  |  | 508 |  |  |  | 58 |  |  |  | 2,956 |  |  |  | 396,643 |  |  |  | 399,599 |
Total |  | $ | 5,684 |  |  | $ | 631 |  |  | $ | 241 |  |  | $ | 6,556 |  |  | $ | 2,123,813 |  |  | $ | 2,130,369 |
Percentage of total loans |  |  | 0.27 | % |  |  | 0.03 | % |  |  | 0.01 | % |  |  | 0.31 | % |  |  | 99.69 | % |  |  |  |

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

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

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

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

Risk Grade 1: Excellent (Pass)

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

Risk Grade 2: Good (Pass)

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

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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)

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

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

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

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

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

Risk Grade 4 Satisfactory/Monitored:

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

Risk Grade 4W Management Watch:

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

Risk Grade 5: Special Mention

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

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.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

Risk Grade 7: Doubtful

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

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

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

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

Risk Grade 8: Loss

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

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents loans by credit grades.

March 31, 2017 |  | Pass |  |  | Special Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 324,596 |  |  | $ | 4,311 |  |  | $ | 10,434 |  |  | $ | — |  |  | $ | 339,341 |
Non owner occupied real estate |  |  | 469,602 |  |  |  | 338 |  |  |  | 5,826 |  |  |  | — |  |  |  | 475,766 |
Residential development |  |  | 6,437 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6,437 |
Development & Spec Land Loans |  |  | 35,213 |  |  |  | — |  |  |  | 182 |  |  |  | — |  |  |  | 35,395 |
Commercial and industrial |  |  | 233,988 |  |  |  | 4,916 |  |  |  | 6,798 |  |  |  | — |  |  |  | 245,702 |
Total commercial |  |  | 1,069,836 |  |  |  | 9,565 |  |  |  | 23,240 |  |  |  | — |  |  |  | 1,102,641 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 503,818 |  |  |  | — |  |  |  | 4,827 |  |  |  | — |  |  |  | 508,645 |
Residential construction |  |  | 21,713 |  |  |  | — |  |  |  | 230 |  |  |  | — |  |  |  | 21,943 |
Mortgage warehouse |  |  | 89,360 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 89,360 |
Total real estate |  |  | 614,891 |  |  |  | — |  |  |  | 5,057 |  |  |  | — |  |  |  | 619,948 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 73,706 |  |  |  | — |  |  |  | 489 |  |  |  | — |  |  |  | 74,195 |
Direct Installment Purchased |  |  | 99 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 99 |
Indirect Installment |  |  | 166,043 |  |  |  | — |  |  |  | 759 |  |  |  | — |  |  |  | 166,802 |
Home Equity |  |  | 175,552 |  |  |  | — |  |  |  | 1,999 |  |  |  | — |  |  |  | 177,551 |
Total Consumer |  |  | 415,400 |  |  |  | — |  |  |  | 3,247 |  |  |  | — |  |  |  | 418,647 |
Total |  | $ | 2,100,127 |  |  | $ | 9,565 |  |  | $ | 31,544 |  |  | $ | — |  |  | $ | 2,141,236 |
Percentage of total loans |  |  | 98.08 | % |  |  | 0.45 | % |  |  | 1.47 | % |  |  | 0.00 | % |  |  |  |
December 31, 2016 |  | Pass |  |  | Special Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied real estate |  | $ | 322,924 |  |  | $ | 4,960 |  |  | $ | 9,664 |  |  | $ | — |  |  | $ | 337,548 |
Non owner occupied real estate |  |  | 455,648 |  |  |  | 341 |  |  |  | 5,908 |  |  |  | — |  |  |  | 461,897 |
Residential development |  |  | 5,006 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 5,006 |
Development & Spec Land Loans |  |  | 31,057 |  |  |  | — |  |  |  | 171 |  |  |  | — |  |  |  | 31,228 |
Commercial and industrial |  |  | 220,424 |  |  |  | 3,728 |  |  |  | 6,368 |  |  |  | — |  |  |  | 230,520 |
Total commercial |  |  | 1,035,059 |  |  |  | 9,029 |  |  |  | 22,111 |  |  |  | — |  |  |  | 1,066,199 |
Real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage |  |  | 503,444 |  |  |  | — |  |  |  | 4,789 |  |  |  | — |  |  |  | 508,233 |
Residential construction |  |  | 20,378 |  |  |  | — |  |  |  | 233 |  |  |  | — |  |  |  | 20,611 |
Mortgage warehouse |  |  | 135,727 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 135,727 |
Total real estate |  |  | 659,549 |  |  |  | — |  |  |  | 5,022 |  |  |  | — |  |  |  | 664,571 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct Installment |  |  | 70,638 |  |  |  | — |  |  |  | 512 |  |  |  | — |  |  |  | 71,150 |
Direct Installment Purchased |  |  | 119 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 119 |
Indirect Installment |  |  | 152,496 |  |  |  | — |  |  |  | 708 |  |  |  | — |  |  |  | 153,204 |
Home Equity |  |  | 173,117 |  |  |  | — |  |  |  | 2,009 |  |  |  | — |  |  |  | 175,126 |
Total Consumer |  |  | 396,370 |  |  |  | — |  |  |  | 3,229 |  |  |  | — |  |  |  | 399,599 |
Total |  | $ | 2,090,978 |  |  | $ | 9,029 |  |  | $ | 30,362 |  |  | $ | — |  |  | $ | 2,130,369 |
Percentage of total loans |  |  | 98.15 | % |  |  | 0.42 | % |  |  | 1.43 | % |  |  | 0.00 | % |  |  |  |

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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 8 – Repurchase Agreements

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

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

March 31, 2017 |  | Remaining Contractual Maturity of the Agreements |
|  | Overnight and Continuous |  |  | Up to one year |  |  | One to three years |  |  | Three to five years |  |  | Five to ten years |  |  | Beyond ten years |  |  | Total |
Repurchase Agreements and repurchase-to-maturity transactions |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Repurchase Agreements |  | $ | 54,149 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 54,149 |
Securities pledged for Repurchase Agreements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Federal agency collateralized mortgage obligations |  |  | 45,034 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 45,034 |
Federal agency mortgage-backed pools |  |  | 14,326 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 14,326 |
Total |  | $ | 59,360 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 59,360 |

Note 9 – Derivative Financial Instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at March 31, 2017 and December 31, 2016. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 2.31% on a notional amount of $30.0 million at March 31, 2017 and December 31, 2016. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At March 31, 2017, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At March 31, 2017, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

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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 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 $137.2 million at March 31, 2017 and $122.4 million at December 31, 2016.

