~~HORIZON BANCORP~~

~~FORM 10-Q~~

~~United States~~UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~Washington,~~WASHINGTON, D.C. 20549

FORM10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2016~~2017

Commission file number0-10792

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 RegulationS-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, anon-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act. ~~(Check One):~~

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 Rule12b-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: ~~22,172,103~~25,482,438 shares of Common Stock, no par value, at November ~~9, 2016.~~7, 2017.

HORIZON BANCORP

FORM10-Q

~~HORIZON BANCORP~~INDEX

~~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	89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4450

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6069

Item 4.	Controls and Procedures	6069

PART II. OTHER INFORMATION		70

Item 1.	Legal Proceedings	6170

Item 1A.	Risk Factors	6170

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6170

Item 3.	Defaults Upon Senior Securities	6170

Item 4.	Mine Safety Disclosures	6170

Item 5.	Other Information	6170

Item 6.	Exhibits	6271

Signatures		63

~~Index To Exhibits~~		6472

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)


						September 30			December 31
	September 30 2016		December 31 2015			2017			2016
	(Unaudited)					(Unaudited)
Assets
Cash and due from banks	$	83,721	$	48,650		$	72,662		$	70,832
Investment securities, available for sale		557,213		444,982			509,844			439,831
Investment securities, held to maturity (fair value of $194,294 and $193,703)		187,027		187,629
Investment securities, held to maturity (fair value of $202,222 and $194,086)							198,605			193,194
Loans held for sale		7,369		7,917			3,616			8,087
Loans, net of allowance for loan losses of $14,524 and $14,534		2,175,995		1,734,597
Loans, net of allowance for loan losses of $15,586 and $14,837							2,410,239			2,121,149
Premises and equipment, net		67,265		60,798			73,743			66,357
Federal Reserve and Federal Home Loan Bank stock		20,877		13,823			15,340			23,932
Goodwill		74,308		49,600			93,750			76,941
Other intangible assets		9,583		7,371			9,494			9,366
Interest receivable		12,702		10,535			14,880			12,713
Cash value of life insurance		73,661		54,504			75,480			74,134
Other assets		55,929		31,995			41,848			44,620

Total assets	$	3,325,650	$	2,652,401		$	3,519,501		$	3,141,156

Liabilities
Deposits
Non-interest bearing	$	479,771	$	335,955		$	563,536		$	496,248
Interest bearing		1,856,391		1,544,198			2,044,739			1,974,962

Total deposits		2,336,162		1,880,153			2,608,275			2,471,210
Borrowings		569,908		449,347			458,152			267,489
Subordinated debentures		37,418		32,797			37,607			37,456
Interest payable		1,015		507			700			472
Other liabilities		35,411		22,765			22,712			23,674

Total liabilities		2,979,914		2,385,569			3,127,446			2,800,301

Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 0 and 12,500 shares		—		12,500
Common stock, no par value Authorized, 66,000,000 shares (Restated - See Note 1) Issued, 22,172,103 and 17,992,986 shares (Restated - See Note 1) Outstanding, 22,143,228 and 17,909,831 shares (Restated - See Note 1)		—		—
Preferred stock, Authorized, 1,000,000 shares
Issued 0 and 0 shares							—			—
Common stock, no par value
Authorized 66,000,000 shares⁽¹⁾
Issued, 23,344,709 and 22,192,530 shares⁽¹⁾
Outstanding, 23,325,459 and 22,171,596 shares⁽¹⁾							—			—
Additional paid-in capital		181,901		106,370			212,436			182,326
Retained earnings		161,026		148,685			181,396			164,173
Accumulated other comprehensive income (loss)		2,809		(723	)
Accumulated other comprehensive loss							(1,777	)		(5,644	)

Total stockholders’ equity		345,736		266,832			392,055			340,855

Total liabilities and stockholders’ equity	$	3,325,650	$	2,652,401		$	3,519,501		$	3,141,156

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

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)


	Three Months Ended					Nine Months Ended
	September 30					September 30						Three Months Ended				Nine Months Ended
	2016		2015			2016			2015			September 30				September 30
	(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)			2017		2016		2017		2016
Interest Income
Loans receivable	$	25,313	$	20,297		$	65,854		$	55,140		$	28,113	$	25,313	$	79,699	$	65,854
Investment securities
Taxable		2,498		2,156			7,703			6,377			2,167		2,498		6,817		7,703
Tax exempt		1,151		1,125			3,583			3,281			1,790		1,151		5,193		3,583

Total interest income		28,962		23,578			77,140			64,798			32,070		28,962		91,709		77,140

Interest Expense
Deposits		1,875		1,566			4,923			4,035			1,841		1,875		5,315		4,923
Borrowed funds		2,128		1,729			5,608			4,747			1,753		2,128		4,028		5,608
Subordinated debentures		549		507			1,556			1,504			597		549		1,721		1,556

Total interest expense		4,552		3,802			12,087			10,286			4,191		4,552		11,064		12,087

Net Interest Income		24,410		19,776			65,053			54,512			27,879		24,410		80,645		65,053
Provision for loan losses		455		300			1,219			2,820			710		455		1,370		1,219

Net Interest Income after Provision for Loan Losses		23,955		19,476			63,834			51,692			27,169		23,955		79,275		63,834

Non-interest Income
Service charges on deposit accounts		1,483		1,359			4,056			3,443			1,672		1,605		4,638		4,310
Wire transfer fees		292		160			588			493			175		292		503		588
Interchange fees		2,016		1,625			5,137			4,093			1,251		1,156		3,809		3,065
Fiduciary activities		1,653		1,520			4,753			4,033			1,887		1,653		5,752		4,753
Gain on sale of investment securities (includes $0 for the three months ended and $875 for the nine months ended September 30, 2016 and $0 for the three months ended and $124 for the nine months ended September 30, 2015, related to accumulated other comprehensive earnings reclassifications)		—		—			875			124
Gains (losses) on sale of investment securities (includes $6 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $38 and $875 for the nine months ended September 30, 2017 and 2016, respectively, related to accumulated other comprehensive earnings reclassifications)													6		—		38		875
Gain on sale of mortgage loans		3,528		2,794			9,171			7,815			1,950		3,528		5,918		9,171
Mortgage servicing income net of impairment		409		246			1,356			725			369		409		1,175		1,356
Increase in cash value of bank owned life insurance		449		374			1,145			889			474		449		1,346		1,145
Death benefit on bank owned life insurance		—		—			—			145
Other income		226		322			708			892			237		226		613		708

Total non-interest income		10,056		8,400			27,789			22,652			8,021		9,318		23,792		25,971

Non-interest Expense
Salaries and employee benefits		12,210		10,652			32,592			27,541			12,911		12,210		37,086		32,592
Net occupancy expenses		2,174		1,723			6,011			4,649			2,400		2,174		7,048		6,011
Data processing		1,616		1,281			3,855			3,170			1,502		1,616		4,311		3,855
Professional fees		612		409			2,190			1,596			649		612		1,797		2,190
Outside services and consultants		2,686		3,209			5,983			4,753			2,504		2,686		4,991		5,983
Loan expense		1,482		1,351			4,086			3,975			1,215		1,482		3,572		4,086
FDIC insurance expense		465		423			1,279			1,099			270		465		776		1,279
Other losses		107		246			510			351			58		107		186		510
Other expense		3,468		2,941			9,616			7,819			3,004		2,730		8,755		7,798

Total non-interest expense		24,820		22,235			66,122			54,953			24,513		24,082		68,522		64,304

Income Before Income Tax		9,191		5,641			25,501			19,391			10,677		9,191		34,545		25,501
Income tax expense (includes $0 for the three months ended and $306 for the nine months ended September 30, 2016 and $0 for the three months ended and $43 for the nine months ended September 30, 2015, related to income tax expense from reclassification items)		2,589		1,353			7,192			5,017
Income tax expense (includes $2 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $13 and $306 for the nine months ended September 30, 2017 and 2016, respectively, related to income tax expense from reclassification items)													2,506		2,589		9,078		7,192

Net Income		6,602		4,288			18,309			14,374			8,171		6,602		25,467		18,309
Preferred stock dividend		—		(31	)		(42	)		(94	)		—		—		—		(42	)

Net Income Available to Common Shareholders	$	6,602	$	4,257		$	18,267		$	14,280		$	8,171	$	6,602	$	25,467	$	18,267

Basic Earnings Per Share (Restated - See Note 1)	$	0.31	$	0.24		$	0.95		$	0.95
Diluted Earnings Per Share (Restated - See Note 1)		0.30		0.24			0.94			0.92
Basic Earnings Per Share												$	0.36	$	0.31	$	1.14	$	0.95
Diluted Earnings Per Share													0.36		0.30		1.13		0.94

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)


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

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

Changes from derivative instruments		193			522			483			103

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

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

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

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

See notes to condensed consolidated financial statements

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Condensed Consolidated Statements of Comprehensive Income~~

~~(Dollar Amounts in Thousands)~~

   Three Months Ended September 30 Nine Months Ended September 30
   2016 2015 2016 2015
   (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Income
   $ 6,602    $ 4,288    $ 18,309    $ 14,374


Other Comprehensive Income (Loss)

Change in fair value of derivative instruments:

Change in fair value of derivative instruments for the period
   803    (516 ) 158    (334 )
Income tax effect
   (281 ) 181    (55 ) 117


Changes from derivative instruments
   522    (335 ) 103    (217 )


Change in securities:

Unrealized appreciation (depreciation) for the period on AFS securities
   (1,927 ) 1,781    6,712    1,379
Amortization from transfer of securities from available-for-sale to held-to-maturity securities
   (83 ) (203 ) (560 ) (475 )
Reclassification adjustment for securities gains realized in income
   —      —      (875 ) (124 )
Income tax effect
   704    (552 ) (1,848 ) (273 )


Unrealized gains (losses) on securities
   (1,306 ) 1,026    3,429    507


Other Comprehensive Income (Loss), Net of Tax
   (784 ) 691    3,532    290


Comprehensive Income
   $ 5,818    $ 4,979    $ 21,841    $ 14,664

~~See notes to condensed consolidated financial statements~~

HORIZON BANCORPAND 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, 2016
   $ 12,500    $ 106,370       $ 148,685    $ (723 ) $ 266,832
Net income
      18,309    18,309
Other comprehensive income, net of tax
      3,532    3,532
Redemption of preferred stock
   (12,500 )    (12,500 )
Amortization of unearned compensation
   222       222
Stock option expense
   247       247
Stock issued stock plans
   286       286
Stock issued in KFI acquisition
   14,470       14,470
Stock issued in LPSB acquisition
   60,306       60,306
Cash dividends on preferred stock (1.00%)
      (42 ) (42 )
Cash dividends on common stock ($.30 per share)
      (5,926 ) (5,926 )




Balances, September 30, 2016
   $ —      $ 181,901       $ 161,026    $ 2,809    $ 345,736


								Accumulated
			Additional					Other
	Preferred		Paid-in		Retained			Comprehensive
	Stock		Capital		Earnings			Income (Loss)			Total
Balances, January 1, 2017	$	—	$	182,326	$	164,173		$	(5,644	)	$	340,855
Net income						25,467						25,467
Other comprehensive income, net of tax									3,867			3,867
Amortization of unearned compensation				103								103
Exercise of stock options				616								616
Stock option expense				238								238
Stock issued in Lafayette acquisition				29,153								29,153
Cash dividends on common stock ($0.37 per share)						(8,244	)					(8,244	)

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

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)


	Nine Months Ended September 30						Nine Months Ended September 30
	2016			2015			2017			2016
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Operating Activities
Net income	$	18,309		$	14,374		$	25,467		$	18,309
Items not requiring (providing) cash
Provision for loan losses		1,219			2,820			1,370			1,219
Depreciation and amortization		3,790			3,020			4,303			3,790
Share based compensation		247			216			238			247
Mortgage servicing rights net impairment		840			389			75			840
Premium amortization on securities available for sale, net		4,389			2,192			4,476			4,389
Gain on sale of investment securities		(875	)		(124	)		(38	)		(875	)
Gain on sale of mortgage loans		(9,171	)		(7,815	)		(5,918	)		(9,171	)
Proceeds from sales of loans		246,435			247,512			174,271			246,435
Loans originated for sale		(236,719	)		(239,137	)		(163,882	)		(236,719	)
Change in cash value of life insurance		(1,145	)		(868	)		(1,346	)		(1,145	)
Gain (Loss) on sale of other real estate owned		118			(214	)
Gain on sale of other real estate owned								12			118
Net change in
Interest receivable		(687	)		(1,337	)		(1,811	)		(687	)
Interest payable		275			(28	)		180			275
Other assets		(16,641	)		(61	)		2,215			(16,641	)
Other liabilities		1,015			1,020			(2,335	)		1,015

Net cash provided by operating activities		11,399			21,959			37,277			11,399

Investing Activities
Purchases of securities available for sale		(152,283	)		(170,391	)		(127,752	)		(152,283	)
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale		88,330			61,785			67,416			88,330
Purchases of securities held to maturity		(35,598	)		(26,128	)		(20,152	)		(35,598	)
Proceeds from maturities of securities held to maturity		14,654			7,155			4,883			14,654
Change in FHLB stock		(2,443	)		268
Change in Federal Reserve and FHLB stock								8,987			(2,443	)
Net change in loans		(26,920	)		(123,326	)		(154,038	)		(26,920	)
Proceeds on the sale of OREO and repossessed assets		1,524			2,425			2,125			1,524
Change in premises and equipment, net		(1,719	)		(4,757	)		(2,667	)		(1,719	)
Acquisition of Peoples, net of cash received		—			182,413
Acquisition of Kosciusko, net of cash received		30,437			—			—			30,437
Acquisition of LaPorte, net of cash received		116,521			—			—			116,521
Acquisition of branch, net of cash received								11,000			—
Acquisition of Lafayette, net of cash received								20,425			—

Net cash provided by (used in) investing activities		32,503			(70,556	)		(189,773	)		32,503

Financing Activities
Net change in
Deposits		(37,495	)		79,669			(28,860	)		(37,495	)
Borrowings		46,846			(26,064	)		190,814			46,846
Redemption of preferred stock		(12,500	)		—			—			(12,500	)
Proceeds from issuance of stock		286			4,178			616			286
Dividends paid on common shares		(5,926	)		(4,413	)		(8,244	)		(5,926	)
Dividends paid on preferred shares		(42	)		(94	)		—			(42	)

Net cash provided by (used in) financing activities		(8,831	)		53,276
Net cash provided by financing activities								154,326			(8,831	)

Net Change in Cash and Cash Equivalents		35,071			4,679			1,830			35,071
Cash and Cash Equivalents, Beginning of Period		48,650			43,476			70,832			48,650

Cash and Cash Equivalents, End of Period	$	83,721		$	48,155		$	72,662		$	83,721

Additional Supplemental Information
Interest paid	$	11,579		$	10,292
Income taxes paid		7,310			4,900
Transfer of loans to other real estate owned		3,035			2,825
The Company purchased all of the capital stock of Kosciusko for $22,983 on June 1, 2016 and Peoples for $78,147 on July 1, 2015. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		155,873			485,077
Less: common stock issued		14,470			22,641
Cash paid for the capital stock		8,513			55,506
Liabilities assumed		132,890			406,930

The Company purchased all of the capital stock of LaPorte Bancorp for $98,634 on July 18, 2016. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		546,770			—
Less: common stock issued		60,306			—
Cash paid for the capital stock		38,328			—
Liabilities assumed		448,136			—

(continued)

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(Dollar Amounts in Thousands)


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

See notes to condensed consolidated financial statements

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”). Horizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. All inter-company balances and transactions have been eliminated. The results of operations for the periods ended September 30, ~~2016~~2017 and September 30, ~~2015~~2016 are not necessarily indicative of the operating results for the full year of ~~2016~~2017 or ~~2015.~~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 Form10-K for ~~2015~~2016 filed with the Securities and Exchange Commission on February ~~29, 2016.~~28, 2017. The condensed consolidated balance sheet of Horizon as of December 31, ~~2015~~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 athree-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 thisthree-for-two stock split. The effect of thethree-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, ~~will receive~~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 ~~are expected to be payable and~~were issued on November 14, 2016, and ~~that~~ the common shares ~~will begin~~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. ~~The following table shows computation of basic and diluted earnings per share.~~

   Three Months Ended    Nine Months Ended
   September 30    September 30
   2016    2015    2016    2015
   (Unaudited)    (Unaudited)    (Unaudited)    (Unaudited)
Basic earnings per share

Net income
   $ 6,602       $ 4,288       $ 18,309       $ 14,374
Less: Preferred stock dividends
   —         31       42       94








Net income available to common shareholders
   $ 6,602       $ 4,257       $ 18,267       $ 14,280
Weighted average common shares outstanding⁽¹⁾
   21,538,752       17,408,964       19,252,295       15,044,129
Basic earnings per share
   $ 0.31       $ 0.24       $ 0.95       $ 0.95








Diluted earnings per share

Net income available to common shareholders
   $ 6,602       $ 4,257       $ 18,267       $ 14,280
Weighted average common shares outstanding⁽¹⁾
   21,538,752       17,408,964       19,252,295       15,044,129
Effect of dilutive securities:

Warrants
   —         321,888       —         436,044
Restricted stock
   33,650       50,207       27,590       46,092
Stock options
   79,551       58,823       66,491       54,446








Weighted average shares outstanding
   21,651,953       17,839,882       19,346,376       15,580,711
Diluted earnings per share
   $ 0.30       $ 0.24       $ 0.94       $ 0.92

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

There were no shares for both the three and nine months ended September 30, 2016, respectively, and 3,750 for both the three and nine months ended September 30, 2015 which were not included in the computation of diluted earnings per share because they were non-dilutive.

