UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

☐ ☒	QUARTERLY REPORT ~~UNDER~~PURSUANT TO SECTION 13 ~~OR 15 (d)~~or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~quarterly period ended~~ Quarterly Period Ended

June 30, ~~2018~~

2019


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

_________
to
_________

Commission file number

0-10792

HORIZON BANCORP, INC.

(Exact name of registrant as specified in its charter)


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



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

Registrant’s telephone number, including area code: ~~(219)~~(
219
)

879-0211

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, no par value	HBNC	The NASDAQ Stock Market, LLC

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

☒

☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large Accelerated Filer	☐ ☒	Accelerated Filer	☒ ☐

~~Non-accelerated Filer~~	~~☐ (Do not check if smaller reporting company)~~
Non-accelerated Filer	☐	Smaller Reporting Company	☐

Emerging growth company	☐

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

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes

☐

☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~38,362,640~~

45,061,372

shares of
Common Stock, no par value, at August 6, ~~2018.~~

2019.

Table of Contents

HORIZON BANCORP, INC.

FORM10-Q

INDEX


PART I. FINANCIAL INFORMATION

~~Item 1.~~
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~~Statements of Stockholders’ Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Condensed Consolidated Financial Statements	8

~~Item 2.~~
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

~~Item 3.~~
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	63

~~Item 4.~~	~~Controls and Procedures~~	63

~~PART II. OTHER INFORMATION~~

~~Item 1.~~	~~Legal Proceedings~~	64

~~Item 1A.~~
Item 4.	~~Risk Factors~~Controls and Procedures	64

~~Item 2.~~
PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	65

Item 1A.	Risk Factors	65

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

~~Item 3.~~	~~Defaults Upon Senior Securities~~	64

~~Item 4.~~	~~Mine Safety Disclosures~~	64

~~Item 5.~~	~~Other Information~~	64

~~Item 6.~~	~~Exhibits~~	65

Item 3.	Defaults Upon Senior Securities	65

Item 4.	Mine Safety Disclosures	65

Item 5.	Other Information	65

Item 6.	Exhibits	66

Index to Exhibits		66

~~Signatures~~
Signatures		67

Table of Contents

PART 1 — FINANCIAL INFORMATION

~~ITEM 1.~~

~~FINANCIAL STATEMENTS~~

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

   June 30
2018 December 31
2017
   (Unaudited)
Assets

Cash and due from banks
   $ 69,018 $ 76,441
Investment securities, available for sale
   526,195 509,665
Investment securities, held to maturity (fair value of $206,730 and $201,085)
   209,767 200,448
Loans held for sale
   3,000 3,094
Loans, net of allowance for loan losses of $17,071 and $16,394
   2,907,445 2,815,601
Premises and equipment, net
   75,063 75,529
Federal Home Loan Bank stock
   18,105 18,105
Goodwill
   119,880 119,880
Other intangible assets
   11,359 12,402
Interest receivable
   12,993 16,244
Cash value of life insurance
   76,576 75,931
Other assets
   47,210 40,963


Total assets
   $ 4,076,611 $ 3,964,303


Liabilities

Deposits

Non-interest bearing
   $ 615,018 $ 601,805
Interest bearing
   2,401,145 2,279,198


Total deposits
   3,016,163 2,881,003
Borrowings
   524,846 564,157
Subordinated debentures
   37,745 37,653
Interest payable
   1,441 886
Other liabilities
   25,881 23,526


Total liabilities
   3,606,076 3,507,225


Commitments and contingent liabilities

Stockholders’ Equity

Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares
   —   —
Common stock, no par value, Authorized 99,000,000 shares (Restated - See Note 1)

Issued 38,387,709 and 38,323,604 shares (Restated - See Note 1), Outstanding 38,362,640 and 38,294,729 shares (Restated - See Note 1)
   —   —
Additionalpaid-in capital
   275,587 275,059
Retained earnings
   205,535 185,570
Accumulated other comprehensive loss
   (10,587 ) (3,551 )


Total stockholders’ equity
   470,535 457,078


Total liabilities and stockholders’ equity
   $ 4,076,611 $ 3,964,303


	June 30		December 31
	2019		2018
Assets
Cash and due from banks	$	94,686	$	58,492
Interest-earning time deposits		8,090		15,744
Investment securities, available for sale		673,419		600,348
Investment securities, held to maturity (fair value of $219,891 and $208,273)		213,768		210,112
Loans held for sale		3,185		1,038
Loans, net of allowance for loan losses of $18,305 and $17,820		3,646,363		2,995,512
Premises and equipment, net		91,469		74,331
Federal Home Loan Bank stock		22,447		18,073
Goodwill		151,111		119,880
Other intangible assets		28,665		10,390
Interest receivable		19,015		14,239
Cash value of life insurance		94,613		88,062
Other assets		51,851		40,467

Total assets	$	5,098,682	$	4,246,688

Liabilities
Deposits
Non-interest bearing	$	810,350	$	642,129
Interest bearing		3,120,425		2,497,247

Total deposits		3,930,775		3,139,376
Borrowings		436,233		550,384
Subordinated debentures		56,194		37,837
Interest payable		3,005		2,031
Other liabilities		46,014		25,068

Total liabilities		4,472,221		3,754,696

Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares		—		—
Common stock, no par value, Authorized 99,000,000 shares (Restated - See Note 1)
Issued 45,086,441 and 38,400,476 shares (Restated - See Note 1), Outstanding 45,061,372 and 38,375,407 shares (Restated - See Note 1)		—		—
Additional paid-in capital		380,735		276,101
Retained earnings		241,519		224,035
Accumulated other comprehensive income (loss)		4,207		(8,144	)

Total stockholders’ equity		626,461		491,992

Total liabilities and stockholders’ equity	$	5,098,682	$	4,246,688

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

   Three Months Ended Six Months Ended
   June 30 June 30
   2018    2017 2018    2017
Interest Income

Loans receivable
   $ 36,308    $ 26,795 $ 71,439    $ 51,586
Investment securities

Taxable
   2,563    2,244 4,993    4,650
Tax exempt
   1,870    1,766 3,735    3,403






Total interest income
   40,741    30,805 80,167    59,639






Interest Expense

Deposits
   3,920    1,721 6,791    3,474
Borrowed funds
   2,679    1,338 5,251    2,275
Subordinated debentures
   592    548 1,164    1,124






Total interest expense
   7,191    3,607 13,206    6,873






Net Interest Income
   33,550    27,198 66,961    52,766
Provision for loan losses
   635    330 1,202    660






Net Interest Income after Provision for Loan Losses
   32,915    26,868 65,759    52,106






Non-interest Income

Service charges on deposit accounts
   1,907    1,566 3,795    2,966
Wire transfer fees
   180    178 330    328
Interchange fees
   1,555    1,382 2,883    2,558
Fiduciary activities
   1,818    1,943 3,743    3,865
Gains on sale of investment securities (includes $0 and $(3) for the three months ended June 30, 2018 and 2017, respectively, and $11 and $32 for the six months ended June 30, 2018 and 2017, respectively, related to accumulated other comprehensive earnings reclassifications)
   —      (3 ) 11    32
Gain on sale of mortgage loans
   1,896    2,054 3,319    3,968
Mortgage servicing income net of impairment
   511    359 860    806
Increase in cash value of bank owned life insurance
   442    408 877    872
Death benefit on bank owned life insurance
   154    —   154    —
Other income
   469    325 1,278    376






Totalnon-interest income
   8,932    8,212 17,250    15,771






Non-interest Expense

Salaries and employee benefits
   13,809    12,466 28,182    24,175
Net occupancy expenses
   2,520    2,196 5,486    4,648
Data processing
   1,607    1,502 3,303    2,809
Professional fees
   376    535 877    1,148
Outside services and consultants
   1,267    1,265 2,531    2,487
Loan expense
   1,525    1,250 2,782    2,357
FDIC insurance expense
   345    243 655    506
Other losses
   269    78 415    128
Other expense
   3,224    2,953 6,548    5,751






Totalnon-interest expense
   24,942    22,488 50,779    44,009






Income Before Income Taxes
   16,905    12,592 32,230    23,868
Income tax expense (includes $0 and $(1) for the three months ended June 30, 2018 and 2017, respectively, and $2 and $11 for the six months ended June 30, 2018 and 2017, respectively, related to income tax expense from reclassification items)
   2,790    3,520 5,311    6,572






Net Income
   $ 14,115    $ 9,072 $ 26,919    $ 17,296






Basic Earnings Per Share (Restated - See Note 1)
   $ 0.37    $ 0.27 $ 0.70    $ 0.52
Diluted Earnings Per Share (Restated - See Note 1)
   0.37    0.27 0.70    0.51


	Three Months Ended					Six Months Ended
	June 30					June 30
	2019			2018		2019			2018
Interest Income
Loans receivable	$	47,784		$	36,308	$	87,407		$	71,439
Investment securities
Taxable		3,273			2,563		6,395			4,993
Tax exempt		2,793			1,870		5,421			3,735

Total interest income		53,850			40,741		99,223			80,167

Interest Expense
Deposits		8,938			3,920		15,814			6,791
Borrowed funds		2,495			2,679		6,116			5,251
Subordinated debentures		888			592		1,484			1,164

Total interest expense		12,321			7,191		23,414			13,206

Net Interest Income		41,529			33,550		75,809			66,961
Provision for loan losses		896			635		1,260			1,202

Net Interest Income after Provision for Loan Losses		40,633			32,915		74,549			65,759

Non-interest Income
Service charges on deposit accounts		2,480			1,907		4,357			3,795
Wire transfer fees		167			180		285			330
Interchange fees		2,160			1,555		3,521			2,883
Fiduciary activities		2,063			1,818		4,152			3,743
Gains (losses) on sale of investment securities (includes $(100) and $0 for the three months ended June 30, 2019 and 2018, respectively, and $(85) and $11 for the six months ended June 30, 2019 and six months ended June 30, 2018 related to accumulated other comprehensive earnings reclassifications)		(100	)		—		(85	)		11
Gain on sale of mortgage loans		2,078			1,896		3,387			3,319
Mortgage servicing income net of impairment		570			511		1,176			860
Increase in cash value of bank owned life insurance		555			442		1,068			877
Death benefit on bank owned life insurance		367			154		367			154
Other income		558			469		1,382			1,278

Total non-interest income		10,898			8,932		19,610			17,250

Non-interest Expense
Salaries and employee benefits		16,951			13,809		31,417			28,182
Net occupancy expenses		3,148			2,520		5,920			5,486
Data processing		2,139			1,607		4,105			3,303
Professional fees		598			376		1,091			877
Outside services and consultants		1,655			1,267		5,185			2,531
Loan expense		2,048			1,525		3,997			2,782
FDIC insurance expense		365			345		525			655
Other losses		169			269		273			415
Other expense		4,511			3,224		8,809			6,548

Total non-interest expense		31,584			24,942		61,322			50,779

Income Before Income Taxes		19,947			16,905		32,837			32,230
Income tax expense (includes $(21) and $0 for the three months ended June 30, 2019 and 2018, respectively, and $(18) and $2 for the six months ended June 30, 2019 and six months ended June 30, 2018 related to income tax expense (benefit) from reclassification items)		3,305			2,790		5,379			5,311

Net Income	$	16,642		$	14,115	$	27,458		$	26,919

Basic Earnings Per Share (Restated - See Note 1)	$	0.37		$	0.37	$	0.65		$	0.70
Diluted Earnings Per Share (Restated - See Note 1)		0.37			0.37		0.65			0.70

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollar Amounts in Thousands)

   Three Months Ended Six Months Ended
   June 30 June 30
   2018 2017 2018 2017
Net Income
   $ 14,115 $ 9,072 $ 26,919 $ 17,296


Other Comprehensive Income (Loss)

Change in fair value of derivative instruments:

Change in fair value of derivative instruments for the period
   354 46 1,113 446
Income tax effect
   (75 ) (16 ) (234 ) (156 )


Changes from derivative instruments
   279 30 879 290


Change in securities:

Unrealized appreciation (depreciation) for the period on AFS securities
   (829 ) 3,638 (8,943 ) 6,235
Amortization from transfer of securities from available for sale to
held to maturity securities
   (46 ) (58 ) (98 ) (146 )
Reclassification adjustment for securities (gains) losses realized in income
   —   3 (11 ) (32 )
Income tax effect
   187 (1,252 ) 1,903 (2,119 )


Unrealized gains (losses) on securities
   (688 ) 2,331 (7,149 ) 3,938


Other Comprehensive Income (Loss), Net of Tax
   (409 ) 2,361 (6,270 ) 4,228


Comprehensive Income
   $ 13,706 $ 11,433 $ 20,649 $ 21,524


	Three Months Ended						Six Months Ended
	June 30						June 30
	2019			2018			2019			2018
Net Income	$	16,642		$	14,115		$	27,458		$	26,919

Other Comprehensive Income (Loss)
Change in fair value of derivative instruments:
Change in fair value of derivative instruments for the period		(1,901	)		354			(3,007	)		1,113
Income tax effect		399			(75	)		631			(234	)

Changes from derivative instruments		(1,502	)		279			(2,376	)		879

Change in securities:
Unrealized appreciation (depreciation) for the period on AFS securities		6,933			(829	)		18,627			(8,943	)
Amortization from transfer of securities from available for sale to held to maturity securities		(30	)		(46	)		(68	)		(98	)
Reclassification adjustment for securities (gains) losses realized in income		100			—			85			(11	)
Income tax effect		(1,472	)		187			(3,917	)		1,903

Unrealized gains (losses) on securities		5,531			(688	)		14,727			(7,149	)

Other Comprehensive Income (Loss), Net of Tax		4,029			(409	)		12,351			(6,270	)

Comprehensive Income	$	20,671		$	13,706		$	39,809		$	20,649

See notes to condensed consolidated financial statements

H~~ORIZON~~ B~~ANCORP~~,

Table of Contents

HORIZON BANCORP, INC.AND S~~UBSIDIARIES~~

SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

   Preferred
Stock    Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Balances, January 1, 2018
   $ —      $ 275,059 $ 185,570 $ (3,551 ) $ 457,078
Net income
   —      —   26,919 —   26,919
Other comprehensive loss, net of tax
   —      —   —   (6,270 ) (6,270 )
Amortization of unearned compensation
   —      (79 ) —   —   (79 )
Exercise of stock options
   —      444 —   —   444
Stock option expense
   —      163 —   —   163
Reclassification of tax adjustment on accumulated other comprehensive loss
   —      —   766 (766 ) —
Cash dividends on common stock ($0.20 per share)
   —      —   (7,720 ) —   (7,720 )




Balances, June 30, 2018
   $ —      $ 275,587 $ 205,535 $ (10,587 ) $ 470,535


	Three Months Ended
	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances, April 1, 2018	$	—	$	—	$	275,302		$	195,292		$	(10,178	)	$	460,416
Net income		—		—		—			14,115			—			14,115
Other comprehensive loss, net of tax		—		—		—			—			(409	)		(409	)
Amortization of unearned compensation		—		—		(140	)		—			—			(140	)
Exercise of stock options		—		—		344			—			—			344
Stock option expense		—		—		81			—			—			81
Reclassification of tax adjustment on accumulated other comprehensive loss		—		—		—			—			—			—
Cash dividends on common stock ($0.10 per share)		—		—		—			(3,872	)		—			(3,872	)

Balances, June 30, 2018	$	—	$	—	$	275,587		$	205,535		$	(10,587	)	$	470,535

Balances, April 1, 2019	$	—	$	—	$	378,963		$	230,327		$	178		$	609,468
Net income		—		—		—			16,642			—			16,642
Other comprehensive income, net of tax		—		—		—			—			4,029			4,029
Amortization of unearned compensation		—		—		210			—			—			210
Exercise of stock options		—		—		38			—			—			38
Stock option expense		—		—		58			—			—			58
Stock issued stock plans		—		—		1,466			—			—			1,466
Stock issued in Salin acquisition		—		—		—			—			—			—
Cash dividends on common stock ($0.12 per share)		—		—		—			(5,450	)		—			(5,450	)

Balances, June 30, 2019	$	—	$	—	$	380,735		$	241,519		$	4,207		$	626,461


	Six Months Ended
	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances, January 1, 2018	$	—	$	—	$	275,059		$	185,570		$	(3,551	)	$	457,078
Net income		—		—		—			26,919			—			26,919
Other comprehensive loss, net of tax		—		—		—			—			(6,270	)		(6,270	)
Amortization of unearned compensation		—		—		(79	)		—			—			(79	)
Exercise of stock options		—		—		444			—			—			444
Stock option expense		—		—		163			—			—			163
Reclassification of tax adjustment on accumulated other comprehensive loss		—		—		—			766			(766	)		—
Cash dividends on common stock ($0.20 per share)		—		—		—			(7,720	)		—			(7,720	)

Balances, June 30, 2018	$	—	$	—	$	275,587		$	205,535		$	(10,587	)	$	470,535

Balances, January 1, 2019	$	—	$	—	$	276,101		$	224,035		$	(8,144	)	$	491,992
Net income		—		—		—			27,458			—			27,458
Other comprehensive income, net of tax		—		—		—			—			12,351			12,351
Amortization of unearned compensation		—		—		301			—			—			301
Exercise of stock options		—		—		155			—			—			155
Stock option expense		—		—		115			—			—			115
Stock issued stock plans		—		—		1,341			—			—			1,341
Stock issued in Salin acquisition		—		—		102,722			—			—			102,722
Cash dividends on common stock ($0.22 per share)		—		—		—			(9,974	)		—			(9,974	)

Balances, June 30, 2019	$	—	$	—	$	380,735		$	241,519		$	4,207		$	626,461

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar Amounts in Thousands)

   Six Months Ended
   June 30
   2018 2017
Operating Activities

Net income
   $ 26,919 $ 17,296
Items not requiring (providing) cash

Provision for loan losses
   1,202 660
Depreciation and amortization
   3,300 2,820
Share based compensation
   163 158
Mortgage servicing rights, net impairment
   24 23
Premium amortization on securities, net
   2,985 2,945
Gain on sale of investment securities
   (11 ) (32 )
Gain on sale of mortgage loans
   (3,319 ) (3,968 )
Proceeds from sales of loans
   95,218 113,382
Loans originated for sale
   (86,812 ) (107,473 )
Change in cash value life insurance
   (877 ) (872 )
Death benefit on bank owned life insurance
   (154 ) —
(Gain)/loss on sale of other real estate owned
   (55 ) 83
Net change in:

Interest receivable
   3,251 (584 )
Interest payable
   555 81
Other assets
   (4,220 ) 3,714
Other liabilities
   7,211 (1,794 )


Net cash provided by operating activities
   45,380 26,439


Investing Activities

Purchases of securities available for sale
   (84,909 ) (97,482 )
Proceeds from sales, maturities, calls and principal repayments of securities available for sale
   55,723 44,223
Purchases of securities held to maturity
   (14,207 ) (19,948 )
Proceeds from maturities of securities held to maturity
   5,517 4,853
Change in Federal Reserve and FHLB stock
   —   8,987
Net change in loans
   (102,516 ) (128,271 )
Proceeds on the sale of OREO and repossessed assets
   794 1,057
Change in premises and equipment, net
   (1,870 ) (1,052 )
Net cash received in acquisition of branch
   —   11,000


Net cash used in investing activities
   (141,468 ) (176,633 )


Financing Activities

Net change in:

Deposits
   135,160 (67,254 )
Borrowings
   (39,219 ) 217,921
Proceeds from issuance of stock
   444 34
Dividends paid on common stock
   (7,720 ) (5,346 )


Net cash provided by financing activities
   88,665 145,355


Net Change in Cash and Cash Equivalents
   (7,423 ) (4,839 )
Cash and Cash Equivalents, Beginning of Period
   76,441 70,832


Cash and Cash Equivalents, End of Period
   $ 69,018 $ 65,993


Additional Supplemental Information

Interest paid
   $ 12,651 $ 6,786
Income taxes paid
   3,966 6,350
Transfer of loans to other real estate
   733 1,416
Acquisition of LaPorte, measurement period adjustments
   —   704


	Six Months Ended
	June 30
	2019			2018
Operating Activities
Net income	$	27,458		$	26,919
Items not requiring (providing) cash
Provision for loan losses		1,260			1,202
Depreciation and amortization		4,380			3,300
Share based compensation		115			163
Mortgage servicing rights, net impairment		(11	)		24
Premium amortization on securities, net		2,589			2,985
Loss (gain) on sale of investment securities		85			(11	)
Gain on sale of mortgage loans		(3,387	)		(3,319	)
Proceeds from sales of loans		92,314			95,218
Loans originated for sale		(91,074	)		(86,812	)
Change in cash value life insurance		(1,068	)		(877	)
Death benefit on bank owned life insurance		367			154
Gain on sale of other real estate owned		(11	)		(55	)
Net change in:
Interest receivable		(2,288	)		3,251
Interest payable		148			555
Other assets		96,042			(4,241	)
Other liabilities		7,780			7,211

Net cash provided by operating activities		134,699			45,667

Investing Activities
Purchases of securities available for sale		(176,629	)		(84,909	)
Proceeds from sales, maturities, calls and principal repayments of securities available for sale		165,638			55,723
Purchases of securities held to maturity		—			(14,207	)
Proceeds from maturities of securities held to maturity		4,551			5,517
Net change in interest-earning time deposits		7,654			(287	)
Change in FHLB stock		(803	)		—
Net change in loans		(84,406	)		(102,516	)
Proceeds on the sale of OREO and repossessed assets		1,260			794
Change in premises and equipment, net		(1,538	)		(1,870	)
Net cash received in acquisition, Salin		128,745			—

Net cash provided by (used in) investing activities		44,472			(141,755	)

Financing Activities
Net change in:
Deposits		50,049			135,160
Borrowings		(184,548	)		(39,219	)
Proceeds from issuance of stock		1,496			444
Dividends paid on common stock		(9,974	)		(7,720	)

Net cash provided by (used in) financing activities		(142,977	)		88,665

Net Change in Cash and Cash Equivalents		36,194			(7,423	)
Cash and Cash Equivalents, Beginning of Period		58,492			76,441

Cash and Cash Equivalents, End of Period	$	94,686		$	69,018

Additional Supplemental Information
Interest paid	$	22,440		$	12,651
Income taxes paid		1,300			3,966
Transfer of loans to other real estate and repossessed assets		1,213			733
Transfer of premises to other real estate		1,564			—
Right-of-use assets exchanged for lease obligations		3,411			—

See notes to condensed consolidated financial statements

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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, Inc. (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”). Horizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, ~~2018~~2019 and June 30, ~~2017~~2018 are not necessarily indicative of the operating results for the full year of ~~2018~~2019 or ~~2017.~~2018. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.

Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form

10-K

for ~~2017~~2018 filed with the Securities and Exchange Commission on February 28, ~~2018.~~2019. The condensed consolidated balance sheet of Horizon as of December 31, ~~2017~~2018 has been derived from the audited balance sheet as of that date.

On May 15, 2018, the Board of Directors of the Company approved a

three-for-two

stock split of the Company’s authorized common stock,

par value. All share and per share amounts in the condensed consolidated financial statements and notes thereto have been retroactively adjusted, where necessary, to reflect this

three-for-two

stock split. The effect of the

three-for-two

stock split on the outstanding common shares is that shareholders of record as of the close of business on May 31, 2018, the record date, received an additional half share for each share of common stock held, with shareholders receiving cash in lieu of any fractional shares. The additional shares issued in the stock split were payable and issued on June 15, 2018, and the common shares began trading on a split-adjusted basis on June 19, 2018.

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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

   Three Months Ended    Six Months Ended
   June 30    June 30
   2018    2017    2018    2017
Basic earnings per share

Net income
   $ 14,115    $ 9,072    $ 26,919    $ 17,296
Weighted average common shares outstanding⁽¹⁾
   38,347,612    33,264,697    38,327,118    33,263,997
Basic earnings per share
   $ 0.37    $ 0.27    $ 0.70    $ 0.52








Diluted earnings per share

Net income available to common shareholders
   $ 14,115    $ 9,072    $ 26,919    $ 17,296
Weighted average common shares outstanding⁽¹⁾
   38,347,612    33,264,697    38,327,118    33,263,997
Effect of dilutive securities:

Restricted stock
   47,307    45,136    37,383    49,807
Stock options
   124,482    173,751    119,820    172,975








Weighted average common shares outstanding
   38,519,401    33,483,584    38,484,321    33,486,779
   $ 0.37    $ 0.27    $ 0.70    $ 0.51


	Three Months Ended				Six Months Ended
	June 30				June 30
	2019		2018		2019		2018
Basic earnings per share
Net income	$	16,642	$	14,115	$	27,458	$	26,919
Weighted average common shares outstanding (1)		45,055,117		38,347,612		41,956,047		38,327,118
Basic earnings per share	$	0.37	$	0.37	$	0.65	$	0.70

Diluted earnings per share
Net income available to common shareholders	$	16,642	$	14,115	$	27,458	$	26,919
Weighted average common shares outstanding (1)		45,055,117		38,347,612		41,956,047		38,327,118
Effect of dilutive securities:
Restricted stock		—		47,307		—		37,383
Stock options		75,291		124,482		76,924		119,820

Weighted average common shares outstanding		45,130,408		38,519,401		42,032,971		38,484,321
	$	0.37	$	0.37	$	0.65	$	0.70

⁽¹⁾	~~adjusted~~Adjusted for 3:2 stock split on June 15, 2018

There were 341,394 and

zero

shares for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, which were not included in the computation of diluted earnings per share because they were

non-dilutive.