Other Derivative Instruments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At March 31, 2017, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

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

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

|  | Asset Derivatives March 31, 2017 |  |  | Liability Derivatives March 31, 2017 |
Derivatives designated as hedging instruments (Unaudited) |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value |
Interest rate contracts |  | Loans |  | $ | — |  |  | Other liabilities |  | $ | 247 |
Interest rate contracts |  | Other Assets |  |  | 247 |  |  | Other liabilities |  |  | 2,732 |
Total derivatives designated as hedging instruments |  |  |  |  | 247 |  |  |  |  |  | 2,979 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |
Mortgage loan contracts |  | Other assets |  |  | 521 |  |  | Other liabilities |  |  | — |
Total derivatives not designated as hedging instruments |  |  |  |  | 521 |  |  |  |  |  | — |
Total derivatives |  |  |  | $ | 768 |  |  |  |  | $ | 2,979 |
|  | Asset Derivatives December 31, 2016 |  |  | Liability Derivatives December 31, 2016 |
Derivatives designated as hedging instruments |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value |
Interest rate contracts |  | Loans |  | $ | — |  |  | Other liabilities |  | $ | 6 |
Interest rate contracts |  | Other Assets |  |  | 6 |  |  | Other liabilities |  |  | 3,132 |
Total derivatives designated as hedging instruments |  |  |  |  | 6 |  |  |  |  |  | 3,138 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |
Mortgage loan contracts |  | Other assets |  |  | 602 |  |  | Other liabilities |  |  | 22 |
Total derivatives not designated as hedging instruments |  |  |  |  | 602 |  |  |  |  |  | 22 |
Total derivatives |  |  |  | $ | 608 |  |  |  |  | $ | 3,160 |

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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 effect of the derivative instruments on the condensed consolidated statements of income for the three-month periods ending March 31 is as follows:

|  | Comprehensive Income on Derivative (Effective Portion) Three Months Ended March 31 |
Derivative in cash flow hedging relationship |  | 2017 (Unaudited) |  |  | 2016 (Unaudited) |
Interest rate contracts |  | $ | 260 |  |  | $ | (365 | )

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

|  |  |  | Amount of Gain (Loss) Recognized on Derivative Three Months Ended March 31 |
Derivative in fair value hedging relationship |  | Location of gain (loss) recognized on derivative |  | 2017 (Unaudited) |  |  | 2016 (Unaudited) |
Interest rate contracts |  | Interest income - loans |  | $ | 253 |  |  | $ | 1,478 |
Interest rate contracts |  | Interest income - loans |  |  | (253 | ) |  |  | (1,478 | )
Total |  |  |  | $ | — |  |  | $ | — |
|  |  |  | Amount of Gain (Loss) Recognized on Derivative Three Months Ended March 31 |
Derivative not designated as hedging relationship |  | Location of gain (loss) recognized on derivative |  | 2017 (Unaudited) |  |  | 2016 (Unaudited) |
Mortgage contracts |  | Other income - gain on sale of loans |  | $ | (59 | ) |  | $ | 2 |

Note 10 – Disclosures about Fair Value of Assets and Liabilities

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

Level 1 |  | Quoted prices in active markets for identical assets or liabilities
Level 2 |  | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 |  | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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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)

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 March 31, 2017. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

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

Hedged loans

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

Interest rate swap agreements

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

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##### Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
March 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 13,480 |  |  | $ | — |  |  | $ | 13,480 |  |  | $ | — |
State and municipal |  |  | 127,105 |  |  |  | — |  |  |  | 127,105 |  |  |  | — |
Federal agency collateralized mortgage obligations |  |  | 136,189 |  |  |  | — |  |  |  | 136,189 |  |  |  | — |
Federal agency mortgage-backed pools |  |  | 193,711 |  |  |  | — |  |  |  | 193,711 |  |  |  | — |
Private labeled mortgage-backed pools |  |  | 1,882 |  |  |  | — |  |  |  | 1,882 |  |  |  | — |
Corporate notes |  |  | 1,855 |  |  |  | — |  |  |  | 1,855 |  |  |  | — |
Total available-for-sale securities |  |  | 474,222 |  |  |  | — |  |  |  | 474,222 |  |  |  | — |
Hedged loans |  |  | 137,202 |  |  |  | — |  |  |  | 137,202 |  |  |  | — |
Forward sale commitments |  |  | 521 |  |  |  | — |  |  |  | 521 |  |  |  | — |
Interest rate swap agreements |  |  | (2,485 | ) |  |  | — |  |  |  | (2,485 | ) |  |  | — |
Commitments to originate loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 7,989 |  |  | $ | — |  |  | $ | 7,989 |  |  | $ | — |
State and municipal |  |  | 116,592 |  |  |  | — |  |  |  | 116,592 |  |  |  | — |
Federal agency collateralized mortgage obligations |  |  | 137,195 |  |  |  | — |  |  |  | 137,195 |  |  |  | — |
Federal agency mortgage-backed pools |  |  | 176,726 |  |  |  | — |  |  |  | 176,726 |  |  |  | — |
Corporate notes |  |  | 1,329 |  |  |  | — |  |  |  | 1,329 |  |  |  | — |
Total available-for-sale securities |  |  | 439,831 |  |  |  | — |  |  |  | 439,831 |  |  |  | — |
Hedged loans |  |  | 122,345 |  |  |  | — |  |  |  | 122,345 |  |  |  | — |
Forward sale commitments |  |  | 602 |  |  |  | — |  |  |  | 602 |  |  |  | — |
Interest rate swap agreements |  |  | (3,138 | ) |  |  | — |  |  |  | (3,138 | ) |  |  | — |
Commitments to originate loans |  |  | (22 | ) |  |  | — |  |  |  | (22 | ) |  |  | — |

Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:

|  | Three Months Ended March 31 |
Non Interest Income Total gains and losses from: |  | 2017 (Unaudited) |  |  | 2016 (Unaudited) |
Hedged loans |  | $ | 253 |  |  | $ | 1,478 |
Fair value interest rate swap agreements |  |  | (253 | ) |  |  | (1,478 | )
Derivative loan commitments |  |  | (59 | ) |  |  | 2 |
|  | $ | (59 | ) |  | $ | 2 |

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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)

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) |
March 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 1,379 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,379 |
Mortgage servicing rights |  |  | 11,257 |  |  |  | — |  |  |  | — |  |  |  | 11,257 |
December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 2,246 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,246 |
Mortgage servicing rights |  |  | 11,174 |  |  |  | — |  |  |  | — |  |  |  | 11,174 |