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

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

~~Note 2 – Acquisitions~~

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and Horizon Bank N.A.’s acquisition of Peoples Federal Savings Bank of DeKalb County (“Peoples FSB”), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 1.425 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 3,288,303. Horizon’s stock price was $16.88 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. The Company had approximately $4.9 million in costs related to the acquisition as of December 31, 2015. These expenses were classified in the 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 increased its deposit base and reduced transaction costs. The Company also expects to reduce cost through economies of scale.

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

ASSETS

Cash and due from banks
   $ 205,054
Investment securities, held to maturity
   2,038
Commercial
   67,435
Residential mortgage
   137,331
Consumer
   19,593


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


Total assets purchased
   $ 485,077


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


Total estimated purchase price
   $ 78,147

LIABILITIES

Deposits

Non-interest bearing
   $ 28,251
NOW accounts
   65,771
Savings and money market
   125,176
Certificates of deposits
   131,889


Total deposits
   351,087
Borrowings
   48,884
Interest payable
   21
Other liabilities
   6,938


Total liabilities assumed
   $ 406,930

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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


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

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

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

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

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

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

~~The Company acquired certain loans~~three and nine months ended September 30, 2017 and 2016 which were not included in the ~~acquisition and~~computation of diluted earnings per share because they werenon-dilutive.

Horizon has share-based employee compensation plans, which are described in 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.~~notes to the financial statements included in the December 31, 2016 Annual Report on Form10-K.

~~The loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered~~Reclassifications

Certain reclassifications have been made to the 2016 condensed consolidated financial statements 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 expectedcomparable 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 based2017. These reclassifications had no effect on ~~reasonable expectation about the timing and amount of cash flows to be collected.~~net income.

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

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


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


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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The results of operations of Peoples and Peoples FSB have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended September 30, 2016 and 2015 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.Note 2 – Acquisitions

   Three Months Ended    Nine Months Ended
   September 30    September 30    September 30    September 30
   2016    2015    2016    2015
Summary of Operations:

Net Interest Income
   $ 24,410       $ 19,776       $ 65,053       $ 60,466
Provision for Loan Losses
   455       300       1,219       2,880
Net Interest Income after Provision for Loan Losses
   23,955       19,476       63,834       57,586
Non-interest Income
   10,056       8,400       27,789       24,545
Non-Interest Expense
   24,820       22,235       66,122       61,192
Income before Income Taxes
   9,191       5,641       25,501       20,939
Income Tax Expense
   2,589       1,353       7,192       5,164
Net Income
   6,602       4,288       18,309       15,776
Net Income Available to Common Shareholders
   $ 6,602       $ 4,257       $ 18,267       $ 15,682
Basic Earnings Per Share
   $ 0.31       $ 0.24       $ 0.95       $ 0.91
Diluted Earnings Per Share
   $ 0.30       $ 0.24       $ 0.94       $ 0.89

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.Kosciusko Financial, Inc.

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 4.5183 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million. The Company has had approximately $1.6 million in costs related to the acquisition. These expenses are classified in thenon-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 ~~will have an opportunity~~was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce ~~cost~~costs through economies of scale.

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


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

Consumer		6,319	Total deposits		122,808

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

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

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

Total estimated purchase price	$	22,983

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

ASSETS

Cash and due from banks
   $ 38,950
Investment securities, held to maturity
   1,191
Commercial
   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 ~~seven~~ten years on a straight line basis.

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

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such aspast-due andnon-accrual status, borrower credit scores and recentloan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC310-30) 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.

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

The following table details the acquired loans that are accounted for in accordance with ASC310-30 as of June 1, 2016.


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

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

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

~~Pro-forma statements were not presented due~~

HORIZON BANCORP AND SUBSIDIARIES

Notes to ~~the immateriality of the transaction.~~Condensed Consolidated Financial Statements

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

LaPorte Bancorp, Inc.

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

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


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

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

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

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

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

Total estimated purchase price	$	98,634

Of the total estimated purchase price of ~~fair value on the date~~$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 ~~acquisition have not been received yet. Prior to the end of the one year measurement period for finalizing~~ the purchase price ~~allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments~~is deductible. The core deposit intangible will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings byamortized over ten years on a straight line ~~item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.~~basis.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

ASSETS

Cash and due from banks
   $ 154,849
Investment securities, held to maturity
   23,779
Commercial
   154,223
Residential mortgage
   42,603
Consumer
   16,801
Mortgage Warehousing
   99,752


Total loans
   313,379
Premises and equipment, net
   6,022
FHLB stock
   4,029
Goodwill
   18,265
Core deposit intangible
   2,514
Interest receivable
   844
Cash value of life insurance
   15,267
Other assets
   7,822


Total assets purchased
   $ 546,770


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
   86,929


Total deposits
   370,696
Borrowings
   64,793
Interest payable
   178
Subordinated debt
   4,504
Other liabilities
   7,965


Total liabilities assumed
   $ 448,136

Of the total estimated purchase price of $98.6 million, $2.5 million has been allocated to core deposit intangible. Additionally, $18.3 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over seven years on a straight line basis.

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.

~~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 ASC310-30 as of July 18, 2016. Final valuation estimates have not yet been determined for acquired loans as of September 30, 2016. If information becomes available which would indicate adjustments to the purchase price allocation, such adjustments would be made prospectively.


Contractually required principal and interest at acquisition	$	12,551	$	12,545
Contractual cash flows not expected to be collected (nonaccretable differences)		3,411		4,492

Expected cash flows at acquisition		9,140		8,053
Interest component of expected cash flows (accretable discount)		1,736		1,258

Fair value of acquired loans accounted for under ASC 310-30	$	7,404	$	6,795

~~Estimates~~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 during the nine months ended September 30, 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:

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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


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

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

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

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

Cash paid		5,311

Total estimated purchase price	$	5,311

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

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

Bargersville Branch Purchase

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

Lafayette Community Bancorp

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

related to the acquisition. These expenses are classified in thenon-interest expense section of the income statement and are primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

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

The purchase price allocated to net tangible and intangible assets was made based upon provisional amounts as the initial accounting was not complete as of September 30, 2017. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Lafayette acquisition is detailed in the following table. Prior to the end of the one year measurement period for finalizing the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.


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

Consumer		5,345		Total deposits		151,098

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

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

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

Total estimated purchase price	$	34,529

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

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

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The Company acquired the $134.4 million loan portfolio at an estimated fair value discount of $3.4 million. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided. When completed, the excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC310-30.

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

The results of operations of Lafayette, CNB, LaPorte Bancorp and ~~The LaPorte Savings Bank~~Kosciusko have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes ~~pro forma~~pro-forma results for the ~~periods~~three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 as if the Lafayette, CNB, LaPorte Bancorp and ~~The LaPorte Savings Bank~~Kosciusko acquisitions had occurred as of the beginning of the comparable prior reporting periods.


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30		September 30		September 30		September 30		September 30				September 30
	2016		2015		2016		2015		2017		2016		2017		2016
Summary of Operations:
Net Interest Income	$	25,044	$	23,981	$	74,512	$	67,243	$	28,856	$	26,628	$	84,471	$	80,515
Provision for Loan Losses		455		400		1,219		3,075		725		455		1,438		1,219

Net Interest Income after Provision for Loan Losses		24,589		23,581		73,293		64,168		28,131	$	26,173		83,033		79,296
Non-interest Income		11,056		9,099		33,052		24,767		8,077		10,534		24,175		32,547
Non-Interest Expense		31,611		25,541		80,937		64,956		26,523		32,400		73,003		86,781

Income before Income Taxes		4,034		7,139		25,408		23,979		9,685		4,307		34,205		25,062
Income Tax Expense		1,855		1,670		8,070		5,932		2,394		1,997		9,260		8,328

Net Income		2,179		5,469		17,338		18,047		7,291		2,310		24,945		16,734
Net Income Available to Common Shareholders	$	2,179	$	5,438	$	17,296	$	17,953	$	7,291	$	2,310	$	24,945	$	16,692

Basic Earnings Per Share	$	0.10	$	0.31	$	0.90	$	1.19	$	0.32	$	0.11	$	1.12	$	0.87
Diluted Earnings Per Share	$	0.10	$	0.30	$	0.89	$	1.15	$	0.32	$	0.11	$	1.11	$	0.86
										22,580,160		21,538,752		22,326,454		19,252,295
										22,715,273		21,651,953		22,455,798		19,346,376

The ~~pro forma~~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~~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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Wolverine Bancorp, Inc.

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

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

Utilizing September 30, 2017 financials for both Horizon and Wolverine and an estimate of the fair market value adjustments associated with the merger, Horizon would have total assets of approximately $3.9 billion, total deposits of approximately $2.9 billion and total net loans of approximately $2.7 billion on a pro forma basis. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 3 – Securities

The fair value of securities is as follows:


			Gross		Gross							Gross		Gross
September 30, 2017										Amortized		Unrealized		Unrealized			Fair
	Amortized		Unrealized		Unrealized			Fair		Cost		Gains		Losses			Value
September 30, 2016	Cost		Gains		Losses			Value
Available for sale
U.S. Treasury and federal agencies	$	27,383	$	54	$	(15	)	$	27,422	$	17,996	$	3	$	(114	)	$	17,885
State and municipal		62,825		1,321		(107	)		64,039		141,751		2,288		(556	)		143,483
Federal agency collateralized mortgage obligations		188,072		1,894		(282	)		189,684		135,511		131		(1,440	)		134,202
Federal agency mortgage-backed pools		272,144		4,240		(411	)		275,973		213,071		496		(1,516	)		212,051
Private labeled mortgage-backed pools											1,841		—		(11	)		1,830
Corporate notes		32		63		—			95		275		118		—			393

Total available for sale investment securities	$	550,456	$	7,572	$	(815	)	$	557,213	$	510,445	$	3,036	$	(3,637	)	$	509,844


Held to maturity
State and municipal	$	158,543	$	6,718	$	(761	)	$	164,500	$	177,473	$	4,249	$	(862	)	$	180,860
Federal agency collateralized mortgage obligations		6,828		144		—			6,972		5,902		25		(31	)		5,896
Federal agency mortgage-backed pools		21,656		1,166		—			22,822		15,230		307		(71	)		15,466

Total held to maturity investment securities	$	187,027	$	8,028	$	(761	)	$	194,294	$	198,605	$	4,581	$	(964	)	$	202,222


			Gross		Gross							Gross		Gross
December 31, 2016										Amortized		Unrealized		Unrealized			Fair
	Amortized		Unrealized		Unrealized			Fair		Cost		Gains		Losses			Value
December 31, 2015	Cost		Gains		Losses			Value
Available for sale
U.S. Treasury and federal agencies	$	5,940	$	3	$	(17	)	$	5,926	$	8,051	$	2	$	(64	)	$	7,989
State and municipal		73,829		1,299		(33	)		75,095		117,327		324		(1,059	)		116,592
Federal agency collateralized mortgage obligations		157,291		567		(1,655	)		156,203		139,040		254		(2,099	)		137,195
Federal agency mortgage-backed pools		206,970		2,080		(1,346	)		207,704		180,183		251		(3,707	)		176,726
Corporate notes		32		22		—			54		1,238		91		—			1,329

Total available for sale investment securities	$	444,062	$	3,971	$	(3,051	)	$	444,982	$	445,839	$	922	$	(6,929	)	$	439,831


Held to maturity
U.S. Treasury and federal agencies	$	5,859	$	93	$	—		$	5,952
State and municipal		146,331		5,375		(253	)		151,453	$	165,607	$	2,700	$	(2,485	)	$	165,822
Federal agency collateralized mortgage obligations		9,051		27		(124	)		8,954		6,530		31		(71	)		6,490
Federal agency mortgage-backed pools		26,388		1,141		(185	)		27,344		21,057		897		(180	)		21,774

Total held to maturity investment securities	$	187,629	$	6,636	$	(562	)	$	193,703	$	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 andheld-to-maturity, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At September 30, ~~2016,~~2017, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

2017.

The amortized cost and fair value of securities available for sale and held to maturity at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2016				December 31, 2015				September 30, 2017				December 31, 2016
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
Available for sale
Within one year	$	6,921	$	6,953	$	7,192	$	7,232	$	9,772	$	9,784	$	7,455	$	7,480
One to five years		52,105		52,482		38,197		38,894		44,771		44,811		37,483		37,479
Five to ten years		12,934		13,325		16,807		17,152		44,163		44,851		21,112		20,984
After ten years		18,280		18,796		17,605		17,797		61,316		62,315		60,566		59,967

		90,240		91,556		79,801		81,075		160,022		161,761		126,616		125,910
Federal agency collateralized mortgage obligations		188,072		189,684		157,291		156,203		135,511		134,202		139,040		137,195
Federal agency mortgage-backed pools		272,144		275,973		206,970		207,704		213,071		212,051		180,183		176,726
Private labeled mortgage-backed pools										1,841		1,830		—		—

Total available for sale investment securities	$	550,456	$	557,213	$	444,062	$	444,982	$	510,445	$	509,844	$	445,839	$	439,831


Held to maturity
Within one year	$	—	$	—	$	—	$	—	$	7,383	$	7,373	$	—	$	—
One to five years		22,801		23,965		17,815		18,403		37,402		38,645		24,594		25,271
Five to ten years		88,924		93,501		106,167		110,026		88,399		90,371		87,645		88,805
After ten years		46,818		47,034		28,208		28,976		44,289		44,471		53,368		51,746

		158,543		164,500		152,190		157,405		177,473		180,860		165,607		165,822
Federal agency collateralized mortgage obligations		6,828		6,972		9,051		8,954		5,902		5,896		6,530		6,490
Federal agency mortgage-backed pools		21,656		22,822		26,388		27,344		15,230		15,466		21,057		21,774

Total held to maturity investment securities	$	187,027	$	194,294	$	187,629	$	193,703	$	198,605	$	202,222	$	193,194	$	194,086

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

   Less than 12 Months 12 Months or More Total
   Fair    Unrealized Fair    Unrealized Fair    Unrealized
September 30, 2016    Value    Losses Value    Losses Value    Losses
U.S. Treasury and federal agencies
   $ 6,594       $ (15 ) $ —         $ —      $ 6,594       $ (15 )
State and municipal
   26,360       (868 ) —         —      26,360       (868 )
Federal agency collateralized mortgage obligations
   48,837       (184 ) 12,304       (98 ) 61,141       (282 )
Federal agency mortgage-backed pools
   47,054       (365 ) 6,779       (46 ) 53,833       (411 )








Total temporarily impaired securities
   $ 128,845       $ (1,432 ) $ 19,083       $ (144 ) $ 147,928       $ (1,576 )








   Less than 12 Months 12 Months or More Total
   Fair    Unrealized Fair    Unrealized Fair    Unrealized
December 31, 2015    Value    Losses Value    Losses Value    Losses
U.S. Treasury and federal agencies
   $ 5,468       $ (17 ) $ —         $ —      $ 5,468       $ (17 )
State and municipal
   17,353       (280 ) 446       (6 ) 17,799       (286 )
Federal agency collateralized mortgage obligations
   89,459       (1,124 ) 25,428       (655 ) 114,887       (1,779 )
Federal agency mortgage-backed pools
   113,244       (1,212 ) 16,506       (319 ) 129,750       (1,531 )








Total temporarily impaired securities
   $ 225,524       $ (2,633 ) $ 42,380       $ (980 ) $ 267,904       $ (3,613 )

   Three Months Ended September 30    Nine Months Ended September 30
   2016    2015    2016    2015
Sales of securities available for sale (Unaudited)

Proceeds
   $ —         $ —         $ 25,077       $ 13,332
Gross gains
   —         —         1,060       147
Gross losses
   —         —         (185 )    (23 )


	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2017	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury and federal agencies	$	15,233	$	(71	)	$	1,372	$	(43	)	$	16,605	$	(114	)
State and municipal		41,995		(483	)		28,127		(935	)		70,122		(1,418	)
Federal agency collateralized mortgage obligations		61,135		(480	)		47,213		(991	)		108,348		(1,471	)
Federal agency mortgage-backed pools		81,397		(567	)		61,624		(1,020	)		143,021		(1,587	)
Private labeled mortgage-backed pools		1,830		(11	)		—		—			1,830		(11	)

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


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

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

~~Note 4~~– ~~Loans~~Information regarding security proceeds, gross gains and gross losses are presented below.