There were ~~67,575~~341,394 and ~~zero~~67,575 shares for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, which were not included in the computation of diluted earnings per share because they were

non-dilutive.

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, ~~2017~~2018 Annual Report on Form

10-K.

Adoption of New Accounting Standards

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)No. ~~2018-02,~~~~Income Statement – Reporting Comprehensive Income~~
2017-12,

Derivatives and Hedging (Topic ~~220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~

815), Targeted Improvements to Accounting for Hedging Activities

The FASB has issued ASUNo. ~~2018-02,~~~~Income Statement – Reporting Comprehensive Income~~
2017-12,
Derivatives and Hedging (Topic ~~220): Reclassification~~815), Targeted Improvements to Accounting for Hedging Activities.
The new guidance improves the financial reporting of ~~Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments~~hedging relationships to better portray the economic results of an entity’s risk management activities in this ASU allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported toits financial ~~statement users.~~statements. The amendments in this ASU also ~~require~~make certain ~~disclosures about stranded tax effects. The amendments~~targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. For public entities, this ~~ASU are~~new guidance became effective ~~for all entities for~~in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early adoption ~~of the amendments in this ASU is~~was permitted ~~including adoption~~ in any interim period ~~(1) for public business entities for reporting periods for which financial statements have not yet been issued~~after issuance of the ASU. All transition requirements and ~~(2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU~~elections should be applied ~~either in the period of adoption or retrospectively~~ to ~~each period (or periods)~~hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the ~~change in~~beginning of the ~~U.S. federal corporate income tax rate in~~fiscal year of adoption (that is, the ~~Tax Cuts and Jobs Act is recognized.~~initial application date). The Company ~~early~~ adopted ASU~~2018-02~~

2017-12

on January 1, ~~2018 through a $766,000 cumulative-effect adjustment from AOCI~~2019 and there was no material impact to ~~increase retained earnings related to unrealized gains and losses on available for sale securities and derivative instruments.~~

~~FASB ASUNo. 2016-01,~~~~Financial Instruments – Overall~~ ~~(Subtopic825-10):~~~~Recognition and Measurement~~the consolidated financial statements.

Table of ~~Financial Assets and Financial Liabilities~~

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

FASB Accounting Standards Updates No.

2016-02,

Leases

(Topic 842)

The FASB has issued ~~ASU~~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;

2016-02,

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

Leases.

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

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

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

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

The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition,Under the new guidance, ~~permits early adoption~~lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the ~~provision~~commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a

right-of-use

asset, which is an asset that ~~exempts private companies andnot-for-profit~~ ~~organizations from having~~represents the lessee’s right to ~~disclose fair value information about financial instruments measured at amortized cost. The Company adopted ASU2016-01~~ ~~on January 1, 2018, and it did not have~~use, or control the use of, a ~~material effect on its accounting for equity investments, fair value disclosures and other disclosure requirements.~~

~~FASB ASUNo. 2014-09,~~~~Revenue from Contracts with Customers~~ ~~(Topic 606)~~

~~The FASB has issued ASUNo. 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~~specified asset for the ~~transfer of nonfinancial assets unless those contracts are within~~lease term. Under the ~~scope of other standards (for example, insurance contracts or lease contracts). The core principle of the~~new guidance, lessor accounting 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.largely unchanged. The amendments in this update ~~become~~became effective for annual periods and interim periods within those annual periods beginning after December 15, ~~2017.~~2018. The Company adopted this ASU~~2014-09~~ on as of January 1, ~~2018~~2019 using the alternative transition method. In addition, the Company utilized the practical expedients provided by the ASU allowing it to retain the classifications of existing leases, not reassess initial direct costs for any existing leases, and ~~did not identify any significant changes in~~to use hindsight when determining the ~~timing~~lease term and assessment of ~~revenue recognition when considering the amended accounting guidance. Additional disclosures related to revenue recognition appear in “Note 1 – Accounting Policies.”~~

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

~~In May 2016, the FASB issued ASUNo. 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 ASUNo. 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 ASUNo. 2014-09~~ ~~to increase awareness~~impairment of the ~~proposals~~right-of-use assets. Upon adoption, the Company capitalized $3.5 million for

right-of-use

assets and ~~to expedite improvements to ASUNo. 2014-09.~~ ~~The amendment affects narrow aspects~~lease liabilities, net of ~~the guidance issued in ASUNo. 2014-09.~~

existing straight-line lease liabilities. See Note 8, “Leases”.

Revenue Recognition

Accounting Standards Codification 606, “

Revenue from Contracts with Customers”

(ASC 606) provides 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 enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result in a change to the accounting for any of the Company’s revenue streams that are within the scope of the amendments. Revenue-generating activities that are within the scope of ASC 606 and that are presented as

non-interest

income in the Company’s consolidated statements of income include:

Service charges and fees on deposit accounts – these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer or overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.

Fiduciary activities – this includes periodic fees due from trust and wealth management customers for managing the customers’ financial assets. Fees are charged based on a standard agreement and are recognized as they are earned.

Reclassifications

Certain reclassifications have been made to the ~~2017~~2018 condensed consolidated financial statements to be comparable to ~~2018.~~2019. These reclassifications had

effect on net income.

Note 2 – Acquisitions

~~Wolverine Bancorp,~~

Salin Bancshares, Inc.

On ~~October 17, 2017,~~March 26, 2019, Horizon completed the acquisition of ~~Wolverine Bancorp,~~Salin Bancshares, Inc. (“Salin”), ~~a Maryland~~an Indiana corporation, ~~(“Wolverine”)~~ and Horizon Bank’s acquisition of ~~Wolverine~~Salin Bank ~~a federally chartered savings~~and Trust Company (“Salin Bank”), an Indiana commercial bank and wholly-owned subsidiary of ~~Wolverine,~~Salin, through mergers effective ~~October 17, 2017.~~March 26, 2019. Under the terms of the Merger Agreement, shareholders of ~~Wolverine~~Salin received ~~1.5228~~

23,907.5

shares of Horizon common stock and ~~$14.00~~ $

87,417.17

in cash for each outstanding share of ~~Wolverine~~Salin common stock. ~~Wolverine~~Salin shares outstanding at the closing to be exchanged were ~~2,129,331,~~275, and the shares of Horizon common stock issued to ~~Wolverine~~Salin shareholders totaled ~~3,241,045.~~6,563,697. The Salin shareholders received cash in lieu of fractional shares. Based upon the ~~October 16, 2017~~March 25, 2019 closing price of ~~$19.37~~$15.65 per share of Horizon common stock immediately prior to the effectiveness of the merger ~~less the consideration used to pay off Wolverine Bancorp’s ESOP loan receivable,~~ the transaction has an implied valuation of approximately ~~$93.8~~

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

$126.7 million. The Company incurred approximately ~~$1.9~~$5.6 million in costs related to the acquisition. These expenses are classified in thenon-interest expense section of the income statement and are primarily located in the ~~salaries~~data processing, professional fees, outside services and ~~employee benefits, professional services~~consultants 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.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

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

The measurement period adjustments will be calculated as ~~follows:~~

Assets
      Liabilities
Cash and due from banks
   $ 44,450    Deposits

Non-interest bearing
   $ 25,221
Loans

NOW accounts
   8,026
Commercial
   276,167
Savings and money market
   129,044
Residential mortgage
   30,603
Certificates of deposit
   94,688


Consumer
   3,897    Total deposits    256,979



Total loans
   310,667
Premises and equipment, net
   2,941    Borrowings    36,970
FRB and FHLB stock
   2,700    Interest payable    214
Goodwill
   26,827    Other liabilities    6,154
Core deposit intangible
   2,024
Interest receivable
   584
Other assets
   3,897




Total assets purchased
   $ 394,090    Total liabilities assumed    $ 300,317




Common shares issued
   $ 62,111
Cash paid
   31,662



Total estimated purchase price
   $ 93,773

if the accounting had been completed as of the acquisition date.

As a result of updated draft valuation estimates, acquired investment securities decreased approximately $387,000, total loans decreased approximately $2.9 million, premises and equipment decreased approximately $4.2 million, goodwill increased approximately $5.4 million, core deposit intangible decreased approximately $1.3 million, other assets increased approximately $4.0 million, total deposits decreased approximately $117,000 and subordinated debentures increased approximately $816,000 compared to previously reported amounts.


Assets
Cash and due from banks	$	152,745
Investment securities, available for sale		54,319
Loans
Commercial		352,798

Residential mortgage		131,008
Consumer		85,112

Total loans		568,918
Premises and equipment, net		19,700
FRB and FHLB stock		3,571
Goodwill		31,232
Core deposit intangible		19,818
Interest receivable		2,488
Other assets		111,651

Total assets purchased	$	964,442

Common shares issued	$	102,722
Cash paid		24,000

Total purchase price	$	126,722


Liabilities
Deposits
Non-interest bearing	$	188,744
NOW accounts		207,567
Savings and money market		274,504
Certificates of deposit		70,535

Total deposits		741,350
Borrowings		70,495
Subordinated debentures		18,259
Interest payable		826
Other liabilities		6,790

Total liabilities assumed	$	837,720

Of the total purchase price of ~~$93.8~~$

126.7

million, ~~$2.0~~$

19.8

million has been allocated to core deposit intangible. Additionally, ~~$26.8~~$

31.2

million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible is being amortized over

years on a straight line basis.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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.

past-due

and

non-accrual

status, borrower credit scores and recent

loan-to-value

percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC

310-30)

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

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

The following table details an estimate of the acquired loans that are accounted for in accordance with ASC

310-30

as of ~~October 17, 2017.~~

Contractually required principal and interest at acquisition
   $ 21,912
Contractual cash flows not expected to be collected (nonaccretable differences)
   1,832


Expected cash flows at acquisition
   20,080
Interest component of expected cash flows (accretable discount)
   2,267


Fair value of acquired loans accounted for under ASC310-30
   $ 17,813

March 26, 2019. Final valuation estimates have not yet been determined for acquired loans as of June 30, 2019. 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	$	22,672
Contractual cash flows not expected to be collected (nonaccretable differences)		6,694

Expected cash flows at acquisition		15,978
Interest component of expected cash flows (accretable discount)		735

Fair value of acquired loans accounted for under ASC 310-30	$	15,243

Estimates of certain loans, those for which specific credit-related deterioration

has occurred

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.

~~Lafayette Community Bancorp~~

~~On September 1, 2017, Horizon completed the acquisition~~

Table 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 0.8817 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 1,636,888. Based upon the August 31, 2017 closing price of $17.45 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 incurred approximately $1.7 million in costs related to the acquisition. These expenses are classified in the~~non-interest~~ expense section of the income statement and are primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

~~Horizon held 5% ownership in Lafayette immediately preceding the merger date. In accordance with ASC805-10~~ – 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. This remeasurement resulted in a gain of $530,000 which was recorded during the fourth quarter of 2017.

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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
Loans

Savings and money market
   53,663
Commercial
   116,258
Certificates of deposit
   32,520


Residential mortgage
   12,761 Total deposits    151,347
Consumer
   5,280



Total loans
   134,299
Premises and equipment, net
   7,818 Interest payable    42
FHLB stock
   395 Other liabilities    990
Goodwill
   15,408
Core deposit intangible
   2,085
Interest receivable
   338
Other assets
   1,649




Total assets purchased
   $ 186,844 Total liabilities assumed    $ 152,379




Common shares issued
   $ 30,044 ⁽¹⁾
Cash paid
   4,421



Total estimated purchase price
   $ 34,465

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

Of the total estimated purchase price of $34.5 million, $2.1 million has been allocated to core deposit intangible. Additionally, $15.4 million 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.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as~~past-due~~ ~~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.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(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 September 1, 2017.~~

Contractually required principal and interest at acquisition
   $ 6,128
Contractual cash flows not expected to be collected (nonaccretable differences)
   1,326


Expected cash flows at acquisition
   4,802
Interest component of expected cash flows (accretable discount)
   933


Fair value of acquired loans accounted for under ASC310-30
   $ 3,869

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.

~~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 $452,000 was recorded in the transaction, which will be amortized over 10 years on a straight line basis. There was no goodwill generated in the transaction.

The results of operations of ~~Wolverine and Lafayette~~Salin have been included in the Company’s consolidated financial statements since the acquisition ~~dates.~~date. The following schedule includes

pro-forma

results for the three and six months ended June 30, ~~2017~~2019 and 2018 as if the ~~Wolverine and Lafayette acquisitions~~Salin acquisition had occurred as of the beginning of the comparable prior reporting ~~period, which was January 1, 2016.~~

   Three Months Ended    Six Months Ended
   June 30    June 30
   2017    2017
Summary of Operations:

Net Interest Income
   $ 32,038    $ 62,164
Provision for Loan Losses
   (1,090 )    (1,337 )




Net Interest Income after Provision for Loan Losses
   33,128    63,501
Non-interest Income
   8,662    16,565
Non-interest Expense
   26,714    51,398




Income before Income Taxes
   15,076    28,668
Income Tax Expense
   4,549    8,412




Net Income
   10,527    20,256




Net Income Available to Common Shareholders
   $ 10,527    $ 20,256




Basic Earnings per Share
   $ 0.32    $ 0.61
Diluted Earnings per Share
   $ 0.31    $ 0.60

periods.


	Three Months Ended				Six Months Ended
	June 30		June 30		June 30
	2019		2018		2019		2018
Summary of Operations:
Net Interest Income	$	41,529	$	41,066	$	83,711	$	81,685
Provision for Loan Losses		896		835		1,560		2,002

Net Interest Income after Provision for Loan Losses		40,633		40,231		82,151		79,683
Non-interest Income		10,898		10,842		20,024		20,841
Non-interest Expense		31,584		32,410		73,736		65,579

Income before Income Taxes		19,947		18,663		28,439		34,945
Income Tax Expense		3,305		2,733		5,322		5,198

Net Income		16,642		15,930		23,117		29,747

Net Income Available to Common Shareholders	$	16,642	$	15,930	$	23,117	$	29,747

Basic Earnings per Share	$	0.37	$	0.42	$	0.51	$	0.78
Diluted Earnings per Share	$	0.37	$	0.41	$	0.51	$	0.77

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.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

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.

~~Note 3 – Securities~~

~~The fair value~~

Table of ~~securities is as follows:~~

   June 30, 2018
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Fair
Value
Available for sale

U.S. Treasury and federal agencies
   $ 24,654    $ —      $ (435 )    $ 24,219
State and municipal
   136,732    300    (2,051 )    134,981
Federal agency collateralized mortgage obligations
   168,382    112    (4,360 )    164,134
Federal agency mortgage-backed pools
   203,593    28    (6,626 )    196,995
Private labeled mortgage-backed pools
   —      —      —      —
Corporate notes
   5,725    145    (4 )    5,866








Total available for sale investment securities
   $ 539,086    $ 585    $ (13,476 )    $ 526,195








Held to maturity

State and municipal
   $ 190,079    $ 1,610    $ (4,309 )    $ 187,380
Federal agency collateralized mortgage obligations
   5,409    8    (157 )    5,260
Federal agency mortgage-backed pools
   14,279    55    (244 )    14,090








Total held to maturity investment securities
   $ 209,767    $ 1,673    $ (4,710 )    $ 206,730








   December 31, 2017
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Fair
Value
Available for sale

U.S. Treasury and federal agencies
   $ 19,277    $ —      $ (225 )    $ 19,052
State and municipal
   148,045    2,189    (670 )    149,564
Federal agency collateralized mortgage obligations
   132,871    45    (2,551 )    130,365
Federal agency mortgage-backed pools
   211,487    155    (2,985 )    208,657
Private labeled mortgage-backed pools
   1,650    —      (8 )    1,642
Corporate notes
   272    113    —      385








Total available for sale investment securities
   $ 513,602    $ 2,502    $ (6,439 )    $ 509,665








Held to maturity

State and municipal
   $ 179,836    $ 3,493    $ (2,932 )    $ 180,397
Federal agency collateralized mortgage obligations
   5,734    17    (69 )    5,682
Federal agency mortgage-backed pools
   14,878    216    (88 )    15,006








Total held to maturity investment securities
   $ 200,448    $ 3,726    $ (3,089 )    $ 201,085








Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Note 3 – Securities

The fair value of securities is as follows:


	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Treasury and federal agencies	$	9,915	$	2	$	(16	)	$	9,901
State and municipal		253,201		8,090		(1,126	)		260,165
Federal agency collateralized mortgage obligations		229,166		2,878		(522	)		231,522
Federal agency mortgage-backed pools		153,378		818		(673	)		153,523
Corporate notes		17,608		700		—			18,308

Total available for sale investment securities	$	663,268	$	12,488	$	(2,337	)	$	673,419

Held to maturity
State and municipal	$	195,719	$	6,196	$	(220	)	$	201,695
Federal agency collateralized mortgage obligations		4,884		12		(19	)		4,877
Federal agency mortgage-backed pools		13,165		167		(13	)		13,319

Total held to maturity investment securities	$	213,768	$	6,375	$	(252	)	$	219,891

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Treasury and federal agencies	$	16,815	$	1	$	(208	)	$	16,608
State and municipal		210,386		1,495		(2,578	)		209,303
Federal agency collateralized mortgage obligations		187,563		625		(3,185	)		185,003
Federal agency mortgage-backed pools		183,479		80		(4,823	)		178,736
Corporate notes		10,666		107		(75	)		10,698

Total available for sale investment securities	$	608,909	$	2,308	$	(10,869	)	$	600,348

Held to maturity
State and municipal	$	191,269	$	1,773	$	(3,366	)	$	189,676
Federal agency collateralized mortgage obligations		5,144		6		(120	)		5,030
Federal agency mortgage-backed pools		13,699		74		(206	)		13,567

Total held to maturity investment securities	$	210,112	$	1,853	$	(3,692	)	$	208,273

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio and

held-to-maturity,

Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At June 30, ~~2018,~~2019, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that 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 June 30, ~~2018.~~

2019.

The amortized cost and fair value of securities available for sale and held to maturity at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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.

   June 30, 2018    December 31, 2017
   Amortized
Cost    Fair
Value    Amortized
Cost    Fair
Value
Available for sale

Within one year
   $ 10,054    $ 10,013    $ 13,347    $ 13,326
One to five years
   29,238    28,739    40,468    40,193
Five to ten years
   80,973    79,937    50,473    51,156
After ten years
   46,846    46,377    63,306    64,326








   167,111    165,066    167,594    169,001
Federal agency collateralized mortgage obligations
   168,382    164,134    132,871    130,365
Federal agency mortgage-backed pools
   203,593    196,995    211,487    208,657
Private labeled mortgage-backed pools
   —      —      1,650    1,642








Total available for sale investment securities
   $ 539,086    $ 526,195    $ 513,602    $ 509,665








Held to maturity

Within one year
   $ 5,578    $ 5,546    $ 1,948    $ 1,934
One to five years
   43,825    44,383    40,603    41,531
Five to ten years
   103,804    103,252    89,801    91,249
After ten years
   36,872    34,199    47,484    45,683








   190,079    187,380    179,836    180,397
Federal agency collateralized mortgage obligations
   5,409    5,260    5,734    5,682
Federal agency mortgage-backed pools
   14,279    14,090    14,878    15,006








Total held to maturity investment securities
   $ 209,767    $ 206,730    $ 200,448    $ 201,085


	June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Within one year	$	26,850	$	26,836	$	20,532	$	20,448
One to five years		40,560		40,333		42,476		41,705
Five to ten years		88,574		92,128		107,839		107,107
After ten years		124,740		129,077		67,020		67,349

		280,724		288,374		237,867		236,609
Federal agency collateralized mortgage obligations		229,166		231,522		187,563		185,003
Federal agency mortgage-backed pools		153,378		153,523		183,479		178,736

Total available for sale investment securities	$	663,268	$	673,419	$	608,909	$	600,348

Held to maturity
Within one year	$	2,481	$	2,499	$	70	$	70
One to five years		56,121		57,124		48,732		49,324
Five to ten years		101,195		104,168		101,809		101,533
After ten years		35,922		37,904		40,658		38,749

		195,719		201,695		191,269		189,676
Federal agency collateralized mortgage obligations		4,884		4,877		5,144		5,030
Federal agency mortgage-backed pools		13,165		13,319		13,699		13,567

Total held to maturity investment securities	$	213,768	$	219,891	$	210,112	$	208,273

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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.