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

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

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

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment decreased by $6,000 during the first three months of 2017 and decreased by $1,000 during the first three months of 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

|  | Fair Value at |  |  | Valuation |  |  |  | Range (Weighted
|  | March 31, 2017 |  |  | Technique |  | Unobservable Inputs |  | Average)
Impaired loans |  | $ | 1,379 |  |  | Collateral based measurement |  | Discount to reflect current market conditions and ultimate collectability |  | 11% - 17% (14%)
Mortgage servicing rights |  | $ | 11,257 |  |  | Discounted cashflows |  | Discount rate, Constant prepayment rate, Probability of default |  | 11% - 17% (14%), 4% - 8% (5.1%), 1% - 11% (5.0%)
|  | Fair Value at |  |  | Valuation |  |  |  | Range (Weighted
|  | December 31, 2016 |  |  | Technique |  | Unobservable Inputs |  | Average)
Impaired loans |  | $ | 2,246 |  |  | Collateral based measurement |  | Discount to reflect current market conditions and ultimate collectability |  | 10% - 16% (13%)
Mortgage servicing rights |  | $ | 11,174 |  |  | Discounted cashflows |  | Discount rate, Constant prepayment rate, Probability of default |  | 10% - 16% (13%), 4% - 7% (4.6%), 1% - 10% (4.5%)

Note 11 – Fair Value of Financial Instruments

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

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at March 31, 2017 and December 31, 2016. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

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

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

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

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

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

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

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

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

|  | March 31, 2017 |
|  | 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 |  | $ | 60,280 |  |  | $ | 60,280 |  |  | $ | — |  |  | $ | — |
Investment securities, held to maturity |  |  | 198,868 |  |  |  | — |  |  |  | 200,482 |  |  |  | — |
Loans held for sale |  |  | 1,789 |  |  |  | — |  |  |  | — |  |  |  | 1,789 |
Loans excluding loan level hedges, net |  |  | 1,994,697 |  |  |  | — |  |  |  | — |  |  |  | 1,954,518 |
Stock in FHLB and FRB |  |  | 24,090 |  |  |  | — |  |  |  | 24,090 |  |  |  | — |
Interest receivable |  |  | 12,581 |  |  |  | — |  |  |  | 12,581 |  |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing deposits |  | $ | 502,400 |  |  | $ | 502,400 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits |  |  | 1,941,299 |  |  |  | — |  |  |  | 1,830,685 |  |  |  | — |
Borrowings |  |  | 319,993 |  |  |  | — |  |  |  | 314,512 |  |  |  | — |
Subordinated debentures |  |  | 37,516 |  |  |  | — |  |  |  | 36,263 |  |  |  | — |
Interest payable |  |  | 523 |  |  |  | — |  |  |  | 523 |  |  |  | — |

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

|  | December 31, 2016 |
|  | 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 |  | $ | 70,832 |  |  | $ | 70,832 |  |  | $ | — |  |  | $ | — |
Investment securities, held to maturity |  |  | 193,194 |  |  |  | — |  |  |  | 194,086 |  |  |  | — |
Loans held for sale |  |  | 8,087 |  |  |  | — |  |  |  | — |  |  |  | 8,087 |
Loans excluding loan level hedges, net |  |  | 1,998,804 |  |  |  | — |  |  |  | — |  |  |  | 1,965,928 |
Stock in FHLB and FRB |  |  | 23,932 |  |  |  | — |  |  |  | 23,932 |  |  |  | — |
Interest receivable |  |  | 12,713 |  |  |  | — |  |  |  | 12,713 |  |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing deposits |  | $ | 496,248 |  |  | $ | 496,248 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits |  |  | 1,974,962 |  |  |  | — |  |  |  | 1,839,167 |  |  |  | — |
Borrowings |  |  | 267,489 |  |  |  | — |  |  |  | 261,141 |  |  |  | — |
Subordinated debentures |  |  | 37,456 |  |  |  | — |  |  |  | 36,371 |  |  |  | — |
Interest payable |  |  | 472 |  |  |  | — |  |  |  | 472 |  |  |  | — |

Note 12 – Accumulated Other Comprehensive Income

|  | March 31 2017 |  |  | December 31 2016 |
|  | (Unaudited) |  |  |  |
Unrealized gain (loss) on securities available for sale |  | $ | (3,448 | ) |  | $ | (6,007 | )
Unamortized gain on securities held to maturity, previously transferred from AFS |  |  | 368 |  |  |  | 456 |
Unrealized loss on derivative instruments |  |  | (2,732 | ) |  |  | (3,132 | )
Tax effect |  |  | 2,035 |  |  |  | 3,039 |
Total accumulated other comprehensive income (loss) |  | $ | (3,777 | ) |  | $ | (5,644 | )

Note 13 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For March 31, 2017, Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined). Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital.

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (March 31, 2017) and Tier I leverage ratios as set forth in the table below. As of March 31, 2017 and December 31, 2016, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the first quarter of 2017 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

Horizon and the Bank’s actual and required capital ratios as of March 31, 2017 and December 31, 2016 were as follows:

|  | Actual |  |  | Required For Capital1 Adequacy Purposes |  |  | Required For Capital1 Adequacy Purposes with Capital Buffer |  |  | Well Capitalized Under Prompt1 Corrective Action Provisions |
|  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |
As of March 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital1 (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 320,710 |  |  |  | 13.87 | % |  | $ | 185,042 |  |  |  | 8.00 | % |  | $ | 199,614 |  |  |  | 8.63 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 320,418 |  |  |  | 13.87 | % |  | $ | 184,771 |  |  |  | 8.00 | % |  |  | 199,322 |  |  |  | 8.63 | % |  | $ | 230,964 |  |  |  | 10.00 | %
Tier 1 capital1 (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 305,656 |  |  |  | 13.21 | % |  | $ | 138,781 |  |  |  | 6.00 | % |  |  | 153,353 |  |  |  | 6.63 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 305,364 |  |  |  | 13.22 | % |  | $ | 138,578 |  |  |  | 6.00 | % |  |  | 153,129 |  |  |  | 6.63 | % |  |  | 184,771 |  |  |  | 8.00 | %
Common equity tier 1 capital1 (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 267,193 |  |  |  | 11.55 | % |  | $ | 104,086 |  |  |  | 4.50 | % |  |  | 118,658 |  |  |  | 5.13 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 305,364 |  |  |  | 13.22 | % |  | $ | 103,934 |  |  |  | 4.50 | % |  |  | 118,484 |  |  |  | 5.13 | % |  |  | 150,126 |  |  |  | 6.50 | %
Tier 1 capital1 (to average assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 305,656 |  |  |  | 10.09 | % |  | $ | 121,213 |  |  |  | 4.00 | % |  |  | 121,213 |  |  |  | 4.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 305,364 |  |  |  | 10.13 | % |  | $ | 120,625 |  |  |  | 4.00 | % |  |  | 120,625 |  |  |  | 4.00 | % |  |  | 150,781 |  |  |  | 5.00 | %
As of December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital1 (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 316,576 |  |  |  | 13.87 | % |  | $ | 182,596 |  |  |  | 8.00 | % |  | $ | 196,976 |  |  |  | 8.63 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 319,013 |  |  |  | 13.98 | % |  |  | 182,541 |  |  |  | 8.00 | % |  |  | 196,916 |  |  |  | 8.63 | % |  | $ | 228,176 |  |  |  | 10.00 | %
Tier 1 capital1 (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 301,739 |  |  |  | 13.22 | % |  |  | 136,947 |  |  |  | 6.00 | % |  |  | 151,326 |  |  |  | 6.63 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 304,176 |  |  |  | 13.33 | % |  |  | 136,905 |  |  |  | 6.00 | % |  |  | 151,280 |  |  |  | 6.63 | % |  |  | 182,540 |  |  |  | 8.00 | %
Common equity tier 1 capital1 (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 263,313 |  |  |  | 11.50 | % |  |  | 103,036 |  |  |  | 4.50 | % |  |  | 117,460 |  |  |  | 5.13 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 304,176 |  |  |  | 13.33 | % |  |  | 102,679 |  |  |  | 4.50 | % |  |  | 117,054 |  |  |  | 5.13 | % |  |  | 148,314 |  |  |  | 6.50 | %
Tier 1 capital1 (to average assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 301,739 |  |  |  | 10.44 | % |  |  | 115,609 |  |  |  | 4.00 | % |  |  | 115,609 |  |  |  | 4.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  |  | 304,176 |  |  |  | 9.93 | % |  |  | 122,521 |  |  |  | 4.00 | % |  |  | 122,521 |  |  |  | 4.00 | % |  |  | 153,151 |  |  |  | 5.00 | %