   September 30    December 31
   2016    2015
Commercial

Working capital and equipment
   $ 440,599       $ 381,245
Real estate, including agriculture
   564,602       391,668
Tax exempt
   12,621       8,674
Other
   29,628       23,408




Total
   1,047,450       804,995
Real estate

1–4 family
   523,721       433,015
Other
   6,441       4,129




Total
   530,162       437,144
Consumer

Auto
   167,541       168,397
Recreation
   5,458       5,365
Real estate/home improvement
   55,505       47,015
Home equity
   140,156       127,113
Unsecured
   4,230       4,120
Other
   13,141       10,290




Total
   386,031       362,300
Mortgage warehouse
   226,876       144,692




Total loans
   2,190,519       1,749,131
Allowance for loan losses
   (14,524 )    (14,534 )




Loans, net
   $ 2,175,995       $ 1,734,597


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

Note 4 – Loans


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

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

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

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

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

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

Commercial

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

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

Real Estate and Consumer

With respect to residential loans that are secured by1-4 family residences and are generally owner occupied, the Company generally establishes a maximumloan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in1-4 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~~loan funded by Horizon undergoes an underwriting review by Horizon to the end investor guidelines and is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company reacquires the loan under its option within the agreement. Due to the reacquire feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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


	Loan					Deferred			Recorded
September 30, 2016	Balance			Interest Due		Fees / (Costs)			Investment
September 30, 2017												Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	321,762		$	1,151	$	1,192		$	324,105		$	403,184		$	1,371	$	880		$	405,435
Non owner occupied real estate		457,555			627		529			458,711			531,560			656		2,202			534,418
Residential spec homes		7,949			20		6			7,975			4,031			11		—			4,042
Development & spec land loans		39,798			79		74			39,951			43,299			100		84			43,483
Commercial and industrial		218,414			1,992		171			220,577			288,086			2,475		464			291,025

Total commercial		1,045,478			3,869		1,972			1,051,319			1,270,160			4,613		3,630			1,278,403

Residential mortgage		506,545			1,599		2,556			510,700			553,451			1,814		2,786			558,051
Residential construction		21,061			38		—			21,099			14,825			29		—			14,854
Mortgage warehouse		226,876			498		—			227,374			95,483			480		—			95,963

Total real estate		754,482			2,135		2,556			759,173			663,759			2,323		2,786			668,868

Direct installment		66,495			178		(439	)		66,234			85,726			249		(566	)		85,409
Direct installment purchased		124			—		—			124			88			—		—			88
Indirect installment		147,829			296		—			148,125			207,293			437		173			207,903
Home equity		172,905			665		(883	)		172,687			194,050			795		(1,274	)		193,571

Total consumer		387,353			1,139		(1,322	)		387,170			487,157			1,481		(1,667	)		486,971

Total loans		2,187,313			7,143		3,206			2,197,662			2,421,076			8,417		4,749			2,434,242
Allowance for loan losses		(14,524	)		—		—			(14,524	)		(15,586	)		—		—			(15,586	)

Net loans	$	2,172,789		$	7,143	$	3,206		$	2,183,138		$	2,405,490		$	8,417	$	4,749		$	2,418,656


	Loan					Deferred			Recorded
December 31, 2015	Balance			Interest Due		Fees / (Costs)			Investment
December 31, 2016												Loan Balance			Interest Due		Deferred Fees / (Costs)			Recorded Investment
Owner occupied real estate	$	268,281		$	613	$	1,328		$	270,222		$	337,548		$	899	$	1,022		$	339,469
Non owner occupied real estate		326,399			306		497			327,202			461,897			624		2,176			464,697
Residential spec homes		5,018			9		17			5,044			5,006			8		(2	)		5,012
Development & spec land loans		18,183			33		26			18,242			31,228			56		119			31,403
Commercial and industrial		184,911			1,246		335			186,492			230,520			1,906		442			232,868

Total commercial		802,792			2,207		2,203			807,202			1,066,199			3,493		3,757			1,073,449

Residential mortgage		414,924			1,275		2,470			418,669			508,233			1,492		3,030			512,755
Residential construction		19,751			34		—			19,785			20,611			33		—			20,644
Mortgage warehouse		144,692			480		—			145,172			135,727			480		—			136,207

Total real estate		579,367			1,789		2,470			583,626			664,571			2,005		3,030			669,606

Direct installment		54,341			168		(359	)		54,150			71,150			199		(385	)		70,964
Direct installment purchased		153			—		—			153			119			—		—			119
Indirect installment		151,523			323		—			151,846			153,204			345		—			153,549
Home equity		157,164			628		(522	)		157,270			175,126			703		(785	)		175,044

Total consumer		363,181			1,119		(881	)		363,419			399,599			1,247		(1,170	)		399,676

Total loans		1,745,340			5,115		3,792			1,754,247			2,130,369			6,745		5,617			2,142,731
Allowance for loan losses		(14,534	)		—		—			(14,534	)		(14,837	)		—		—			(14,837	)

Net loans	$	1,730,806		$	5,115	$	3,792		$	1,739,713		$	2,115,532		$	6,745	$	5,617		$	2,127,894

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 5 – Accounting for Certain Loans Acquired in a Transfer

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

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


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

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

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


	September 30		September 30		September 30		September 30		September 30		September 30		December 31		December 31		December 31		December 31		December 31		December 31
	2016		2016		2016		2016		2016		2016		2016		2016		2016		2016		2016		2016
	Heartland		Summit		Peoples		Kosciusko		LaPorte		Total		Heartland		Summit		Peoples		Kosciusko		LaPorte		Total
Commercial	$	867	$	5,323	$	724	$	1,667	$	5,731	$	14,312	$	774	$	5,245	$	692	$	1,652	$	3,200	$	11,563
Real estate		605		989		204		492		1,673		3,963		534		967		165		457		1,114		3,237
Consumer		2		9		—		—		—		11		2		—		—		—		41		43

Outstanding balance	$	1,474	$	6,321	$	928	$	2,159	$	7,404	$	18,286	$	1,310	$	6,213	$	856	$	2,109	$	4,355	$	14,843

Carrying amount, net of allowance of $0											$	18,286											$	14,843


	December 31		December 31		December 31		December 31		December 31		December 31
	2015		2015		2015		2015		2015		2015
	Heartland		Summit		Peoples		Kosciusko		LaPorte		Total
Commercial	$	1,633	$	5,567	$	1,061	$	—	$	—	$	8,261
Real estate		693		1,216		179		—		—		2,088
Consumer		6		35		—		—		—		41

Outstanding balance	$	2,332	$	6,818	$	1,240	$	—	$	—	$	10,390

Carrying amount, net of allowance of $63											$	10,327

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


	Nine Months Ended September 30, 2016																	Nine Months Ended September 30, 2017
	Heartland			Summit			Peoples			Kosciusko			LaPorte		Total			Heartland			Summit			Peoples			Kosciusko			LaPorte			Total
Balance at January 1	$	795		$	708		$	555		$	—		$	—	$	2,058		$	557		$	502		$	389		$	530		$	1,479		$	3,457
Additions		—			—			—			634			1,736		2,370			—			—			—			—			—			—
Accretion		(127	)		(139	)		(92	)		(38	)		—		(396	)		(99	)		(268	)		(388	)		(80	)		(194	)		(1,029	)
Reclassification from nonaccretable difference		—			—			—			—			—		—			—			—			—			—			—			—
Disposals		(74	)		(35	)		(59	)		(23	)		—		(191	)		(6	)		(2	)		(1	)		(42	)		(264	)		(315	)

Balance at September 30	$	594		$	534		$	404		$	573		$	1,736	$	3,841		$	452		$	232		$	—		$	408		$	1,021		$	2,113


	Nine Months Ended September 30, 2015																	Nine Months Ended September 30, 2016
	Heartland			Summit			Peoples			Kosciusko			LaPorte		Total			Heartland			Summit			Peoples			Kosciusko			LaPorte			Total
Balance at January 1	$	2,400		$	1,268		$	—		$	—		$	—	$	3,668		$	795		$	708		$	555		$	—		$	—		$	2,058
Additions		—			—			647			—			—		647			—			—			—			634			1,736			2,370
Accretion		(272	)		(254	)		—			—			—		(526	)		(127	)		(139	)		(92	)		(38	)		—			(396	)
Reclassification from nonaccretable difference		—			—			—			—			—		—			—			—			—			—			—			—
Disposals		(1,210	)		(237	)		—			—			—		(1,447	)		(74	)		(35	)		(59	)		(23	)		—			(191	)

Balance at September 30	$	918		$	777		$	647		$	—		$	—	$	2,342		$	594		$	534		$	404		$	573		$	—		$	3,841

During the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, the Company ~~decreased~~increased the allowance for loan losses on purchased loans by a ~~recovery~~charge to the income statement of $0$71,000 and ~~$87,000,~~$0, respectively.

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						Nine Months Ended
	September 30						September 30						Three Months Ended September 30						Nine Months Ended September 30
	2016			2015			2016			2015			2017			2016			2017			2016
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Balance at beginning of the period	$	14,226		$	16,421		$	14,534		$	16,501		$	15,027		$	14,226		$	14,837		$	14,534
Loans charged-off:
Commercial
Owner occupied real estate		4			56			182			1,478			12			4			12			182
Non owner occupied real estate		(1	)		—			471			16			20			(1	)		20			471
Residential development		—			—			—			—			—			—			—			—
Development & Spec Land Loans		—			—			—			—			—			—			1			—
Commercial and industrial		8			38			47			291			232			8			273			47

Total commercial		11			94			700			1,785			264			11			306			700
Real estate
Residential mortgage		12			101			127			287			37			12			89			127
Residential construction		—			—			—			—			—			—			—			—
Mortgage warehouse		—			—			—			—			—			—			—			—

Total real estate		12			101			127			287			37			12			89			127
Consumer
Direct Installment		55			51			159			206			84			55			331			159
Direct Installment Purchased		—			—			—			—			—			—			—			—
Indirect Installment		296			218			851			783			254			296			862			851
Home Equity		32			262			271			766			24			32			95			271

Total consumer		383			531			1,281			1,755			362			383			1,288			1,281

Total loans charged-off		406			726			2,108			3,827			663			406			1,683			2,108

Recoveries of loans previously charged-off:
Commercial
Owner occupied real estate		2			8			31			94			7			2			8			31
Non owner occupied real estate		1			1			55			1			4			1			29			55
Residential development		2			—			6			—			2			2			6			6
Development & Spec Land Loans		—			—			—			—			—			—			—			—
Commercial and industrial		12			8			107			41			82			12			204			107

Total commercial		17			17			199			136			95			17			247			199
Real estate
Residential mortgage		12			5			75			10			13			12			35			75
Residential construction		—			—			—			—			—			—			—			—
Mortgage warehouse		—			—			—			—			—			—			—			—

Total real estate		12			5			75			10			13			12			35			75
Consumer
Direct Installment		26			15			70			91			260			26			311			70
Direct Installment Purchased		—			—			—			—			—			—			—			—
Indirect Installment		160			112			400			347			119			160			384			400
Home Equity		34			24			135			90			25			34			85			135

Total consumer		220			151			605			528			404			220			780			605

Total loan recoveries		249			173			879			674			512			249			1,062			879

Net loans charged-off (recovered)		157			553			1,229			3,153			151			157			621			1,229

Provision charged to operating expense
Commercial		165			532			(471	)		2,580			429			165			1,357			(471	)
Real estate		102			(955	)		(147	)		(51	)		361			102			(113	)		(147	)
Consumer		188			723			1,837			291			(80	)		188			126			1,837

Total provision charged to operating expense		455			300			1,219			2,820			710			455			1,370			1,219

Balance at the end of the period	$	14,524		$	16,168		$	14,524		$	16,168		$	15,586		$	14,524		$	15,586		$	14,524

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.

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

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 except1-4 family residential properties and consumer, the Company promptlycharges-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 partialcharge-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~~charges-off1-4 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 of1-4 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 alsocharges-off unsecuredopen-end loans when the loan is contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

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:


September 30, 2016	Commercial		Real Estate		Mortgage Warehousing		Consumer		Total
															Mortgage
September 30, 2017											Commercial		Real Estate		Warehousing		Consumer		Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		6,222		1,947		1,337		5,018		14,524		7,877		2,129		1,048		4,532		15,586
Loans acquired with deteriorated credit quality		—		—		—		—		—		—		—		—		—		—

Total ending allowance balance	$	6,222	$	1,947	$	1,337	$	5,018	$	14,524	$	7,877	$	2,129	$	1,048	$	4,532	$	15,586


Loans:
Individually evaluated for impairment	$	5,855	$	—	$	—	$	—	$	5,855	$	3,451	$	—	$	—	$	—	$	3,451
Collectively evaluated for impairment		1,045,464		531,799		227,374		387,170		2,191,807		1,274,952		572,905		95,963		486,971		2,430,791
Loans acquired with deteriorated credit quality		—		—		—		—		—		—		—		—		—		—

Total ending loans balance	$	1,051,319	$	531,799	$	227,374	$	387,170	$	2,197,662	$	1,278,403	$	572,905	$	95,963	$	486,971	$	2,434,242


December 31, 2015	Commercial		Real Estate		Mortgage Warehousing		Consumer		Total
															Mortgage
December 31, 2016											Commercial		Real Estate		Warehousing		Consumer		Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	202	$	—	$	—	$	—	$	202	$	4	$	—	$	—	$	—	$	4
Collectively evaluated for impairment		6,739		2,476		1,007		3,856		14,078		6,575		2,090		1,254		4,914		14,833
Loans acquired with deteriorated credit quality		254		—		—		—		254		—		—		—		—		—

Total ending allowance balance	$	7,195	$	2,476	$	1,007	$	3,856	$	14,534	$	6,579	$	2,090	$	1,254	$	4,914	$	14,837


Loans:
Individually evaluated for impairment	$	7,019	$	—	$	—	$	—	$	7,019	$	2,250	$	—	$	—	$	—	$	2,250
Collectively evaluated for impairment		798,454		438,454		145,172		363,419		1,745,499		1,071,199		533,399		136,207		399,676		2,140,481
Loans acquired with deteriorated credit quality		1,729		—		—		—		1,729		—		—		—		—		—

Total ending loans balance	$	807,202	$	438,454	$	145,172	$	363,419	$	1,754,247	$	1,073,449	$	533,399	$	136,207	$	399,676	$	2,142,731

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 thenon-accrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDRs”) by class of loans:


September 30, 2016	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non- Performing TDRs		Performing TDRs		Total Non- Performing Loans
September 30, 2017											Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non- Performing TDRs		Performing TDRs		Total Non- Performing Loans
Commercial
Owner occupied real estate	$	566	$	—	$	—	$	—	$	566	$	894	$	—	$	29	$	—	$	923
Non owner occupied real estate		2,734		—		240		60		3,034		218		—		483		—		701
Residential development		—		—		—		—		—		—		—		—		—		—
Development & Spec Land Loans		137		—		—		—		137		102		—		—		—		102
Commercial and industrial		1,740		—		—		—		1,740		1,707		—		—		—		1,707

Total commercial		5,177		—		240		60		5,477		2,921		—		512		—		3,433

Real estate
Residential mortgage		1,094		44		870		863		2,871		3,269		119		460		1,473		5,321
Residential construction		—		—		238		—		238		—		—		—		224		224
Mortgage warehouse		—		—		—		—		—		—		—		—		—		—

Total real estate		1,094		44		1,108		863		3,109		3,269		119		460		1,697		5,545

Consumer
Direct Installment		1,505		—		—		—		1,505		310		—		—		—		310
Direct Installment Purchased		—		—		—		—		—		—		—		—		—		—
Indirect Installment		970		15		—		—		985		1,019		15		—		—		1,034
Home Equity		1,345		—		175		241		1,761		1,546		28		220		318		2,112

Total Consumer		3,820		15		175		241		4,251		2,875		43		220		318		3,456

Total	$	10,091	$	59	$	1,523	$	1,164	$	12,837	$	9,065	$	162	$	1,192	$	2,015	$	12,434


December 31, 2015	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non- Performing TDRs		Performing TDRs		Total Non- Performing Loans
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	$	1,749	$	—	$	—	$	—	$	1,749	$	1,532	$	183	$	—	$	—	$	1,715
Non owner occupied real estate		3,034		—		1,915		60		5,009		440		—		—		—		440
Residential development		—		—		—		—		—		—		—		—		—		—
Development & Spec Land Loans		71		—		—		—		71		118		—		—		—		118
Commercial and industrial		176		—		—		—		176		159		—		—		—		159

Total commercial		5,030		—		1,915		60		7,005		2,249		183		—		—		2,432

Real estate
Residential mortgage		4,354		1		824		808		5,987		2,959		—		576		1,254		4,789
Residential construction		—		—		250		—		250		—		—		233		—		233
Mortgage warehouse		—		—		—		—		—		—		—		—		—		—

Total real estate		4,354		1		1,074		808		6,237		2,959		—		809		1,254		5,022

Consumer
Direct Installment		541		—		—		—		541		512		—		—		—		512
Direct Installment Purchased		—		—		—		—		—		—		—		—		—		—
Indirect Installment		601		27		—		—		628		659		49		—		—		708
Home Equity		1,736		—		183		350		2,269		1,557		9		205		238		2,009

Total Consumer		2,878		27		183		350		3,438		2,728		58		205		238		3,229

Total	$	12,262	$	28	$	3,172	$	1,218	$	16,680	$	7,936	$	241	$	1,014	$	1,492	$	10,683

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Included in the ~~$10.1~~$9.1 million ofnon-accrual loans and the ~~$1.5~~$1.2 million ofnon-performing TDRs at September 30, ~~2016~~2017 were ~~$1.2~~$4.3 million and ~~$238,000,~~$339,000, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to anon-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 anon-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief ~~Operations~~Credit Officer and/or the ~~senior collection officer~~Chief Operations Officer must review all loans placed onnon-accrual status. Subsequent payments onnon-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 anon-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 tonon-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At September 30, ~~2016,~~2017, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of September 30, ~~2016,~~2017, the Company had ~~$2.7~~$3.2 million in TDRs and ~~$1.5~~$2.0 million were performing according to the restructured terms and ~~zero~~$298,000 in TDRs were returned to accrual status during the first nine months of ~~2016.~~2017. There ~~was $84,000 of~~were zero specific reserves allocated to TDRs at September 30, ~~2016~~2017 based on the discounted cash flows or when appropriate the fair value of the collateral.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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