   June 30, 2018
   Less than 12 Months 12 Months or More Total
   Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses
Available for sale

U.S. Treasury and federal agencies
   $ 20,387    $ (352 ) $ 3,832    $ (83 ) $ 24,219    $ (435 )
State and municipal
   149,412    (4,495 ) 37,546    (1,865 ) 186,958    (6,360 )
Federal agency collateralized mortgage obligations
   67,216    (1,507 ) 67,923    (3,010 ) 135,139    (4,517 )
Federal agency mortgage-backed pools
   119,369    (3,073 ) 84,772    (3,797 ) 204,141    (6,870 )
Private labeled mortgage-backed pools
   —      —   —      —   —      —
Corporate notes
   971    (4 ) —      —   971    (4 )








Total temporarily impaired securities
   $ 357,355    $ (9,431 ) $ 194,073    $ (8,755 ) $ 551,428    $ (18,186 )








   December 31, 2017
   Less than 12 Months 12 Months or More Total
   Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses
Available for sale

U.S. Treasury and federal agencies
   $ 15,882    $ (180 ) $ 2,870    $ (45 ) $ 18,752    $ (225 )
State and municipal
   54,312    (2,758 ) 30,691    (844 ) 85,003    (3,602 )
Federal agency collateralized mortgage obligations
   54,006    (589 ) 73,462    (2,031 ) 127,468    (2,620 )
Federal agency mortgage-backed pools
   103,926    (1,019 ) 86,846    (2,054 ) 190,772    (3,073 )
Private labeled mortgage-backed pools
   1,642    (8 ) —      —   1,642    (8 )








Total temporarily impaired securities
   $ 229,768    $ (4,554 ) $ 193,869    $ (4,974 ) $ 423,637    $ (9,528 )


	June 30, 2019
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Investment Securities
U.S. Treasury and federal agencies	$	—	$	—		$	3,399	$	(16	)	$	3,399	$	(16	)
State and municipal		72,943		(1,039	)		16,097		(307	)		89,040		(1,346	)
Federal agency collateralized mortgage obligations		3,706		(1	)		52,991		(540	)		56,697		(541	)
Federal agency mortgage-backed pools		1,671		(1	)		78,972		(685	)		80,643		(686	)

Total temporarily impaired securities	$	78,320	$	(1,041	)	$	151,459	$	(1,548	)	$	229,779	$	(2,589	)


	December 31, 2018
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Investment Securities
U.S. Treasury and federal agencies	$	—	$	—		$	9,707	$	(208	)	$	9,707	$	(208	)
State and municipal		75,163		(1,628	)		106,335		(4,316	)		181,498		(5,944	)
Federal agency collateralized mortgage obligations		6,450		(25	)		106,257		(3,280	)		112,707		(3,305	)
Federal agency mortgage-backed pools		5,739		(39	)		175,865		(4,990	)		181,604		(5,029	)
Corporate notes		5,263		(75	)		—		—			5,263		(75	)

Total temporarily impaired securities	$	92,615	$	(1,767	)	$	398,164	$	(12,794	)	$	490,779	$	(14,561	)

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

   Three Months Ended    Six Months Ended
   June 30    June 30
   2018    2017    2018    2017
Sales of securities available for sale

Proceeds
   $ —      $ 3,013    $ 9,836    $ 5,103
Gross gains
   —      110    37    145
Gross losses
   —      (113 )    (26 )    (113 )


	Three Months Ended					Six Months Ended
	June 30					June 30
	2019			2018		2019			2018
Sales of securities available for sale
Proceeds	$	74,048		$	—	$	91,635		$	9,836
Gross gains		99			—		158			37
Gross losses		(199	)		—		(243	)		(26	)

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Note 4

–

Loans

   June 30    December 31
   2018    2017
Commercial

Working capital and equipment
   $ 744,842    $ 720,477
Real estate, including agriculture
   857,336    880,861
Tax exempt
   36,857    36,324
Other
   33,963    32,066




Total
   1,672,998    1,669,728
Real estate

1-4 family
   627,137    599,217
Other
   7,499    7,543




Total
   634,636    606,760
Consumer

Auto
   289,361    244,003
Recreation
   13,158    8,728
Real estate/home improvement
   38,096    37,052
Home equity
   161,047    165,240
Unsecured
   3,996    3,479
Other
   2,208    2,497




Total
   507,866    460,999
Mortgage warehouse
   109,016    94,508




Total loans
   2,924,516    2,831,995
Allowance for loan losses
   (17,071 )    (16,394 )




Loans, net
   $ 2,907,445    $ 2,815,601


	June 30			December 31
	2019			2018
Commercial
Working capital and equipment	$	917,533		$	804,083
Real estate, including agriculture		1,017,138			834,037
Tax exempt		61,015			48,975
Other		66,937			34,495

Total		2,062,623			1,721,590
Real estate
1-4 family		806,390			659,754
Other		7,675			8,387

Total		814,065			668,141
Consumer
Auto		343,876			327,413
Recreation		16,257			13,975
Real estate/home improvement		44,988			39,587
Home equity		239,358			163,209
Unsecured		7,455			4,043
Other		2,618			1,254

Total		654,552			549,481
Mortgage warehouse		133,428			74,120

Total loans		3,664,668			3,013,332
Allowance for loan losses		(18,305	)		(17,820	)

Loans, net	$	3,646,363		$	2,995,512

Commercial

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

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

non-owner

occupied loans.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Real Estate and Consumer

With respect to residential loans that are secured by

1-4

family residences and are generally owner occupied, the Company generally establishes a maximum

loan-to-value

ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in

1-4

family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Mortgage Warehousing

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

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

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

   June 30, 2018
   Loan
Balance    Interest
Due    Deferred
Fees/
(Costs)    Recorded
Investment
Owner occupied real estate
   $ 591,273    $ 1,446    $ 2,000    $ 594,719
Non-owner occupied real estate
   678,913    980    2,100    681,993
Residential spec homes
   11,614    27    45    11,686
Development & spec land
   34,384    97    28    34,509
Commercial and industrial
   352,213    2,573    428    355,214








Total commercial
   1,668,397    5,123    4,601    1,678,121
Residential mortgage
   610,871    1,827    2,180    614,878
Residential construction
   21,585    40    —      21,625
Mortgage warehouse
   109,016    480    —      109,496








Total real estate
   741,472    2,347    2,180    745,999
Direct installment
   39,065    103    (576 )    38,592
Indirect installment
   276,317    607    —      276,924
Home equity
   194,637    883    (1,577 )    193,943








Total consumer
   510,019    1,593    (2,153 )    509,459








Total loans
   2,919,888    9,063    4,628    2,933,579
Allowance for loan losses
   (17,071 )    —      —      (17,071 )








Net loans
   $ 2,902,817    $ 9,063    $ 4,628    $ 2,916,508








   December 31, 2017
   Loan
Balance    Interest
Due    Deferred
Fees/
(Costs)    Recorded
Investment
Owner occupied real estate
   $ 571,982    $ 1,511    $ 1,917    $ 575,410
Non-owner occupied real estate
   678,945    1,138    2,478    682,561
Residential spec homes
   16,431    63    80    16,574
Development & spec land
   48,838    117    579    49,534
Commercial and industrial
   347,871    2,572    607    351,050








Total commercial
   1,664,067    5,401    5,661    1,675,129
Residential mortgage
   588,358    1,776    2,375    592,509
Residential construction
   16,027    39    —      16,066
Mortgage warehouse
   94,508    480    —      94,988








Total real estate
   698,893    2,295    2,375    703,563
Direct installment
   37,841    113    (552 )    37,402
Indirect installment
   227,323    528    168    228,019
Home equity
   197,578    889    (1,359 )    197,108








Total consumer
   462,742    1,530    (1,743 )    462,529








Total loans
   2,825,702    9,226    6,293    2,841,221
Allowance for loan losses
   (16,394 )    —      —      (16,394 )








Net loans
   $ 2,809,308    $ 9,226    $ 6,293    $ 2,824,827


	June 30, 2019
	Loan Balance			Interest Due		Deferred Costs/(Fees)			Recorded Investment
Owner occupied real estate	$	709,597		$	1,253	$	(1,584	)	$	709,266
Non-owner occupied real estate		783,092			1,464		(1,701	)		782,855
Residential spec homes		14,862			36		(24	)		14,874
Development & spec land		41,102			179		71			41,352
Commercial and industrial		518,880			4,806		(1,672	)		522,014

Total commercial		2,067,533			7,738		(4,910	)		2,070,361
Residential mortgage		798,813			2,521		(7,151	)		794,183
Residential construction		22,403			57		—			22,460
Mortgage warehouse		133,428			480		—			133,908

Total real estate		954,644			3,058		(7,151	)		950,551
Direct installment		46,468			156		808			47,432
Indirect installment		329,773			806		—			330,579
Home equity		275,396			1,505		2,107			279,008

Total consumer		651,637			2,467		2,915			657,019

Total loans		3,673,814			13,263		(9,146	)		3,677,931
Allowance for loan losses		(18,305	)		—		—			(18,305	)

Net loans	$	3,655,509		$	13,263	$	(9,146	)	$	3,659,626


	December 31, 2018
	Loan Balance			Interest Due		Deferred Costs/(Fees)			Recorded Investment
Owner occupied real estate	$	561,463		$	1,240	$	(1,629	)	$	561,074
Non-owner occupied real estate		717,814			1,063		(1,839	)		717,038
Residential spec homes		5,199			13		(2	)		5,210
Development & spec land		46,547			131		(12	)		46,666
Commercial and industrial		394,346			3,149		(297	)		397,198

Total commercial		1,725,369			5,596		(3,779	)		1,727,186
Residential mortgage		646,136			1,861		(2,025	)		645,972
Residential construction		24,030			42		—			24,072
Mortgage warehouse		74,120			480		—			74,600

Total real estate		744,286			2,383		(2,025	)		744,644
Direct installment		38,173			103		566			38,842
Indirect installment		314,177			738		—			314,915
Home equity		194,766			973		1,799			197,538

Total consumer		547,116			1,814		2,365			551,295

Total loans		3,016,771			9,793		(3,439	)		3,023,125
Allowance for loan losses		(17,820	)		—		—			(17,820	)

Net loans	$	2,998,951		$	9,793	$	(3,439	)	$	3,005,305

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Note 5 – Accounting for Certain Loans Acquired in a Transfer

The Company has acquired loans in acquisitions, ~~and~~whereby 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.

past-due

and

non-accrual

status, borrower credit scores and recent

loan-to-value

percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC

310-30)

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

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

   June 30, 2018
   Commercial    Real
Estate    Consumer    Outstanding
Balance    Allowance
for Loan
Losses    Carrying
Amount
Heartland
   $ 254    $ 193    $ —      $ 447    $ —      $ 447
Summit
   3,301    592    —      3,893    —      3,893
Peoples
   296    112    —      408    —      408
Kosciusko
   791    207    —      998    —      998
LaPorte
   855    974    30    1,859    —      1,859
Lafayette
   3,481    —      —      3,481    —      3,481
Wolverine
   10,020    —      —      10,020    —      10,020












Total
   $ 18,998    $ 2,078    $ 30    $ 21,106    $ —      $ 21,106












   December 31, 2017
   Commercial    Real
Estate    Consumer    Outstanding
Balance    Allowance
for Loan
Losses    Carrying
Amount
Heartland
   $ 390    $ 229    $ —      $ 619    $ —      $ 619
Summit
   3,653    870    —      4,523    —      4,523
Peoples
   315    126    —      441    —      441
Kosciusko
   838    403    —      1,241    —      1,241
LaPorte
   1,034    1,004    33    2,071    —      2,071
Lafayette
   4,271    —      —      4,271    —      4,271
Wolverine
   16,697    —      —      16,697    —      16,697












Total
   $ 27,198    $ 2,632    $ 33    $ 29,863    $ —      $ 29,863


	June 30, 2019
	Commercial		Real Estate		Consumer		Outstanding Balance		Allowance for Loan Losses		Carrying Amount
Heartland	$	217	$	152	$	—	$	369	$	—	$	369
Summit		213		515		—		728		—		728
Peoples		249		40		—		289		—		289
Kosciusko		672		148		—		820		195		625
LaPorte		663		818		24		1,505		—		1,505
Lafayette		2,002		—		—		2,002		—		2,002
Wolverine		5,606		—		—		5,606		19		5,587
Salin		8,075		1,855		1,096		11,026		—		11,026

Total	$	17,697	$	3,528	$	1,120	$	22,345	$	214	$	22,131


	December 31, 2018
	Commercial		Real Estate		Consumer		Outstanding Balance		Allowance for Loan Losses		Carrying Amount
Heartland	$	232	$	175	$	—	$	407	$	—	$	407
Summit		323		555		—		878		—		878
Peoples		270		58		—		328		—		328
Kosciusko		746		155		—		901		—		901
LaPorte		753		947		27		1,727		60		1,667
Lafayette		3,080		—		—		3,080		—		3,080
Wolverine		7,841		—		—		7,841		—		7,841

Total	$	13,245	$	1,890	$	27	$	15,162	$	60	$	15,102

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

   Six Months Ended June 30, 2018
   Beginning
balance    Additions    Accretion Reclassification
from
nonaccretable
difference    Disposals Ending
balance
Heartland
   $ 452    $ —      $ (68 ) $ —      $ (193 ) $ 191
Summit
   147    —      (34 ) —      (6 ) 107
Kosciusko
   386    —      (40 ) —      —   346
LaPorte
   980    —      (75 ) —      (7 ) 898
Lafayette
   933    —      (176 ) —      (2 ) 755
Wolverine
   2,267    —      (538 ) —      (680 ) 1,049








Total
   $ 5,165    $ —      $ (931 ) $ —      $ (888 ) $ 3,346








   Six Months Ended June 30, 2017
   Beginning
balance    Additions    Accretion Reclassification
from
nonaccretable
difference    Disposals Ending
balance
Heartland
   $ 557    $ —      $ (67 ) $ —      $ (6 ) $ 484
Summit
   502    —      (182 ) —      (2 ) 318
Peoples
   389    —      (388 ) —      (1 ) —
Kosciusko
   530    —      (58 ) —      (18 ) 454
LaPorte
   1,479    —      (150 ) —      (153 ) 1,176








Total
   $ 3,457    $ —      $ (845 ) $ —      $ (180 ) $ 2,432


	Six Months Ended June 30, 2019
	Beginning balance		Additions		Accretion			Reclassification from nonaccretable difference		Disposals			Ending balance
Heartland	$	174	$	—	$	(16	)	$	—	$	—		$	158
Summit		42		—		(5	)		—		(11	)		26
Kosciusko		300		—		(33	)		—		(1	)		266
LaPorte		829		—		(59	)		—		—			770
Lafayette		609		—		(67	)		—		(180	)		362
Wolverine		698		—		(212	)		—		(120	)		366
Salin		—		735		—			—		—			735

Total	$	2,652	$	735	$	(392	)	$	—	$	(312	)	$	2,683


	Six Months Ended June 30, 2018
	Beginning balance		Additions		Accretion			Reclassification from nonaccretable difference		Disposals			Ending balance
Heartland	$	452	$	—	$	(68	)	$	—	$	(193	)	$	191
Summit		147		—		(34	)		—		(6	)		107
Kosciusko		386		—		(40	)		—		—			346
LaPorte		980		—		(75	)		—		(7	)		898
Lafayette		933		—		(176	)		—		(2	)		755
Wolverine		2,267		—		(538	)		—		(680	)		1,049

Total	$	5,165	$	—	$	(931	)	$	—	$	(888	)	$	3,346

During the six months ended June 30, ~~2018~~2019 and ~~2017~~2018, the Company increased the allowance for loan losses on purchased loans by a charge to the income statement of $0$154,000 and ~~$71,000,~~

zero

, respectively.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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 using the highest of the one, two or five-year historical loss experience is an appropriate methodology 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    Six Months Ended
   June 30    June 30
   2018    2017    2018    2017
   (Unaudited)    (Unaudited)    (Unaudited)    (Unaudited)
Balance at beginning of the period
   $ 16,474    $ 15,054    $ 16,394    $ 14,837
Loanscharged-off:

Commercial

Owner occupied real estate
   —      —      13    —
Non-owner occupied real estate
   —      —      —      —
Residential spec homes
   —      —      —      —
Development & spec land
   —      1    —      1
Commercial and industrial
   —      254    —      259








Total commercial
   —      255    13    260
Real estate

Residential mortgage
   3    1    15    52
Residential construction
   —      —      —      —
Mortgage warehouse
   —      —      —      —








Total real estate
   3    1    15    52
Consumer

Direct installment
   49    9    104    29
Indirect installment
   365    323    870    608
Home equity
   —      21    131    71








Total consumer
   414    353    1,105    708








Total loanscharged-off
   417    609    1,133    1,020
Recoveries of loans previouslycharged-off:

Commercial

Owner occupied real estate
   —      1    12    1
Non-owner occupied real estate
   12    3    17    25
Residential spec homes
   2    2    4    4
Development & spec land
   —      —      —      —
Commercial and industrial
   26    30    58    141








Total commercial
   40    36    91    171
Real estate

Residential mortgage
   5    9    11    22
Residential construction
   —      —      —      —
Mortgage warehouse
   —      —      —      —








Total real estate
   5    9    11    22
Consumer

Direct installment
   21    16    32    32
Indirect installment
   132    152    271    265
Home equity
   181    39    203    60








Total consumer
   334    207    506    357








Total loan recoveries
   379    252    608    550








Net loanscharged-off
   38    357    525    470








Provision charged to operating expense

Commercial
   985    41    (306 )    928
Real estate
   (117 )    93    (369 )    (474 )
Consumer
   (233 )    196    1,877    206








Total provision charged to operating expense
   635    330    1,202    660








Balance at the end of the period
   $ 17,071    $ 15,027    $ 17,071    $ 15,027


	Three Months Ended						Six Months Ended
	June 30						June 30
	2019			2018			2019			2018
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Balance at beginning of the period	$	17,821		$	16,474		$	17,820		$	16,394
Loans charged-off:
Commercial
Owner occupied real estate		336			—			337			13
Non-owner occupied real estate		—			—			64			—
Residential spec homes		3			—			3			—
Development & spec land		—			—			—			—
Commercial and industrial		—			—			12			—

Total commercial		339			—			416			13
Real estate
Residential mortgage		48			3			48			15
Residential construction		—			—			—			—
Mortgage warehouse		—			—			—			—

Total real estate		48			3			48			15
Consumer
Direct installment		37			49			65			104
Indirect installment		251			365			791			870
Home equity		39			—			55			131

Total consumer		327			414			911			1,105

Total loans charged-off		714			417			1,375			1,133
Recoveries of loans previously charged-off:
Commercial
Owner occupied real estate		—			—			—			12
Non-owner occupied real estate		4			12			10			17
Residential spec homes		1			2			3			4
Development & spec land		—			—			—			—
Commercial and industrial		69			26			77			58

Total commercial		74			40			90			91
Real estate
Residential mortgage		7			5			34			11
Residential construction		—			—			—			—
Mortgage warehouse		—			—			—			—

Total real estate		7			5			34			11
Consumer
Direct installment		75			21			86			32
Indirect installment		182			132			383			271
Home equity		(36	)		181			7			203

Total consumer		221			334			476			506

Total loan recoveries		302			379			600			608

Net loans charged-off		412			38			775			525

Provision charged to operating expense
Commercial		590			985			1,712			(306	)
Real estate		211			(117	)		104			(369	)
Consumer		95			(233	)		(556	)		1,877

Total provision charged to operating expense		896			635			1,260			1,202

Balance at the end of the period	$	18,305		$	17,071		$	18,305		$	17,071

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

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

For all loan portfolio segments except

1-4

family residential properties and consumer, the Company promptly

charges-off

loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial

charge-off

is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company~~charges-off1-4~~

charges-off

1-4

family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of

1-4

family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also

charges-off

unsecured

open-end

loans when the loan is contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

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:

   June 30, 2018
   Commercial    Real
Estate    Mortgage
Warehousing    Consumer    Total
Allowance For Loan Losses

Ending allowance balance attributable to loans:

Individually evaluated for impairment
   $ 184    $ —      $ —      $ —      $ 184
Collectively evaluated for impairment
   8,681    1,761    1,084    5,361    16,887
Loans acquired with deteriorated credit quality
   —      —      —      —      —










Total ending allowance balance
   $ 8,865    $ 1,761    $ 1,084    $ 5,361    $ 17,071










Loans:

Individually evaluated for impairment
   $ 8,999    $ —      $ —      $ —      $ 8,999
Collectively evaluated for impairment
   1,669,122    636,503    109,496    509,459    2,924,580
Loans acquired with deteriorated credit quality
   —      —      —      —      —










Total ending loans balance
   $ 1,678,121    $ 636,503    $ 109,496    $ 509,459    $ 2,933,579


	June 30, 2019
	Commercial		Real Estate		Mortgage Warehousing		Consumer		Total
Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	787	$	—	$	—	$	—	$	787
Collectively evaluated for impairment		11,094		1,732		1,040		3,652		17,518
Loans acquired with deteriorated credit quality		—		—		—		—		—

Total ending allowance balance	$	11,881	$	1,732	$	1,040	$	3,652	$	18,305

Loans:
Individually evaluated for impairment	$	8,641	$	—	$	—	$	—	$	8,641
Collectively evaluated for impairment		2,058,892		821,216		133,428		651,637		3,665,173
Loans acquired with deteriorated credit quality		—		—		—		—		—

Total ending loans balance	$	2,067,533	$	821,216	$	133,428	$	651,637	$	3,673,814

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

   December 31, 2017
   Commercial    Real
Estate    Mortgage
Warehousing    Consumer    Total
Allowance For Loan Losses

Ending allowance balance attributable to loans:

Individually evaluated for impairment
   $ 184    $ —      $ —      $ —      $ 184
Collectively evaluated for impairment
   8,909    2,188    1,030    4,083    16,210
Loans acquired with deteriorated credit quality
   —      —      —      —      —










Total ending allowance balance
   $ 9,093    $ 2,188    $ 1,030    $ 4,083    $ 16,394










Loans:

Individually evaluated for impairment
   $ 7,187    $ —      $ —      $ —      $ 7,187
Collectively evaluated for impairment
   1,667,942    608,575    94,988    462,529    2,834,034
Loans acquired with deteriorated credit quality
   —      —      —      —      —










Total ending loans balance
   $ 1,675,129    $ 608,575    $ 94,988    $ 462,529    $ 2,841,221

December 31, 2018

Commercial

Real Estate

Mortgage
Warehousing

Consumer

Total

Allowance For Loan Losses

Ending allowance balance attributable to loans:

Individually evaluated for impairment
$
1,035
$
—
$
—
$
—
$
1,035

Collectively evaluated for impairment

9,460

1,676

1,006

4,643

16,785

Loans acquired with deteriorated credit quality

—

—

—

—

—

Total ending allowance balance
$
10,495
$
1,676
$
1,006
$
4,643
$
17,820

Loans:

Individually evaluated for impairment
$
6,708
$
—
$
—
$
—
$
6,708

Collectively evaluated for impairment

1,718,661

670,166

74,120

547,116

3,010,063

Loans acquired with deteriorated credit quality

—

—

—

—

—

Total ending loans balance
$
1,725,369
$
670,166
$
74,120
$
547,116
$
3,016,771

Note 7 –
Non-performing
Loans and Impaired Loans

The following table presents the

non-accrual,

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

   June 30, 2018
   Non-accrual    Loans Past
Due Over 90
Days Still
Accruing    Non-peforming
TDRs    Performing
TDRs    Total
Non-performing
Loans
Commercial

Owner occupied real estate
   $ 5,629    $ —      $ —      $ —      $ 5,629
Non-owner occupied real estate
   1,038    —      305    —      1,343
Residential spec homes
   —      —      —      —      —
Development & spec land
   72    —      —      —      72
Commercial and industrial
   1,943    —      —      —      1,943










Total commercial
   8,682    —      305    —      8,987
Real estate

Residential mortgage
   1,823    11    440    1,641    3,915
Residential construction
   —      —      —      —      —
Mortgage warehouse
   —      —      —      —      —










Total real estate
   1,823    11    440    1,641    3,915
Consumer

Direct installment
   54    —      —      —      54
Direct installment purchased
   —      —      —      —      —
Indirect installment
   619    38    —      —      657
Home equity
   1,377    —      149    270    1,796










Total consumer
   2,050    38    149    270    2,507










Total
   $ 12,555    $ 49    $ 894    $ 1,911    $ 15,409


	June 30, 2019
	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non-peforming TDRs		Performing TDRs		Total Non-performing Loans
Commercial
Owner occupied real estate	$	3,694	$	63	$	389	$	139	$	4,285
Non-owner occupied real estate		616		—		635		—		1,251
Residential spec homes		—		—		—		—		—
Development & spec land		140		—		—		—		140
Commercial and industrial		3,021		—		—		—		3,021

Total commercial		7,471		63		1,024		139		8,697
Real estate
Residential mortgage		4,219		77		416		1,732		6,444
Residential construction		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—

Total real estate		4,219		77		416		1,732		6,444
Consumer
Direct installment		36		—		—		—		36
Indirect installment		1,129		156		—		—		1,285
Home equity		1,909		95		136		327		2,467

Total consumer		3,074		251		136		327		3,788

Total	$	14,764	$	391	$	1,576	$	2,198	$	18,929

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

   December 31, 2017
   Non-accrual    Loans Past
Due Over 90
Days Still
Accruing    Non-peforming
TDRs    Performing
TDRs    Total
Non-performing
Loans
Commercial

Owner occupied real estate
   $ 4,877    $ —      $ 11    $ 1    $ 4,889
Non-owner occupied real estate
   115    —      440    —      555
Residential spec homes
   —      —      —      —      —
Development & spec land
   176    —      —      —      176
Commercial and industrial
   1,734    —      —      —      1,734










Total commercial
   6,902    —      451    1    7,354
Real estate

Residential mortgage
   3,693    —      351    1,450    5,494
Residential construction
   —      —      —      222    222
Mortgage warehouse
   —      —      —      —      —










Total real estate
   3,693    —      351    1,672    5,716
Consumer

Direct installment
   160    —      —      —      160
Direct installment purchased
   —      —      —      —      —
Indirect installment
   1,041    167    —      —      1,208
Home equity
   1,480    —      211    285    1,976










Total consumer
   2,681    167    211    285    3,344










Total
   $ 13,276    $ 167    $ 1,013    $ 1,958    $ 16,414


	December 31, 2018
	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non-peforming TDRs		Performing TDRs		Total Non-performing Loans
Commercial
Owner occupied real estate	$	3,413	$	—	$	—	$	109	$	3,522
Non-owner occupied real estate		554		—		492		—		1,046
Residential spec homes		—		—		—		—		—
Development & spec land		68		—		—		—		68
Commercial and industrial		2,059		208		—		—		2,267

Total commercial		6,094		208		492		109		6,903
Real estate
Residential mortgage		2,846		180		423		1,558		5,007
Residential construction		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—

Total real estate		2,846		180		423		1,558		5,007
Consumer
Direct installment		35		—		—		—		35
Indirect installment		916		173		—		—		1,089
Home equity		1,657		7		142		335		2,141

Total consumer		2,608		180		142		335		3,265

Total	$	11,548	$	568	$	1,057	$	2,002	$	15,175

Included in the ~~$12.6~~$14.8 million of

non-accrual

loans and the ~~$894,000~~$1.6 million of

non-performing

TDRs at June 30, ~~2018~~2019 were ~~$2.0~~$2.4 million and ~~$0,~~$640,000, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a

non-accruing

loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to generally place a loan on a

non-accrual

status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Commercial Banking Officer and/or the Chief Operations Officer must review all loans placed on

non-accrual

status. Subsequent payments on

non-accrual

loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured.

Non-accrual

loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a

non-accrual

loan to accrual status.