1 | As defined by regulatory agencies

Note 14 – Preferred Stock Redemption

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

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Notes to Condensed Consolidated Financial Statements

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

Note 15 – Future Accounting Matters

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

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

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

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

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

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

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Notes to Condensed Consolidated Financial Statements

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

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

The FASB has issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption will be permitted beginning after December 15, 2018. We have formed a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

The FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. The amendments in this update became effective on January 1, 2017 and resulted in a tax benefit of $19,000 for the three months ended March 31, 2017.

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

The FASB has issued Accounting Standards Update (ASU) No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding as of December 31, 2016, we do not expect the new standard to have a material impact on our income statement, but anticipate an $80 million to $100 million increase in our assets and liabilities. Decisions to repurchase, modify or renew leases prior to the implementation date will impact this level of materiality.

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Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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

Note 16 – General Litigation

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

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward–Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp (“Horizon” or the “Company”) and Horizon Bank, N.A. (the “Bank”). Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to:

| • |  | economic conditions and their impact on Horizon and its customers;

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

| • |  | rising interest rates and their impact on mortgage loan volumes and the outflow of deposits;

| • |  | loss of key Horizon personnel;

| • |  | increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks;

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

| • |  | estimates of fair value of certain of Horizon’s assets and liabilities;

| • |  | volatility and disruption in financial markets;

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

| • |  | sources of liquidity;

| • |  | potential risk of environmental liability related to lending activities;

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

| • |  | legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular, including the effects resulting from the reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the adoption of regulations by regulatory bodies under the Dodd-Frank Act;

| • |  | the possible impact of whole or partial dismantling of provisions of the Dodd-Frank Act under the administration of President Donald J. Trump;

| • |  | the impact of the Basel III capital rules;

| • |  | changes in regulatory supervision and oversight, including monetary policy and capital requirements;

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

| • |  | changes in accounting policies or procedures as may be adopted and required by regulatory agencies;

| • |  | rapid technological developments and changes;

| • |  | the risks presented by cyber terrorism and data security breaches;

| • |  | containing costs and expenses;

| • |  | the slowing or failure of economic recovery;

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

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

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2016 Annual Report on Form 10-K and in the subsequent reports we file with the SEC.

Overview

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

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

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

On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and Horizon Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.9435 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, the transaction has an implied valuation of approximately $98.6 million.

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock, or a combination of both, for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million.

Following are some highlights of Horizon’s financial performance through the first quarter of 2017:

| • |  | Net income for the first quarter of 2017 was $8.2 million or $0.37 diluted earnings per share compared to $5.4 million or $0.30 diluted earnings per share for the first quarter of 2016. The first quarter of 2017 represents an excellent start to the year given that the first quarter is typically a seasonal low revenue point for Horizon.

| • |  | Excluding acquisition-related expenses, gain on sale of investment securities and purchase accounting adjustments, net income for the first quarter of 2017 increased 38.9% to $7.5 million or $0.34 diluted earnings per share compared to $5.4 million or $0.30 diluted earnings per share for the same period of 2016.

| • |  | Return on average assets was 1.07% for the first quarter of 2017 compared to 0.83% for the same period in 2016.

| • |  | Net interest income for the first quarter of 2017 increased $5.8 million, or 29.3%, compared to the same period in 2016.

| • |  | Net interest margin was 3.80% for the first quarter of 2017 compared to 2.92% for the prior quarter and 3.45% for the same period in 2016. The improvement in net interest margin reflects Horizon’s execution on its plan to reduce expensive funding costs, which was accomplished in the fourth quarter of 2016.

| • |  | Net interest margin, excluding the impact of prepayment penalties on borrowings and purchase accounting adjustments (“core net interest margin”), was 3.66% for the first quarter of 2017 compared to 3.45% for the prior quarter and 3.36% for the same period in 2016.

| • |  | Horizon’s tangible book value per share rose to $11.79 at March 31, 2017, compared to $11.48 at December 31, 2016.

| • |  | Commercial loans, excluding acquired commercial loans, increased by an annualized rate of 12.8%, or $33.8 million, during the first quarter of 2017.

| • |  | Consumer loans, excluding acquired consumer loans, increased by an annualized rate of 18.8%, or $18.5 million, during the first quarter of 2017.

| • |  | On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company located in Bargersville, Indiana. The acquired office was closed and consolidated into Horizon’s existing Bargersville location.

| • |  | Our Grand Rapids team moved to their new downtown loan production office during February 2017. This office was approved to continue as a full service branch which will take place in the second quarter of 2017.

| • |  | Early in the second quarter, Horizon hired two additional seasoned commercial lenders for our Fort Wayne, Indiana loan production office.

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

| • |  | At the beginning of the second quarter of 2017, Michael Lamping, joined Horizon as Central Ohio Market President. A loan production office will be opened in the greater Columbus, Ohio area during the second quarter of 2017 and will focus on commercial business.

| • |  | Horizon received regulatory approval to open a new office in Noblesville, Indiana, which will be open later this year.

| • |  | Horizon, for the first time, hired a corporate general legal counsel in the first quarter. The objective for this position is, in part, to better manage legal costs and to more closely monitor changes in the regulatory and legal landscape.

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for 2016 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for loan losses, intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for Loan Losses

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

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350-10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At March 31, 2017, Horizon had core deposit intangibles of $9.5 million subject to amortization and $77.6 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 March 31, 2017 was $26.22 per share compared to a book value of $15.68 per common share.

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

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

Mortgage Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, from time-to-time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are 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

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

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.