							Three Months Ending				Nine Months Ending										Three Months Ending				Nine Months Ending
September 30, 2016	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
September 30, 2017															Unpaid Principal Balance		Recorded Investment		Allowance For Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate	$	994	$	995	$	—	$	1,029	$	—	$	1,062	$	—	$	923	$	934	$	—	$	1,167	$	4	$	1,033	$	4
Non owner occupied real estate		3,106		3,120		—		3,150		1		3,776		3		701		701		—		468		—		308		2
Residential development		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—		—		—		102		102		—		222		—		230		—
Commercial and industrial		1,740		1,740		—		1,984		—		878		—		1,707		1,714		—		2,066		3		1,071		19

Total commercial		5,840		5,855		—		6,163		1		5,716		3		3,433		3,451		—		3,923		7		2,642		25

With an allowance recorded
Commercial
Owner occupied real estate		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Non owner occupied real estate		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Residential development		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—		—		—		—		—		—		—		—

Total commercial		—		—		—		—		—		—		—		—		—		—		—		—		—		—

Total	$	5,840	$	5,855	$	—	$	6,163	$	1	$	5,716	$	3	$	3,433	$	3,451	$	—	$	3,923	$	7 $		2,642	$	25


							Three Months Ending				Nine Months Ending										Three Months Ending				Nine Months Ending
September 30, 2015	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
September 30, 2016															Unpaid Principal Balance		Recorded Investment		Allowance For Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate	$	1,235	$	1,238	$	—	$	1,262	$	1	$	1,041	$	10	$	994	$	995	$	—	$	1,029	$	—	$	1,062	$	—
Non owner occupied real estate		2,798		2,801		—		2,815		1		2,846		4		3,106		3,120		—		3,150		1		3,776		3
Residential development		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Development & Spec Land Loans		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		239		239		—		583		4		415		4		1,740		1,740		—		1,984		—		878		—

Total commercial		4,272		4,278		—		4,660		6		4,302		18		5,840		5,855		—		6,163		1		5,716		3

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

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

Total	$	10,832	$	10,848	$	1,599	$	11,262	$	6	$	10,271	$	73	$	5,840	$	5,855	$	—	$	6,163	$	1	$	5,716	$	3

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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

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

Owner occupied real estate
   $ 282    $ 17    $ —      $ 299    $ 321,463    $ 321,762
Non owner occupied real estate
   180    103    —      283    457,272    457,555
Residential development
   —      —      —      —      7,949    7,949
Development & Spec Land Loans
   32    —      —      32    39,766    39,798
Commercial and industrial
   361    267    —      628    217,786    218,414


Total commercial
   855    387    —      1,242    1,044,236    1,045,478
Real estate

Residential mortgage
   982    210    43    1,235    505,310    506,545
Residential construction
   —      —      —      —      21,061    21,061
Mortgage warehouse
   —      —      —      —      226,876    226,876


Total real estate
   982    210    43    1,235    753,247    754,482
Consumer

Direct Installment
   42    30    —      72    66,423    66,495
Direct Installment Purchased
   —      —      —      —      124    124
Indirect Installment
   805    49    15    869    146,960    147,829
Home Equity
   436    26    —      462    172,443    172,905


Total consumer
   1,283    105    15    1,403    385,950    387,353


Total
   $ 3,120    $ 702    $ 58    $ 3,880    $ 2,183,433    $ 2,187,313


Percentage of total loans
   0.14 % 0.03 % 0.00 % 0.18 % 99.82 %


December 31, 2015	30 - 59 Days Past Due			60 - 89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Loans Not Past Due			Total
																								90 Days or
																		30-59 Days			60-89 Days			Greater Past			Total Past			Loans Not
September 30, 2017																		Past Due			Past Due			Due			Due			Past Due			Total
Commercial
Owner occupied real estate	$	481		$	18		$	—		$	499		$	267,782		$	268,281	$	2,282		$	—		$	—		$	2,282		$	400,902		$	403,184
Non owner occupied real estate		49			—			—			49			326,350			326,399		132			—			—			132			531,428			531,560
Residential development		—			—			—			—			5,018			5,018		135			—			—			135			3,896			4,031
Development & Spec Land Loans		—			—			—			—			18,183			18,183		—			—			—			—			43,299			43,299
Commercial and industrial		32			—			—			32			184,879			184,911		255			166			—			421			287,665			288,086

Total commercial		562			18			—			580			802,212			802,792		2,804			166			—			2,970			1,267,190			1,270,160

Real estate
Residential mortgage		1,121			344			1			1,466			413,458			414,924		1,012			167			119			1,298			552,153			553,451
Residential construction		—			—			—			—			19,751			19,751		—			—			—			—			14,825			14,825
Mortgage warehouse		—			—			—			—			144,692			144,692		—			—			—			—			95,483			95,483

Total real estate		1,121			344			1			1,466			577,901			579,367		1,012			167			119			1,298			662,461			663,759

Consumer
Direct Installment		106			10			—			116			54,225			54,341		67			—			—			67			85,659			85,726
Direct Installment Purchased		—			—			—			—			153			153		—			—			—			—			88			88
Indirect Installment		1,186			268			27			1,481			150,042			151,523		1,192			181			15			1,388			205,905			207,293
Home Equity		1,193			203			—			1,396			155,768			157,164		611			84			28			723			193,327			194,050

Total consumer		2,485			481			27			2,993			360,188			363,181		1,870			265			43			2,178			484,979			487,157

Total	$	4,168		$	843		$	28		$	5,039		$	1,740,301		$	1,745,340	$	5,686		$	598		$	162		$	6,446		$	2,414,630		$	2,421,076

Percentage of total loans		0.24	%		0.05	%		0.00	%		0.29	%		99.71	%				0.23	%		0.02	%		0.01	%		0.27	%		99.73	%

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

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

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

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

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

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

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

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 beingre-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to ~~$2,500,000)~~$3,500,000) are validated by the Loan Committee, which is chaired by the Chief Credit Officer (CCO).

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

The CCO, or his designee, meets weekly with loan officers to discuss the status ofpast-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, onnon-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 onnon-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.

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.

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

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

•

At inception, the loan was properly underwritten, didnot 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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Risk Grade 6: Substandard

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

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

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

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

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

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

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

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

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

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

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

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

Risk Grade 7: Doubtful

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

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

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

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

Risk Grade 8: Loss

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

The following table presents loans by credit grades.


September 30, 2016	Pass			Special Mention			Substandard			Doubtful			Total
																		Special
September 30, 2017															Pass			Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	305,849		$	5,258		$	10,655		$	—		$	321,762	$	386,856		$	5,776		$	10,552		$	—		$	403,184
Non owner occupied real estate		450,811			344			6,400			—			457,555		523,831			1,008			6,721			—			531,560
Residential development		7,949			—			—			—			7,949		4,031			—			—			—			4,031
Development & Spec Land Loans		39,571			—			227			—			39,798		43,066			—			233			—			43,299
Commercial and industrial		207,998			1,419			8,997			—			218,414		272,622			4,969			10,495			—			288,086

Total commercial		1,012,178			7,021			26,279			—			1,045,478		1,230,406			11,753			28,001			—			1,270,160

Real estate
Residential mortgage		503,821			—			2,724			—			506,545		548,249			—			5,202			—			553,451
Residential construction		20,823			—			238			—			21,061		14,601			—			224			—			14,825
Mortgage warehouse		226,876			—			—			—			226,876		95,483			—			—			—			95,483

Total real estate		751,520			—			2,962			—			754,482		658,333			—			5,426			—			663,759

Consumer
Direct Installment		64,990			—			1,505			—			66,495		85,416			—			310			—			85,726
Direct Installment Purchased		124			—			—			—			124		88			—			—			—			88
Indirect Installment		146,844			—			985			—			147,829		206,259			—			1,034			—			207,293
Home Equity		171,152			—			1,753			—			172,905		191,938			—			2,112			—			194,050

Total Consumer		383,110			—			4,243			—			387,353		483,701			—			3,456			—			487,157

Total	$	2,146,808		$	7,021		$	33,484		$	—		$	2,187,313	$	2,372,439		$	11,753		$	36,883		$	—		$	2,421,076

Percentage of total loans		98.15	%		0.32	%		1.53	%		0.00	%				97.99	%		0.49	%		1.52	%		0.00	%

December 31, 2015	Pass			Special Mention			Substandard			Doubtful			Total
																		Special
December 31, 2016															Pass			Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	257,181		$	4,954		$	6,146		$	—		$	268,281	$	322,924		$	4,960		$	9,664		$	—		$	337,548
Non owner occupied real estate		320,216			585			5,598			—			326,399		455,648			341			5,908			—			461,897
Residential development		5,018			—			—			—			5,018		5,006			—			—			—			5,006
Development & Spec Land Loans		18,112			—			71			—			18,183		31,057			—			171			—			31,228
Commercial and industrial		180,581			693			3,637			—			184,911		220,424			3,728			6,368			—			230,520

Total commercial		781,108			6,232			15,452			—			802,792		1,035,059			9,029			22,111			—			1,066,199

Real estate
Residential mortgage		408,937			—			5,987			—			414,924		503,444			—			4,789			—			508,233
Residential construction		19,501			—			250			—			19,751		20,378			—			233			—			20,611
Mortgage warehouse		144,692			—			—			—			144,692		135,727			—			—			—			135,727

Total real estate		573,130			—			6,237			—			579,367		659,549			—			5,022			—			664,571

Consumer
Direct Installment		53,800			—			541			—			54,341		70,638			—			512			—			71,150
Direct Installment Purchased		153			—			—			—			153		119			—			—			—			119
Indirect Installment		150,895			—			628			—			151,523		152,496			—			708			—			153,204
Home Equity		154,895			—			2,269			—			157,164		173,117			—			2,009			—			175,126

Total Consumer		359,743			—			3,438			—			363,181		396,370			—			3,229			—			399,599

Total	$	1,713,981		$	6,232		$	25,127		$	—		$	1,745,340	$	2,090,978		$	9,029		$	30,362		$	—		$	2,130,369

Percentage of total loans		98.20	%		0.36	%		1.44	%		0.00	%				98.15	%		0.42	%		1.43	%		0.00	%

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 8 – Repurchase Agreements

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

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


September 30, 2016	Remaining Contractual Maturity of the Agreements
September 30, 2017																			Remaining Contractual Maturity of the Agreements
	Overnight and Continuous			Up to one year		One to three years		Three to five years		Five to ten years			Beyond ten years			Total			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	$	62,703		$	35,000	$	50,000	$	10,000	$	—		$	—		$	157,703		$	63,081	$	—	$	—	$	—	$	—	$	—	$	63,081


Securities lending transactions
Securities pledged for Repurchase Agreements
U.S. Treasury and federal agencies		4,025			—		—		—		—			—			4,025			—		—		—		—		—		—		—
Federal agency collateralized mortgage obligations		50,255			—		316		258		21,514			30,621			102,964			40,740		—		—		—		—		—		40,740
Federal agency mortgage-backed pools		14,501			—		89		2,146		20,778			29,388			66,902			38,476		—		—		—		—		—		38,476

Total		68,781			—		405		2,404		42,292			60,009			173,891		$	79,216	$	—	$	—	$	—	$	—	$	—	$	79,216

Total borrowings	$	(6,078	)	$	35,000	$	49,595	$	7,596	$	(42,292	)	$	(60,009	)	$	(16,188	)

Gross amount of recognized liabilities for repurchase agreements and securities lending																$	157,703

Note 9 – Derivative Financial Instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

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

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At September 30, ~~2016,~~2017, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

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

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 ~~$118.1~~$152.2 million at September 30, ~~2016~~2017 and ~~$117.3~~$122.4 million at December 31, ~~2015.~~2016.

Other Derivative Instruments

The Company enters intonon-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At September 30, ~~2016,~~2017, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

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

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


	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	September 30, 2016				September 30, 2016				September 30, 2017				September 30, 2017
Derivatives designated as hedging instruments (Unaudited)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Interest rate contracts		Loans	$	—		Other liabilities	$	4,563		Loans	$	—		Other liabilities	$	429
Interest rate contracts		Other Assets		4,563		Other liabilities		3,002		Other Assets		429		Other liabilities		2,390

Total derivatives designated as hedging instruments				4,563				7,565				429				2,819


Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets		787		Other liabilities		—		Other assets		286		Other liabilities		31

Total derivatives not designated as hedging instruments				787				—				286				31

Total derivatives			$	5,350			$	7,565			$	715			$	2,850


	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	December 31, 2015				December 31, 2015				December 31, 2016				December 31, 2016
Derivatives designated as hedging instruments (Unaudited)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments									Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Interest rate contracts		Loans	$	—		Other liabilities	$	1,782		Loans	$	—		Other liabilities	$	6
Interest rate contracts		Other Assets		1,782		Other liabilities		3,141		Other Assets		6		Other liabilities		3,132

Total derivatives designated as hedging instruments				1,782				4,923				6				3,138


Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets		642		Other liabilities		—		Other assets		602		Other liabilities		22

Total derivatives not designated as hedging instruments				642				—				602				22

Total derivatives			$	2,424			$	4,923			$	608			$	3,160

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


	Comprehensive Income on Derivative (Effective Portion)					Comprehensive Income on Derivative (Effective Portion)					Comprehensive Income on Derivative				Comprehensive Income on Derivative
	Three Months Ended September 30					Nine Months Ended September 30					(Effective Portion)				(Effective Portion)
Derivative in cash flow hedging relationship	2016		2015			2016		2015
Derivative in cash flow hedging relationship	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
											Three Months Ended September 30				Nine Months Ended September 30
Derivative in cash flow											2017		2016		2017		2016
hedging relationship											(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Interest rate contracts	$	522	$	(335	)	$	103	$	(217	)	$	193	$	522	$	483	$	103

FASB Accounting Standards Codification (“ASC”) Topic820-10-20 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. Topic820-10-55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.


		Amount of Gain (Loss) Recognized on Derivative						Amount of Gain (Loss) Recognized on Derivative							Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended September 30						Nine Months Ended September 30							Three Months Ended September 30						Nine Months Ended September 30
Derivative in fair value hedging relationship	Location of gain (loss) recognized on derivative	2016			2015			2016			2015
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Derivative in fair value														Location of gain (loss)	2017			2016			2017			2016
hedging relationship														recognized on derivative	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest rate contracts	Interest income - loans	$	(830	)	$	765		$	2,781		$	579		Interest income-loans	$	(4	)	$	(830	)	$	423		$	2,781
Interest rate contracts	Interest income - loans		830			(765	)		(2,781	)		(579	)	Interest income-loans		4			830			(423	)		(2,781	)

Total		$	—		$	—		$	—		$	—			$	—		$	—		$	—		$	—


		Amount of Gain (Loss) Recognized on Derivative						Amount of Gain (Loss) Recognized on Derivative							Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended September 30						Nine Months Ended September 30							Three Months Ended September 30						Nine Months Ended September 30
Derivative not designated as hedging relationship	Location of gain (loss) recognized on derivative	2016			2015			2016			2015
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Derivative not designated														Location of gain (loss)	2017			2016			2017			2016
as hedging relationship														recognized on derivative	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Mortgage contracts	Other income - gain on sale of loans	$	(324	)	$	(77	)	$	145		$	196		Other income-gain on sale of loans	$	(112	)	$	(324	)	$	(324	)	$	145

Note 10 – Disclosures about Fair Value of Assets and Liabilities

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


Level 1		Quoted prices in active markets for identical assets or liabilities

Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, ~~2016.~~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.

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)					Quoted Prices in		Significant
September 30, 2016
														Active Markets		Other			Significant
														for Identical		Observable			Unobservable
														Assets		Inputs			Inputs
											Fair Value			(Level 1)		(Level 2)			(Level 3)
September 30, 2017
Available-for-sale securities
U.S. Treasury and federal agencies											$	17,885		$	—	$	17,885		$	—
State and municipal												143,483			—		143,483			—
Federal agency collateralized mortgage obligations												134,202			—		134,202			—
Federal agency mortgage-backed pools												212,051			—		212,051			—
Private labeled mortgage-backed pools												1,830			—		1,830			—
Corporate notes												393			—		393			—

Totalavailable-for-sale securities												509,844			—		509,844			—
Hedged loans												152,216			—		152,216			—
Forward sale commitments												286			—		286			—
Interest rate swap agreements												(2,819	)		—		(2,819	)		—
Commitments to originate loans												(31	)		—		(31	)		—
December 31, 2016
Available-for-sale securities
U.S. Treasury and federal agencies	$	27,422		$	—	$	27,422		$	—	$	7,989		$	—	$	7,989		$	—
State and municipal		64,039			—		64,039			—		116,592			—		116,592			—
Federal agency collateralized mortgage obligations		189,684			—		189,684			—		137,195			—		137,195			—
Federal agency mortgage-backed pools		275,973			—		275,973			—		176,726			—		176,726			—
Corporate notes		95			—		95			—		1,329			—		1,329			—

Total available-for-sale securities		557,213			—		557,213			—		439,831			—		439,831			—

Hedged loans		113,558			—		113,558			—		122,345			—		122,345			—
Forward sale commitments		787			—		787			—		602			—		602			—
Interest rate swap agreements		(7,870	)		—		(7,870	)		—		(3,138	)		—		(3,138	)		—
Commitments to originate loans		—			—		—			—		(22	)		—		(22	)		—

December 31, 2015
Available-for-sale securities
U.S. Treasury and federal agencies	$	5,926		$	—	$	5,926		$	—
State and municipal		75,095			—		75,095			—
Federal agency collateralized mortgage obligations		156,203			—		156,203			—
Federal agency mortgage-backed pools		207,704			—		207,704			—
Corporate notes		54			—		54			—

Total available-for-sale securities		444,982			—		444,982			—

Hedged loans		115,472			—		115,472			—
Forward sale commitments		642			—		642			—
Interest rate swap agreements		(4,923	)		—		(4,923	)		—

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


	Three Months Ended September 30						Nine Months Ended September 30						Three Months Ended September 30						Nine Months Ended September 30
Non Interest Income Total gains and losses from:	2016 (Unaudited)			2015 (Unaudited)			2016 (Unaudited)			2015 (Unaudited)
Non Interest Income													2017			2016			2017			2016
Total gains and losses from:													(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Hedged loans	$	(830	)	$	765		$	2,781		$	579		$	(4	)	$	(830	)	$	423		$	2,781
Fair value interest rate swap agreements		830			(765	)		(2,781	)		(579	)		4			830			(423	)		(2,781	)
Derivative loan commitments		(324	)		(77	)		145			196			(112	)		(324	)		(324	)		145

	$	(324	)	$	(77	)	$	145		$	196		$	(112	)	$	(324	)	$	(324	)	$	145

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~~non-recurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

   Fair Value    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
September 30, 2016

Impaired loans
   $ 5,840       $ —         $ —         $ 5,840
Mortgage servicing rights
   10,269       —         —         10,269
December 31, 2015

Impaired loans
   $ 6,803       $ —         $ —         $ 6,803
Mortgage servicing rights
   8,874       —         —         8,874

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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


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

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

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

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

Mortgage Servicing Rights (MSRs):MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’smonth-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment decreased by $75,000 during the first nine months of 2017 and decreased by $193,000 during the first nine months of ~~2016 and decreased by $51,000 during the first nine months of 2015.~~2016.