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

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

non-accrual

status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

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

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, ~~2018,~~2019, 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 June 30, ~~2018,~~2019, the Company had ~~$2.8~~$3.8 million in TDRs and ~~$1.9~~$2.2 million were performing according to the restructured terms and ~~$32,000 in~~

TDRs were returned to accrual status during the first six months of ~~2018.~~2019. There were ~~$70,000~~$20,000 specific reserves allocated to TDRs at June 30, ~~2018~~2019 based on the discounted cash flows or when appropriate the fair value of the collateral.

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

   June 30, 2018
            Three Months Ended    Six Months Ended
   Unpaid
Principal
Balance    Recorded
Investment    Allowance for
Loan Loss
Allocated    Average
Balance in
Impaired
Loans    Cash/Accrual
Interest
Income
Recognized    Average
Balance in
Impaired
Loans    Cash/Accrual
Interest
Income
Recognized
With no recorded allowance

Commercial

Owner occupied real estate
   $ 4,765    $ 4,762    $ —      $ 5,271    $ 59    $ 5,303    $ 96
Non-owner occupied real estate
   1,344    1,360    —      1,591    5    1,559    10
Residential spec homes
   —      —      —      —      —      —      —
Development & spec land
   72    70    —      71    —      73    —
Commercial and industrial
   1,943    1,943    —      1,916    7    1,886    7














Total commercial
   8,124    8,135    —      8,849    71    8,821    113
With an allowance recorded

Commercial

Owner occupied real estate
   864    864    184    871    —      885    —
Non-owner occupied real estate
   —      —      —      —      —      —      —
Residential spec homes
   —      —      —      —      —      —      —
Development & spec land
   —      —      —      —      —      —      —
Commercial and industrial
   —      —      —      —      —      —      —














Total commercial
   864    864    184    871    —      885    —














Total
   $ 8,988    $ 8,999    $ 184    $ 9,720    $ 71    $ 9,706    $ 113














   June 30, 2017
            Three Months Ended    Six Months Ended
   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
   $ 1,591    $ 1,592    $ —      $ 1,538    $ 22    $ 1,233    $ 22
Non-owner occupied real estate
   467    467    —      471    2    432    2
Residential spec homes
   —      —      —      —      —      —      —
Development & spec land
   107    107    —      230    —      234    —
Commercial and industrial
   1,474    1,474    —      1,023    16    619    16














Total commercial
   3,639    3,640    —      3,262    40    2,518    40
With an allowance recorded

Commercial

Owner occupied real estate
   —      —      —      —      —      —      —
Non-owner occupied real estate
   —      —      —      —      —      —      —
Residential spec homes
   —      —      —      —      —      —      —
Development & spec land
   —      —      —      —      —      —      —
Commercial and industrial
   —      —      —      —      —      —      —














Total commercial
   —      —      —      —      —      —      —














Total
   $ 3,639    $ 3,640    $ —      $ 3,262    $ 40    $ 2,518    $ 40


	June 30, 2019
							Three Months Ended				Six Months Ended
	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	$	3,851	$	3,851	$	—	$	5,987	$	76	$	6,005	$	130
Non-owner occupied real estate		1,116		1,143		—		1,260		33		1,293		64
Residential spec homes		—		—		—		—		—		—		—
Development & spec land		140		139		—		226		2		224		2
Commercial and industrial		1,797		1,778		—		2,073		15		2,078		22

Total commercial		6,904		6,911		—		9,546		126		9,600		218
With an allowance recorded
Commercial
Owner occupied real estate		371		371		3		372		10		365		10
Non-owner occupied real estate		135		135		40		135		—		135		—
Residential spec homes		—		—		—		—		—		—		—
Development & spec land		—		—		—		—		—		—		—
Commercial and industrial		1,224		1,224		744		1,252		25		1,258		25

Total commercial		1,730		1,730		787		1,759		35		1,758		35

Total	$	8,634	$	8,641	$	787	$	11,305	$	161	$	11,358	$	253

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

	June 30, 2018
							Three Months Ended				Six Months Ended
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Loss Allocated		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized		Average Balance in Impaired Loans		Cash/Accrual Interest Income Recognized
With no recorded allowance
Commercial
Owner occupied real estate	$	4,765	$	4,762	$	—	$	5,271	$	59	$	5,303	$	96
Non-owner occupied real estate		1,344		1,360		—		1,591		5		1,559		10
Residential spec homes		—		—		—		—		—		—		—
Development & spec land		72		70		—		71		—		73		—
Commercial and industrial		1,943		1,943		—		1,916		7		1,886		7

Total commercial		8,124		8,135		—		8,849		71		8,821		113
With an allowance recorded
Commercial
Owner occupied real estate		864		864		184		871		—		885		—
Non-owner occupied real estate		—		—		—		—		—		—		—
Residential spec homes		—		—		—		—		—		—		—
Development & spec land		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—

Total commercial		864		864		184		871		—		885		—

Total	$	8,988	$	8,999	$	184	$	9,720	$	71	$	9,706	$	113

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

   June 30, 2018
   30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
Greater
Past Due Total
Past Due Loans Not
Past Due Total
Commercial

Owner occupied real estate
   $ 897 $ 138 $ —   $ 1,035 $ 590,238 $ 591,273
Non-owner occupied real estate
   42 895 —   937 677,976 678,913
Residential spec homes
   —   —   —   —   11,614 11,614
Development & spec land
   —   —   —   —   34,384 34,384
Commercial and industrial
   175 966 —   1,141 351,072 352,213


Total commercial
   1,114 1,999 —   3,113 1,665,284 1,668,397
Real estate

Residential mortgage
   822 302 11 1,135 609,736 610,871
Residential construction
   —   —   —   —   21,585 21,585
Mortgage warehouse
   —   —   —   —   109,016 109,016


Total real estate
   822 302 11 1,135 740,337 741,472
Consumer

Direct installment
   78 26 —   104 38,961 39,065
Indirect installment
   1,513 256 38 1,807 274,510 276,317
Home equity
   451 30 —   481 194,156 194,637


Total consumer
   2,042 312 38 2,392 507,627 510,019


Total
   $ 3,978 $ 2,613 $ 49 $ 6,640 $ 2,913,248 $ 2,919,888


Percentage of total loans
   0.14 % 0.09 % 0.00 % 0.23 % 99.77 %
   December 31, 2017
   30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
Greater
Past Due Total
Past Due Loans Not
Past Due Total
Commercial

Owner occupied real estate
   $ 1,613 $ 1,950 $ —   $ 3,563 $ 568,419 $ 571,982
Non-owner occupied real estate
   512 122 —   634 678,311 678,945
Residential spec homes
   —   —   —   —   16,431 16,431
Development & spec land
   31 —   —   31 48,807 48,838
Commercial and industrial
   520 1 —   521 347,350 347,871


Total commercial
   2,676 2,073 —   4,749 1,659,318 1,664,067
Real estate

Residential mortgage
   1,248 49 —   1,297 587,061 588,358
Residential construction
   63 —   —   63 15,964 16,027
Mortgage warehouse
   —   —   —   —   94,508 94,508


Total real estate
   1,311 49 —   1,360 697,533 698,893
Consumer

Direct installment
   78 10 —   88 37,753 37,841
Indirect installment
   1,859 244 167 2,270 225,053 227,323
Home equity
   502 527 —   1,029 196,549 197,578


Total consumer
   2,439 781 167 3,387 459,355 462,742


Total
   $ 6,426 $ 2,903 $ 167 $ 9,496 $ 2,816,206 $ 2,825,702


Percentage of total loans
   0.23 % 0.10 % 0.01 % 0.34 % 99.66 %


	June 30, 2019
	Current			30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Non-accrual			Total Past Due & Non-accrual Loans			Total
Commercial
Owner occupied real estate	$	705,186		$	265		$	—		$	63		$	4,083		$	4,411		$	709,597
Non-owner occupied real estate		781,012			829			—			—			1,251			2,080			783,092
Residential spec homes		14,862			—			—			—			—			—			14,862
Development & spec land		40,509			453			—			—			140			593			41,102
Commercial and industrial		513,126			2,234			499			—			3,021			5,754			518,880

Total commercial		2,054,695			3,781			499			63			8,495			12,838			2,067,533
Real estate
Residential mortgage		791,704			2,272			125			77			4,635			7,109			798,813
Residential construction		22,403			—			—			—			—			—			22,403
Mortgage warehouse		133,428			—			—			—			—			—			133,428

Total real estate		947,535			2,272			125			77			4,635			7,109			954,644
Consumer
Direct installment		46,203			180			49			—			36			265			46,468
Indirect installment		326,970			1,268			250			156			1,129			2,803			329,773
Home equity		272,047			640			569			95			2,045			3,349			275,396

Total consumer		645,220			2,088			868			251			3,210			6,417			651,637

Total	$	3,647,450		$	8,141		$	1,492		$	391		$	16,340		$	26,364		$	3,673,814

Percentage of total loans		99.28	%		0.22	%		0.04	%		0.01	%		0.44	%		0.72	%		100.00	%

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

	December 31, 2018
	Current			30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Non-accrual			Total Past Due & Non-accrual Loans			Total
Commercial
Owner occupied real estate	$	556,516		$	537		$	997		$	—		$	3,413		$	4,947		$	561,463
Non-owner occupied real estate		716,574			175			19			—			1,046			1,240			717,814
Residential spec homes		4,707			492			—			—			—			492			5,199
Development & spec land		46,479			—			—			—			68			68			46,547
Commercial and industrial		390,828			515			736			208			2,059			3,518			394,346

Total commercial		1,715,104			1,719			1,752			208			6,586			10,265			1,725,369
Real estate
Residential mortgage		641,500			1,131			56			180			3,269			4,636			646,136
Residential construction		24,030			—			—			—			—			—			24,030
Mortgage warehouse		74,120			—			—			—			—			—			74,120

Total real estate		739,650			1,131			56			180			3,269			4,636			744,286
Consumer
Direct installment		38,027			93			18			—			35			146			38,173
Indirect installment		311,494			1,396			198			173			916			2,683			314,177
Home equity		192,162			761			37			7			1,799			2,604			194,766

Total consumer		541,794			2,250			253			180			2,750			5,433			547,116

Total	$	2,996,548		$	5,100		$	2,061		$	568		$	12,605		$	20,334		$	3,016,771

Percentage of total loans		99.33	%		0.17	%		0.07	%		0.02	%		0.42	%		0.67	%		100.00	%

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

Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being

re-evaluated

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

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

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

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

The CCBO, or his designee, meets ~~weekly~~regularly with loan officers to discuss the status of

past-due

loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.

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

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on

non-accrual,

or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on

non-accrual.

Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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~~

five

-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3: Satisfactory (Pass)

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

•

~~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 properly underwritten, did

not

possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

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

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

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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 unstablized, high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.

Risk Grade 5: Special Mention

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

Risk Grade 6: Substandard

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

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

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

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

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.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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.

The following table presents loans by credit grades.

   June 30, 2018
   Pass Special
Mention Substandard Doubtful Total
Commercial

Owner occupied real estate
   $ 569,089 $ 5,772 $ 16,412 $ —   $ 591,273
Non-owner occupied real estate
   667,031 5,888 5,994 —   678,913
Residential spec homes
   11,614 —   —   —   11,614
Development & spec land
   34,168 144 72 —   34,384
Commercial and industrial
   335,442 4,719 12,052 —   352,213


Total commercial
   1,617,344 16,523 34,530 —   1,668,397
Real estate

Residential mortgage
   606,967 —   3,904 —   610,871
Residential construction
   21,585 —   —   —   21,585
Mortgage warehouse
   109,016 —   —   —   109,016


Total real estate
   737,568 —   3,904 —   741,472
Consumer

Direct installment
   39,011 —   54 —   39,065
Indirect installment
   275,660 —   657 —   276,317
Home equity
   192,841 —   1,796 —   194,637


Total consumer
   507,512 —   2,507 —   510,019


Total
   $ 2,862,424 $ 16,523 $ 40,941 $ —   $ 2,919,888


Percentage of total loans
   98.03 % 0.57 % 1.40 % 0.00 %


	June 30, 2019
	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	686,630		$	5,711		$	17,256		$	—		$	709,597
Non-owner occupied real estate		764,517			13,002			5,573			—			783,092
Residential spec homes		14,862			—			—			—			14,862
Development & spec land		37,847			97			3,158			—			41,102
Commercial and industrial		482,043			25,214			11,623			—			518,880

Total commercial		1,985,899			44,024			37,610			—			2,067,533
Real estate
Residential mortgage		792,446			—			6,367			—			798,813
Residential construction		22,403			—			—			—			22,403
Mortgage warehouse		133,428			—			—			—			133,428

Total real estate		948,277			—			6,367			—			954,644
Consumer
Direct installment		46,433			—			35			—			46,468
Indirect installment		328,488			—			1,285			—			329,773
Home equity		272,929			—			2,467			—			275,396

Total consumer		647,850			—			3,787			—			651,637

Total	$	3,582,026		$	44,024		$	47,764		$	—		$	3,673,814

Percentage of total loans		97.50	%		1.20	%		1.30	%		0.00	%		100.00	%

	December 31, 2018
	Pass			Special Mention			Substandard			Doubtful			Total
Commercial
Owner occupied real estate	$	538,177		$	6,618		$	16,668		$	—		$	561,463
Non-owner occupied real estate		702,269			9,682			5,863			—			717,814
Residential spec homes		5,199			—			—			—			5,199
Development & spec land		46,382			97			68			—			46,547
Commercial and industrial		379,607			6,655			8,084			—			394,346

Total commercial		1,671,634			23,052			30,683			—			1,725,369
Real estate
Residential mortgage		641,309			—			4,827			—			646,136
Residential construction		24,030			—			—			—			24,030
Mortgage warehouse		74,120			—			—			—			74,120

Total real estate		739,459			—			4,827			—			744,286
Consumer
Direct installment		38,138			—			35			—			38,173
Indirect installment		313,088			—			1,089			—			314,177
Home equity		192,625			—			2,141			—			194,766

Total consumer		543,851			—			3,265			—			547,116

Total	$	2,954,944		$	23,052		$	38,775		$	—		$	3,016,771

Percentage of total loans		97.95	%		0.76	%		1.29	%		0.00	%		100.00	%

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

   December 31, 2017
   Pass Special
Mention Substandard Doubtful Total
Commercial

Owner occupied real estate
   $ 545,158 $ 8,622 $ 18,202 $ —   $ 571,982
Non-owner occupied real estate
   670,074 3,864 5,007 —   678,945
Residential spec homes
   16,431 —   —   —   16,431
Development & spec land
   47,726 886 226 —   48,838
Commercial and industrial
   326,756 7,448 13,667 —   347,871


Total commercial
   1,606,145 20,820 37,102 —   1,664,067
Real estate

Residential mortgage
   582,864 —   5,494 —   588,358
Residential construction
   15,805 —   222 —   16,027
Mortgage warehouse
   94,508 —   —   —   94,508


Total real estate
   693,177 —   5,716 —   698,893
Consumer

Direct installment
   37,681 —   160 —   37,841
Indirect installment
   226,115 —   1,208 —   227,323
Home equity
   195,602 —   1,976 —   197,578


Total consumer
   459,398 —   3,344 —   462,742


Total
   $ 2,758,720 $ 20,820 $ 46,162 $ —   $ 2,825,702


Percentage of total loans
   97.63 % 0.74 % 1.63 % 0.00 %

Note 8 – Leases

As of January 1, 2019, when the Company adopted ASU 2016-02 prospectively, the Company began recording operating leases as a right-of-use (“ROU”) asset in other assets and operating lease liability in other liabilities on the consolidated balance sheet. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating liability, is recognized on a straight-line basis over the lease term, and is recorded primarily in net occupancy expense in the consolidated statements of income.

When the Company adopted the guidance on January 1, 2019, it elected the optional alternative transition method permitted by ASU 2018-11 allowing for recognition of applicable leases as of January 1, 2019. Additionally, the Company elected the following accounting policies:

The practical expedient package that forgoes:

Reassessment of any expired or existing contracts for a lease

Reassessment of lease classification for expired or existing leases

Reassessment of initial direct costs for existing leases

The hindsight practical expedient to determine lease term and impairment of ROU assets

Other practical expedients regarding combination of lease and

non-lease

components and the exclusion of short-term leases

The Company did not elect to follow the practical expedients for land easements and the portfolio approach

Operating leases relate primarily to bank branches and office space with remaining average lease terms of seven years. The weighted average discount rate utilized to calculate the ROU asset and operating lease liability was approximately 2.57%, which represents the incremental borrowing rate. At inception, the Company recorded a ROU asset and operating lease liability of $3.4 million. At June 30, 2019, a ROU asset of $3.1 million is included in other assets and an operating lease liability of $3.3 million is included in other liabilities. Options to extend a lease were considered in the remaining lease term determination. The lease expense for operating leases was $149,000 for the three months ended June 30, 2019 and $297,000 for the six months ended June 30, 2019.

Future minimum operating lease payments under

non-cancellable

leases with initial or remaining lease terms at June 30, 2019 were as follows:


Year	Amount
2019	$	240
2020		476
2021		476
2022		504
2023 and thereafter		1,609

Total lease payments	$	3,305

Less: Interest		(175	)

Present value of lease liabilities	$	3,130

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Note 89 – 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:

   June 30, 2018
   Remaining Contractual Maturity of the Agreements
   Overnight
and
Continuous    Up to
one
year    One
to
three
years    Three
to
five
years    Five
to ten
years    Beyond
ten
years    Total
Repurchase Agreements andrepurchase-to-maturity transactions

Repurchase Agreements
   $ 43,702    $ —      $ —      $ —      $ —      $ —      $ 43,702
Securities pledged for Repurchase Agreements

Federal agency collateralized mortgage obligations
   $ 34,344    $ —      $ —      $ —      $ —      $ —      $ 34,344
Federal agency mortgage-backed pools
   31,208    —      —      —      —      —      31,208














Total
   $ 65,552    $ —      $ —      $ —      $ —      $ —      $ 65,552


	June 30, 2019
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to one year		One to three years		Three to five years		Five to ten years		Beyond ten years		Total
Repurchase Agreements and repurchase-to-maturity transactions
Repurchase Agreements	$	92,256	$	—	$	—	$	—	$	—	$	—	$	92,256
Securities pledged for Repurchase Agreements
Federal agency collateralized mortgage obligations	$	36,183	$	—	$	—	$	—	$	—	$	—	$	36,183
Federal agency mortgage-backed pools		68,684		—		—		—		—		—		68,684

Total	$	104,867	$	—	$	—	$	—	$	—	$	—	$	104,867

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

Note 910 – Derivative Financial Instruments

Cash Flow Hedges

–

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 5.81% on a notional amount of $30.5 million at June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. 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 June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

On July 20, 2018, the Company entered into an interest rate swap agreement for an additional portion of its floating rate debt. The agreement provides for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a rate of 2.81% on a notional amount of $50.0 million at June 30, 2019

and December 31, 2018.

Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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 June 30, ~~2018,~~2019, 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 June 30, ~~2018,~~2019, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan agreements being hedged were ~~$155.7~~$258.2 million at June 30, ~~2018~~2019 and ~~$154.6~~$209.2 million at December 31, ~~2017.~~

2018.

Other Derivative Instruments

The Company enters into

non-hedging

derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At June 30, ~~2018,~~2019, 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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

   Asset Derivatives    Liability Derivatives
   June 30, 2018    June 30, 2018
   Balance Sheet
Location    Fair
Value    Balance Sheet
Location    Fair
Value
Derivatives designated as hedging instruments

Interest rate contracts
   Loans    $ —      Other liabilities    $ 3,579
Interest rate contracts
   Other Assets    3,579    Other liabilities    969




Total derivatives desginated as hedging instruments
      3,579       4,548




Derivatives not designated as hedging instruments

Mortgage loan contracts
   Other assets    257    Other liabilities    4




Total derivatives not designated as hedging instruments
      257       4




Total derivatives
      $ 3,836       $ 4,552




   Asset Derivatives    Liability Derivatives
   December 31, 2017    December 31, 2017
   Balance Sheet
Location    Fair
Value    Balance Sheet
Location    Fair
Value
Derivatives designated as hedging instruments

Interest rate contracts
   Loans    $ —      Other liabilities    $ 811
Interest rate contracts
   Other Assets    811    Other liabilities    1,728




Total derivatives desginated as hedging instruments
      811       2,539




Derivatives not designated as hedging instruments

Mortgage loan contracts
   Other assets    143    Other liabilities    3




Total derivatives not designated as hedging instruments
      143       3




Total derivatives
      $ 954       $ 2,542


	Asset Derivatives				Liability Derivatives
	June 30, 2019				June 30, 2019
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate contracts		Loans	$	11,622		Loans	$	—
Interest rate contracts		Other Assets		—		Other liabilities		16,389

Total derivatives desginated as hedging instruments				11,622				16,389

Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets		467		Other liabilities		—

Total derivatives not designated as hedging instruments				467				—

Total derivatives			$	12,089			$	16,389


	Asset Derivatives				Liability Derivatives
	December 31, 2018				December 31, 2018
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate contracts		Loans	$	—		Loans	$	42
Interest rate contracts		Other Assets		42		Other liabilities		1,760

Total derivatives desginated as hedging instruments				42				1,802

Derivatives not designated as hedging instruments
Mortgage loan contracts		Other assets		135		Other liabilities		—

Total derivatives not designated as hedging instruments				135				—

Total derivatives			$	177			$	1,802

The effect of the derivative instruments on the condensed consolidated statements of income for the three and

six-month

periods ending June 30 is as follows:

   Amount of Loss Recognized in Other Comprehensive Income on
Derivative
(Effective Portion)
   Three Months Ended    Six Months Ended
   June 30, 2018    June 30, 2017    June 30, 2018    June 30, 2017
Derivatives in cash flow hedging relationship

Interest rate contracts
   $ 279    $ 30    $ 879    $ 290


	Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended					Six Months Ended
	June 30, 2019			June 30, 2018		June 30, 2019			June 30, 2018
Derivatives in cash flow hedging relationship
Interest rate contracts	$	(1,502	)	$	279	$	(2,376	)	$	879

FASB Accounting Standards Codification (“ASC”) Topic

820-10-20

defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic

820-10-55

establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Location of gain (loss)
recognized on derivative
   Amount of Gain (Loss) Recognized
on Derivative
   Three Months
Ended Six Months Ended
   June 30,
2018 June 30,
2017 June 30,
2018 June 30,
2017
Derivative in fair value hedging relationship

Interest rate contracts
   Interest income - loans    $ 2,768 $ 679 $ 574 $ 426
Interest rate contracts
   Interest income - loans    (2,768 ) (679 ) (574 ) (426 )


Total
      $ —   $ —   $ —   $ —



Location of gain (loss)
recognized on derivative
   Amount of Gain (Loss) Recognized
on Derivative
   Three Months
Ended Six Months Ended
   June 30,
2018 June 30,
2017 June 30,
2018 June 30,
2017
Derivative not designated as hedging relationship

Mortgage contracts
   Other income -
gain on sale of loans    $ 112 $ (153 ) $ 195 $ (212 )


	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended						Six Months Ended
		June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Derivative in fair value hedging relationship
Interest rate contracts	Interest income - loans	$	(7,529	)	$	2,768		$	(11,580	)	$	574
Interest rate contracts	Interest income - loans		7,529			(2,768	)		11,580			(574	)

Total		$	—		$	—		$	—		$	—

	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended						Six Months Ended
		June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Derivative not designated as hedging relationship
Mortgage contracts	Other income - gain on sale of loans	$	75		$	112		$	332		$	195

Note 1011 – 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

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

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, ~~2018.~~2019. 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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Hedged loans

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

Interest rate swap agreements

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

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

   June 30, 2018
   Fair Value    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Available for sale securities

U.S. Treasury and federal agencies
   $ 24,219    $ —      $ 24,219    $ —
State and municipal
   134,981    —      134,981    —
Federal agency collateralized mortgage obligations
   164,134    —      164,134    —
Federal agency mortgage-backed pools
   196,995    —      196,995    —
Private labeled mortgage-backed pools
   —      —      —      —
Corporate notes
   5,866    —      5,866    —








Total available for sale securities
   526,195    —      526,195    —
Hedged loans
   155,742    —      155,742    —
Forward sale commitments
   344    —      344    —
Interest rate swap agreements
   3,939    —      3,939    —
Commitments to originate loans
   (21 )    —      (21 )    —


	June 30, 2019
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	9,901		$	—	$	9,901		$	—
State and municipal		260,165			—		260,165			—
Federal agency collateralized mortgage obligations		231,522			—		231,522			—
Federal agency mortgage-backed pools		153,523			—		153,523			—
Corporate notes		18,308			—		18,308			—

Total available for sale securities		673,419			—		673,419			—
Hedged loans		258,180			—		258,180			—
Forward sale commitments		467			—		467			—
Interest rate swap agreements		(16,389	)		—		(16,389	)		—
Commitments to originate loans		—			—		—			—

	December 31, 2018
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Treasury and federal agencies	$	16,608		$	—	$	16,608		$	—
State and municipal		209,303			—		209,303			—
Federal agency collateralized mortgage obligations		185,003			—		185,003			—
Federal agency mortgage-backed pools		178,736			—		178,736			—
Corporate notes		10,698			—		10,698			—

Total available for sale securities		600,348			—		600,348			—
Hedged loans		209,161			—		209,161			—
Forward sale commitments		135			—		135			—
Interest rate swap agreements		(1,801	)		—		(1,801	)		—
Commitments to originate loans		—			—		—			—

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

   December 31, 2017
   Fair Value    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Available for sale securities

U.S. Treasury and federal agencies
   $ 19,052    $ —      $ 19,052    $ —
State and municipal
   149,564    —      149,564    —
Federal agency collateralized mortgage obligations
   130,365    —      130,365    —
Federal agency mortgage-backed pools
   208,657    —      208,657    —
Private labeled mortgage-backed pools
   1,642    —      1,642    —
Corporate notes
   385    —      385    —








Total available for sale securities
   509,665    —      509,665    —
Hedged loans
   154,575    —      154,575    —
Forward sale commitments
   143    —      143    —
Interest rate swap agreements
   (917 )    —      (917 )    —
Commitments to originate loans
   (3 )    —      (3 )    —

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

Non-interest Income    Three Months Ended    Six Months Ended
   June 30,
2018    June 30,
2017    June 30,
2018    June 30,
2017
Total gains and losses from:

Hedged loans
   $ 976    $ 679    $ 3,744    $ 426
Fair value interest rate swap agreements
   (976 )    (679 )    (3,744 )    (426 )
Derivative loan commitments
   71    (153 )    183    (212 )








   $ 71    $ (153 )    $ 183    $ (212 )


Non-interest Income	Three Months Ended						Six Months Ended
Total gains and losses from:	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Hedged loans	$	(7,529	)	$	976		$	(11,580	)	$	3,744
Fair value interest rate swap agreements		7,529			(976	)		11,580			(3,744	)
Derivative loan commitments		75			71			332			183

	$	75		$	71		$	332		$	183

Certain other assets are measured at fair value on a

non-recurring

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


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2019
Impaired loans	$	7,847	$	—	$	—	$	7,847
Mortgage servicing rights		13,652		—		—		13,652
December 31, 2018
Impaired loans	$	5,661	$	—	$	—	$	5,661
Mortgage servicing rights		12,349		—		—		12,349

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

   Fair
Value    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
June 30, 2018

Impaired loans
   $ 8,804    $ —      $ —      $ 8,804
Mortgage servicing rights
   11,670    —      —      11,670
December 31, 2017

Impaired loans
   $ 6,957    $ —      $ —      $ 6,957
Mortgage servicing rights
   11,602    —      —      11,602

Impaired (collateral dependent):

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

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

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

Mortgage Servicing Rights (MSRs):

MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s

month-end

interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment increased by $11,000 during the first six months of 2019 and decreased by $24,000 during the first six months of ~~2018 and decreased by $23,000 during the first six months~~2018.