Financial Condition

On March 31, 2017, Horizon’s total assets were $3.2 billion, an increase of approximately $28.5 million compared to December 31, 2016. The increase was primarily in investment securities available for sale of $34.4 million, net loans of $10.8 million and investment securities held to maturity of $5.7 million which were offset by decreases in cash and due from banks of $10.6 million, loans held for sale of $6.3 million and other assets of $6.7 million.

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

|  | March 31, 2017 |  |  | December 31, 2016 |
|  | Amortized Cost |  |  | Fair Value |  |  | Amortized Cost |  |  | Fair Value |
Available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 13,546 |  |  | $ | 13,480 |  |  | $ | 8,051 |  |  | $ | 7,989 |
State and municipal |  |  | 127,108 |  |  |  | 127,105 |  |  |  | 117,327 |  |  |  | 116,592 |
Federal agency collateralized mortgage obligations |  |  | 137,815 |  |  |  | 136,189 |  |  |  | 139,040 |  |  |  | 137,195 |
Federal agency mortgage-backed pools |  |  | 196,064 |  |  |  | 193,711 |  |  |  | 180,183 |  |  |  | 176,726 |
Private labeled mortgage-backed pools |  |  | 1,901 |  |  |  | 1,882 |  |  |  | — |  |  |  | — |
Corporate notes |  |  | 1,236 |  |  |  | 1,855 |  |  |  | 1,238 |  |  |  | 1,329 |
Total available for sale investment securities |  | $ | 477,670 |  |  | $ | 474,222 |  |  | $ | 445,839 |  |  | $ | 439,831 |
Held to maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal |  | $ | 176,631 |  |  | $ | 178,000 |  |  | $ | 165,607 |  |  | $ | 165,822 |
Federal agency collateralized mortgage obligations |  |  | 6,297 |  |  |  | 6,262 |  |  |  | 6,530 |  |  |  | 6,490 |
Federal agency mortgage-backed pools |  |  | 15,940 |  |  |  | 16,220 |  |  |  | 21,057 |  |  |  | 21,774 |
Total held to maturity investment securities |  | $ | 198,868 |  |  | $ | 200,482 |  |  | $ | 193,194 |  |  | $ | 194,086 |

Total investment securities increased by approximately $40.1 million at March 31, 2017 compared to December 31, 2016, primarily due to the investing of cash received from the Bargersville branch purchase and the CNB merger.

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

Total loans increased $4.5 million since December 31, 2016 to $2.1 billion as of March 31, 2017. This increase was the result of an increase in commercial loans of $36.5 million, consumer loans of $19.0 million and residential mortgage loans of $1.8 million, offset by a decrease in mortgage warehouse loans of $46.4 million and a decrease in loans held for sale of $6.3 million. The growth markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo contributed total loan growth of $39.7 million during the first quarter of 2017 leading to the increase in commercial loans. Additionally, the consumer loan increase was the result of a new seasoned consumer loan portfolio manager in the third quarter of 2016 and increasing our focus on the management of direct consumer loans.

Total deposits decreased $27.5 million since December 31, 2016 to $2.4 billion as of March 31, 2017. Interest bearing transaction accounts decreased $94.7 million, offset by increases in interest bearing deposit accounts of $27.8 million, time deposits of $33.2 million and non-interest bearing accounts of $6.2 million during the three months ended March 31, 2017.

The Company’s borrowings increased $52.6 million from December 31, 2016 to $357.5 million as of March 31, 2017. At March 31, 2017, the Company had $242.1 million in short-term funds borrowed compared to $189.0 million at December 31, 2016.

Stockholders’ equity totaled $348.6 million at March 31, 2017 compared to $340.9 million at December 31, 2016. The increase in stockholders’ equity during the period was the result of the generation of net income, net of dividends declared. At March 31, 2017, the ratio of average stockholders’ equity to average assets was 11.12% compared to 10.59% at December 31, 2016. Book value per common share at March 31, 2017 increased to $15.72 compared to $15.37 at December 31, 2016.

Results of Operations

Overview

Consolidated net income for the three-month period ended March 31, 2017 was $8.2 million compared to $5.3 million for the same period in 2016. Earnings per common share for the three months ended March 31, 2017 were $0.37 basic and diluted, compared to $0.30 basic and diluted for the same three-month period in the previous year. The increase in net income and earnings per share from the previous year reflects an increase in net interest income and non-interest income of $5.8 million and $172,000, respectively, a decrease in provision for loan losses of $202,000, partially offset by increases in non-interest expense of $2.3 million, income tax expense of $1.1 million and the diluted shares outstanding primarily due to the stock issued in the Kosciusko Financial, Inc. and LaPorte Bancorp, Inc. acquisitions. Non-interest expenses increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing expense, outside services and consultants and other expense. Excluding acquisition-related expenses and purchase accounting adjustments, net income for the first quarter of 2017 was $7.5 million or $0.34 diluted earnings per share compared to $5.4 million or $0.30 diluted earnings per share in the same period of 2016.