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~~non-recurring Level 3 fair value measurements, other than goodwill.


						Fair Value at		Valuation		Range (Weighted
	Fair Value at September 30, 2016		Valuation Technique	Unobservable Inputs	Range (Weighted Average)	September 30, 2017		Technique	Unobservable Inputs	Average)
									Discount to reflect current market conditions and ultimate
Impaired loans	$	5,840	Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	10% - 15% (12%)	$	3,433	Collateral based measurement	collectability		11% - 17% (14%	)
									Discount rate, Constant		11% - 17% (14%	),
									prepayment rate, Probability of		4% - 8% (5.1%	),
Mortgage servicing rights	$	10,269	Discounted cashflows	Discount rate, Constant prepayment rate, Probability of default	10% - 15% (12%), 4% - 7% (4.6%), 1% - 10% (4.5%)	$	11,485	Discounted cashflows	default		1% - 11% (5.0%	)

	Fair Value at		Valuation		Range (Weighted	Fair Value at		Valuation		Range (Weighted
	December 31, 2015		Technique	Unobservable Inputs	Average)	December 31, 2016		Technique	Unobservable Inputs	Average)
									Discount to reflect current
									market conditions and ultimate
Impaired loans	$	6,803	Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	10% - 15% (12%)	$	2,246	Collateral based measurement	collectability		10% - 16% (13%	)
									Discount rate, Constant		10% - 16% (13%	),
									prepayment rate, Probability of		4% - 7% (4.6%	),
Mortgage servicing rights	$	8,874	Discounted cashflows	Discount rate, Constant prepayment rate, Probability of default	10% - 15% (12%), 4% - 7% (4.6%), 1% - 10% (4.5%)	$	11,174	Discounted cashflows	default		1% - 10% (4.5%	)

Note 11 – Fair Value of Financial Instruments

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

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certainoff-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.

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.

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

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


	September 30, 2016								September 30, 2017
			Quoted Prices								Quoted Prices
			in Active		Significant						in Active		Significant
			Markets for		Other		Significant				Markets for		Other		Significant
			Identical		Observable		Unobservable				Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs		Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Amount		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	83,721	$	83,721	$	—	$	—	$	72,662	$	72,662	$	—	$	—
Investment securities, held to maturity		187,027		—		194,294		—		198,605		—		202,222		—
Loans held for sale		7,369		—		—		7,369		3,616		—		—		3,616
Loans excluding loan level hedges, net		2,062,437		—		—		2,046,807		2,258,023		—		—		2,205,681
Stock in FHLB and FRB		20,877		—		20,877		—		15,340		—		15,340		—
Interest receivable		12,702		—		12,702		—		14,880		—		14,880		—

Liabilities
Non-interest bearing deposits	$	479,771	$	479,771	$	—	$	—	$	563,536	$	563,536	$	—	$	—
Interest-bearing deposits		1,856,391		—		1,873,377		—		2,044,739		—		1,948,765		—
Borrowings		569,908		—		566,880		—		458,152		—		453,303		—
Subordinated debentures		37,418		—		36,491		—		37,607		—		36,241		—
Interest payable		1,015		—		1,015		—		700		—		700		—

	December 31, 2015
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	48,650	$	48,650	$	—	$	—
Investment securities, held to maturity		187,629		—		193,703		—
Loans held for sale		7,917		—		—		7,917
Loans excluding loan level hedges, net		1,619,125		—		—		1,703,506
Stock in FHLB and FRB		13,823		—		13,823		—
Interest receivable		10,535		—		10,535		—

Liabilities
Non-interest bearing deposits	$	335,955	$	335,955	$	—	$	—
Interest-bearing deposits		1,544,198		—		1,461,314		—
Borrowings		449,347		—		441,547		—
Subordinated debentures		32,797		—		32,996		—
Interest payable		507		—		507		—

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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


	December 31, 2016
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	70,832	$	70,832	$	—	$	—
Investment securities, held to maturity		193,194		—		194,086		—
Loans held for sale		8,087		—		—		8,087
Loans excluding loan level hedges, net		1,998,804		—		—		1,965,928
Stock in FHLB and FRB		23,932		—		23,932		—
Interest receivable		12,713		—		12,713		—
Liabilities
Non-interest bearing deposits	$	496,248	$	496,248	$	—	$	—
Interest-bearing deposits		1,974,962		—		1,839,167		—
Borrowings		267,489		—		261,141		—
Subordinated debentures		37,456		—		36,371		—
Interest payable		472		—		472		—

Note 12 – Accumulated Other Comprehensive Income


	September 30 2016			December 31 2015			September 30			December 31
Unrealized gain on securities available for sale	$	6,757		$	920
							2017			2016
							(Unaudited)
Unrealized gain (loss) on securities available for sale							$	(601	)	$	(6,007	)
Unamortized gain on securities held to maturity, previously transferred from AFS		548			1,109			256			456
Unrealized loss on derivative instruments		(3,002	)		(3,142	)		(2,390	)		(3,132	)
Tax effect		(1,494	)		390			958			3,039

Total accumulated other comprehensive income (loss)	$	2,809		$	(723	)	$	(1,777	)	$	(5,644	)

Note 13 – Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For September 30, ~~2016,~~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 toopt-out of including accumulated other comprehensive income in regulatory capital.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (September 30, ~~2016)~~2017) and Tier I leverage ratios as set forth in the table below. As of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the third quarter of ~~2016~~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 BANCORP AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

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

Horizon and the Bank’s actual and required capital ratios as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


	Actual					Required For Capital¹ Adequacy Purposes					Well Capitalized Under Prompt¹ Corrective Action Provisions					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			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2016

As of September 30, 2017
Total capital¹ (to risk-weighted assets)
Consolidated	$	317,012		13.39	%	$	204,318		8.63	%		N/A		N/A		$	347,601		13.22	%		210,274		8.00	%		226,833		8.63	%		N/ A		N/ A
Bank		315,040		13.34	%		203,808		8.63	%	$	236,162		10.00	%		339,596		12.93	%		210,162		8.00	%		226,713		8.63	%	$	262,703		10.00	%

Tier 1 capital¹ (to risk-weighted assets)
Consolidated		302,488		12.78	%		156,925		6.63	%		N/A		N/A			331,962		12.63	%		157,705		6.00	%		174,264		6.63	%		N/ A		N/ A
Bank		300,516		12.73	%		156,514		6.63	%		188,855		8.00	%		323,957		12.33	%		157,622		6.00	%		174,172		6.63	%		210,162		8.00	%

Common equity tier 1 capital¹ (to risk-weighted assets)
Consolidated		302,488		11.16	%		121,395		5.13	%		N/A		N/A			293,499		11.17	%		118,279		4.50	%		134,838		5.13	%		N/ A		N/ A
Bank		300,516		12.73	%		121,103		5.13	%		153,445		6.50	%		323,957		12.33	%		118,216		4.50	%		134,766		5.13	%		170,757		6.50	%

Tier 1 capital¹ (to average assets)
Consolidated		302,488		9.69	%		124,866		4.00	%		N/A		N/A			331,962		10.11	%		131,319		4.00	%		131,319		4.00	%		N/ A		N/ A
Bank		300,516		9.65	%		124,566		4.00	%		155,708		5.00	%		323,957		9.90	%		130,877		4.00	%		130,877		4.00	%		163,596		5.00	%

As of December 31, 2015

As of December 31, 2016
Total capital¹ (to risk-weighted assets)
Consolidated	$	264,452		13.99	%	$	151,223		8.00	%		N/A		N/A		$	316,576		13.87	%	$	182,596		8.00	%	$	196,976		8.63	%		N/ A		N/ A
Bank		237,348		12.57	%		151,057		8.00	%	$	188,821		10.00	%		319,013		13.98	%		182,541		8.00	%		196,916		8.63	%	$	228,176		10.00	%

Tier 1 capital¹ (to risk-weighted assets)
Consolidated		249,918		13.22	%		113,427		6.00	%		N/A		N/A			301,739		13.22	%		136,947		6.00	%		151,326		6.63	%		N/ A		N/ A
Bank		222,814		11.80	%		113,295		6.00	%		151,060		8.00	%		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		204,350		10.81	%		85,067		4.50	%		N/A		N/A			263,313		11.50	%		103,036		4.50	%		117,460		5.13	%		N/ A		N/ A
Bank		222,814		11.80	%		84,971		4.50	%		122,737		6.50	%		304,176		13.33	%		102,679		4.50	%		117,054		5.13	%		148,314		6.50	%

Tier 1 capital¹ (to average assets)
Consolidated		249,918		9.82	%		101,800		4.00	%		N/A		N/A			301,739		10.44	%		115,609		4.00	%		115,609		4.00	%		N/ A		N/ A
Bank		222,814		8.77	%		101,626		4.00	%		127,032		5.00	%		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 SeniorNon-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 SeniorNon-Cumulative Perpetual Preferred Stock, Series B outstanding. The Redemption terminates Horizon’s participation in the SBLF.

~~Note 15 – Subsequent Events~~

On July 12, 2016, Horizon announced the acquisition of CNB Bancorp, parent company of The Central National Bank and Trust Company (“Central National Bank & Trust”). Under the terms of the Merger Agreement, stockholders of CNB Bancorp will receive cash consideration consisting of a special dividend calculated as capital in excess of 8% of CNB Bancorp’s total assets, less certain after tax transaction costs, and an amount to be paid by Horizon equal to 120% of remaining capital. These amounts will be determined as of the end of the month prior to the closing of the merger. These amounts are dependent on CNB Bancorp’s earnings and other factors, but if the cash consideration for the stockholders were calculated based on the

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

March 31, 2016 financial information available at the time of signing the Merger Agreement, the stockholders would receive, in the aggregate, a $6.7 million special dividend and a $5.3 million payment from Horizon. As of September 30, 2016, CNB Bancorp had total assets of approximately $56.4 million. Horizon anticipates closing the acquisition in early November 2016.

On October 4, 2016, Horizon announced the signing of a definitive agreement to purchase certain loans and substantially all of the deposits of a single branch located at 42 S. State Road 135, Bargersville, Indiana and owned by First Farmers Bank & Trust Co., an Indiana state chartered bank (“First Farmers”) and wholly owned subsidiary of First Farmers Financial Corporation, headquartered in Converse, Indiana. Under the terms of the agreement, Horizon anticipates purchasing approximately $5.0 million dollars in loans and assuming approximately $15 million in deposits. The loans to be purchased are subject to review and acceptance by Horizon prior to closing. Horizon will not be purchasing fixed assets or assuming the underlying lease for the First Farmers branch.

Note 1615 – Future Accounting Matters

~~In February 2016, the~~ Financial Accounting Standards Board (FASB) ~~issued~~Accounting Standards Update (ASU) ~~2016-02, Leases~~No. 2017-12,Derivatives and Hedging (Topic ~~842)~~815), Targeted Improvements to Accounting for Hedging Activities

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU)No. 2017-12,Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. ~~Topic 842 establishes a right~~The new guidance improves the financial reporting of ~~use model that requires a lessee~~hedging relationships to ~~record a right~~better portray the economic results of ~~use asset and a lease liability for all leases with terms longer than 12 months. Leases~~an entity’s risk management activities in its financial statements. The amendments in this ASU also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. For public entities, the new guidance will be ~~classified as either finance or operating, with classification affecting~~effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as a sale it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results.

~~The~~ amendments are effective for fiscal years beginning after December 15, ~~2018, including~~2019, and interim periods ~~within those fiscal years for public business entities. Entities are required~~beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the ASU. All transition requirements and elections should be applied to ~~use a modified retrospective approach for leases that exist~~hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or ~~are entered into after~~exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).

FASB Accounting Standards UpdateNo. 2017-08,Receivables – Nonrefundable Fees and Other Costs (Subtopic310-20), 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 (Subtopic310-20), 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 ~~comparative period in~~call date. The amendments do not require an accounting change for securities held at a discount; the ~~financial statements, with certain practical expedients available. Early adoption is permitted. The Company~~discount continues to ~~assess the impact of Topic 842 on its accounting and disclosures.~~

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

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

~~The amendments are~~ effective for ~~all~~public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2016.~~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 ~~prospectively upon their effective date~~on a modified retrospective basis, with a cumulative-effect adjustment directly to ~~increases in the level of ownership interest or degree of influence that result in the adoption~~retained earnings as of the ~~equity method. Earlier application~~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 UpdatesNo. 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 ~~permitted.~~

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 ~~March 2016,~~addition, the ~~FASB issued~~~~ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~~~. ASU 2016-09 requires all~~ income tax effects of ~~awards~~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 ~~recognized~~applied on a prospective basis. The nature of and reason for the change in ~~the income statement when the awards vest~~accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur.

~~The guidance is effective for public business entities for~~any interim goodwill impairment tests in fiscal years beginning after December 15, ~~2016,~~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.

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

FASB Accounting Standards UpdatesNo. 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 ~~years. Early adoption is permitted.~~annual periods beginning after December 15, 2017. The ~~Company continues to assess ASU 2016-09 but does~~amendments in this update became effective on January 1, 2017 and did not ~~expect~~have a ~~significant~~material impact on ~~its accounting and disclosures.~~the consolidated financial statements.

~~In June 2016, the~~ FASB ~~issued~~Accounting Standards UpdatesNo. 2016-13,~~ASU 2016-13,~~ Financial ~~Instruments-Credit~~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 ~~Statements~~~~. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.~~Instruments. The ~~ASU~~main objective of this amendment is ~~intended~~ to ~~improve~~provide financial ~~reporting by requiring timelier recording of~~statement users with more decision-useful information about the expected credit losses on ~~loans~~financial instruments and other ~~financial instruments~~commitments to extend credit held by ~~financial institutions and other organizations.~~a reporting entity at each reporting date. The ~~ASU~~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 ~~better inform~~enhance their credit loss estimates.

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ~~ASU~~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 onavailable-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 aone-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 suchone-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

FASB Accounting Standards UpdatesNo. 2016-09,Compensation – Stock Compensation(Topic 718):Improvements to Employee Share-Based Payment Acounting

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.FASB Accounting Standards UpdatesNo. 2016-02,Leases(Topic 842)

The ~~ASU~~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) aright-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 ~~SEC filers for fiscal years,~~annual periods and interim periods within those ~~fiscal years,~~annual periods beginning after December 15, ~~2019~~2018. Based on leases outstanding as of December 31, 2016, we do not expect the new standard to have a material impact on our balance sheet or income statement.

FASB Accounting Standards UpdatesNo. 2016-01,Financial Instruments – Overall (Subtopic825-10):Recognition and Measurement of Financial Assets and Financial Liabilities

The FASB has issued Accounting Standards Update (ASU)No. 2016-01,Financial Instruments – Overall (Subtopic825-10): 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., ~~January 1, 2020,~~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 ~~calendar year entities. Early application will~~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 ~~permitted~~disclosed for ~~all organizations~~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 ~~fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.~~

~~In August 2016, the FASB issued~~~~ASU 2016-15, Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments~~. ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows.

financial instruments.

The new guidance is effective for public ~~business entities~~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 andnot-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

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

The FASB has issued Accounting Standards Update (ASU) No. 2014-09 creating, Revenue from Contracts with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those ~~fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is assessing ASU 2016-15 but does~~annual periods beginning after December 15, 2017. We do not expect the new standard, or any of the amendments detailed below, to result in a ~~significant impact on its~~material change from our current accounting for revenue, as recognition of interest income and ~~disclosures.~~the larger sources of non-interest income from Horizon’s current financial instruments would not be impacted by the guidance. Additional disclosures regarding the composition of Horizon’s revenue sources will be required.