Table of ~~2017.~~

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

The following table presents qualitative information about unobservable inputs used in recurring and

non-recurring

Level 3 fair value measurements, other than goodwill.

   June 30, 2018
   Fair    Valuation    Unobservable    Range
   Value
Technique

Inputs

(Weighted Average)
Impaired loans
   $ 8,804    Collateral based measurement    Discount to reflect current market
conditions and ultimate
collectability    0%-54.8% (2.0%)
Mortgage servicing rights
   11,670    Discounted cash flows    Discount rate,
Constant prepayment rate,
Probability of default    10.3%-11.3% (10.3%),
8.3%-16.5% (8.6%),
0.1%-1.7% (0.6%)
   December 31, 2017
   Fair    Valuation    Unobservable    Range
   Value
Technique

Inputs

(Weighted Average)
Impaired loans
   $ 6,957    Collateral based measurement    Discount to reflect current market
conditions and ultimate
collectability    0%-46.8% (2.6%)
Mortgage servicing rights
   11,602    Discounted cash flows    Discount rate,
Constant prepayment rate,
Probability of default    9.6%-10.8% (9.7%),
9.2%-27.7% (10.5%),
0%-1.5% (0.2%)

June 30, 2019

Fair
Value

Valuation

Technique

Unobservable

Inputs

Range

(Weighted Average)

Impaired loans

7,847

Collateral based measurement

Discount to reflect current market

conditions and ultimate

collectability

100

(

9.1

Mortgage servicing rights

13,652

Discounted cash flows

Discount rate,

Constant prepayment rate,

Probability of default

9.7

10.0

(

9.8

%),

9.6

19.3

(

11.0

%),

0.0

1.7

(

0.7

December 31, 2018

Fair
Value

Valuation

Technique

Unobservable

Inputs

Range

(Weighted Average)

Impaired loans

5,661

Collateral based measurement

Discount to reflect current market

conditions and ultimate

collectability

100

(

15.5

Mortgage servicing rights

12,349

Discounted cash flows

Discount rate,

Constant prepayment rate,

Probability of default

10.2

11.0

(

10.3

%),

9.1

21.9

(

9.3

%),

0.1

2.8

(

0.6

Note 1112 – Fair Value of Financial Instruments

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

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain

off-balance

sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

— ~~At June 30, 2018, the~~The fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed at December 31, 2017, which were based on an entrance price basis. At December 31, 2017, the fair value of portfolio loans were 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.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~(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.~~

FHLB.

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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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).

   June 30, 2018
   Carrying
Amount    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Assets

Cash and due from banks
   $ 69,018    $ 69,018    $ —      $ —
Investment securities, held to maturity
   209,767    —      206,730    —
Loans held for sale
   3,000    —      —      3,000
Loans (excluding loan level hedges), net
   2,751,703    —      —      2,585,501
Stock in FHLB
   18,105    —      18,105    —
Interest receivable
   12,993    —      12,993    —
Liabilities

Non-interest bearing deposits
   $ 615,018    $ 615,018    $ —      $ —
Interest bearing deposits
   2,401,145    —      2,263,817    —
Borrowings
   524,846    —      520,701    —
Subordinated debentures
   37,745    —      35,682    —
Interest payable
   1,441    —      1,441    —


	June 30, 2019
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and due from banks	$	94,686	$	94,686	$	—	$	—
Interest-earning time deposits		8,090		—		8,107		—
Investment securities, held to maturity		213,768		—		219,891		—
Loans held for sale		3,185		—		—		3,185
Loans (excluding loan level hedges), net		3,388,183		—		—		3,247,837
Stock in FHLB		22,447		—		22,447		—
Interest receivable		19,015		—		19,015		—
Liabilities
Non-interest bearing deposits	$	810,350	$	810,350	$	—	$	—
Interest bearing deposits		3,120,425		—		3,068,227		—
Borrowings		436,233		—		433,258		—
Subordinated debentures		56,194		—		50,603		—
Interest payable		3,005		—		3,005		—

	December 31, 2018
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and due from banks	$	58,492	$	58,492	$	—	$	—
Interest-earning time deposits		15,744		—		15,542		—
Investment securities, held to maturity		210,112		—		208,273		—
Loans held for sale		1,038		—		—		1,038
Loans (excluding loan level hedges), net		2,786,351		—		—		2,681,741
Stock in FHLB		18,073		—		18,073		—
Interest receivable		14,239		—		14,239		—
Liabilities
Non-interest bearing deposits	$	642,129	$	642,129	$	—	$	—
Interest bearing deposits		2,497,247		—		2,377,274		—
Borrowings		550,384		—		542,311		—
Subordinated debentures		37,837		—		35,711		—
Interest payable		2,031		—		2,031		—

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

   December 31, 2017
   Carrying
Amount    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Assets

Cash and due from banks
   $ 76,441    $ 76,441    $ —      $ —
Investment securities, held to maturity
   200,448    —      201,085    —
Loans held for sale
   3,094    —      —      3,094
Loans (excluding loan level hedges), net
   2,661,026    —      —      2,585,879
Stock in FHLB
   18,105    —      18,105    —
Interest receivable
   16,244    —      16,244    —
Liabilities

Non-interest bearing deposits
   $ 601,805    $ 601,805    $ —      $ —
Interest bearing deposits
   2,279,198    —      2,156,487    —
Borrowings
   564,157    —      560,057    —
Subordinated debentures
   37,653    —      35,994    —
Interest payable
   886    —      886    —

Note 1213 – Accumulated Other Comprehensive Income

   June 30    December 31
   2018    2017
Unrealized loss on securities available for sale
   $ (12,891 )    $ (3,937 )
Unamortized gain on securities held to maturity, previously transferred from AFS
   102    200
Unrealized loss on derivative instruments
   (615 )    (1,728 )
Tax effect
   2,817    1,914




Total accumulated other comprehensive loss
   $ (10,587 )    $ (3,551 )


	June 30 2019			December 31 2018
Unrealized gain (loss) on securities available for sale	$	10,151		$	(8,561	)
Unamortized gain (loss) on securities held to maturity, previously transferred from AFS		(58	)		10
Unrealized loss on derivative instruments		(4,767	)		(1,760	)
Tax effect		(1,119	)		2,167

Total accumulated other comprehensive income (loss)	$	4,207		$	(8,144	)

Note 1314 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking ~~agencies~~agencies. These capital requirements implement changes arising from the Dodd-Frank Wall Street Reform and ~~are assigned to a~~Consumer Protection Act and the U.S. Basel Committee on Banking Supervision’s capital ~~category.~~framework (known as “Basel III”). 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~~Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Company and Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain

off-balance-sheet

items as calculated under regulatory accounting practices. The Company’s and 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~~

The Company and Bank are subject to ~~ensure~~minimum regulatory capital ~~adequacy require~~requirements as defined and calculated in accordance with 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 June 30, 2018, 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,~~

III-based

regulations. As allowed under Basel III rules, the Company made the decision ~~was made~~ to

opt-out

of including accumulated other comprehensive income in regulatory capital.

To The minimum regulatory capital requirements are set forth in the table below.

In addition, to be categorized as well capitalized, the Company and Bank must maintain ~~minimum~~ Total risk-based, Tier I risk-based, common equity Tier I risk-based and Tier I leverage ratios as set forth in the table below. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company and Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the ~~first~~second quarter of ~~2018~~2019 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Horizon and the Bank’s actual and required capital ratios as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:

Actual Required for Capital¹Adequacy
Purposes Required For Capital¹
Adequacy Purposes
with Capital Buffer Well Capitalized Under
Prompt¹
Corrective Action
Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
June 30, 2018

Total capital¹(to risk-weighted assets)

Consolidated
$ 403,480 13.07 % 246,952 8.00 % 285,539 9.25 % N/A N/A
Bank
392,814 12.77 % 246,109 8.00 % 284,563 9.25 % $ 307,636 10.00 %
Tier 1 capital¹ (to risk-weighted assets)

Consolidated
386,409 12.52 % 185,214 6.00 % 223,800 7.25 % N/A N/A
Bank
375,684 12.21 % 184,581 6.00 % 223,035 7.25 % 246,108 8.00 %
Common equity tier 1 capital¹ (to risk-weighted assets)

Consolidated
347,946 11.27 % 138,910 4.50 % 177,497 5.75 % N/A N/A
Bank
375,684 12.21 % 138,436 4.50 % 176,890 5.75 % 199,963 6.50 %
Tier 1 capital¹ (to average assets)

Consolidated
386,409 9.94 % 155,556 4.00 % 155,556 4.00 % N/A N/A
Bank
375,684 9.65 % 155,805 4.00 % 155,805 4.00 % 194,756 5.00 %
December 31, 2017

Total capital¹(to risk-weighted assets)

Consolidated
$ 384,800 12.91 % $ 238,543 8.00 % $ 275,816 9.25 % N/A N/A
Bank
382,788 12.85 % 238,386 8.00 % 275,634 9.25 % $ 297,982 10.00 %
Tier 1 capital¹ (to risk-weighted assets)

Consolidated
368,355 12.35 % 178,907 6.00 % 216,180 7.25 % N/A N/A
Bank
366,343 12.29 % 178,790 6.00 % 216,038 7.25 % 238,386 8.00 %
Common equity tier 1 capital¹ (to risk-weighted assets)

Consolidated
329,892 11.06 % 134,181 4.50 % 171,454 5.75 % N/A N/A
Bank
366,343 12.29 % 134,092 4.50 % 171,340 5.75 % 193,689 6.50 %
Tier 1 capital¹ (to average assets)

Consolidated
368,355 9.92 % 148,503 4.00 % 148,503 4.00 % N/A N/A
Bank
366,343 9.89 % 148,116 4.00 % 148,116 4.00 % 185,145 5.00 %


	Actual					Required for Capital 1 Adequacy Purposes					Required For Capital 1 Adequacy Purposes with Capital Buffer					Well Capitalized Under Prompt 1 Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2019
Total capital 1 (to risk-weighted assets)
Consolidated	$	519,613		13.23	%	$	314,113		8.00	%	$	412,273		10.50	%		N/A		N/A
Bank		480,366		12.23	%		314,242		8.00	%		412,443		10.50	%	$	392,802		10.00	%
Tier 1 capital 1 (to risk-weighted assets)
Consolidated		501,272		12.77	%		235,586		6.00	%		333,747		8.50	%		N/A		N/A
Bank		462,025		11.76	%		235,681		6.00	%		333,881		8.50	%		314,241		8.00	%
Common equity tier 1 capital 1 (to risk-weighted assets)
Consolidated		443,779		11.30	%		176,689		4.50	%		274,849		7.00	%		N/A		N/A
Bank		462,025		11.76	%		176,761		4.50	%		274,961		7.00	%		255,321		6.50	%
Tier 1 capital 1 (to average assets)
Consolidated		501,272		10.33	%		194,081		4.00	%		194,081		4.00	%		N/A		N/A
Bank		462,025		9.52	%		194,081		4.00	%		194,081		4.00	%		242,602		5.00	%
December 31, 2018
Total capital 1 (to risk-weighted assets)
Consolidated	$	427,616		13.39	%	$	255,419		8.00	%	$	315,283		9.875	%		N/A		N/A
Bank		396,755		12.43	%		255,419		8.00	%		315,283		9.875	%	$	319,274		10.00	%
Tier 1 capital 1 (to risk-weighted assets)
Consolidated		409,760		12.83	%		191,565		6.00	%		251,429		7.875	%		N/A		N/A
Bank		378,899		11.87	%		191,565		6.00	%		251,429		7.875	%		255,420		8.00	%
Common equity tier 1 capital 1 (to risk-weighted assets)
Consolidated		371,297		11.63	%		143,673		4.50	%		203,537		6.375	%		N/A		N/A
Bank		378,899		11.87	%		143,674		4.50	%		203,537		6.375	%		207,528		6.50	%
Tier 1 capital 1 (to average assets)
Consolidated		409,760		10.12	%		162,033		4.00	%		162,033		4.000	%		N/A		N/A
Bank		378,899		9.34	%		162,327		4.00	%		162,327		4.000	%		202,908		5.00	%

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Note 1415 – Future Accounting Matters

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)No. ~~2017-12,~~~~Derivatives and Hedging~~

2018-13,

Fair Value Measurement (Topic ~~815), Targeted Improvements~~820): Disclosure Framework – Changes to ~~Accounting~~the Disclosure Requirements for ~~Hedging Activities~~

Fair Value Measurement

The FASB has issued ASUNo. ~~2017-12,~~~~Derivatives~~

2018-13,

Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

. These amendments modify the disclosure requirements in Topic 820 as follows:

Removals

: the amount of and ~~Hedging (Topic 815), Targeted Improvements~~reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.

Modifications

: for investments in certain entities that calculate net asset value, an entity is required to ~~Accounting for Hedging Activities~~~~. The new guidance improves~~disclose the ~~financial reporting~~timing of ~~hedging relationships to better portray the economic results~~liquidation of an ~~entity’s risk management activities~~investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in ~~its financial statements. The amendments in this ASU also make certain targeted improvements to simplify the application~~measurement as of the ~~hedge accounting~~reporting date.

Additions

: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The guidance ~~in current GAAP. For public~~is effective for all entities ~~the new guidance will be effective~~ for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018,~~2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim ~~periods within those fiscal years. For all~~or annual period presented in the initial year of adoption. All other ~~entities, the~~ amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the ASU. All transition requirements and elections should be applied retrospectively to ~~hedging relationships existing (that~~all periods presented upon their effective date. Early adoption is ~~hedging relationships in which the hedging instrument has not expired, been sold, terminated,~~permitted. An entity is permitted to early adopt any removed or ~~exercised or the entity has not removed the designation~~modified disclosures upon issuance of ASU No.

2018-13

and delay adoption 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).~~additional disclosures until their effective date. We are currently evaluating the impact of ~~adopting~~adoption of ASU

2018-13

and the ~~new guidance~~impact on ~~the consolidated financial statements, but it is not expected to have a material impact.~~

our accounting and disclosures.

FASB ASUNo.

2017-04,

Intangibles – Goodwill and Other

(Topic 350):

Simplifying the Test for Goodwill Impairment

The FASB has issued ASUNo.

2017-04,

Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.

The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

FASB ASUNo.

2016-13,

Financial Instruments – Credit Losses ~~(Topic~~

(Topic 326):

Measurement of Credit Losses on Financial Instruments

The FASB has issued ASUNo.

2016-13,

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on

available-for-sale

debt securities and purchased financial assets with credit deterioration. The

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

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

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~~expect a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. This committee has developed a timeline associated with the Company’s adoption of this ASU. We expect to recognize a

one-time ~~cumulative effect~~

cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, ~~but cannot yet determine~~as is consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We are currently implementing third-party software that was purchased and are validating the data loaded into the solution. Our implementation team meets on a regular basis to oversee activities and monitor progress. The methodologies are in the process of being finalized so the magnitude of any such~~one-time~~ adjustment or the overall impact of the new ~~guidance~~standard on the ~~consolidated~~ financial ~~statements.~~

~~FASB Accounting Standards UpdatesNo. 2016-02,~~~~Leases~~~~(Topic 842)~~

~~The FASB has issued Accounting Standards Update (ASU)No. 2016-02,~~~~Leases.~~ ~~Under the new guidance, lessees will~~condition or results of operations cannot yet be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a~~right-of-use~~ asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding as of December 31, 2017, we do not expect the new standard to have a material impact on our balance sheet or income statement.

determined.

Note 1516 – 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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, ~~2018~~2019 and ~~2017~~

2018

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, Inc. (“Horizon” or the “Company”) and Horizon Bank (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, including interchange fees, as new and emerging alternative payment platforms (e.g. Apple Pay or Bitcoin) 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 current federal ~~administration;~~

administration, including the ~~potential for additional changes in tax laws, particularly corporate income tax reform, that may affect current returns, Horizon’s deferred tax assets~~2018 Economic Growth, Regulatory Relief, and ~~liabilities, the ability to utilize federal and state net operating loss carryforwards, and the market’s perception on overall value;~~

Consumer Protection Act;

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

the impact of the Basel III capital rules;

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

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

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

rapid technological developments and changes;

the risks presented by cyber terrorism and data security ~~breaches, and the increasing costs of cybersecurity for the Company;~~

breaches;

containing costs and expenses;

the slowing or failure of economic ~~slowdown and/or possible recession;~~

recovery;

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

the potential influence on the U.S. financial markets and

economy from material changes outside the U.S. or in overseas relations, including changes in the U.S. trade relations related to imposition of tariffs, Brexit and the phase out in 2021 of the London Interbank Offered Rate (“LIBOR”); and

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

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our ~~2017~~2018 Annual Report on Form

10-K

and in the subsequent reports we file with the SEC.

Overview

Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northern and Central regions of Indiana and the Southern, Central and Great Lakes Bay regions of Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was originally chartered as a national banking association in 1873 and has operated continuously since that time and converted to an Indiana state-chartered bank effective on June 23, 2017. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. Upon approval of a name change by Horizon’s shareholders at the annual meeting on May 3, 2018, Horizon’s full corporate name became “Horizon Bancorp, Inc.”

On March 26, 2019, Horizon completed the acquisition of Salin Bancshares, Inc. (“Salin”), an Indiana corporation and Horizon Bank’s acquisition of Salin Bank and Trust Company (“Salin Bank”), an Indiana commercial bank and wholly-owned subsidiary of Salin, through mergers effective March 26, 2019. Under the terms of the Merger Agreement, shareholders of Salin received 23,907.5 shares of Horizon common stock and $87,417.17 in cash for each outstanding share of Salin common stock. Salin shares outstanding at the closing to be exchanged were 275, and the shares of Horizon common stock issued to Salin shareholders totaled 6,563,697. Based upon the March 25, 2019 closing price of $15.65 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $126.7 million.

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 1.5228 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 3,241,045. Based upon the October 16, 2017 closing price of $19.37 per share of Horizon common stock immediately prior to the effectiveness of the merger, less the consideration used to pay off Wolverine Bancorp’s ESOP loan receivable, the transaction has an implied valuation of approximately $93.8 million.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

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 0.8817 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 1,636,888. Based upon the August 31, 2017 closing price of $17.45 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.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, located in Bargersville, Indiana. 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.

Following ~~are some highlights~~is a summary of Horizon’s financial performance through the first six months of ~~2018:~~

2019:

Net income for the quarter ended June 30, ~~2018~~2019 was ~~$14.1~~$16.6 million, or $0.37 diluted earnings per share, compared to ~~$9.1~~$14.1 million, or ~~$0.27~~$0.37 diluted earnings per share, for the quarter ended June 30, ~~2017 resulting in a 37.0% increase in diluted earnings per share.~~2018. This represents the highest quarterly net income in the Company’s history

Core net income for the quarter ended June 30, 2019 increased 26.0% to $17.6 million, or $0.39 diluted earnings per share, compared to $14.0 million, or $0.37 diluted earnings per share, for the same period in 2018. This represents the highest

quarter-to-date

core net income and core diluted earnings per share in the Company’s~~145-year~~ history.

(Please refer to the section captioned “Use of

Non-GAAP

•

Net income for the first six months of 2018 was $26.9 million, or $0.70 diluted earnings per share, compared to $17.3 million, or $0.51 diluted earnings per share, for the first six months of 2017 resulting in a 37.3% increase in diluted earnings per share. This represents the highest~~year-to-date~~ ~~net income and diluted earnings per share as of June 30~~^th ~~in the Company’s145-year~~ ~~history.~~

Financial Measures” within this Item 2 for a description of the elements of core net income and a table reconciling core net income to its most closely related GAAP measures.)

Net income for the first six months of 2019 was $27.5 million, or $0.65 diluted earnings per share, compared to $26.9 million, or $0.70 diluted earnings per share for the first six months of 2018. This represents the highest

year-to-date

net income as of June 30

in the Company’s history.

Core net income for the first six months of 2019 was $31.8 million, or $0.75 diluted earnings per share, compared to $26.9 million, or $0.70 diluted earnings per share, for the first six months of 2018. This represents the highest

year-to-date

core net income and core diluted earnings per share as of June 30

in the Company’s history. (Please refer to the section captioned “Use of

Non-GAAP

Financial Measures” within this Item 2 for a description of the elements of core net income and a table reconciling core net income to its most closely related GAAP measures.)

Net interest margin for the quarter ended June 30, 2019 was 3.73% compared to 3.62% and 3.78% for the quarters ended March 31, 2019 and June 30, 2018, respectively. The increase in net interest margin from the first quarter of 2019 reflects an increase in the yield of interest-earning assets as loans continue to reprice upwards and a decrease in interest-bearing liabilities from reducing short-term borrowings with the liquidity obtained from the Salin acquisition, along with a stabilization in deposit pricing.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

Core net interest margin for the quarter ended June 30, 2019 was 3.61% compared to 3.46% and 3.60% for the quarters ended March 31, 2019 and June 30, 2018, respectively. (Please refer to the section captioned “Use of

Non-GAAP

Financial Measures” within this Item 2 for a description of the elements of core net interest margin and a table reconciling core net interest margin to its most closely related GAAP measures.)