Net Interest Income

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

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

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

|  | Three Months Ended March 31, 2017 |  |  | Three Months Ended March 31, 2016 |
|  | Average Balance |  |  | Interest |  |  | Average Rate |  |  | Average Balance |  |  | Interest |  |  | Average Rate |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal funds sold |  | $ | 3,034 |  |  | $ | 5 |  |  |  | 0.67 | % |  | $ | 2,424 |  |  | $ | 1 |  |  |  | 0.17 | %
Interest-earning deposits |  |  | 24,748 |  |  |  | 69 |  |  |  | 1.13 | % |  |  | 20,810 |  |  |  | 49 |  |  |  | 0.95 | %
Investment securities - taxable |  |  | 398,871 |  |  |  | 2,332 |  |  |  | 2.37 | % |  |  | 463,544 |  |  |  | 2,494 |  |  |  | 2.16 | %
Investment securities - non-taxable (1) |  |  | 270,522 |  |  |  | 1,637 |  |  |  | 3.41 | % |  |  | 182,275 |  |  |  | 1,237 |  |  |  | 3.79 | %
Loans receivable (2)(3) |  |  | 2,100,254 |  |  |  | 24,791 |  |  |  | 4.79 | % |  |  | 1,698,197 |  |  |  | 19,747 |  |  |  | 4.69 | %
Total interest-earning assets (1) |  |  | 2,797,429 |  |  |  | 28,834 |  |  |  | 4.28 | % |  |  | 2,367,250 |  |  |  | 23,528 |  |  |  | 4.09 | %
Non-interest-earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  |  | 40,994 |  |  |  |  |  |  |  |  |  |  |  | 32,925 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  |  | (14,937 | ) |  |  |  |  |  |  |  |  |  |  | (14,508 | ) |  |  |  |  |  |  |  |
Other assets |  |  | 279,982 |  |  |  |  |  |  |  |  |  |  |  | 214,604 |  |  |  |  |  |  |  |  |
|  | $ | 3,103,468 |  |  |  |  |  |  |  |  |  |  | $ | 2,600,271 |  |  |  |  |  |  |  |  |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits |  | $ | 1,960,337 |  |  | $ | 1,753 |  |  |  | 0.36 | % |  | $ | 1,534,833 |  |  | $ | 1,491 |  |  |  | 0.39 | %
Borrowings |  |  | 249,923 |  |  |  | 937 |  |  |  | 1.52 | % |  |  | 406,679 |  |  |  | 1,759 |  |  |  | 1.74 | %
Subordinated debentures |  |  | 36,290 |  |  |  | 576 |  |  |  | 6.44 | % |  |  | 32,813 |  |  |  | 504 |  |  |  | 6.18 | %
Total interest-bearing liabilities |  |  | 2,246,550 |  |  |  | 3,266 |  |  |  | 0.59 | % |  |  | 1,974,325 |  |  |  | 3,754 |  |  |  | 0.76 | %
Non-interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  |  | 491,154 |  |  |  |  |  |  |  |  |  |  |  | 339,141 |  |  |  |  |  |  |  |  |
Accrued interest payable and other liabilities |  |  | 20,672 |  |  |  |  |  |  |  |  |  |  |  | 22,521 |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  | 345,092 |  |  |  |  |  |  |  |  |  |  |  | 264,284 |  |  |  |  |  |  |  |  |
|  | $ | 3,103,468 |  |  |  |  |  |  |  |  |  |  | $ | 2,600,271 |  |  |  |  |  |  |  |  |
Net interest income/spread |  |  |  |  |  | $ | 25,568 |  |  |  | 3.69 | % |  |  |  |  |  | $ | 19,774 |  |  |  | 3.32 | %
Net interest income as a percent of average interest earning assets (1) |  |  |  |  |  |  |  |  |  |  | 3.80 | % |  |  |  |  |  |  |  |  |  |  | 3.45 | %

(1) | Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. Interest rate is presented on a tax equivalent basis.

(2) | Includes loan fees and late fees. The inclusion of these fees does not have a material effect on the average interest rate.

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

Net interest income during the three months ended March 31, 2017 was $25.6 million, an increase of $5.8 million from the $19.8 million earned during the same period in 2016. Yields on the Company’s interest-earning assets increased by 19 basis points to 4.28% for the three months ending March 31, 2017 from 4.09% for the three months ended March 31, 2016. Interest income increased $5.3 million from $23.5 million for the three months ended March 31, 2016 to $28.8 million for the same period in 2017. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $1.0 million for the three months ending March 31, 2017 compared to $547,000 for the same period of 2016.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

Rates paid on interest-bearing liabilities decreased by 17 basis points for the three-month period ended March 31, 2017 compared to the same period in 2016 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense decreased $488,000 compared to the three-month period ended March 31, 2016 to $3.3 million for the same period in 2017. This decrease was due to lower average balances of borrowings in addition to lower rates paid on interest-bearing deposits and borrowings, partially offset by higher average balances of interest-bearing deposits.

The net interest margin increased 35 basis points from 3.45% for the three-month period ended March 31, 2016 to 3.80% for the same period in 2017. The increase in the margin for the three-month period ended March 31, 2017 compared to the same period in 2016 was due to an increase in the yield on interest-earning assets and a reduction in the cost on interest-bearing liabilities. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.66% for the three-month period ending March 31, 2017 compared to 3.36% for the same period in 2016.

Provision for Loan Losses

Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly reviewing the performance of its loan portfolio. During the three-month period ended March 31, 2017, a provision of $330,000 was required to adequately fund the ALLL compared to $532,000 for the same period of 2016. Commercial loan net charge-offs during the three-month period ended March 31, 2017 were negative $134,000, residential mortgage loan net charge-offs were $38,000 and consumer loan net charge-offs were $209,000. The decrease in the provision for loan losses in the first quarter of 2017 compared to the same period of 2016 was due to lower net charge-offs, stable delinquency trends and a decrease in non-performing loans. The ALLL balance at March 31, 2017 was $15.1 million or 0.70% of total loans. This compares to an ALLL balance of $14.8 million at December 31, 2016 or 0.69% of total loans. The increase in the ratio at March 31, 2017 compared to December 31, 2016 was due to an increase in ALLL balance of $217,000.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 0.89% as of March 31, 2017. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was 1.31% as of March 31, 2017. The table below illustrates Horizon’s loan loss reserve ratio composition as of March 31, 2017.

Non-GAAP Allowance for Loan and Lease Loss Detail

As of March 31, 2017

(Dollars in Thousands, Unaudited)

|  | Horizon Legacy |  |  | Heartland |  |  | Summit |  |  | Peoples |  |  | Kosciusko |  |  | LaPorte |  |  | CNB |  |  | Total |
Pre-discount loan balance |  | $ | 1,681,167 |  |  | $ | 14,698 |  |  | $ | 51,026 |  |  | $ | 139,602 |  |  | $ | 75,151 |  |  | $ | 189,149 |  |  | $ | 9,485 |  |  | $ | 2,160,278 |
Allowance for loan losses (ALLL) |  |  | 14,983 |  |  |  | 71 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,054 |
Loan discount |  |  | N/A |  |  |  | 867 |  |  |  | 2,431 |  |  |  | 3,260 |  |  |  | 994 |  |  |  | 5,466 |  |  |  | 307 |  |  |  | 13,325 |
ALLL+loan discount |  |  | 14,983 |  |  |  | 938 |  |  |  | 2,431 |  |  |  | 3,260 |  |  |  | 994 |  |  |  | 5,466 |  |  |  | 307 |  |  |  | 28,379 |
Loans, net |  | $ | 1,666,184 |  |  | $ | 13,760 |  |  | $ | 48,595 |  |  | $ | 136,342 |  |  | $ | 74,157 |  |  | $ | 183,683 |  |  | $ | 9,178 |  |  | $ | 2,131,899 |
ALLL/ pre-discount loan balance |  |  | 0.89 | % |  |  | 0.48 | % |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.70 | %
Loan discount/ pre-discount loan balance |  |  | N/A |  |  |  | 5.90 | % |  |  | 4.76 | % |  |  | 2.34 | % |  |  | 1.32 | % |  |  | 2.89 | % |  |  | 3.24 | % |  |  | 0.62 | %
ALLL+loan discount/ pre-discount loan balance |  |  | 0.89 | % |  |  | 6.38 | % |  |  | 4.76 | % |  |  | 2.34 | % |  |  | 1.32 | % |  |  | 2.89 | % |  |  | 3.24 | % |  |  | 1.31 | %

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 March 31, 2017.