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

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

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1716 – 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.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward–Looking Statements

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

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

economic conditions and their impact on Horizon and its customers;

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

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

loss of key Horizon personnel;

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

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

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

volatility and disruption in financial markets;

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

sources of liquidity;

potential risk of environmental liability related to lending activities;

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

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

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

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

the impact of the ~~new~~ Basel III capital rules;

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

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

rapid technological developments and changes;

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

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

the risks presented by cyber terrorism and data security breaches;

containing costs and expenses;

~~the slowing or failure of economic recovery;~~

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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 ~~behalf of us.~~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 ~~2015~~2016 Annual Report on Form10-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 and Central Ohio through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was originally chartered as a national banking association in 1873 and has operated continuously since that ~~time.~~time and converted to an Indiana state-chartered bank effective on June 23, 2017. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

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

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

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

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and Horizon Bank’s acquisition of Peoples Federal Savings Bank of DeKalb County, a federally-chartered stock savings bank and wholly owned subsidiary of Peoples, through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 1.425 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 3,288,303. Horizon’s stock price was $16.88 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million.

~~Following are some highlights of Horizon’s financial performance through the third quarter of 2016:~~

~~Net income for the third quarter of 2016 was $6.6 million or $.30 diluted earnings per share compared to $4.3 million or $.24 diluted earnings per share for the third quarter of 2015.~~

Excluding acquisition-related expenses and purchase accounting adjustments, net income for the third quarter of 2016 increased 29.6% compared to the same period of 2015 to $8.4 million or $.39 diluted earnings per share.

~~Net income for the first nine months of 2016 was $18.3 million or $.94 diluted earnings per share compared to $14.4 million or $.92 diluted earnings per share for the first nine months of 2015.~~

~~Excluding acquisition-related expenses and purchase accounting adjustments, gain on sale of investment securities and the death benefit on bank owned life insurance,~~Core net income for the first nine months of ~~2016~~2017 increased ~~32.1%~~22.5% to $25.4 million or $1.13 diluted earnings per share compared ~~to the same period of 2015~~ to $20.7 million or $1.07 diluted earnings per ~~share.~~share for the same period of 2016.

~~Excluding the LaPorte Bancorp, Inc. (“LaPorte Bancorp”) acquisition, mortgage warehouse loans and loans held~~Return on average assets was 0.96% for ~~sale, loans increased 4.1% on an annualized basis during~~ the third quarter of 2017 compared to 0.80% for the same period in 2016.

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

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

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

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

Net interest income for the ~~first nine months~~third quarter of ~~2016~~2017 increased ~~19.3%~~$3.5 million, or ~~$10.5 million~~14.2%, compared to the same period in ~~2015.~~2016.

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

Net interest margin, excluding the impact of ~~acquisitions~~purchase accounting adjustments (“core net interest margin”), was ~~3.31%~~3.63% for the third quarter of ~~2016~~2017 compared to ~~3.42%~~3.71% for the prior quarter and ~~3.44%~~3.31% for the same period in ~~2015.~~

~~Non-interest income for the first nine months of 2016 increased 22.7% or $5.1 million compared to the same period in 2015.~~2016.

Horizon’s tangible book value per share rose to ~~$11.83~~$12.38 at September 30, ~~2016,~~2017, compared to ~~$11.02~~$11.48 at December 31, ~~2015 and $10.89 at September 30, 2015.~~2016.

On September 1, 2017, Horizon ~~opened~~closed the acquisition of Lafayette Community Bancorp (“Lafayette”) and its ~~first commercial office~~wholly-owned subsidiary, Lafayette Community Bank, headquartered in ~~Fort Wayne, Indiana~~Lafayette, Indiana. The system integration of Lafayette was successfully completed on September ~~14, 2016.~~22, 2017.

On October 17, 2017, Horizon closed the acquisition of Wolverine Bancorp, Inc. (“Wolverine”) and its wholly-owned subsidiary, Wolverine Bank, headquartered in Midland, Michigan. The ~~new location will offer commercial loans and cash management services and will be led by Greg Haney, Horizon’s Fort Wayne Market President.~~system integration of Wolverine is scheduled for November 2017.

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form10-K for ~~2015~~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

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

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

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC350-10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At September 30, ~~2016,~~2017, Horizon had core deposit intangibles of ~~$9.6~~$9.5 million subject to amortization and ~~$74.3~~$93.8 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC350-10 requires an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on September 30, ~~2016~~2017 was ~~$19.59~~$29.17 per share compared to a book value of ~~$15.55~~$16.81 per common share.

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

Mortgage Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized intonon-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

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

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

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, fromtime-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 ASC815-10. 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 innon-interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.

Valuation Measurements

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

Financial Condition

On September 30, ~~2016,~~2017, Horizon’s total assets were ~~$3.3~~$3.5 billion, an increase of approximately ~~$673.2~~$378.3 million compared to December 31, ~~2015.~~2016. The increase was primarily in net loans of ~~$441.4~~$289.1 million, investment securities available for sale of ~~$112.2 million, cash of $35.1~~$70.0 million, goodwill of ~~$24.7~~$16.8 million and investment securities held to maturity of $5.4 million which were offset by decreases in Federal Reserve Bank stock of $8.6 million, other assets of ~~$23.9~~$2.8 million and ~~cash value~~loans held for sale of ~~life insurance of $19.2~~$4.5 million.

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


									September 30, 2017				December 31, 2016
	September 30, 2016				December 31, 2015				Amortized		Fair		Amortized		Fair
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Cost		Value		Cost		Value
Available for sale
U.S. Treasury and federal agencies	$	27,383	$	27,422	$	5,940	$	5,926	$	17,996	$	17,885	$	8,051	$	7,989
State and municipal		62,825		64,039		73,829		75,095		141,751		143,483		117,327		116,592
Federal agency collateralized mortgage obligations		188,072		189,684		157,291		156,203		135,511		134,202		139,040		137,195
Federal agency mortgage-backed pools		272,144		275,973		206,970		207,704		213,071		212,051		180,183		176,726
Private labeled mortgage-backed pools										1,841		1,830		—		—
Corporate notes		32		95		32		54		275		393		1,238		1,329

Total available for sale investment securities	$	550,456	$	557,213	$	444,062	$	444,982	$	510,445	$	509,844	$	445,839	$	439,831


Held to maturity
U.S. Treasury and federal agencies	$	—	$	—	$	5,859	$	5,952
State and municipal		158,543		164,500		146,331		151,453	$	177,473	$	180,860	$	165,607	$	165,822
Federal agency collateralized mortgage obligations		6,828		6,972		9,051		8,954		5,902		5,896		6,530		6,490
Federal agency mortgage-backed pools		21,656		22,822		26,388		27,344		15,230		15,466		21,057		21,774

Total held to maturity investment securities	$	187,027	$	194,294	$	187,629	$	193,703	$	198,605	$	202,222	$	193,194	$	194,086

Total investment securities increased by approximately ~~$111.6~~$75.4 million at September 30, ~~2016~~2017 compared to December 31, ~~2015,~~2016, primarily due to the investing of cash received from the ~~closing of~~Bargersville branch purchase and the ~~LaPorte Bancorp acquisition.~~CNB merger and increasing earning assets due to lower mortgage warehouse balances.

Total loans increased ~~$441.4~~$285.4 million since December 31, ~~2015~~2016 to ~~$2.2~~$2.4 billion as of September 30, ~~2016.~~2017. This increase was the result of an increase in commercial loans of ~~$242.5~~$203.8 million, consumer loans of $87.1 million and residential mortgage loans of $39.2 million, offset by a decrease in mortgage warehouse loans of ~~$82.2 million, residential mortgage loans of $93.0~~$40.2 million and a decrease in loans held for sale of $4.5 million. Total loans increased $134.4 million as a result of the acquisition of Lafayette during the third quarter of 2017. The growth markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo contributed total loan growth of $120.1 million during the first nine months of 2017 leading to the increase in commercial loans. The addition of a seasoned consumer loan portfolio manager during the fourth quarter of 2016 and an increased focus on the management of direct consumer loans are the main drivers for the increase in consumer loans.

Total deposits increased $137.1 million since December 31, 2016 to $2.6 billion as of ~~$23.7 million. The growth in total loans~~September 30, 2017.Non-interest bearing transaction accounts, interest bearing transaction accounts and time deposits increased $67.3 million, $37.0 million and $32.7 million, respectively, during the nine months ended September 30, ~~2016~~2017. The increase in deposits is primarily attributable to the ~~direct result~~acquisition of ~~increased calling efforts to increase Horizon’s market share within the Company’s footprint and market expansion as well as the loans added through the Kosciusko and LaPorte Bancorp acquisitions.~~

~~Total~~$151.1 million in deposits increased $456.0 million since December 31, 2015 to $2.3 billion as of September 30, 2016. Non-interest bearing deposit accounts increased by $143.8 million, interest-bearing transaction accounts increased by $189.6 million and time deposits increased by $122.6 millionfrom Lafayette during the ~~nine months ended September 30, 2016.~~third quarter of 2017.

The Company’s borrowings increased ~~$120.6~~$190.7 million from December 31, ~~2015~~2016 to ~~$569.9~~$458.2 million as of September 30, ~~2016.~~2017. At September 30, ~~2016,~~2017, the Company had ~~$307.9~~$320.3 million in short-term funds borrowed compared to ~~$206.0~~$189.0 million at December 31, ~~2015. The Company has a debt reduction plan either through cash flow or possible early redemption.~~

~~Stockholders’ equity totaled $345.7 million at September 30, 2016 compared to $266.8 million at December 31, 2015.~~2016. The increase in ~~stockholders’ equity during the period~~borrowings was ~~the result~~utilized to fund loan growth of ~~the generation of net~~$285.4 million since December 31, 2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

Stockholders’ equity totaled $392.1 million at September 30, 2017 compared to $340.9 million at December 31, 2016. The increase in stockholders’ equity during the period was the result of the acquisition of Lafayette, generation of net income, net of dividends ~~declared, as well as the stock issued in the Kosciusko and LaPorte Bancorp acquisitions.~~declared. At September 30, ~~2016,~~2017, the ratio of average stockholders’ equity to average assets was ~~10.18%~~10.74% compared to ~~10.32%~~10.59% at December 31, ~~2015.~~2016. Book value per common share at September 30, ~~2016~~2017 increased to ~~$15.61~~$16.81 compared to ~~$14.20~~$15.37 at December 31, ~~2015.~~2016.

Results of Operations

Overview

Consolidated net income for the three-month period ended September 30, ~~2016~~2017 was ~~$6.6~~$8.2 million compared to ~~$4.3~~$6.6 million for the same period in ~~2015.~~2016. Earnings per common share for the three months ended September 30, ~~2016~~2017 were $0.36 basic and diluted, compared to $0.31 basic and $0.30 ~~diluted, compared to $0.24 basic and $0.24~~ 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 ~~$4.6~~$3.5 million, ~~and $1.7 million, respectively,~~ partially offset by a decrease innon-interest income of $1.3 million and increases in provision for loan losses of $255,000,non-interest expense of ~~$2.6~~$431,000 and the diluted shares outstanding primarily due to the stock issued in the Kosciusko and LaPorte Bancorp acquisitions.Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses and other expense. Excluding acquisition-related expenses, gain/losses on sale of investment securities and purchase accounting adjustments, net income for the third quarter of 2017 was $9.2 million or $0.41 diluted earnings per share compared to $8.4 million or $0.39 diluted earnings per share in the same period of 2016.

Consolidated net income for the nine-month period ended September 30, 2017 was $25.5 million compared to $18.3 million for the same period in 2016. Earnings per common share for the nine months ended September 30, 2017 were $1.14 basic and $1.13 diluted, compared to $0.95 basic and $0.94 diluted for the same nine-month period in the previous year. The increase in net income and earnings per share from the previous year reflects an increase in net interest income of $15.6 million, partially offset by a decrease innon-interest income of $2.2 million and increases innon-interest expense of $4.2 million, income tax expense of ~~$1.2~~$1.9 million and the diluted shares outstanding primarily due to the stock issued in the Kosciusko and LaPorte Bancorp acquisitions.Non-interest ~~expenses~~ expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing expense ~~professional fees, loan expenses~~ and other expense. Excluding acquisition-related expenses, gains/losses on sale of investment securities and purchase accounting adjustments, net income for the ~~third quarter of 2016~~nine months ended September 30, 2017 was ~~$8.4~~$25.4 million or ~~$0.39~~$1.13 diluted earnings per share compared to ~~$6.5~~$20.7 million or ~~$0.36~~$1.07 diluted earnings per share in the same period of ~~2015.~~

Consolidated net income for the nine-month period ended September 30, 2016 was $18.3 million compared to $14.3 million for the same period in 2015. Earnings per common share for the nine months ended September 30, 2016 were $0.95 basic and $0.94 diluted, compared to $0.95 basic and $0.92 diluted for the same period of 2015. The increase in net income from the previous year reflects an increase in net interest income and non-interest income of $10.5 million and $5.1 million, respectively, and a decrease in the provision for loan losses of $1.6 million, partially offset by increases in non-interest expense of $11.2 million and income tax expense of $2.2 million and the diluted shares outstanding primarily due to the stock issued in the Kosciusko and LaPorte Bancorp acquisitions. Non-interest expenses increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing expense, professional fees, outside services and consultants’ expense, loan expense, FDIC deposit insurance, other losses and other expense. Excluding acquisition-related expenses and purchase accounting adjustments, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the nine months ended September 30, 2016 was $20.7 million or $1.07 diluted earnings per share compared to $15.7 million or $0.99 diluted earnings per share in the same period of 2015.2016.

Net Interest Income

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

Net interest income during the three months ended September 30, ~~2016~~2017 was ~~$24.4~~$27.9 million, an increase of ~~$4.6~~$3.5 million from the ~~$19.8~~$24.4 million earned during the same period in ~~2015.~~2016. Yields on the Company’s interest-earning assets ~~decreased~~increased by 1934 basis points to ~~3.98%~~3.71% for the three months ending September 30, ~~2016~~2017 from ~~4.17%~~3.37% for the three months ended September 30, ~~2015.~~2016. Interest income increased ~~$5.4~~$3.1 million from ~~$23.6~~$29.0 million for the three months ended September 30, ~~2015~~2016 to ~~$29.0~~$32.1 million for the same period in 2017. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $661,000 for the three months ending September 30, 2017 compared to $459,000 for the same period of 2016. ~~This~~

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

increase was due to an increase in interest-earning assets, partially offset by lower yields on loans and investment securities. Interest income from acquisition-related purchase accounting adjustments was $459,000 for the three months ending September 30, 2016 compared to $402,000 for the same period of 2015.

Rates paid on interest-bearing liabilities decreased by 56 basis points for the three-month period ended September 30, ~~2016~~2017 compared to the same period in ~~2015~~2016 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense ~~increased $750,000~~decreased $361,000 compared to the three-month period ended September 30, ~~2015~~2016 to ~~$4.6~~$4.2 million for the same period in ~~2016.~~2017. This ~~increase~~decrease was due to lower average balances of borrowings in addition to lower rates paid on borrowings, partially offset by higher average balances of interest-bearing ~~deposits and borrowings, partially offset by lower~~deposits. The rates paid on ~~interest-bearing deposits and borrowings.~~ borrowings decreased as a result of Horizon executing a strategy to reduce expensive funding costs in the fourth quarter of 2016.

The net interest margin ~~decreased 14~~increased 34 basis points from ~~3.51%~~3.37% for the three-month period ended September 30, ~~2015~~2016 to ~~3.37%~~3.71% for the same period in ~~2016.~~2017. The ~~decrease~~increase in the margin for the three-month period ended September 30, ~~2016~~2017 compared to the same period in ~~2015~~2016 was due to ~~a reduction~~an increase in the yield on interest-earning ~~assets.~~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 ~~3.31%~~3.63% for the three-month period ending September 30, ~~2016~~2017 compared to ~~3.44%~~3.31% for the same period in ~~2015.~~2016.

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

Three Months Ended
September 30, 2016

Three Months Ended
September 30, 2015

   Average
Balance Interest    Average
Rate Average
Balance Interest    Average
Rate
ASSETS

Interest-earning assets

Federal funds sold
   $ 35,492    $ 20       0.22 % $ 23,086    $ 2       0.03 %
Interest-earning deposits
   55,047    32       0.23 % 16,340    5       0.12 %
Investment securities - taxable
   530,228    2,446       1.84 % 401,702    2,149       2.12 %
Investment securities - non-taxable (1)
   186,074    1,151       3.73 % 154,050    1,125       4.39 %
Loans receivable (2)(3)
   2,151,103    25,313       4.69 % 1,709,337    20,297       4.72 %





Total interest-earning assets (1)
   2,957,944    28,962       3.98 % 2,304,515    23,578       4.17 %
Non-interest-earning assets

Cash and due from banks
   39,875       31,384
Allowance for loan losses
   (14,301 )    (16,427 )
Other assets
   290,100       206,545





   $ 3,273,618       $ 2,526,017





LIABILITIES AND SHAREHOLDERS’ EQUITY


Interest-bearing liabilities

Interest-bearing deposits
   $ 1,896,156    $ 1,875       0.39 % $ 1,568,777    $ 1,566       0.40 %
Borrowings
   510,738    2,128       1.66 % 303,521    1,729       2.26 %
Subordinated debentures
   37,092    549       5.89 % 32,737    507       6.14 %





Total interest-bearing liabilities
   2,443,986    4,552       0.74 % 1,905,035    3,802       0.79 %
Non-interest-bearing liabilities

Demand deposits
   462,253       343,780
Accrued interest payable and other liabilities
   34,144       14,891
Stockholders’ equity
   333,235       262,311





   $ 3,273,618       $ 2,526,017





Net interest income/spread
   $ 24,410       3.24 % $ 19,776       3.38 %





Net interest income as a percent of average interest earning assets (1)
      3.37 %    3.51 %

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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


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

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

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

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

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

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

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

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

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

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

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

Net interest income during the nine months ended September 30, ~~2016~~2017 was ~~$65.1~~$80.6 million, an increase of ~~$10.5~~$15.6 million from the ~~$54.5~~$65.1 million earned during the same period in ~~2015.~~2016. Yields on the Company’s interest-earning assets ~~decreased~~increased by 2034 basis points to ~~4.05%~~3.77% for the nine months ending September 30, ~~2016 compared to 4.25%~~2017 from 3.43% for the ~~same period of 2015.~~nine months ended September 30, 2016. Interest income increased ~~$12.3~~$14.6 million from ~~$64.8~~$77.1 million for the nine months ended September 30, ~~2015~~2016 to ~~$77.1~~$91.7 million for the same period in ~~2016.~~2017. This ~~increase~~ was due to an increase in average interest-earning assets ~~partially offset by lower yields on loans~~through organic and ~~investment securities and a decrease in interest~~acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments ~~from $2.3~~was $2.6 million for the nine months ending September 30, ~~2015~~2017 compared to $1.4 million for the same period of 2016.