Return on average assets was 1.32% for the second quarter of 2019 compared to 1.41% for the second quarter of ~~2018 compared to 1.12%~~2018.

Core return on average assets for the second quarter of ~~2017. Return on average assets for the first six months of 2018~~2019 was ~~1.36%~~1.40% compared to ~~1.10% for the first six months of 2017.~~

~~Return on average equity was 12.15%~~1.39% for the second quarter of ~~2018 compared~~2018. (Please refer to ~~10.24%~~the section captioned “Use of

Non-GAAP

Financial Measures” within this Item 2 for a description of the ~~second quarter~~elements of ~~2017. Return~~core return on average ~~equity was 11.72% for the first six months of 2018 compared~~assets and a table reconciling core return on average assets to ~~9.96% for the first six months of 2017.~~

its most closely related GAAP measures.)

~~Total loans increased by an annualized rate of 6.6%, or $92.4 million, during the first six months of 2018.~~

~~Consumer loans increased by an annualized rate of 20.5%, or $46.9 million, during the first six months of 2018.~~

~~Residential mortgage loans increased by an annualized rate of 9.3%, or $27.9 million, during the first six months of 2018.~~

~~Total deposits increased by an annualized rate of 9.5%, or $135.2 million, during the first six months of 2018.~~

Net interest income increased $6.4 million, or 23.4%, to $33.6 million for the three months ended June 30, 2018 compared to $27.2 million for the three months ended June 30, 2017. Net interest income increased $14.2 million, or 26.9%, to $67.0 million for the six months ended June 30, 2018 compared to $52.8 million for the six months ended June 30, 2017.

Net interest margin was 3.78% for the three months ended June 30, 2018 compared to 3.84% for the three months ended June 30, 2017. Net interest margin for the six months ended June 30, 2018 and 2017 was 3.81%.

Horizon’s tangible book value per share increased to ~~$8.84~~$9.91 at June 30, ~~2018~~2019 compared to ~~$8.48~~$9.60 and ~~$8.13~~$8.84 at ~~December~~March 31, ~~2017~~2019 and June 30, ~~2017,~~2018, respectively. This represents the highest tangible book value per share in the Company’s~~145-year~~ history.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form

10-K

for ~~2017~~2018 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, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for Loan Losses

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

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC

350-10

establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At June 30, ~~2018,~~2019, Horizon had core deposit intangibles of ~~$11.4~~$28.7 million subject to amortization and ~~$119.9~~$151.1 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC

350-10

requires an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on June ~~30, 2018~~28, 2019 was ~~$20.69~~$16.34 per share compared to a book value of ~~$12.27~~$13.90 per common share.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

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

Mortgage Servicing Rights

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

non-interest

income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

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

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, from

time-to-time,

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

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC

815-10.

Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

non-interest

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

Valuation Measurements

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

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

~~Management’s Discussion and Analysis of~~

Financial Condition

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

~~Financial Condition~~

On June 30, ~~2018,~~2019, Horizon’s total assets were ~~$4.077~~$5.099 billion, an increase of approximately ~~$112.3~~$852.0 million compared to December 31, ~~2017.~~2018. The increase was primarily in net loans of ~~$91.8~~$650.9 million, ~~other assets of $6.2 million and~~ investment securities available for sale ~~and held to maturity~~ of ~~$16.5~~$76.7 million, ~~and $9.3 million, respectively, which were offset by decreases in~~ cash and due from banks of ~~$7.4~~$36.2 million, goodwill of $31.2 million, other intangible assets of $18.3 million and ~~interest receivable~~premises and equipment of ~~$3.3 million.~~

$17.1 million due to the acquisition of Salin Bancshares, Inc.

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

   June 30, 2018    December 31, 2017
   Amortized
Cost    Fair
Value    Amortized
Cost    Fair
Value
Available for sale

U.S. Treasury and federal agencies
   $ 24,654    $ 24,219    $ 19,277    $ 19,052
State and municipal
   136,732    134,981    148,045    149,564
Federal agency collateralized mortgage obligations
   168,382    164,134    132,871    130,365
Federal agency mortgage-backed pools
   203,593    196,995    211,487    208,657
Private labeled mortgage-backed pools
   —      —      1,650    1,642
Corporate notes
   5,725    5,866    272    385








Total available for sale investment securities
   $ 539,086    $ 526,195    $ 513,602    $ 509,665








Held to maturity

State and municipal
   $ 190,079    $ 187,380    $ 179,836    $ 180,397
Federal agency collateralized mortgage obligations
   5,409    5,260    5,734    5,682
Federal agency mortgage-backed pools
   14,279    14,090    14,878    15,006








Total held to maturity investment securities
   $ 209,767    $ 206,730    $ 200,448    $ 201,085

~~Total loans~~


	June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
U.S. Treasury and federal agencies	$	9,915	$	9,901	$	16,815	$	16,608
State and municipal		253,201		260,165		210,386		209,303
Federal agency collateralized mortgage obligations		229,166		231,522		187,563		185,003
Federal agency mortgage-backed pools		153,378		153,523		183,479		178,736
Private labeled mortgage-backed pools		—		—		—		—
Corporate notes		17,608		18,308		10,666		10,698

Total available for sale investment securities	$	663,268	$	673,419	$	608,909	$	600,348

Held to maturity
State and municipal	$	195,719	$	201,695	$	191,269	$	189,676
Federal agency collateralized mortgage obligations		4,884		4,877		5,144		5,030
Federal agency mortgage-backed pools		13,165		13,319		13,699		13,567

Total held to maturity investment securities	$	213,768	$	219,891	$	210,112	$	208,273

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

Investment securities available for sale increased ~~$92.4~~$73.1 million since December 31, ~~2017~~2018 to ~~$2.928~~$673.4 million as of June 30, 2019. This increase was primarily due to securities acquired through the acquisition of Salin which totaled approximately $54.3 million.

Total loans increased $653.5 million since December 31, 2018 to $3.668 billion as of June 30, ~~2018.~~2019. This increase was primarily due to $568.9 million in loans through the ~~result~~acquisition of ~~an increase~~Salin. Total loans, excluding acquired loans, increased $84.6 million due to increases in consumer loans of ~~$46.9~~$20.0 million, residential mortgage loans of ~~$27.9~~$14.9 million, mortgage warehouse loans of ~~$14.5~~$59.3 million and ~~commercial~~ loans held for sale of ~~$3.3~~$2.1 million, offset by a decrease in commercial loans ~~held for sale~~ of ~~$94,000.~~$11.8 million. During the first six months of 2019, the Bank originated approximately $206.0 million of commercial loans; however, only 54.4%, or $112.1 million, of these loan originations had been funded as of June 30, 2019. These originations were offset by commercial loan payoffs totaling approximately $157.8 million during the first six months of 2019, as there was an increase in clients moving projects that had reached stabilization into the long-term, fixed rate conduit financing market. The ~~growth~~ markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo contributed total loan growth of ~~$34.3~~$99.7 million during the first six months of ~~2018. Our experienced consumer loan team~~2019. Management believes that this growth is due to our seasoned lending teams, who live and ~~increased focus on the consumer portfolio have been the main drivers for the increase in consumer loans.~~

work within these expanding and robust communities.

Total deposits increased ~~$135.2~~$791.4 million since December 31, ~~2017~~2018 to ~~$3.016~~$3.931 billion as of June 30, ~~2018.Non-interest~~ ~~bearing transaction accounts and time~~2019. This increase was primarily due to $741.4 million in deposits ~~increased $13.2 million and $189.4 million, respectively, during~~through the ~~six months ended June 30, 2018 which was offset by a decrease in interest-bearing deposits~~acquisition of ~~$67.5 million.~~

Salin.

The Company decreased total borrowings from ~~$564.2~~$550.4 million as of December 31, ~~2017~~2018 to ~~$524.8~~$436.2 million as of June 30, ~~2018.~~2019. At June 30, ~~2018,~~2019, the Company had ~~$366.4~~$307.3 million in short-term funds borrowed compared to ~~$392.3~~$402.8 million at December 31, ~~2017.~~2018. The decrease in borrowings was primarily due to liquidity received in the ~~increase in deposits~~acquisition of ~~$135.2 million~~Salin from ~~December 31, 2017.~~

the sale of the investment portfolio.

Stockholders’ equity totaled ~~$470.5~~$626.5 million at June 30, ~~2018~~2019 compared to ~~$457.1~~$492.0 million at December 31, ~~2017.~~2018. The increase in stockholders’ equity during the period was due to the acquisition of Salin, generation of net income, net of dividends declared, and ~~a decrease~~an increase in accumulated other comprehensive income. AtFor the six months ended June 30, ~~2018,~~2019, the ratio of average stockholders’ equity to average assets was ~~11.60%~~12.05% compared to ~~11.70% at~~11.65% for the year ended December 31, ~~2017.~~2018. Book value per common share at June 30, ~~2018~~2019 increased to ~~$12.27~~$13.90 compared to ~~$11.93~~$12.82 at December 31, ~~2017.~~

2018.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And~~

Results of Operations

~~For the Three and Six Months ended June 30, 2018 and 2017~~

~~Results of Operations~~

Overview

Consolidated net income for the three-month period ended June 30, ~~2018~~2019 was ~~$14.1~~$16.6 million compared to ~~$9.1~~$14.1 million for the same period in ~~2017.~~2018. Earnings per common share for the three months ended June 30, 2019 and 2018 were $0.37 basic and ~~diluted, compared to $0.27 basic and diluted for the same three-month period in the previous year.~~diluted. The increase in net income ~~and earnings per share~~ from the previous year reflects ~~increases~~an increase in net interest income of ~~$6.4~~$8.0 million and

non-interest

income of ~~$720,000, partially~~$2.0 million, offset by increases in

non-interest

expense of $6.6 million, income tax expense of $515,000 and provision for loan losses of ~~$305,000 andnon-interest~~ ~~expense of $2.5 million.Non-interest~~ ~~expense increased primarily due to an increase in salaries, employee benefits, net occupancy~~$261,000. Excluding merger expenses, ~~data processing, loan expense, other losses and other expense. Excluding loss~~gain (loss) on sale of investment securities and death benefit on bank owned life insurance ~~and purchase accounting adjustments,~~(“core net income”), core net income for the second quarter of ~~2018~~2019 was ~~$12.7~~$17.6 million, or ~~$0.33~~$0.39 diluted earnings per share, compared to ~~$8.6~~$14.0 million, or ~~$0.26~~$0.37 diluted earnings per share, infor the same period of ~~2017.~~

2018.

Consolidated net income for the

six-month

period ended June 30, ~~2018~~2019 was ~~$26.9~~$27.5 million compared to ~~$17.3~~$26.9 million for the same period ~~of 2017.~~in 2018. Earnings per common share for the six months ended June 30, ~~2018~~2019 were ~~$0.70~~$0.65 basic and diluted, compared to ~~$0.52~~$0.70 basic and ~~$0.51~~ diluted for the same

six-month

period in the ~~previous~~prior year. The increase in net income ~~and earnings per share from~~when comparing the ~~previous~~first six months of 2019 to the prior year period reflects increases in net interest income of ~~$14.2~~$8.8 million and

non-interest

income of ~~$1.5~~$2.4 million, ~~partially~~ offset by ~~increases~~an increase in ~~provision for loan losses of $542,000 and~~

non-interest

expense of ~~$6.8~~$10.5 million.~~Non-interest~~ ~~expense increased~~ The decrease in basic and diluted earnings per common share is primarily due to ~~an increase in salaries, employee benefits, net occupancy expenses, data processing, loan expense, other losses and other expense. Excluding acquisition-related expenses, gains on sale~~the stock issued as part of ~~investment securities, death benefit on bank owned life insurance and purchase accounting adjustments,~~the Salin acquisition during the first quarter of 2019. Core net income for the ~~six months~~

six-month

period ended June 30, ~~2018~~2019 was ~~$23.9~~$31.8 million, or ~~$0.62~~$0.75 diluted earnings per share, compared to ~~$16.1~~$26.8 million, or ~~$0.47~~$0.70 diluted earnings per share, infor the same period of ~~2017.~~

2018.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

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 June 30, ~~2018~~2019 was ~~$33.6~~$41.5 million, an increase of ~~$6.4~~$8.0 million from the ~~$27.2~~$33.5 million earned during the same period in ~~2017.~~2018. Yields on the Company’s interest-earning assets increased by 24 basis points to ~~4.57% for the three months ending June 30, 2018 from 4.33%~~4.81% for the three months ended June 30, ~~2017.~~2019 from 4.57% for the three months ended June 30, 2018. Interest income increased ~~$9.9~~$13.1 million from ~~$30.8~~$40.7 million for the three months ended June 30, ~~2017~~2018 to ~~$40.7~~$53.8 million for the same period in ~~2018.~~2019. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was ~~$1.6~~$1.3 million for the three months ending June 30, ~~2018~~2019 compared to ~~$939,000~~$1.6 million for the same period of ~~2017.~~

2018.

Rates paid on interest-bearing liabilities increased by 40 basis points for the three-month period ended June 30, 2019 compared to the same period in 2018 due to increases in the cost of interest-bearing deposits and borrowings. Interest expense increased $5.1 million compared to the three-month period ended June 30, 2018 to $12.3 million for the same period in 2019. This increase was due to higher average balances of interest-bearing deposits and higher rates paid on these deposits. Average balances of interest-bearing deposits increased $715.0 million and were due to the acquisition of Salin during the first quarter of 2019. Average balances of borrowings decreased $91.3 million for the three-month period ended June 30, 2019 when compared to the same period in 2018 primarily from reducing short-term borrowings during the second quarter of 2019 with the liquidity obtained through the Salin acquisition. The cost of borrowings increased 32 basis points for the three-month period ended June 30, 2019 when compared to the same period in 2018.

The net interest margin decreased five basis points from 3.78% for the three-month period ended June 30, 2018 to 3.73% for the same period in 2019. The decrease in the margin for the three-month period ended June 30, 2019 compared to the same period in 2018 was due to an increase in the cost of interest-bearing liabilities, offset by an increase in the yield of interest-earning assets. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments (“core net interest margin”), the margin would have been 3.61% for the three-month period ending June 30, 2019 compared to 3.60% for the same period in 2018. The increase in the core net interest margin for the second quarter of 2019 was due to the

pay-down

of short-term borrowings with the liquidity obtained through the acquisition of Salin and an increase in the yield on earning assets from higher mortgage warehouse lending balances, loans continuing to reprice higher and the addition of acquired Salin loans.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, ~~2018~~2019 and ~~2017~~

2018

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

   Three Months Ended Three Months Ended
   June 30, 2018 June 30, 2017
   Average
Balance Interest    Average
Rate Average
Balance Interest    Average
Rate
Assets

Interest-earning assets

Federal funds sold
   $ 3,367 $ 15    1.79 % $ 1,728 $ 6    1.39 %
Interest-earning deposits
   25,946 107    1.65 % 27,677 83    1.20 %
Investment securities - taxable
   416,182 2,441    2.35 % 423,815 2,155    2.04 %
Investment securities -non-taxable⁽¹⁾
   307,219 1,870    3.15 % 290,494 1,766    3.40 %
Loans receivable⁽²⁾⁽³⁾
   2,886,087 36,308    5.08 % 2,199,913 26,795    4.94 %





Total interest-earning assets⁽¹⁾
   3,638,801 40,741    4.57 % 2,943,627 30,805    4.33 %
Non-interest-earning assets

Cash and due from banks
   44,213    42,331
Allowance for loan losses
   (16,617 )    (15,131 )
Other assets
   351,154    279,024





Total average assets
   $ 4,017,551    $ 3,249,851





Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits
   $ 2,403,780 $ 3,920    0.65 % $ 1,980,025 $ 1,721    0.35 %
Borrowings
   489,608 2,679    2.19 % 359,462 1,338    1.49 %
Subordinated debentures
   36,525 592    6.50 % 36,340 548    6.05 %





Total interest-bearing liabilities
   2,929,913 7,191    0.98 % 2,375,827 3,607    0.61 %
Non-interest-bearing liabilities

Demand deposits
   605,188    499,446
Accrued interest payable and other liabilities
   16,482    19,143
Stockholders’ equity
   465,968    355,435





Total average liabilities and stockholders’ equity
   $ 4,017,551    $ 3,249,851





Net interest income/spread
   $ 33,550    3.59 % $ 27,198    3.73 %





Net interest income as a percent of average interest-earning assets⁽¹⁾
      3.78 %    3.84 %


	Three Months Ended								Three Months Ended
	June 30, 2019								June 30, 2018
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Assets
Interest-earning assets
Federal funds sold	$	18,251		$	120		2.64	%	$	3,367		$	15		1.79	%
Interest-earning deposits		18,516			83		1.80	%		25,946			107		1.65	%
Investment securities - taxable		480,036			3,070		2.57	%		416,182			2,441		2.35	%
Investment securities - non-taxable (1)		411,944			2,793		3.44	%		307,219			1,870		3.15	%
Loans receivable (2)(3)		3,637,927			47,784		5.29	%		2,886,087			36,308		5.08	%

Total interest-earning assets (1)		4,566,674			53,850		4.81	%		3,638,801			40,741		4.57	%
Non-interest-earning assets
Cash and due from banks		67,537								44,213
Allowance for loan losses		(18,036	)							(16,617	)
Other assets		431,190								351,154

Total average assets	$	5,047,365							$	4,017,551

Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	3,118,821		$	8,938		1.15	%	$	2,403,780		$	3,920		0.65	%
Borrowings		398,320			2,495		2.51	%		489,608			2,679		2.19	%
Subordinated debentures		53,572			888		6.65	%		36,525			592		6.50	%

Total interest-bearing liabilities		3,570,713			12,321		1.38	%		2,929,913			7,191		0.98	%
Non-interest-bearing liabilities
Demand deposits		818,872								605,188
Accrued interest payable and other liabilities		35,752								16,482
Stockholders’ equity		622,028								465,968

Total average liabilities and stockholders’ equity	$	5,047,365							$	4,017,551

Net interest income/spread				$	41,529		3.43	%				$	33,550		3.59	%

Net interest income as a percent of average interest-earning assets (1)							3.73	%							3.78	%

⁽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. The average rate is presented on a tax equivalent basis.

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

⁽³⁾	Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

Net interest income during the six months ended June 30, 2019 was $75.8 million, an increase of $8.8 million from the $67.0 million earned during the same period in 2018. Yields on the Company’s interest-earning assets increased by 24 basis points to 4.79% for the six months ending June 30, 2019 from 4.55% for the six months ended June 30, 2018. Interest income increased $19.1 million from $80.2 million for the six months ended June 30, 2018 to $99.2 million for the same period in 2019. This was due to an increase in average interest-earning assets through organic and acquisition-related growth, in addition to an increase in yield. Interest income from acquisition-related purchase accounting adjustments was $2.8 million for the six months ending June 30, 2019 compared to $3.7 million for the same period of 2018.

Rates paid on interest-bearing liabilities increased by 3749 basis points for the ~~three-month~~

six-month

period ended June 30, ~~2018~~2019 compared to the same period in ~~2017~~2018 due to increases in the cost of interest-bearing deposits and borrowings. Interest expense increased ~~$3.6~~$10.2 million compared to the ~~three-month~~

six-month

period ended June 30, ~~2017~~2018 to ~~$7.2~~$23.4 million for the same period in ~~2018.~~2019. This increase was due to higher average balances of interest-bearing deposits ~~and borrowings~~ in addition to the higher rates paid on ~~both.~~these deposits. Average balances of interest-bearing deposits increased ~~$423.8~~$463.9 million and ~~were~~was due to the ~~acquisitions~~acquisition of ~~Lafayette and Wolverine during the third and fourth quarters of 2017, as well as organic growth~~Salin during the first ~~six months~~quarter of 2019. Average balances of borrowings decreased $21.5 million for the

six-month

period ended June 30, 2019 when compared to the same period in 2018 primarily from reducing short-term borrowings during the second quarter of 2019 with the liquidity obtained through the Salin acquisition. The cost of borrowings increased 45 basis points for the

six-month

period ended June 30, 2019 when compared to the same period in 2018.

The net interest margin decreased 613 basis points from ~~3.84%~~3.81% for the ~~three-month~~

six-month

period ended June 30, ~~2017~~2018 to ~~3.78%~~3.68% for the same period in ~~2018.~~2019. The decrease in the margin for the ~~three-month~~

six-month

period ended June 30, ~~2018~~2019 compared to the same period in ~~2017~~2018 was due to an increase in the cost of interest-bearing liabilities, ~~and the impact of the lower income tax rate onnon-taxable~~ ~~interest-earning assets,~~ offset by an increase in the yield of ~~taxable~~ interest-earning assets.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

Excluding the interest income recognized from the acquisition-related purchase accounting adjustments (“core net interest margin”), the margin would have been ~~3.60%~~3.55% for the ~~three-month~~

six-month

period ending June 30, ~~2018~~2019 compared to ~~3.71% for the same period in 2017.~~

Net interest income during the six months ended June 30, 2018 was $67.0 million, an increase of $14.2 million from the $52.8 million earned during the same period in 2017. Yields on the Company’s interest-earning assets increased by 26 basis points to 4.55% for the six months ending June 30, 2018 from 4.29% for the six months ended June 30, 2017. Interest income increased $20.5 million from $59.6 million for the six months ended June 30, 2017 to $80.2 million3.61% for the same period in 2018. ~~This was due to an increase in average interest-earning assets through organic~~

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and ~~acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $3.7 million for~~Analysis of Financial Condition

And Results of Operations

For the ~~six months ending~~Three and Six Months ended June 30, 2019 and 2018 ~~compared to $2.0 million for the same period of 2017.~~

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

   Six Months Ended Six Months Ended
   June 30, 2018 June 30, 2017
   Average
Balance Interest    Average
Rate Average
Balance Interest    Average
Rate
Assets

Interest-earning assets

Federal funds sold
   $ 3,560 $ 29    1.64 % $ 2,377 $ 11    0.93 %
Interest-earning deposits
   24,749 197    1.61 % 26,220 152    1.17 %
Investment securities - taxable
   409,669 4,767    2.35 % 411,417 4,487    2.20 %
Investment securities -non-taxable⁽¹⁾
   307,462 3,735    3.13 % 280,563 3,403    3.40 %
Loans receivable⁽²⁾⁽³⁾
   2,855,236 71,439    5.05 % 2,150,307 51,586    4.85 %





Total interest-earning assets⁽¹⁾
   3,600,676 80,167    4.55 % 2,870,884 59,639    4.29 %
Non-interest-earning assets

Cash and due from banks
   43,984    41,788
Allowance for loan losses
   (16,480 )    (15,035 )
Other assets
   352,684    279,497





Total average assets
   $ 3,980,864    $ 3,177,134





Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits
   $ 2,354,578 $ 6,791    0.58 % $ 1,970,235 $ 3,474    0.36 %
Borrowings
   508,731 5,251    2.08 % 305,116 2,275    1.50 %
Subordinated debentures
   37,695 1,164    6.23 % 36,315 1,124    6.24 %





Total interest-bearing liabilities
   2,901,004 13,206    0.92 % 2,311,666 6,873    0.60 %
Non-interest-bearing liabilities

Demand deposits
   600,214    495,262
Accrued interest payable and other liabilities
   16,490    19,901
Stockholders’ equity
   463,156    350,305





Total average liabilities and stockholders’ equity
   $ 3,980,864    $ 3,177,134





Net interest income/spread
   $ 66,961    3.64 % $ 52,766    3.69 %





Net interest income as a percent of average
interest-earning assets⁽¹⁾
      3.81 %    3.81 %


	Six Months Ended								Six Months Ended
	June 30, 2019								June 30, 2018
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Assets
Interest-earning assets
Federal funds sold	$	13,072		$	224		3.46	%	$	3,560		$	29		1.64	%
Interest-earning deposits		22,414			191		1.72	%		24,749			197		1.61	%
Investment securities - taxable		464,544			5,980		2.60	%		409,669			4,767		2.35	%
Investment securities - non-taxable (1)		402,883			5,421		3.43	%		307,462			3,735		3.13	%
Loans receivable (2)(3)		3,346,731			87,407		5.28	%		2,855,236			71,439		5.05	%

Total interest-earning assets (1)		4,249,644			99,223		4.79	%		3,600,676			80,167		4.55	%
Non-interest-earning assets
Cash and due from banks		56,160								43,984
Allowance for loan losses		(17,939	)							(16,480	)
Other assets		391,558								352,684

Total average assets	$	4,679,423							$	3,980,864

Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	2,818,496		$	15,814		1.13	%	$	2,354,578		$	6,791		0.58	%
Borrowings		487,266			6,116		2.53	%		508,731			5,251		2.08	%
Subordinated debentures		45,735			1,484		6.54	%		37,695			1,164		6.23	%

Total interest-bearing liabilities		3,351,497			23,414		1.41	%		2,901,004			13,206		0.92	%
Non-interest-bearing liabilities
Demand deposits		731,556								600,214
Accrued interest payable and other liabilities		32,508								16,490
Stockholders’ equity		563,862								463,156

Total average liabilities and stockholders’ equity	$	4,679,423							$	3,980,864

Net interest income/spread				$	75,809		3.38	%				$	66,961		3.64	%

Net interest income as a percent of average interest-earning assets (1)							3.68	%							3.81	%

⁽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. The average rate is presented on a tax equivalent basis.