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

Non-performing loans totaled $9.8 million as of March 31, 2017, down from $10.7 million as of December 31, 2016. Compared to December 31, 2016, non-performing commercial loans decreased by $902,000 and non-performing real estate and consumer loans increased by $35,000 and $18,000, respectively.

Other Real Estate Owned (OREO) totaled $3.0 million at March 31, 2017 compared to $3.2 million on December 31, 2016 and $3.8 million on March 31, 2016.

Non-interest Income

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

|  | Three Months Ended |  |  |  |  |  |  |
|  | March 31 2017 |  |  | March 31 2016 |  |  | Amount Change |  |  | Percent Change |
Non-interest Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 1,400 |  |  | $ | 1,288 |  |  | $ | 112 |  |  |  | 8.7 | %
Wire transfer fees |  |  | 150 |  |  |  | 121 |  |  |  | 29 |  |  |  | 24.0 | %
Interchange fees |  |  | 1,176 |  |  |  | 931 |  |  |  | 245 |  |  |  | 26.3 | %
Fiduciary activities |  |  | 1,922 |  |  |  | 1,635 |  |  |  | 287 |  |  |  | 17.6 | %
Gain on sale of investment securities |  |  | 35 |  |  |  | 108 |  |  |  | (73 | ) |  |  | -67.6 | %
Gain on sale of mortgage loans |  |  | 1,914 |  |  |  | 2,114 |  |  |  | (200 | ) |  |  | -9.5 | %
Mortgage servicing net of impairment |  |  | 447 |  |  |  | 447 |  |  |  | — |  |  |  | 0.0 | %
Increase in cash surrender value of bank owned life insurance |  |  | 471 |  |  |  | 345 |  |  |  | 126 |  |  |  | 36.5 | %
Other income |  |  | 44 |  |  |  | 398 |  |  |  | (354 | ) |  |  | -88.9 | %
Total non-interest income |  | $ | 7,559 |  |  | $ | 7,750 |  |  | $ | 172 |  |  |  | 2.2 | %

Total non-interest income was $172,000 higher in the first quarter of 2017 compared to the same period of 2016. Service charges on deposit accounts increased $112,000, wire transfer fees increased $29,000, interchange fees increased by $245,000, and fiduciary activities increased $287,000 primarily due to overall company growth and increased volume. Residential mortgage loan activity during the first quarter of 2017 generated $1.9 million of income from the gain on sale of mortgage loans, down $200,000 from the same period in 2016. The decrease in the gain on sale of mortgage loans was due to a decrease in the volume of mortgage loans sold from $55.2 million in the first quarter of 2016 to $49.9 million in the same period of 2017 which was slightly offset by an increase in the percentage earned on the sale of these loans from 3.83% in the first quarter of 2016 to 3.95% in the same period of 2017. Other income decreased $354,000 in the first quarter of 2017 when compared to the same period of 2016. The Company recognized losses on other real estate owned properties of $148,000 in the first quarter of 2017 compared to gains on other real estate owned properties of $100,000 in the same period of 2016.

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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 Months ended March 31, 2017 and 2016

Non-interest Expense

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

|  | Three Months Ended |  |  |  |  |  |  |
|  | March 31 2017 |  |  | March 31 2016 |  |  | Amount Change |  |  | Percent Change |
Non-interest expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Salaries |  | $ | 8,506 |  |  | $ | 6,886 |  |  | $ | 1,620 |  |  |  | 23.5 | %
Commission and bonuses |  |  | 1,061 |  |  |  | 1,075 |  |  |  | (14 | ) |  |  | -1.3 | %
Employee benefits |  |  | 2,142 |  |  |  | 2,104 |  |  |  | 38 |  |  |  | 1.8 | %
Net occupancy expenses |  |  | 2,452 |  |  |  | 1,936 |  |  |  | 516 |  |  |  | 26.7 | %
Data processing |  |  | 1,307 |  |  |  | 1,105 |  |  |  | 202 |  |  |  | 18.3 | %
Professional fees |  |  | 613 |  |  |  | 831 |  |  |  | (218 | ) |  |  | -26.2 | %
Outside services and consultants |  |  | 1,222 |  |  |  | 1,099 |  |  |  | 123 |  |  |  | 11.2 | %
Loan expense |  |  | 1,107 |  |  |  | 1,195 |  |  |  | (88 | ) |  |  | -7.4 | %
FDIC deposit insurance |  |  | 263 |  |  |  | 405 |  |  |  | (142 | ) |  |  | -35.1 | %
Other losses |  |  | 50 |  |  |  | 267 |  |  |  | (217 | ) |  |  | -81.3 | %
Other expense |  |  | 2,798 |  |  |  | 2,367 |  |  |  | 431 |  |  |  | 18.2 | %
Total non-interest expense |  | $ | 21,521 |  |  | $ | 19,240 |  |  | $ | 2,251 |  |  |  | 11.7 | %

Total non-interest expense was $2.3 million higher in the first quarter of 2017 compared to the same period of 2016. Salaries increased by $1.6 million due to a larger employee base. Net occupancy expense increased $516,000 due to Horizon’s investment in growth markets and the Kosciusko, LaPorte Bancorp and CNB acquisitions. Data processing expenses increased $202,000, outside services and consultants increased $123,000 and other expense increased $431,000 primarily due to company growth. Professional fee expense decreased $218,000 in the first quarter of 2017 when compared to the same period of 2016 primarily due to one-time expenses related to the Kosciusko and LaPorte Bancorp acquisitions. Other losses decreased by $217,000 in the first quarter of 2017 due to a decrease in debit card fraud-related expense. FDIC insurance expense was $142,000 lower in the first quarter of 2017 when compared to the same period of 2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and during 2017.

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 three months ended March 31, 2017, cash and cash equivalents decreased by approximately $10.6 million. At March 31, 2017, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $304.8 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $453.9 million at December 31, 2016 and $257.5 million at March 31, 2016.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2017. Stockholders’ equity totaled $348.6 million as of March 31, 2017, compared to $340.9 million as of December 31, 2016. For the three months ended March 31, 2017, the ratio of average stockholders’ equity to average assets was 11.12% compared to 10.59% for the three months ended December 31, 2016. The increase in stockholders’ equity during the period was the result of the generation of net income, net of dividends declared.

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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 Months ended March 31, 2017 and 2016

On February 1, 2016, the Company paid off the $12.5 million in funds received through the Small Business Lending Fund with cash from the holding company, thereby ending its participation in the program, pursuant to which it issued preferred stock to the US Treasury. The funds were paid off due to an increase in the dividend cost that would have gone in effect at the end of February 2016.

Horizon declared common stock dividends in the amount of $0.11 per share during the first three months of 2017 and $0.10 per share for the same period of 2016. The dividend payout ratio (dividends as a percent of basic earnings per share) was 29.7% and 33.6% for the first three months of 2017 and 2016, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2016.