Rates paid on interest-bearing liabilities decreased by 5 basis points for the nine-month period ended September 30, 2016 compared to the same period in 2015 due to the continued low interest rate environment and shift in mix on interest-bearing liabilities. Interest expense increased $1.8 million compared to the nine-month period ended September 30, 2015 to $12.1 million for the same period in 2016. This increase was due to higher average balances of interest-bearing deposits and borrowings, partially offset by lower rates paid on interest-bearing deposits and borrowings. The net interest margin decreased 16 basis points from 3.59% for the nine-month period ended September 30, 2015 to 3.43% for the same period in 2016. The decrease in the margin for the nine-month period ended September 30, 2016 compared to the same period in 2015 was due to a reduction in the yield on interest-earning assets and a decrease of approximately $878,000 of interest income from acquisition-related purchase accounting adjustments. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.36% for the nine-month period ending September 30, 2016 compared to 3.44% for the same period in 2015.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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


																		Nine Months Ended								Nine Months Ended
																		September 30, 2017								September 30, 2016
		Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2015								Average					Average			Average					Average
		Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets
Federal funds sold		$	13,812		$	23		0.22	%	$	10,563		$	11		0.14	%	$	3,857		$	35		1.21	%	$	13,812		$	23		0.22	%
Interest-earning deposits			34,624			59		0.23	%		11,927			10		0.11	%		24,177			201		1.11	%		34,624			59		0.23	%
Investment securities - taxable			486,374			7,621		2.09	%		375,548			6,356		2.26	%		416,323			6,581		2.11	%		486,374			7,621		2.09	%
Investment securities - non-taxable (1)			183,142			3,583		3.63	%		145,576			3,281		3.96	%		286,007			5,193		3.39	%		183,142			3,583		3.63	%
Loans receivable (2)(3)			1,873,614			65,854		4.70	%		1,528,662			55,140		4.83	%		2,210,295			79,699		4.83	%		1,873,614			65,854		4.70	%

Total interest-earning assets (1)			2,591,566			77,140		4.05	%		2,072,276			64,798		4.25	%		2,940,659			91,709		4.27	%		2,591,566			77,140		4.05	%

Non-interest-earning assets
Cash and due from banks			36,220								30,729								42,004								36,220
Allowance for loan losses			(14,334	)							(16,557	)							(15,069	)							(14,334	)
Other assets			243,021								174,363								279,706								243,021


		$	2,856,473							$	2,260,811
																		$	3,247,300							$	2,856,473

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Interest-bearing deposits		$	1,680,560		$	4,923		0.39	%	$	1,347,882		$	4,035		0.40	%	$	1,967,457		$	5,315		0.36	%	$	1,680,560		$	4,923		0.39	%
Borrowings			438,324			5,608		1.71	%		340,593			4,747		1.86	%		357,932			4,028		1.50	%		438,324			5,608		1.71	%
Subordinated debentures			34,144			1,556		6.09	%		32,698			1,504		6.15	%		36,339			1,721		6.33	%		34,144			1,556		6.09	%

Total interest-bearing liabilities			2,153,028			12,087		0.75	%		1,721,173			10,286		0.80	%		2,361,728			11,064		0.63	%		2,153,028			12,087		0.75	%

Non-interest-bearing liabilities
Demand deposits			387,768								303,309								510,230								387,768
Accrued interest payable and other liabilities			26,397								14,582								20,220								26,397
Stockholders’ equity			289,280								221,747								355,121								289,280

																		$	3,247,299							$	2,856,473
		$	2,856,473							$	2,260,811


Net interest income/spread					$	65,053		3.30	%				$	54,512		3.45	%				$	80,645		3.64	%				$	65,053		3.30	%


Net interest income as a percent of average interest earning assets (1)								3.43	%							3.59	%							3.77	%							3.43	%

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

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

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

Provision for Loan Losses

Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly reviewing the performance of its loan portfolio. During the three-month period ended September 30, ~~2016,~~2017, a provision of ~~$455,000~~$710,000 was required to adequately fund the ALLL compared to ~~$300,000~~$455,000 for the same period of ~~2015.~~2016. Commercial loan net charge-offs during the three-month period ended September 30, ~~2016~~2017 were ~~negative $6,000, there were no~~$169,000, residential mortgage loan net charge-offs were $24,000 and consumer loan net charge-offs were ~~$163,000.~~negative $42,000. The increase in the provision for loan losses in the third quarter of ~~2016~~2017 compared to the same period of ~~2015~~2016 was due to ~~loan growth.~~increased additional allocations to loans originated in new markets and an increase in allocation for agricultural economic factors. The ALLL balance at September 30, ~~2016~~2017 was ~~$14.5~~$15.6 million or ~~0.66%~~0.64% of total loans. This compares to an ALLL balance of ~~$14.5~~$14.8 million at December 31, ~~2015~~2016 or ~~0.83%~~0.69% of total loans. The decrease in the ratio at September 30, ~~2016~~2017 compared to December 31, ~~2015~~2016 was due to an increase in ~~total~~loan balances, excluding acquired loans and loans held for sale, of ~~$441.4 million from the Kosciusko and LaPorte Bancorp mergers and improving credit trends.~~

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

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

$187.9 million.

For the nine-month period ended September 30, ~~2016,~~2017, the provision for loan losses totaled ~~$1.2~~$1.4 million compared to ~~$2.8~~$1.2 million in the same period of ~~2015.~~2016. The ~~lower~~higher provision for loan losses infor the ~~third quarter of 2016~~nine months ended September 30, 2017 compared to the same period of ~~2015~~2016 was due to ~~the improvement of non-performing~~an increase in loan balances, along with additional allocations to loans originated in new markets and ~~the charge-off of one commercial credit of $1.3 million~~an increase in ~~the first nine months of 2015.~~allocation for agricultural economic factors.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at ~~0.87%~~0.82% as of September 30, ~~2016.~~2017. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was ~~1.40%~~1.24% as of September 30, ~~2016.~~2017. The table below illustrates Horizon’s loan loss reserve ratio composition as of September 30, ~~2016.~~2017.

Non-GAAP Allowance for Loan and Lease Loss Detail

As of September 30, ~~2016~~2017

(Dollars in Thousands, Unaudited)


																						Horizon
	Horizon Legacy			Heartland			Summit			Peoples			Kosciusko			LaPorte			Total			Legacy			Heartland			Summit			Peoples			Kosciusko			LaPorte			CNB			Lafayette			Total
Pre-discount loan balance	$	1,673,722		$	15,719		$	57,214		$	155,318		$	89,490		$	215,531		$	2,206,994		$	1,903,322		$	12,861		$	44,649		$	123,332		$	64,450		$	158,099		$	7,694		$	125,981		$	2,440,388

Allowance for loan losses (ALLL)		14,524			—			—			—			—			—			14,524			15,515			71			—			—			—			—			—			—			15,586
Loan discount		N/A			1,067			2,645			3,545			1,132			8,086			16,475			N/A			846			2,365			2,944			810			4,036			206			3,356			14,563

ALLL+loan discount		14,524			1,067			2,645			3,545			1,132			8,086			30,999
ALLL+ loan discount																							15,515			917			2,365			2,944			810			4,036			206			3,356			30,149

Loans, net	$	1,659,198		$	14,652		$	54,569		$	151,773		$	88,358		$	207,445		$	2,175,995		$	1,887,807		$	11,944		$	42,284		$	120,388		$	63,640		$	154,063		$	7,488		$	122,625		$	2,410,239


ALLL/ pre-discount loan balance		0.87	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.66	%		0.82	%		0.55	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.64	%
Loan discount/ pre-discount loan balance		N/A			6.79	%		4.62	%		2.28	%		1.26	%		3.75	%		0.75	%		N/A			6.58	%		5.30	%		2.39	%		1.26	%		2.55	%		2.68	%		2.66	%		0.60	%
ALLL+loan discount/ pre-discount loan balance		0.87	%		6.79	%		4.62	%		2.28	%		1.26	%		3.75	%		1.40	%
ALLL+ loan discount/pre-discount loan balance																							0.82	%		7.13	%		5.30	%		2.39	%		1.26	%		2.55	%		2.68	%		2.66	%		1.24	%

No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. Horizon considers the allowance for loan losses to be appropriate to cover probable incurred losses in the loan portfolio as of September 30, ~~2016.~~2017.

Non-performing loans totaled ~~$12.8~~$12.4 million as of September 30, ~~2016, down~~2017, up from ~~$16.7~~$10.7 million as of December 31, ~~2015. Compared to December 31, 2015, non-performing~~2016.Non-performing commercial, ~~and~~ real estate ~~loans decreased by $1.5 million~~ and ~~$3.1 million, respectively, and non-performing~~ consumer loans increased by ~~$813,000.~~$1.0 million, $523,000 and $227,000, respectively, at September 30, 2017 compared to December 31, 2016.

Other Real Estate Owned (OREO) totaled ~~$3.7~~$1.8 million at September 30, ~~2016~~2017 compared to $3.2 million on December 31, ~~2015~~2016 and ~~$1.3~~$3.7 million on September 30, ~~2015.~~2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

Non-interest Income

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


											Three Months Ended
	Three Months Ended										September 30		September 30		Amount			Percent
	September 30 2016		September 30 2015		Amount Change			Percent Change			2017		2016		Change			Change
Non-interest Income
Service charges on deposit accounts	$	1,483	$	1,359	$	124			9.1	%	$	1,672	$	1,605	$	67			4.2	%
Wire transfer fees		292		160		132			82.5	%		175		292		(117	)		-40.1	%
Interchange fees		2,016		1,625		391			24.1	%		1,251		1,156		95			8.2	%
Fiduciary activities		1,653		1,520		133			8.8	%		1,887		1,653		234			14.2	%
Gain on sale of investment securities												6		—		6			NM
Gain on sale of mortgage loans		3,528		2,794		734			26.3	%		1,950		3,528		(1,578	)		-44.7	%
Mortgage servicing net of impairment		409		246		163			66.3	%		369		409		(40	)		-9.8	%
Increase in cash surrender value of bank owned life insurance		449		374		75			20.1	%		474		449		25			5.6	%
Other income		226		322		(96	)		-29.8	%		237		226		11			4.9	%

Total non-interest income	$	10,056	$	8,400	$	1,656			19.7	%	$	8,021	$	9,318	$	(1,297	)		-13.9	%

Totalnon-interest income was ~~$1.7~~$1.3 million ~~higher in~~lower during the third quarter of ~~2016~~2017 compared to the same period of ~~2015.~~2016. Service charges on deposit accounts increased ~~$124,000, wire transfer fees increased $132,000,~~$67,000, interchange fees increased by ~~$391,000,~~$95,000, and fiduciary activities increased ~~$133,000~~$234,000 primarily due to overall company growth and increased volume. Residential mortgage loan activity during the third quarter of ~~2016~~2017 generated ~~$3.5~~$1.9 million of income from the gain on sale of mortgage loans, ~~up $734,000~~down $1.6 million from the same period in ~~2015.~~2016. The ~~increase~~decrease in the gain on sale of mortgage loans was due to ~~an increase~~a decrease in the ~~percentage earned on the sale~~volume of ~~these~~mortgage loans sold from ~~3.30%~~$98.3 million in the third quarter of ~~2015~~2016 to ~~3.91%~~$56.4 million in the same period of ~~2016. Mortgage servicing net of impairment increased by $163,000~~2017. Wire transfer fee income decreased $117,000 during the third quarter of ~~2016~~2017 when compared to the same period of ~~2015 primarily~~2016 due to a ~~larger portfolio~~decrease in mortgage warehouse activity and related wire transfer fees.

The following is a summary of ~~mortgage loans serviced.~~changes innon-interest income (table dollar amounts in thousands):


											Nine Months Ended
	Nine Months Ended										September 30		September 30		Amount			Percent
	September 30 2016		September 30 2015		Amount Change			Percent Change			2017		2016		Change			Change
Non-interest Income
Service charges on deposit accounts	$	4,056	$	3,443	$	613			17.8	%	$	4,638	$	4,310	$	328			7.6	%
Wire transfer fees		588		493		95			19.3	%		503		588		(85	)		-14.5	%
Interchange fees		5,137		4,093		1,044			25.5	%		3,809		3,065		744			24.3	%
Fiduciary activities		4,753		4,033		720			17.9	%		5,752		4,753		999			21.0	%
Gain on sale of investment securities		875		124		751			605.6	%		38		875		(837	)		-95.7	%
Gain on sale of mortgage loans		9,171		7,815		1,356			17.4	%		5,918		9,171		(3,253	)		-35.5	%
Mortgage servicing net of impairment		1,356		725		631			87.0	%		1,175		1,356		(181	)		-13.3	%
Increase in cash surrender value of bank owned life insurance		1,145		889		256			28.8	%		1,346		1,145		201			17.6	%
Death benefit on officer life insurance		—		145		(145	)		100.0	%
Other income		708		892		(184	)		-20.6	%		613		708		(95	)		-13.4	%

Total non-interest income	$	27,789	$	22,652	$	5,137			22.7	%	$	23,792	$	25,971	$	(2,179	)		-8.4	%

Totalnon-interest income was ~~$5.1~~$2.2 million ~~higher~~lower in the first nine months of ~~2016~~2017 when compared to the same period of ~~2015.~~2016. Service charges on deposit accounts increased ~~$613,000,~~$328,000, interchange fees increased ~~by $1.0 million~~$744,000 and fiduciary activities increased ~~$720,000,~~$999,000, primarily due to overall company growth and increased volume. Gain on sale of investment securities ~~increased $751,000~~decreased $837,000 due to gains realized in the first nine months of 2016 as ~~the~~a result of an analysis that determined market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings. Residential mortgage loan activity during the first nine months of 2016 generated $9.2 million of income from the gain on sale of mortgage loans, up $1.4 million from the same period in 2015. The increase in the gain on sale of mortgage loans was due to an increase in the percentage earned on the sale of these loans from 3.19% during the first nine months of 2015 to 3.81% in the same period of 2016, partially offset by a decrease in total loans sold of $2.4 million from $239.1 million

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

gains to capital without negatively impacting loan-term earnings. Residential mortgage loan activity during the first nine months of ~~2015 to $236.7~~2017 generated $5.9 million infrom the gain on sale of mortgage loans, down $3.3 million from the same period in 2016. The decrease in the gain on sale of ~~2016. Mortgage servicing net of impairment increased by $631,000 during the first nine months of 2016 compared to the same period of 2015 primarily~~mortgage loans was due to a ~~larger portfolio~~decrease in the volume of mortgage loans ~~serviced. The cash surrender value of bank owned life insurance increased by $256,000~~sold from $236.7 million in the first nine months of 2016 ~~compared~~ to $163.9 million in the same period ~~in 2015 due to the addition~~ of bank owned life insurance policies as a result of the Kosciusko and LaPorte Bancorp acquisitions. The death benefit on bank owned life insurance decreased by $145,000 compared to the previous year due to a $145,000 death benefit on officer life insurance realized during the first nine months of 2015.2017.