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

⁽³⁾	Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

~~Rates paid on interest-bearing liabilities increased by 32 basis points for thesix-month~~ ~~period ended June 30, 2018 compared to the same period in 2017 due to increases in the cost of interest-bearing deposits and borrowings. Interest expense increased $6.3 million compared to thesix-month~~ period ended June 30, 2017 to $13.2 million for the same period in 2018. This increase was due to higher average balances of interest-bearing deposits and borrowings in addition to the higher rates paid on both. Average balances of interest-bearing deposits increased $384.3 million and were due to the acquisitions of Lafayette and Wolverine during the third and fourth quarters of 2017, as well as organic growth during the first six months of 2018.

~~The net interest margin remained at 3.81% for thesix-month~~ ~~periods ended June 30, 2018 and 2017, respectively. The increase in the cost of interest-bearing liabilities and the impact of the lower income tax rate onnon-taxable~~ ~~interest-earning assets was offset by an increase in the yield of taxable interest-earning assets when comparing thesix-month~~ ~~periods ended June 30, 2017 and 2018. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.61% for thesix-month~~ ~~period ending June 30, 2018 compared to 3.67% for the same period in 2017.~~

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 June 30, ~~2018,~~2019, a provision of ~~$635,000~~$896,000 was required to adequately fund the ALLL compared to ~~$330,000~~$635,000 for the same period of ~~2017.~~2018. Commercial loan net charge-offs during the three-month period ended June 30, ~~2018~~2019 were ~~negative $40,000,~~$265,000, residential mortgage loan net charge-offs were ~~negative $2,000~~$41,000 and consumer loan net charge-offs were ~~$80,000.~~$106,000. The increase in the provision for loan losses in

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

the second quarter of ~~2018~~2019 compared to the same period of ~~2017~~2018 was primarily due to ~~additional general andnon-specific~~ ~~allocations for loan growth in new markets, higher than anticipated growth of the indirect loan portfolio and an increase in allocation for other economic factors, including the potential of~~ a ~~recession.~~specific reserve placed on a single credit. The ALLL balance at June 30, ~~2018~~2019 was ~~$17.1~~$18.3 million, or ~~0.58%~~0.50% of total loans. This compares to an ALLL balance of ~~$16.4~~$17.8 million at December 31, ~~2017~~2018 or ~~0.58%~~0.59% of total loans.

For the

six-month

period ended June 30, ~~2018,~~2019, the provision for loan losses totaled ~~$1.2~~$1.3 million compared to ~~$660,000~~$1.2 million in the same period of ~~2017.~~2018. The increase in the provision for loan losses was primarily due to ~~additional general andnon-specific~~ ~~allocations for~~organic loan growth ~~in new markets, higher than anticipated growth of the indirect loan portfolio and an increase in allocation for other economic factors, including the potential of a recession.~~

experienced from June 30, 2018 to June 30, 2019.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at ~~0.75%~~0.68% as of June 30, 2019 compared to 0.72% as of December 31, 2018. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was ~~1.08%~~1.14% as of June 30, 2019 compared to 0.98% as of December 31, 2018. The table below illustrates Horizon’s loan loss reserve ratio composition as of June 30, ~~2018.~~

2019.

Non-GAAP

Allowance for Loan and Lease Loss Detail

As of June 30, ~~2018~~

2019

(Dollars in Thousands, Unaudited)

   Pre-discount
Loan
Balance    Allowance
for Loan
Losses
(ALLL)    Loan
Discount    ALLL
+
Loan
Discount    Loans, net    ALLL/
Pre-discount
Loan Balance Loan
Discount/
Pre-discount
Loan Balance ALLL+Loan
Discount/
Pre-discount
Loan Balance
Horizon Legacy
   $ 2,280,089    $ 17,071    N/A    $ 17,071    $ 2,263,018    0.75 % 0.00 % 0.75 %
Heartland
   10,290    —      725    725    9,565    0.00 % 7.05 % 7.05 %
Summit
   31,357    —      1,858    1,858    29,499    0.00 % 5.93 % 5.93 %
Peoples
   99,586    —      2,259    2,259    97,327    0.00 % 2.27 % 2.27 %
Kosciusko
   46,070    —      700    700    45,370    0.00 % 1.52 % 1.52 %
LaPorte
   108,429    —      3,283    3,283    105,146    0.00 % 3.03 % 3.03 %
CNB
   5,293    —      144    144    5,149    0.00 % 2.72 % 2.72 %
Lafayette
   112,352    —      2,036    2,036    110,316    0.00 % 1.81 % 1.81 %
Wolverine
   234,050    —      3,447    3,447    230,603    0.00 % 1.47 % 1.47 %











Total
   $ 2,927,516    $ 17,071    $ 14,452    $ 31,523    $ 2,895,993    0.58 % 0.49 % 1.08 %


	Pre-discount Loan Balance		Allowance for Loan Losses (ALLL)		Loan Discount		ALLL + Loan Discount		Loans, net		ALLL/ Pre-discount Loan Balance			Loan Discount/ Pre-discount Loan Balance			ALLL+Loan Discount/ Pre-discount Loan Balance
Horizon Legacy	$	2,677,923	$	18,091		N/A	$	18,091	$	2,659,832		0.68	%		0.00	%		0.68	%
Heartland		6,044		—		621		621		5,423		0.00	%		10.27	%		10.27	%
Summit		17,194		—		1,003		1,003		16,191		0.00	%		5.83	%		5.83	%
Peoples		75,918		—		1,732		1,732		74,186		0.00	%		2.28	%		2.28	%
Kosciusko		34,056		195		567		762		33,294		0.57	%		1.66	%		2.24	%
LaPorte		73,228		—		2,651		2,651		70,577		0.00	%		3.62	%		3.62	%
CNB		3,701		—		94		94		3,607		0.00	%		2.54	%		2.54	%
Lafayette		71,707		19		652		671		71,036		0.03	%		0.91	%		0.94	%
Wolverine		161,066		—		2,120		2,120		158,946		0.00	%		1.32	%		1.32	%
Salin		547,016		—		14,230		14,230		532,786		0.00	%		2.60	%		2.60	%

Total	$	3,667,853	$	18,305	$	23,670	$	41,975	$	3,625,878		0.50	%		0.65	%		1.14	%

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

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 June 30, ~~2018.~~

2019.

Non-performing

loans totaled ~~$15.4~~$18.9 million as of June 30, ~~2018, down~~2019, up from ~~$16.4~~$15.2 million as of December 31, ~~2017.~~2018.

Non-performing ~~real estate and consumer~~

commercial loans ~~decreased~~increased by $1.8 million,

non-performing

real estate loans increased by $1.4 million and ~~$837,000, respectively,~~

non-performing

consumer loans increased by $523,000 at June 30, ~~2018~~2019 compared to December 31, ~~2017.Non-performing~~ ~~commercial~~ 2018. The increase in

non-performing

loans ~~increased $1.6 million at June 30, 2018 compared~~was primarily due to ~~December 31, 2017.~~

non-performing

loans acquired from Salin.

Other Real Estate Owned (OREO) and repossessed assets totaled ~~$3.0~~$3.9 million at June 30, ~~2018~~2019 compared to ~~$838,000~~$2.1 million on December 31, ~~2017 and $2.2 million on June 30, 2017.~~2018. The majority of this increase was due to ~~several bank owned properties acquired through acquisitions and listed for sale beingre-classified~~ to other real estate owned properties acquired in the Salin transaction, including the closed branches, totaling $1.7 million.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and ~~recorded at fair value during~~Analysis of Financial Condition

And Results of Operations

For the ~~second quarter of 2018.~~

Three and Six Months ended June 30, 2019 and 2018

Non-interest

Income

The following is a summary of changes in

non-interest

income for the three months ending June 30, 2019 and 2018 (table dollar amounts in thousands):

   Three Months Ended
Non-interest Income    June 30
2018    June 30
2017    Amount
Change    Percent
Change
Service charges on deposit accounts
   $ 1,907    $ 1,566    $ 341    21.8 %
Wire transfer fees
   180    178    2    1.1 %
Interchange fees
   1,555    1,382    173    12.5 %
Fiduciary activities
   1,818    1,943    (125 )    -6.4 %
Gain on sale of investment securities
   —      (3 )    3    -100.0 %
Gain on sale of mortgage loans
   1,896    2,054    (158 )    -7.7 %
Mortgage servicing net of impairment
   511    359    152    42.3 %
Increase in cash surrender value of bank owned life insurance
   442    408    34    8.3 %
Death benefit on bank owned life insurance
   154    —      154    0.0 %
Other income
   469    325    144    44.3 %







Totalnon-interest income
   $ 8,932    $ 8,212    $ 720    8.8 %


	Three Months Ended
	June 30 2019			June 30 2018		Amount Change			Percent Change
Non-interest Income
Service charges on deposit accounts	$	2,480		$	1,907	$	573			30.0	%
Wire transfer fees		167			180		(13	)		-7.2	%
Interchange fees		2,160			1,555		605			38.9	%
Fiduciary activities		2,063			1,818		245			13.5	%
Gain on sale of investment securities		(100	)		—		(100	)		0.0	%
Gain on sale of mortgage loans		2,078			1,896		182			9.6	%
Mortgage servicing net of impairment		570			511		59			11.5	%
Increase in cash surrender value of bank owned life insurance		555			442		113			25.6	%
Death benefit on bank owned life insurance		367			154		213			138.3	%
Other income		558			469		89			19.0	%

Total non-interest income	$	10,898		$	8,932	$	1,966			22.0	%

Total

non-interest

income was ~~$720,000~~$2.0 million higher during the second quarter of ~~2018~~2019 compared to the same period of ~~2017.~~2018. Service charges on deposit accounts, ~~increased $341,000 and~~ interchange fees and fiduciary activities increased ~~by $173,000~~$573,000, $605,000 and $245,000, respectively, for the three-month period ended June 30, 2019 when compared to the same period of 2018 primarily due to ~~overall company growth~~the acquisition of Salin and ~~increased volume.~~organic growth. Residential mortgage loan activity during the second quarter of ~~2018~~2019 generated ~~$1.9~~$2.1 million of income from the gain on sale of mortgage loans, ~~down $158,000~~up from $1.9 million for the same period in ~~2017. The decrease in the gain on sale of mortgage loans was~~2018 due to a ~~decrease in the~~higher volume of ~~mortgage~~ loans ~~sold from $57.5 million~~sold.

The following is a summary of changes in ~~the second quarter of 2017 to $51.0 million in the same period of 2018. Total mortgage loan originations, including mortgage loans sold, decreased to $109.0 million~~

non-interest

income for the ~~second quarter~~six months ending June 30, 2019 and 2018 (table dollar amounts in thousands):


	Six Months Ended
	June 30 2019			June 30 2018		Amount Change			Percent Change
Non-interest Income
Service charges on deposit accounts	$	4,357		$	3,795	$	562			14.8	%
Wire transfer fees		285			330		(45	)		-13.6	%
Interchange fees		3,521			2,883		638			22.1	%
Fiduciary activities		4,152			3,743		409			10.9	%
Gain on sale of investment securities		(85	)		11		(96	)		-872.7	%
Gain on sale of mortgage loans		3,387			3,319		68			2.0	%
Mortgage servicing net of impairment		1,176			860		316			36.7	%
Increase in cash surrender value of bank owned life insurance		1,068			877		191			21.8	%
Death benefit on bank owned life insurance		367			154		213			138.3	%
Other income		1,382			1,278		104			8.1	%

Total non-interest income	$	19,610		$	17,250	$	2,360			13.7	%

Table of ~~2018 compared to $110.4 million for the second quarter of 2017.~~

Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, ~~2018~~2019 and ~~2017~~

~~The following is a summary of changes in~~2018

Total

non-interest ~~income (table dollar amounts in thousands):~~

   Six Months Ended
Non-interest Income    June 30
2018    June 30
2017    Amount
Change    Percent
Change
Service charges on deposit accounts
   $ 3,795    $ 2,966    $ 829    28.0 %
Wire transfer fees
   330    328    2    0.6 %
Interchange fees
   2,883    2,558    325    12.7 %
Fiduciary activities
   3,743    3,865    (122 )    -3.2 %
Gain on sale of investment securities
   11    32    (21 )    -65.6 %
Gain on sale of mortgage loans
   3,319    3,968    (649 )    -16.4 %
Mortgage servicing net of impairment
   860    806    54    6.7 %
Increase in cash surrender value of bank
owned life insurance
   877    872    5    0.6 %
Death benefit on bank owned life insurance
   154    —      154    0.0 %
Other income
   1,278    376    902    239.9 %







Totalnon-interest income
   $ 17,250    $ 15,771    $ 1,479    9.4 %

~~Totalnon-interest~~

income was ~~$1.5~~$2.4 million higher during the first six months of ~~2018~~2019 compared to the same period of ~~2017.~~2018. Service charges on deposit accounts, ~~increased $829,000 and~~ interchange fees and fiduciary activities increased ~~by $325,000~~$562,000, $638,000 and $409,000, respectively, for the

six-month

period ended June 30, 2019 when compared to the same period of 2018 primarily due to ~~overall company growth~~the acquisition of Salin and ~~increased volume.~~organic growth. Residential mortgage loan activity during the first six months of ~~2018~~2019 generated ~~$3.3~~$3.4 million of income from the gain on sale of mortgage loans, ~~down $649,000~~up from $3.3 million for the same period in ~~2017. The decrease in the gain on sale of mortgage loans was~~2018 due to a ~~decrease in the~~higher volume of ~~mortgage~~ loans sold ~~from $107.5~~during the first six months of 2019.

Non-interest

Expense

The following is a summary of changes in

non-interest

expense for the three months ending June 30, 2019 and 2018 (table dollar amounts in thousands):


	Three Months Ended
	June 30									June 30
	2019									2018								Adjusted
	Actual			Merger Expenses			Adjusted			Actual			Merger Expenses		Adjusted			Amount Change			Percent Change
Non-interest Expense
Salaries and employee benefits	$	16,951		$	(482	)	$	16,469		$	13,809		$	—	$	13,809		$	2,660			19.3	%
Net occupancy expenses		3,148			(75	)		3,073			2,520			—		2,520			553			21.9	%
Data processing		2,139			(68	)		2,071			1,607			—		1,607			464			28.9	%
Professional fees		598			(153	)		445			376			—		376			69			18.4	%
Outside services and consultants		1,655			(176	)		1,479			1,267			—		1,267			212			16.7	%
Loan expense		2,048			(2	)		2,046			1,525			—		1,525			521			34.2	%
FDIC deposit insurance		365			—			365			345			—		345			20			5.8	%
Other losses		169			(69	)		100			269			—		269			(169	)		-62.8	%
Other expenses		4,511			(507	)		4,004			3,224			—		3,224			780			24.2	%

Total non-interest expense	$	31,584		$	(1,532	)	$	30,052		$	24,942		$	—	$	24,942		$	5,110			20.5	%

Annualized Non-interest Exp. to Avg. Assets		2.51	%					2.39	%		2.49	%				2.49	%

Total

non-interest

expense was $6.6 million higher during the second quarter of 2019 compared to the same period of 2018. Salaries and employee benefits, other expense, net occupancy expense, data processing and loan expense increased $3.1 million, $1.3 million, $628,000, $532,000 and $523,000, respectively. Excluding merger expenses, total

non-interest

expense increased $5.1 million during the second quarter of 2019 when compared to the second quarter of 2018 primarily due to the Salin acquisition. Annualized

non-interest

expense as a percentage of average assets were 2.51% and 2.49% for the three months ended June 30, 2019 and 2018, respectively. Annualized

non-interest

expense, excluding merger expenses, as a percent of average assets declined to 2.39% for the three months ended June 30, 2019 compared to 2.49% for the three months ended June 30, 2018 as the Company has been able to leverage its expense base.

The following is a summary of changes in

non-interest

expense for the six months ending June 30, 2019 and 2018 (table dollar amounts in thousands):


	Six Months Ended
	June 30									June 30								Adjusted
	2019									2018								Amount Change			Percent Change
	Actual			Merger Expenses			Adjusted			Actual			Merger Expenses		Adjusted			Amount Change			Percent Change
Non-interest Expense
Salaries and employee benefits	$	31,417		$	(484	)	$	30,933		$	28,182		$	—	$	28,182		$	2,751			9.8	%
Net occupancy expenses		5,920			(75	)		5,845			5,486			—		5,486			359			6.5	%
Data processing		4,105			(360	)		3,745			3,303			—		3,303			442			13.4	%
Professional fees		1,091			(392	)		699			877			—		877			(178	)		-20.3	%
Outside services and consultants		5,185			(2,466	)		2,719			2,531			—		2,531			188			7.4	%
Loan expense		3,997			(2	)		3,995			2,782			—		2,782			1,213			43.6	%
FDIC deposit insurance		525			—			525			655			—		655			(130	)		-19.8	%
Other losses		273			(71	)		202			415			—		415			(213	)		-51.3	%
Other expenses		8,809			(1,800	)		7,009			6,548			—		6,548			461			7.0	%

Total non-interest expense	$	61,322		$	(5,650	)	$	55,672		$	50,779		$	—	$	50,779		$	4,893			9.6	%

Annualized Non-interest Exp. to Avg. Assets		2.64	%					2.40	%		2.57	%				2.57	%

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2019 and 2018

Total

non-interest

expense was $10.5 million higher during the first six months of 2019 when compared to the first six months of 2018. Salaries and employee benefits, outside services and consultants expense, other expense, loan expense and data processing increased $3.2 million, $2.7 million, $2.3 million, $1.2 million and $802,000, respectively. Excluding merger expenses, total

non-interest

expense increased $4.9 million during the first six months of ~~2017~~2019 when compared to ~~$86.8 million during~~ the same period of ~~2018. Total mortgage loan originations, including mortgage loans sold, increased~~2018 primarily due to ~~$181.3 million~~the Salin acquisition. Annualized

non-interest

expense as a percentage of average assets were 2.64% and 2.57% for the first six months of 2019 and 2018, respectively. Annualized

non-interest

expense, excluding merger expenses, as a percent of average assets declined to 2.40% for the first six months of 2019 compared to ~~$176.3 million~~2.57% for the same period ~~of 2017.~~

~~Non-interest~~ ~~Expense~~

~~The following is a summary of changes~~ in~~non-interest~~ 2018 as the Company has been able to leverage its expense ~~(table dollar amounts in thousands):~~

   Three Months Ended
Non-interest Expense    June 30
2018    June 30
2017    Amount
Change    Percent
Change
Salaries
   $ 10,043    $ 9,116    $ 927    10.2 %
Commission and bonuses
   1,509    1,389    120    8.6 %
Employee benefits
   2,257    1,961    296    15.1 %
Net occupancy expenses
   2,520    2,196    324    14.8 %
Data processing
   1,607    1,502    105    7.0 %
Professional fees
   376    535    (159 )    -29.7 %
Outside services and consultants
   1,267    1,265    2    0.2 %
Loan expense
   1,525    1,250    275    22.0 %
FDIC deposit insurance
   345    243    102    42.0 %
Other losses
   269    78    191    244.9 %
Other expenses
   3,224    2,953    271    9.2 %







Totalnon-interest expense
   $ 24,942    $ 22,488    $ 2,454    10.9 %

~~Totalnon-interest~~base.

Income Taxes

Income tax expense ~~was $2.5~~totaled $3.3 million ~~higher in~~for the second quarter of ~~2018~~2019, an increase of $515,000 when compared to the ~~same period~~second quarter of ~~2017.~~2018. The increase was primarily due to an increase in ~~salaries and employee benefits~~income before income tax of ~~$1.3~~$3.0 million net occupancy expenses of $324,000, loan expense of $275,000, other expenses of $271,000, other losses of $191,000, data processing of $105,000 and FDIC deposit insurance of $102,000. The increase in salaries and employee benefits, net occupancy expense, other expense, data processing and FDIC deposit insurance reflect overall company growth and the acquisitions of Lafayette Community Bancorp and Wolverine Bancorp, Inc. during the third and fourth quarters of

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

~~2017. Loan expense increased due to a higher level of loan originations and loan collection expenses~~ when compared to the second quarter of ~~2017. Other losses increased primarily due to write-downs on other bank owned properties and an accrual for a potential loss on a fiduciary account recorded during the second quarter of~~ 2018.

~~The following is a summary of changes innon-interest~~

Income tax expense ~~(table dollar amounts in thousands):~~

   Six Months Ended
Non-interest Expense    June 30
2018    June 30
2017    Amount
Change    Percent
Change
Salaries
   $ 20,117    $ 17,622    $ 2,495    14.2 %
Commission and bonuses
   2,856    2,450    406    16.6 %
Employee benefits
   5,209    4,103    1,106    27.0 %
Net occupancy expenses
   5,486    4,648    838    18.0 %
Data processing
   3,303    2,809    494    17.6 %
Professional fees
   877    1,148    (271 )    -23.6 %
Outside services and consultants
   2,531    2,487    44    1.8 %
Loan expense
   2,782    2,357    425    18.0 %
FDIC deposit insurance
   655    506    149    29.4 %
Other losses
   415    128    287    224.2 %
Other expenses
   6,548    5,751    797    13.9 %







Totalnon-interest expense
   $ 50,779    $ 44,009    $ 6,770    15.4 %

~~Totalnon-interest~~ ~~expense was $6.8~~totaled $5.4 million ~~higher~~ for the first six months ~~ended June 30, 2018 when compared to the six months ended June 30, 2017. The~~of 2019, an increase ~~was primarily due to increases in salaries and employee benefits~~ of $4.0 million, net occupancy expenses of $838,000, other expense of $797,000, data processing of $494,000 and loan expense of $425,000. The increase in salaries and employee benefits, net occupancy expense, other expense and data processing expense reflect overall company growth and recent acquisitions. Loan expense increased due to a higher level of loan originations and collection expenses during the six months ended June 30, 2018$68,000 when compared to the same period ~~of 2017. Offsetting these increases~~in 2018. The increase was ~~a decrease of $271,000 in professional fees primarily~~ due to ~~a lack of acquisition-related expenses in 2018.~~

~~Income Taxes~~

Income tax expense totaled $2.8 million for the second quarter of 2018, a decrease of $730,000 when compared to the second quarter of 2017. The decrease was primarily due to the impact of the new corporate tax rate which was signed into law at the end of 2017 reducing the effective federal tax rate from 35% to 21% and the benefits from the exercising of stock options. This decrease was offset by an increase in income before income ~~taxes~~tax of ~~$4.3 million when comparing the second quarter of 2018 to the same period of 2017.~~

~~Income tax expense totaled $5.3 million for the six months ended June 30, 2018, a decrease of $1.3 million~~$607,000 when compared to the six months ended June 30, 2017. The decrease was primarily due to the impact of the new corporate tax rate which was signed into law at the end of 2017 reducing the effective federal tax rate from 35% to 21% and the benefits from the exercising of stock options. This decrease was offset by an increase in income before income taxes of $8.4 million when comparing the first six months of ~~2018 to the same period of 2017.~~

2018.

~~HORIZON BANCORP, INC. AND SUBSIDIARIES~~

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

~~And Results of Operations~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

Liquidity

The Bank maintains a stable base of core deposits provided by long-standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. During the six months ended June 30, ~~2018,~~2019, cash and cash equivalents ~~decreased~~increased by approximately ~~$7.4~~$28.5 million. At June 30, ~~2018,~~2019, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately ~~$207.3~~$626.3 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to ~~$127.2~~$340.3 million at December 31, ~~2017~~2018 and ~~$181.2~~$207.3 million at June 30, ~~2017.~~2018. The Bank had approximately ~~$561.3~~$653.7 million of unpledged investment securities at June 30, ~~2018~~2019 compared to ~~$518.2~~$648.6 million at December 31, ~~2017~~2018 and ~~$545.0~~$561.3 million at June 30, ~~2017.~~

2018.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, ~~2018.~~2019. Stockholders’ equity totaled ~~$470.5~~$626.5 million as of June 30, ~~2018,~~2019, compared to ~~$457.1~~$492.0 million as of December 31, ~~2017.~~2018. For the six months ended June 30, ~~2018,~~2019, the ratio of average stockholders’ equity to average assets was ~~11.63%~~12.05% compared to ~~11.15%~~11.65% for the twelve months ended December 31, ~~2017.~~2018. The increase in stockholders’ equity during the period was the result of stock issued through the acquisition of Salin and the generation of net income, net of dividends declared.