Use of Non-GAAP Financial Measures

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

Non-GAAP Reconciliation of Net Interest Margin

(Dollars in Thousands, Unaudited)

|  | Three Months Ended |
|  | March 31 2017 |  |  | December 31 2016 |  |  | March 31 2016 |
Net Interest Margin As Reported |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 25,568 |  |  | $ | 20,939 |  |  | $ | 19,774 |
Average interest-earning assets |  |  | 2,797,429 |  |  |  | 2,932,145 |  |  |  | 2,367,250 |
Net interest income as a percent of average interest- earning assets (“Net Interest Margin”) |  |  | 3.80 | % |  |  | 2.92 | % |  |  | 3.45 | %
Impact of Prepayment Penalties on Borrowings |  |  |  |  |  |  |  |  |  |  |  |
Interest expense from prepayment penalties on borrowings |  | $ | — |  |  | $ | 4,839 |  |  | $ | — |
Impact of Acquisitions |  |  |  |  |  |  |  |  |  |  |  |
Interest income from acquisition-related purchase accounting adjustments |  | $ | (1,016 | ) |  | $ | (900 | ) |  | $ | (547 | )
Excluding Impact of Prepayment Penalties and Acquisitions |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 24,552 |  |  | $ | 24,878 |  |  | $ | 19,227 |
Average interest-earning assets |  |  | 2,797,429 |  |  |  | 2,932,145 |  |  |  | 2,367,250 |
Core Net Interest Margin |  |  | 3.66 | % |  |  | 3.45 | % |  |  | 3.36 | %

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months ended March 31, 2017 and 2016

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

(Dollars in Thousands Except per Share Data)

|  | Three Months Ended |
|  | March 31 |
|  | 2017 |  |  | 2016 |
|  | (Unaudited) |
Non-GAAP Reconciliation of Net Income |  |  |  |  |  |  |  |
Net income as reported |  | $ | 8,224 |  |  | $ | 5,381 |
Merger expenses |  |  | — |  |  |  | 639 |
Tax effect |  |  | — |  |  |  | (165 | )
Net income excluding merger expenses |  |  | 8,224 |  |  |  | 5,855 |
Gain on sale of investment securities |  |  | (35 | ) |  |  | (108 | )
Tax effect |  |  | 12 |  |  |  | 38 |
Net income excluding gain on sale of investment securities |  |  | 8,201 |  |  |  | 5,785 |
Acquisition-related purchase accounting adjustments (“PAUs”) |  |  | (1,016 | ) |  |  | (547 | )
Tax effect |  |  | 356 |  |  |  | 191 |
Net income excluding PAUs |  | $ | 7,541 |  |  | $ | 5,429 |
Non-GAAP Reconciliation of Diluted Earnings per Share |  |  |  |  |  |  |  |
Diluted earnings per share as reported |  | $ | 0.37 |  |  | $ | 0.30 |
Merger expenses |  |  | — |  |  |  | 0.04 |
Tax effect |  |  | — |  |  |  | (0.01 | )
Diluted earnings per share excluding merger expenses |  |  | 0.37 |  |  |  | 0.33 |
Gain on sale of investment securities |  |  | (0.00 | ) |  |  | (0.01 | )
Tax effect |  |  | 0.00 |  |  |  | 0.00 |
Net income excluding gain on sale of investment securities |  |  | 0.37 |  |  |  | 0.32 |
Acquisition-related PAUs |  |  | (0.05 | ) |  |  | (0.03 | )
Tax effect |  |  | 0.02 |  |  |  | 0.01 |
Diluted earnings per share excluding PAUs |  | $ | 0.34 |  |  | $ | 0.30 |

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

(Dollars in Thousands Except per Share Data)

|  | March 31 2017 |  |  | December 31 2016 |  |  | March 31 2016 |
|  | (Unaudited) |  |  |  |  |  | (Unaudited) |
Total stockholders’ equity |  | $ | 348,575 |  |  | $ | 340,855 |  |  | $ | 261,417 |
Less: Preferred stock |  |  | — |  |  |  | — |  |  |  | — |
Less: Intangible assets |  |  | 87,094 |  |  |  | 86,307 |  |  |  | 56,695 |
Total tangible stockholders’ equity |  | $ | 261,481 |  |  | $ | 254,548 |  |  | $ | 204,722 |
Common shares outstanding |  |  | 22,176,465 |  |  |  | 22,171,596 |  |  |  | 17,974,970 |
Tangible book value per common share |  | $ | 11.79 |  |  | $ | 11.48 |  |  | $ | 11.39 |

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HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three Months ended March 31, 2017 and 2016

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2016 Annual Report on Form 10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2016 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

Based on an evaluation of disclosure controls and procedures as of March 31, 2017, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes In Internal Control Over Financial Reporting

Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended March 31, 2017, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

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HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three Months ended March 31, 2017 and 2016

ITEM 1. | LEGAL PROCEEDINGS

Horizon and its subsidiaries are involved in various legal proceedings incidental to the conduct of their business. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 1A. | RISK FACTORS

There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form 10-K for 2016.

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

The following table sets forth the number and prices paid for shares deemed to be repurchased during the periods set forth below. Horizon does not have a stock repurchase program. During the three months ended March 31, 2017, Horizon withheld a small number of shares associated with employee share-based incentive programs, and such withholdings are deemed “repurchases” for purposes of this Item.

Issuer Purchases of Equity Securities |
Month of Purchase |  | Total Number of Shares Purchased |  |  | Average Price Paid per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announce Plans or Programs |  |  | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 - January 31, 2017 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
February 1 - February 28, 2017 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
March 1 - March 31, 2017 |  |  | 1,794 |  |  | $ | 25.14 |  |  |  | — |  |  |  | — |
Total |  |  | 1,794 |  |  | $ | 25.14 |  |  |  | — |  |  |  | — |

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 Months ended March 31, 2017 and 2016

ITEM 6. | EXHIBITS

| (a) | Exhibits

Exhibit No. |  | Description
10.1 |  | Performance Share Award Agreement (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed March 27, 2017)
10.2 |  | Performance Share Award Agreement (with restrictions) (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed March 27, 2017)
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

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##### Table of Contents

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: May 9, 2017 |  |  |  |  |  | /s/ Craig M. Dwight
|  |  |  |  |  | Craig M. Dwight
|  |  |  |  |  | Chief Executive Officer
Dated: May 9, 2017 |  |  |  |  |  | /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 10.1 |  | Performance Share Award Agreement |  | Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed March 27, 2017
Exhibit 10.2 |  | Performance Share Award Agreement (with restrictions) |  | Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed March 27, 2017
Exhibit 31.1 |  | Certification of Craig M. Dwight |  | Attached
Exhibit 31.2 |  | Certification of Mark E. Secor |  | Attached
Exhibit 32 |  | Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Attached
Exhibit 101 |  | Interactive Data Files |  | Attached

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