Non-interest Expense

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


											Three Months Ended
	Three Months Ended										September 30		September 30		Amount			Percent
	September 30 2016		September 30 2015		Amount Change			Percent Change			2017		2016		Change			Change
Non-interest expense
Salaries	$	8,349	$	6,896	$	1,453			21.1	%	$	9,245	$	8,349	$	896			10.7	%
Commission and bonuses		1,799		1,958		(159	)		-8.1	%		1,413		1,799		(386	)		-21.5	%
Employee benefits		2,062		1,798		264			14.7	%		2,253		2,062		191			9.3	%
Net occupancy expenses		2,174		1,723		451			26.2	%		2,400		2,174		226			10.4	%
Data processing		1,616		1,281		335			26.2	%		1,502		1,616		(114	)		-7.1	%
Professional fees		612		409		203			49.6	%		649		612		37			6.0	%
Outside services and consultants		2,686		3,209		(523	)		-16.3	%		2,504		2,686		(182	)		-6.8	%
Loan expense		1,482		1,351		131			9.7	%		1,215		1,482		(267	)		-18.0	%
FDIC deposit insurance		465		423		42			9.9	%		270		465		(195	)		-41.9	%
Other losses		107		246		(139	)		-56.5	%		58		107		(49	)		-45.8	%
Other expense		3,468		2,941		527			17.9	%		3,004		2,730		274			10.0	%

Total non-interest expense	$	24,820	$	22,235	$	2,585			11.6	%	$	24,513	$	24,082	$	431			1.8	%

Totalnon-interest expense was ~~$2.6 million~~$431,000 higher in the third quarter of ~~2016~~2017 compared to the same period of ~~2015.~~2016. Excluding merger-related expenses of $2.0 million and $3.0 million recorded during the three months ended September 30, 2017 and 2016, respectively, totalnon-interest expense increased $1.4 million, or 6.5%. Salaries increased by ~~$1.5 million and employee benefits increased by $264,000~~$896,000 due to a larger employee base. Net occupancy expense increased ~~$451,000~~$226,000 due to Horizon’s investment in growth markets and the ~~Peoples, Kosciusko and~~ LaPorte Bancorp, CNB and Lafayette acquisitions. ~~Data processing expenses~~Other expense increased ~~$335,000, professional fees increased $203,000 and loan expenses increased $131,000~~$274,000 primarily due to ~~company growth. Other expenses increased by $527,000 primarily due~~higher amortization expense related to ~~company growth~~core deposit intangibles. Outside service and ~~one-time merger-related expenses. Outside services~~consultant, professional fees and ~~consultants~~other expense decreased ~~by $523,000 due to the one-time fees associated with the Peoples acquisition~~$182,000 in the third quarter of ~~2015. One-time non-interest expense related~~2017 when compared to the ~~Kosciusko, LaPorte Bancorp and CNB Bancorp acquisitions~~same period of 2016 primarily due to lower merger-related expenses. FDIC insurance expense was $195,000 lower in the third quarter of ~~2016 totaled $2.9 million~~2017 when compared to ~~$3.6 million in one-time fees associated with the Peoples acquisition in~~ the same period of ~~2015.~~2016 as the assessment rate schedule was reduced effective for assessment payments due in the fourth quarter of 2016 and during 2017. Loan expenses decreased $267,000 primarily due to a decrease in loan collection expenses. Data processing expense decreased $114,000 in the third quarter of 2017 when compared to the same period in 2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

   Nine Months Ended
   September 30
2016    September 30
2015    Amount
Change    Percent
Change
Non-interest expense

Salaries
   $ 22,485       $ 18,522       $ 3,963       21.4 %
Commission and bonuses
   4,064       4,325       (261 )    -6.0 %
Employee benefits
   6,043       4,694       1,349       28.7 %
Net occupancy expenses
   6,011       4,649       1,362       29.3 %
Data processing
   3,855       3,170       685       21.6 %
Professional fees
   2,190       1,596       594       37.2 %
Outside services and consultants
   5,983       4,753       1,230       25.9 %
Loan expense
   4,086       3,975       111       2.8 %
FDIC deposit insurance
   1,279       1,099       180       16.4 %
Other losses
   510       351       159       45.3 %
Other expense
   9,616       7,819       1,797       23.0 %







Total non-interest expense
   $ 66,122       $ 54,953       $ 11,169       20.3 %

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


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

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

Totalnon-interest ~~expenses were $11.2~~ expense was $2.4 million higher infor the ~~first~~ nine months ~~of 2016~~ended September 30, 2017 compared to the same period of ~~2015.~~2016. Excluding merger-related expenses of $2.2 million and $5.5 million recorded during the nine months of September 30, 2017 and 2016, respectively, totalnon-interest expense increased $5.7 million, or 9.3%. Salaries increased by ~~$4.0 million and employee benefits increased by $1.3~~$4.4 million due to a larger employee base. Net occupancy ~~expense~~expenses increased ~~$1.4~~$1.0 million due to Horizon’s investment in growth markets and the ~~Peoples,~~Kosciusko, LaPorte Bancorp, CNB and Lafayette acquisitions. Data processing expenses increased $456,000 primarily due to company growth. Outside services and consultants, professional fees and other expenses decreased $992,000, $393,000 and $861,000, respectively, for the nine months ended September 30, 2017 compared to the same period of 2016 primarily due toone-time expenses related to the Kosciusko and LaPorte Bancorp acquisitions. ~~Data processing expenses increased $685,000, loan expense increased $111,000 and~~ FDIC deposit insurance ~~increased by $180,000 primarily~~expense was $503,000 lower for the first nine months of 2017 when compared to the same period in 2016 as the assessment rate schedule was reduced effective for assessment payments due ~~to company growth.~~in the fourth quarter of 2016 and in 2017. Other losses ~~increased by $159,000~~decreased $324,000 for the nine months ended September 30, 2017 when compared to the same period in 2016, primarily due to higher debit card losses and a trust settlement. Other expenses increased by $1.8 million primarily due to company growth and one-time merger-related expenses. Commission and bonuses decreased by $261,000 due to a decrease in debit card related expense. Loan expense decreased $514,000 as loan volume and incentive pay. Outside services and consultants expense increased by $1.2 million due to the one-time fees associated with Kosciusko, LaPorte Bancorp and CNB Bancorp acquisitions. One-time non-interest expense related to the Kosciusko, LaPorte Bancorp and CNB Bancorp acquisitions totaled $5.5 million incollection expenses were lower during the first nine months of ~~2016~~2017 when compared to ~~$4.4~~the same period of 2016.

Income Taxes

Income tax expense for the third quarter of 2017 was $2.5 million ~~in one-time fees associated with~~compared to $2.6 million for the ~~Peoples acquisition~~same period of 2016. The effective tax rate for the third quarter of 2017 was 23.5% compared to 28.2% in the same period of ~~2015.~~2016. The decrease in the effective tax rate for the third quarter of 2017 was primarily due to tax benefits related to the exercise of stock options.

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

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

Liquidity

The Bank maintains a stable base of core deposits provided by long-standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, and borrowing relationships with correspondent banks, including the FHLB. During the nine months ended September 30, ~~2016,~~2017, cash and cash equivalents increased by approximately ~~$35.1~~$1.8 million. At September 30, ~~2016,~~2017, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately ~~$278.2~~$236.3 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to ~~$253.2~~$453.9 million at December 31, ~~2015~~2016 and ~~$328.0~~$278.2 million at September 30, ~~2015.~~2016.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, ~~2016.~~2017. Stockholders’ equity totaled ~~$345.7~~$392.1 million as of September 30, ~~2016,~~2017, compared to ~~$266.8~~$340.9 million as of December 31, ~~2015.~~2016. For the ~~three~~nine months ended September 30, ~~2016,~~2017, the ratio of average stockholders’ equity to average assets was ~~10.18%~~10.94% compared to ~~10.32%~~10.22% for the ~~three~~twelve months ended December 31, ~~2015.~~2016. The increase in stockholders’ equity during the period was the result of the generation of net income, net of dividends declared, as well as the stock issued in the ~~Kosciusko and LaPorte Bancorp acquisitions.~~

~~HORIZON BANCORP AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of Financial Condition~~

~~And Results of Operations~~

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

Lafayette acquisition.

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

Horizon declared common stock dividends in the amount of ~~$0.30~~$0.37 per share during the first nine months of ~~2016 compared to $0.29~~2017 and $0.30 per share for the same period of ~~2015.~~2016. The dividend payout ratio (dividends as a percent of basic earnings per share) was ~~31.6%~~32.4% and ~~30.2%~~31.6% for the first nine months of ~~2016~~2017 and ~~2015,~~2016, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form10-K for ~~2015.~~2016.

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

Use ofNon-GAAP Financial Measures

Certain information set forth in this quarterly report on Form10-Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have includednon-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 ofone-time costs related to acquisitions, acquisition-related purchase accounting adjustments and other events that are considered to benon-recurring. Horizon believes that thesenon-GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts andone-time costs of acquisitions andnon-core items, although these measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure.

Non-GAAP Reconciliation of Net Interest Margin

(Dollars in Thousands, Unaudited)


	Three Months Ended									Nine Months Ended						Three Months Ended									Nine Months Ended
	September 30			June 30			September 30			September 30						September 30			June 30			September 30			September 30
	2016			2016			2015			2016			2015			2017			2017			2016			2017			2016
Net Interest Margin As Reported
Net interest income	$	24,410		$	20,869		$	19,776		$	65,053		$	54,512		$	27,879		$	27,198		$	24,410		$	80,645		$	65,053
Average interest-earning assets		2,957,944			2,471,354			2,304,515			2,591,566			2,072,276			3,078,611			2,943,627			2,957,944			2,940,659			2,591,566
Net interest income as a percent of average interest-earning assets (“Net Interest Margin”)		3.37	%		3.48	%		3.51	%		3.43	%		3.59	%		3.71	%		3.84	%		3.37	%		3.77	%		3.43	%

Impact of Acquisitions
Interest income from acquisition-related purchase accounting adjustments	$	(459	)	$	(397	)	$	(402	)	$	(1,404	)	$	(2,282	)	$	(661	)	$	(939	)	$	(459	)	$	(2,616	)	$	(1,404	)

Excluding Impact of Acquisitions
Excluding Impact of Prepayment Penalties and Acquisitions
Net interest income	$	23,951		$	20,472		$	19,374		$	63,649		$	52,230		$	27,218		$	26,259		$	23,951		$	78,029		$	63,649
Average interest-earning assets		2,957,944			2,471,354			2,304,515			2,591,566			2,072,276			3,078,611			2,943,627			2,957,944			2,940,659			2,591,566
Core Net Interest Margin		3.31	%		3.42	%		3.44	%		3.36	%		3.44	%		3.63	%		3.71	%		3.31	%		3.65	%		3.36	%

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

(Dollars in Thousands Except per Share ~~Data, Unaudited)~~Data)


													Three Months Ended						Nine Months Ended
	Three Months Ended						Nine Months Ended						September 30						September 30
	September 30						September 30						2017			2016			2017			2016
	2016			2015			2016			2015			(Unaudited)						(Unaudited)
Non-GAAP Reconciliation of Net Income
Net income as reported	$	6,602		$	4,288		$	18,309		$	14,374		$	8,171		$	6,602		$	25,467		$	18,309
Merger expenses		2,953			3,648			5,472			4,364			2,013			2,953			2,213			5,472
Tax effect		(886	)		(1,219	)		(1,582	)		(1,402	)		(516	)		(886	)		(586	)		(1,582	)

Net income excluding merger expenses		8,669			6,717			22,199			17,336			9,668			8,669			27,094			22,199

Gain on sale of investment securities		—			—			(875	)		(124	)		(6	)		—			(38	)		(875	)
Tax effect		—			—			306			43			2			—			13			306

Net income excluding gain on sale of investment securities		8,669			6,717			21,630			17,255			9,664			8,669			27,069			21,630

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

Net income excluding death benefit on BOLI		8,669			6,717			21,630			17,161


Acquisition-related purchase accounting adjustments (“PAUs”)		(459	)		(402	)		(1,404	)		(2,282	)		(661	)		(459	)		(2,616	)		(1,404	)
Tax effect		161			141			491			799			231			161			916			491

Net income excluding PAUs	$	8,371		$	6,456		$	20,717		$	15,678		$	9,234		$	8,371		$	25,369		$	20,717


Non-GAAP Reconciliation of Diluted Earnings per Share
Diluted earnings per share as reported	$	0.30		$	0.24		$	0.94		$	0.92		$	0.36		$	0.30		$	1.13		$	0.94
Merger expenses		0.14			0.20			0.28			0.28			0.09			0.14			0.10			0.28
Tax effect		(0.04	)		(0.07	)		(0.08	)		(0.09	)		(0.02	)		(0.04	)		(0.02	)		(0.08	)

Diluted earnings per share excluding merger expenses		0.40			0.37			1.14			1.11			0.43			0.40			1.21			1.14

Gain on sale of investment securities		—			—			(0.05	)		(0.01	)		(0.00	)		—			(0.00	)		(0.05	)
Tax effect		—			—			0.02			0.00			0.00			—			0.00			0.02

Net income excluding gain on sale of investment securities		0.40			0.37			1.11			1.10			0.43			0.40			1.21			1.11

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

Net income excluding death benefit on BOLI		0.40			0.37			1.11			1.09


Acquisition-related PAUs		(0.02	)		(0.02	)		(0.07	)		(0.15	)		(0.03	)		(0.02	)		(0.12	)		(0.07	)
Tax effect		0.01			0.01			0.03			0.05			0.01			0.01			0.04			0.03

Diluted earnings per share excluding PAUs	$	0.39		$	0.36		$	1.07		$	0.99		$	0.41		$	0.39		$	1.13		$	1.07

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

(Dollars in Thousands Except per Share Data)


											September 30		June 30		March 31		December 31		September 30
	September 30 2016		June 30 2016		March 31 2016		December 31 2015		September 30 2015		2017		2017		2017		2016		2016
	(Unaudited)		(Unaudited)		(Unaudited)				(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Total stockholders’ equity	$	345,736	$	281,002	$	261,417	$	266,832	$	264,738	$	392,055	$	357,259	$	348,575	$	340,855	$	345,736
Less: Preferred stock		—		—		—		12,500		12,500
Less: Intangible assets		83,891		65,144		56,695		56,971		57,248		103,244		86,726		87,094		86,307		83,891

Total tangible stockholder’s equity	$	261,845	$	215,858	$	204,722	$	197,361	$	194,990

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

Common shares outstanding		22,143,228		18,857,301		17,974,970		17,909,831		17,897,981		23,325,459		22,176,465		22,176,465		22,171,596		22,143,228

Tangible book value per common share	$	11.83	$	11.45	$	11.39	$	11.02	$	10.89	$	12.38	$	12.20	$	11.79	$	11.48	$	11.83

HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

Non-GAAP Reconciliation of Return on Average Assets

(Dollars in Thousands)


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

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

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

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

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

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

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

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

HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

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

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s ~~2015~~2016 Annual Report on Form10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its ~~2015~~2016 Annual Report on Form10-K.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

Based on an evaluation of disclosure controls and procedures as of September 30, ~~2016,~~2017, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes In Internal Control Over Financial Reporting

Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended September 30, ~~2016,~~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.

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

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

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form10-K for ~~2015.~~2016.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5.

OTHER INFORMATION

Not Applicable

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

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

ITEM 6.

EXHIBITS

(a) Exhibits

~~(a)~~

~~Exhibits~~


Exhibit No.		Description

~~3.1~~ 31.1		~~Amended and Restated Articles~~Certification of ~~Incorporation of Horizon Bancorp, with October 19, 2016 Amendment (incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed October 19, 2016)~~Craig M. Dwight

~~10.1~~ 31.2		~~Agreement between Horizon Bank, N.A. and Kathie A. DeRuiter (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed September 21, 2016~~Certification of Mark E. Secor

~~31.1~~		~~Certification of Craig M. Dwight~~

~~31.2~~		~~Certification of Mark E. Secor~~

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

101		Interactive Data Files

SIGNATURES

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

HORIZON BANCORP


Dated:	November 8, 2017	/s/ Craig M. Dwight
		~~HORIZON BANCORP~~Craig M. Dwight
		Chief Executive Officer

Dated:	November ~~9, 2016~~		~~/s/ Craig M. Dwight~~
			~~Craig M. Dwight~~
			~~Chief Executive Officer~~

~~Dated:~~	~~November 9, 2016~~	8, 2017	/s/ Mark E. Secor

		Mark E. Secor

		Chief Financial Officer

~~INDEX TO EXHIBITS~~


~~Exhibit No.~~	~~Description~~	~~Location~~

~~Exhibit 3.1~~	~~Amended and Restated Articles of Incorporation of Horizon Bancorp, with October 19, 2016 Amendment~~	~~Incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed October 19, 2016~~

~~Exhibit 10.1~~	~~Agreement between Horizon Bank, N.A. and Kathie A. DeRuiter~~	~~Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed September 21, 2016~~

~~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~~

6472


ASSETS
Cash and due from banks	$	205,054
Investment securities, held to maturity		2,038

Commercial		67,435
Residential mortgage		137,331
Consumer		19,593

Total loans		224,359

Premises and equipment, net		5,524
FRB and FHLB stock		2,743
Goodwill		21,424
Core deposit intangible		4,394
Interest receivable		1,279
Cash value of life insurance		13,898
Other assets		4,364

Total assets purchased	$	485,077


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

Total estimated purchase price	$	78,147


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

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

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


	Three Months Ended September 30, 2016								Three Months Ended September 30, 2015
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
ASSETS
Interest-earning assets
Federal funds sold	$	35,492		$	20		0.22	%	$	23,086		$	2		0.03	%
Interest-earning deposits		55,047			32		0.23	%		16,340			5		0.12	%
Investment securities - taxable		530,228			2,446		1.84	%		401,702			2,149		2.12	%
Investment securities - non-taxable (1)		186,074			1,151		3.73	%		154,050			1,125		4.39	%
Loans receivable (2)(3)		2,151,103			25,313		4.69	%		1,709,337			20,297		4.72	%

Total interest-earning assets (1)		2,957,944			28,962		3.98	%		2,304,515			23,578		4.17	%

Non-interest-earning assets
Cash and due from banks		39,875								31,384
Allowance for loan losses		(14,301	)							(16,427	)
Other assets		290,100								206,545


	$	3,273,618							$	2,526,017


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Interest-bearing deposits	$	1,896,156		$	1,875		0.39	%	$	1,568,777		$	1,566		0.40	%
Borrowings		510,738			2,128		1.66	%		303,521			1,729		2.26	%
Subordinated debentures		37,092			549		5.89	%		32,737			507		6.14	%

Total interest-bearing liabilities		2,443,986			4,552		0.74	%		1,905,035			3,802		0.79	%

Non-interest-bearing liabilities
Demand deposits		462,253								343,780
Accrued interest payable and other liabilities		34,144								14,891
Stockholders’ equity		333,235								262,311


	$	3,273,618							$	2,526,017


Net interest income/spread				$	24,410		3.24	%				$	19,776		3.38	%


Net interest income as a percent of average interest earning assets (1)							3.37	%							3.51	%

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