Horizon declared common stock dividends in the amount of ~~$0.20~~$0.22 per share during the first six months of ~~2018~~2019 and ~~$0.16~~$0.20 per share for the same period of ~~2017.~~2018. The dividend payout ratio (dividends as a percent of basic earnings per share) was ~~28.5%~~28.1% and ~~30.8%~~28.5% for the first six months of ~~2018~~2019 and ~~2017,~~2018, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form

10-K

for ~~2017.~~

2018.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, ~~2018~~2019 and ~~2017~~

2018

Use of
Non-GAAP
Financial Measures

Certain information set forth in this quarterly report on Form

10-Q

refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included

non-GAAP

financial measures relating to net income, diluted earnings per share, net interest margin, the allowance for loan and lease losses, tangible stockholders’ equity, tangible book value per share, the return on average assets and the return on average common equity. In each case, we have identified special circumstances that we consider to be

non-recurring

and have excluded them, to show the impact of such events as acquisition-related purchase accounting adjustments and the tax reform bill, among others we have identified in our reconciliations. Horizon believes that these

non-GAAP

financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and

one-time

costs of acquisitions and

non-core

items. 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. See the tables and other information below and contained elsewhere in this Report on Form

10-Q

for reconciliations of the

non-GAAP

figures identified herein and their most comparable GAAP measures.

Non-GAAP

Reconciliation of Net Interest Margin

(Dollars in Thousands, Unaudited)

   Three Months Ended Six Months Ended
   June 30 March 31 June 30 June 30 June 30
   2018 2018 2017 2018 2017
Non-GAAP Reconciliation of Net Interest Margin

Net interest income as reported
   $ 33,550 $ 33,411 $ 27,198 $ 66,961 $ 52,766
Average interest-earning assets
   3,638,801 3,580,143 2,943,627 3,600,676 2,870,884
Net interest income as a percentage of average interest-earning assets (“Net Interest Margin”)
   3.78 % 3.81 % 3.84 % 3.81 % 3.81 %
Acquisition-related purchase accounting adjustments (“PAUs”)
   $ (1,634 ) $ (2,037 ) $ (939 ) (3,671 ) (1,955 )


Core net interest income
   $ 31,916 $ 31,374 $ 26,259 63,290 50,811


Core net interest margin
   3.60 % 3.55 % 3.71 % 3.61 % 3.67 %


	Three Months Ended									Six Months Ended
	June 30			March 31			June 30			June 30			June 30
	2019			2019			2018			2019			2018
Non-GAAP Reconciliation of Net Interest Margin
Net interest income as reported	$	41,529		$	34,280		$	33,550		$	75,809		$	66,961
Average interest-earning assets		4,566,674			3,929,296			3,638,801			4,249,644			3,600,676
Net interest income as a percentage of average interest-earning assets (“Net Interest Margin”)		3.73	%		3.62	%		3.78	%		3.68	%		3.81	%
Acquisition-related purchase accounting adjustments (“PAUs”)	$	(1,299	)	$	(1,510	)	$	(1,634	)	$	(2,809	)	$	(3,671	)


Core net interest income	$	40,230		$	32,770		$	31,916		$	73,000		$	63,290

Core net interest margin		3.61	%		3.46	%		3.60	%		3.55	%		3.61	%

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, ~~2018~~2019 and ~~2017~~

2018

Non-GAAP

Reconciliation of Net Income and Diluted Earnings per Share

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

   Three Months Ended Six Months Ended
   June 30 March 31 June 30 June 30 June 30
   2018 2018 2017 2018 2017
Non-GAAP Reconciliation of Net Income

Net income as reported
   $ 14,115 $ 12,804 $ 9,072 $ 26,919 $ 17,296
Merger expenses
   —   —   200 —   200
Tax effect
   —   —   (70 ) —   (70 )


Net income excluding merger expenses
   14,115 12,804 9,202 26,919 17,426
Gain on sale of investment securities
   —   (11 ) 3 (11 ) (32 )
Tax effect
   —   2 (1 ) 2 11


Net income excluding gain on sale of investment securities
   14,115 12,795 9,204 26,910 17,405
Death benefit on bank owned life insurance (“BOLI”)
   (154 ) —   —   (154 ) —
Tax effect
   32 —   —   32 —


Net income excluding death benefit on BOLI
   13,993 12,795 9,204 26,788 17,405
Acquisition-related purchase accounting adjustments (“PAUs”)
   (1,634 ) (2,037 ) (939 ) (3,671 ) (1,955 )
Tax effect
   343 428 329 771 684


Core Net Income
   $ 12,702 $ 11,186 $ 8,594 $ 23,888 $ 16,134


Non-GAAP Reconciliation of Diluted Earnings per Share

Diluted earnings per share (“EPS”) as reported
   $ 0.37 $ 0.33 $ 0.27 $ 0.70 $ 0.51
Merger expenses
   —   —   0.01 —   0.01
Tax effect
   —   —   —   —   —


Diluted EPS excluding merger expenses
   0.37 0.33 0.28 0.70 0.52
Gain on sale of investment securities
   —   —   —   —   —
Tax effect
   —   —   —   —   —


Diluted EPS excluding gain on sale of investment securities
   0.37 0.33 0.28 0.70 0.52
Death benefit on BOLI
   —   —   —   —   —
Tax effect
   —   —   —   —   —


Diluted EPS excluding death benefit on BOLI
   0.37 0.33 0.28 0.70 0.52
Acquisition-related PAUs
   (0.04 ) (0.05 ) (0.03 ) (0.10 ) (0.06 )
Tax effect
   —   0.01 0.01 0.02 0.01


Core Diluted EPS
   $ 0.33 $ 0.29 $ 0.26 $ 0.62 $ 0.47

~~Non-GAAP~~ ~~Reconciliation~~

Three Months Ended

Six Months Ended

June 30

March 31

June 30

June 30

June 30

2019

2019

2018

2019

2018

Non-GAAP Reconciliation of Net Income

Net income as reported
$
16,642
$
10,816
$
14,115
$
27,458
$
26,919

Merger expenses

1,532

4,118

—

5,650

—

Tax effect

(295
)
(692
)
—

(987
)
—

Net income excluding merger expenses

17,879

14,242

14,115

32,121

26,919

Loss (gain) on sale of investment securities

100

(15
)
—

85

(11
)
Tax effect

(21
)
3

—

(18
)
2

Net income excluding gain on sale of investment securities

17,958

14,230

14,115

32,188

26,910

Death benefit on bank owned life insurance (“BOLI”)

(367
)
—

(154
)
(367
)
(154
)

Net income excluding death benefit on BOLI

17,591

14,230

13,961

31,821

26,756

Core Net Income
$
  17,591
$
  14,230
$
  13,961
$
  31,821
$
  26,756

Non-GAAP Reconciliation of Diluted Earnings per Share

Diluted earnings per share (“EPS”) as reported
$
0.37
$
0.28
$
0.37
$
0.65
$
0.70

Merger expenses

0.03

0.11

—

0.13

—

Tax effect

—

(0.02
)
—

(0.02
)
—

Diluted EPS excluding merger expenses

0.40

0.37

0.37

0.76

0.70

Loss (gain) on sale of investment securities

—

—

—

—

—

Tax effect

—

—

—

—

—

Diluted EPS excluding gain on sale of investment securities

0.40

0.37

0.37

0.76

0.70

Death benefit on BOLI

(0.01
)
—

—

(0.01
)
—

Diluted EPS excluding death benefit on BOLI

0.39

0.37

0.37

0.75

0.70

Core Diluted EPS
$
0.39
$
0.37
$
0.37
$
0.75
$
0.70

Table of ~~Tangible Stockholders’ Equity and Tangible Book Value per Share~~

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

   June 30    March 31    December 31    September 30    June 30
   2018    2018    2017    2017    2017
Total stockholders’ equity
   $ 470,535    $ 460,416    $ 457,078    $ 392,055    $ 357,259
Less: Intangible assets
   131,239    131,724    132,282    103,244    86,726










Total tangible stockholders’ equity
   $ 339,296    $ 328,692    $ 324,796    $ 288,811    $ 270,533










Common shares outstanding
   38,362,640    38,332,853    38,294,729    34,988,189    33,264,698
Tangible book value per common share
   $ 8.84    $ 8.57    $ 8.48    $ 8.25    $ 8.13
Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, ~~2018~~2019 and ~~2017~~

2018

Non-GAAP

Reconciliation of Return on Average Assets and Return on Average Common Equity

(Dollars in Thousands, Unaudited)

   Three Months Ended Six Months Ended
   June 30 March 31 June 30 June 30 June 30
   2018 2018 2017 2018 2017
Non-GAAP Reconciliation of Return on Average Assets

Average assets
   $ 4,017,551 $ 3,942,837 $ 3,249,851 $ 3,980,864 $ 3,177,134
Return on average assets (“ROAA”) as reported
   1.41 % 1.32 % 1.12 % 1.36 % 1.10 %
Merger expenses
   0.00 % 0.00 % 0.02 % 0.00 % 0.01 %
Tax effect
   0.00 % 0.00 % -0.01 % 0.00 % 0.00 %


ROAA excluding merger expenses
   1.41 % 1.32 % 1.13 % 1.36 % 1.11 %
Gain on sale of investment securities
   0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
Tax effect
   0.00 % 0.00 % 0.00 % 0.00 % 0.00 %


ROAA excluding gain on sale of investment securities
   1.41 % 1.32 % 1.13 % 1.36 % 1.11 %
Death benefit on bank owned life insurance (“BOLI”)
   -0.02 % 0.00 % 0.00 % -0.01 % 0.00 %
Tax effect
   0.00 % 0.00 % 0.00 % 0.00 % 0.00 %


ROAA excluding death benefit on BOLI
   1.39 % 1.32 % 1.13 % 1.35 % 1.11 %
Acquisition-related purchase accounting adjustments (“PAUs”)
   -0.16 % -0.21 % -0.12 % -0.19 % -0.12 %
Tax effect
   0.03 % 0.04 % 0.04 % 0.04 % 0.04 %


Core ROAA
   1.26 % 1.15 % 1.05 % 1.20 % 1.03 %


Non-GAAP Reconciliation of Return on Average Common Equity

Average Common Equity
   $ 465,968 $ 460,076 $ 355,435 $ 463,156 $ 350,305
Return on average common equity (“ROACE”) as reported
   12.15 % 11.29 % 10.24 % 11.72 % 9.96 %
Merger expenses
   0.00 % 0.00 % 0.23 % 0.00 % 0.12 %
Tax effect
   0.00 % 0.00 % -0.08 % 0.00 % -0.04 %


ROACE excluding merger expenses
   12.15 % 11.29 % 10.39 % 11.72 % 10.04 %
Gain on sale of investment securities
   0.00 % -0.01 % 0.00 % 0.00 % -0.02 %
Tax effect
   0.00 % 0.00 % 0.00 % 0.00 % 0.01 %


ROACE excluding gain on sale of investment securities
   12.15 % 11.28 % 10.39 % 11.72 % 10.03 %
Death benefit on bank owned life insurance (“BOLI”)
   -0.13 % 0.00 % 0.00 % -0.07 % 0.00 %
Tax effect
   0.03 % 0.00 % 0.00 % 0.01 % 0.00 %


ROACE excluding death benefit on BOLI
   12.05 % 11.28 % 10.39 % 11.66 % 10.03 %
Acquisition-related purchase accounting adjustments (“PAUs”)
   -1.41 % -1.80 % -1.06 % -1.60 % -1.13 %
Tax effect
   0.30 % 0.38 % 0.37 % 0.34 % 0.39 %


Core ROACE
   10.94 % 9.86 % 9.70 % 10.40 % 9.29 %


	Three Months Ended									Six Months Ended
	June 30			March 31			June 30			June 30			June 30
	2019			2019			2018			2019			2018
Non-GAAP Reconciliation of Return on Average Assets
Average assets	$	5,047,365		$	4,307,189		$	4,017,551		$	4,679,423		$	3,980,864
Return on average assets (“ROAA”) as reported		1.32	%		1.02	%		1.41	%		1.18	%		1.36	%
Merger expenses		0.12	%		0.39	%		0.00	%		0.24	%		0.00	%
Tax effect		-0.02	%		-0.07	%		0.00	%		-0.04	%		0.00	%

ROAA excluding merger expenses		1.42	%		1.34	%		1.41	%		1.38	%		1.36	%
Loss (gain) on sale of investment securities		0.01	%		0.00	%		0.00	%		0.00	%		0.00	%
Tax effect		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

ROAA excluding gain on sale of investment securities		1.43	%		1.34	%		1.41	%		1.38	%		1.36	%
Death benefit on bank owned life insurance (“BOLI”)		-0.03	%		0.00	%		-0.02	%		-0.02	%		-0.01	%

ROAA excluding death benefit on BOLI		1.40	%		1.34	%		1.39	%		1.36	%		1.35	%

Core ROAA		1.40	%		1.34	%		1.39	%		1.36	%		1.35	%

Non-GAAP Reconciliation of Return on Average Common Equity
Average Common Equity	$	622,028		$	506,449		$	465,968		$	563,862		$	463,156
Return on average common equity (“ROACE”) as reported		10.73	%		8.66	%		12.15	%		9.82	%		11.72	%
Merger expenses		0.99	%		3.30	%		0.00	%		2.02	%		0.00	%
Tax effect		-0.19	%		-0.55	%		0.00	%		-0.35	%		0.00	%

ROACE excluding merger expenses		11.53	%		11.41	%		12.15	%		11.49	%		11.72	%
Loss (gain) on sale of investment securities		0.06	%		-0.01	%		0.00	%		0.03	%		0.00	%
Tax effect		-0.01	%		0.00	%		0.00	%		-0.01	%		0.00	%

ROACE excluding gain on sale of investment securities		11.58	%		11.40	%		12.15	%		11.51	%		11.72	%
Death benefit on bank owned life insurance (“BOLI”)		-0.24	%		0.00	%		-0.13	%		-0.13	%		-0.07	%

ROACE excluding death benefit on BOLI		11.34	%		11.40	%		12.02	%		11.38	%		11.65	%

Core ROACE		11.34	%		11.40	%		12.02	%		11.38	%		11.65	%

Non-GAAP

Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share

(Dollars in Thousands Except per Share Data, Unaudited)


	June 30		March 31		December 31		September 30		June 30
	2019		2019		2018		2018		2018
Total stockholders’ equity	$	626,461	$	609,468	$	491,992	$	477,594	$	470,535
Less: Intangible assets		179,776		176,864		130,270		130,755		131,239

Total tangible stockholders’ equity	$	446,685	$	432,604	$	361,722	$	346,839	$	339,296

Common shares outstanding		45,061,372		45,052,747		38,375,407		38,367,890		38,362,640
Tangible book value per common share	$	9.91	$	9.60	$	9.43	$	9.04	$	8.84

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

~~Quantitative and Qualitative Disclosures About Market Risk~~

~~For the Three and Six Months ended June 30, 2018 and 2017~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s ~~2017~~2018 Annual Report on Form

10-K

for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its ~~2017~~2018 Annual Report on Form

10-K.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of disclosure controls and procedures as of June 30, ~~2018,~~2019, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule

13a-15(e)

of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended June 30, ~~2018,~~2019, 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.

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

~~For the Three and Six Months ended June 30, 2018 and 2017~~

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form

10-K

for ~~2017.~~

2018.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Not Applicable~~

None not previously reported on a Current Report on Form

8-K.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5.

OTHER INFORMATION

Not Applicable

Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

~~For the Three and Six Months ended June 30, 2018 and 2017~~

ITEM 6.

EXHIBITS

(a) Exhibits

Exhibit Index


~~Exhibit~~ ~~No.~~	~~Description~~	~~Location~~
Exhibit No.	Description	Location
~~3.1~~	~~Amended and Restated Articles of Incorporation of Horizon Bancorp, Inc., as amended by the Articles of Amendment effective May 16, 2018~~	~~Incorporated by reference to Exhibit 3.1 to Registrant’s Form8-K~~ ~~filed May 16, 2018~~

~~10.1~~ 31.1	~~Horizon Bancorp Amended and Restated 2013 Omnibus Equity Incentive Plan (effective February 1, 2013; amended and restated as of December 19, 2017; approved by shareholders effective May 3, 2018~~	~~Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement for its 2018 Annual Meeting of Shareholders~~

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

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

32
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

~~101~~
101	Interactive Data Files	Attached

Table of Contents

SIGNATURES

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


~~HORIZON BANCORP~~						HORIZON BANCORP, INC.

Dated: August ~~7, 2018~~8, 2019						/s/ Craig M. Dwight
						Craig M. Dwight
						Chief Executive Officer


Dated: August ~~7, 2018~~8, 2019						/s/ Mark E. Secor
						Mark E. Secor
						Chief Financial Officer


	June 30 2018			December 31 2017
	(Unaudited)
Assets
Cash and due from banks	$	69,018		$	76,441
Investment securities, available for sale		526,195			509,665
Investment securities, held to maturity (fair value of $206,730 and $201,085)		209,767			200,448
Loans held for sale		3,000			3,094
Loans, net of allowance for loan losses of $17,071 and $16,394		2,907,445			2,815,601
Premises and equipment, net		75,063			75,529
Federal Home Loan Bank stock		18,105			18,105
Goodwill		119,880			119,880
Other intangible assets		11,359			12,402
Interest receivable		12,993			16,244
Cash value of life insurance		76,576			75,931
Other assets		47,210			40,963

Total assets	$	4,076,611		$	3,964,303

Liabilities
Deposits
Non-interest bearing	$	615,018		$	601,805
Interest bearing		2,401,145			2,279,198

Total deposits		3,016,163			2,881,003
Borrowings		524,846			564,157
Subordinated debentures		37,745			37,653
Interest payable		1,441			886
Other liabilities		25,881			23,526

Total liabilities		3,606,076			3,507,225

Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares		—			—
Common stock, no par value, Authorized 99,000,000 shares (Restated - See Note 1)
Issued 38,387,709 and 38,323,604 shares (Restated - See Note 1), Outstanding 38,362,640 and 38,294,729 shares (Restated - See Note 1)		—			—
Additionalpaid-in capital		275,587			275,059
Retained earnings		205,535			185,570
Accumulated other comprehensive loss		(10,587	)		(3,551	)

Total stockholders’ equity		470,535			457,078

Total liabilities and stockholders’ equity	$	4,076,611		$	3,964,303


Contractually required principal and interest at acquisition	$	21,912
Contractual cash flows not expected to be collected (nonaccretable differences)		1,832

Expected cash flows at acquisition		20,080
Interest component of expected cash flows (accretable discount)		2,267

Fair value of acquired loans accounted for under ASC310-30	$	17,813


Contractually required principal and interest at acquisition	$	6,128
Contractual cash flows not expected to be collected (nonaccretable differences)		1,326

Expected cash flows at acquisition		4,802
Interest component of expected cash flows (accretable discount)		933

Fair value of acquired loans accounted for under ASC310-30	$	3,869


	June 30, 2018				December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Within one year	$	10,054	$	10,013	$	13,347	$	13,326
One to five years		29,238		28,739		40,468		40,193
Five to ten years		80,973		79,937		50,473		51,156
After ten years		46,846		46,377		63,306		64,326

		167,111		165,066		167,594		169,001
Federal agency collateralized mortgage obligations		168,382		164,134		132,871		130,365
Federal agency mortgage-backed pools		203,593		196,995		211,487		208,657
Private labeled mortgage-backed pools		—		—		1,650		1,642

Total available for sale investment securities	$	539,086	$	526,195	$	513,602	$	509,665

Held to maturity
Within one year	$	5,578	$	5,546	$	1,948	$	1,934
One to five years		43,825		44,383		40,603		41,531
Five to ten years		103,804		103,252		89,801		91,249
After ten years		36,872		34,199		47,484		45,683

		190,079		187,380		179,836		180,397
Federal agency collateralized mortgage obligations		5,409		5,260		5,734		5,682
Federal agency mortgage-backed pools		14,279		14,090		14,878		15,006

Total held to maturity investment securities	$	209,767	$	206,730	$	200,448	$	201,085


	June 30, 2018
	Commercial		Real Estate		Consumer		Outstanding Balance		Allowance for Loan Losses		Carrying Amount
Heartland	$	254	$	193	$	—	$	447	$	—	$	447
Summit		3,301		592		—		3,893		—		3,893
Peoples		296		112		—		408		—		408
Kosciusko		791		207		—		998		—		998
LaPorte		855		974		30		1,859		—		1,859
Lafayette		3,481		—		—		3,481		—		3,481
Wolverine		10,020		—		—		10,020		—		10,020

Total	$	18,998	$	2,078	$	30	$	21,106	$	—	$	21,106


	December 31, 2017
	Commercial		Real Estate		Consumer		Outstanding Balance		Allowance for Loan Losses		Carrying Amount
Heartland	$	390	$	229	$	—	$	619	$	—	$	619
Summit		3,653		870		—		4,523		—		4,523
Peoples		315		126		—		441		—		441
Kosciusko		838		403		—		1,241		—		1,241
LaPorte		1,034		1,004		33		2,071		—		2,071
Lafayette		4,271		—		—		4,271		—		4,271
Wolverine		16,697		—		—		16,697		—		16,697

Total	$	27,198	$	2,632	$	33	$	29,863	$	—	$	29,863


	June 30, 2018
	Non-accrual		Loans Past Due Over 90 Days Still Accruing		Non-peforming TDRs		Performing TDRs		Total Non-performing Loans
Commercial
Owner occupied real estate	$	5,629	$	—	$	—	$	—	$	5,629
Non-owner occupied real estate		1,038		—		305		—		1,343
Residential spec homes		—		—		—		—		—
Development & spec land		72		—		—		—		72
Commercial and industrial		1,943		—		—		—		1,943

Total commercial		8,682		—		305		—		8,987
Real estate
Residential mortgage		1,823		11		440		1,641		3,915
Residential construction		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—

Total real estate		1,823		11		440		1,641		3,915
Consumer
Direct installment		54		—		—		—		54
Direct installment purchased		—		—		—		—		—
Indirect installment		619		38		—		—		657
Home equity		1,377		—		149		270		1,796

Total consumer		2,050		38		149		270		2,507

Total	$	12,555	$	49	$	894	$	1,911	$	15,409


	June 30, 2018
	30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Total Past Due			Loans Not Past Due			Total
Commercial
Owner occupied real estate	$	897		$	138		$	—		$	1,035		$	590,238		$	591,273
Non-owner occupied real estate		42			895			—			937			677,976			678,913
Residential spec homes		—			—			—			—			11,614			11,614
Development & spec land		—			—			—			—			34,384			34,384
Commercial and industrial		175			966			—			1,141			351,072			352,213

Total commercial		1,114			1,999			—			3,113			1,665,284			1,668,397
Real estate
Residential mortgage		822			302			11			1,135			609,736			610,871
Residential construction		—			—			—			—			21,585			21,585
Mortgage warehouse		—			—			—			—			109,016			109,016

Total real estate		822			302			11			1,135			740,337			741,472
Consumer
Direct installment		78			26			—			104			38,961			39,065
Indirect installment		1,513			256			38			1,807			274,510			276,317
Home equity		451			30			—			481			194,156			194,637

Total consumer		2,042			312			38			2,392			507,627			510,019

Total	$	3,978		$	2,613		$	49		$	6,640		$	2,913,248		$	2,919,888

Percentage of total loans		0.14	%		0.09	%		0.00	%		0.23	%		99.77	%

	December 31, 2017
	30-59 Days Past Due			60-89 Days Past Due			90 Days or Greater Past Due			Total Past Due			Loans Not Past Due			Total
Commercial
Owner occupied real estate	$	1,613		$	1,950		$	—		$	3,563		$	568,419		$	571,982
Non-owner occupied real estate		512			122			—			634			678,311			678,945
Residential spec homes		—			—			—			—			16,431			16,431
Development & spec land		31			—			—			31			48,807			48,838
Commercial and industrial		520			1			—			521			347,350			347,871

Total commercial		2,676			2,073			—			4,749			1,659,318			1,664,067
Real estate
Residential mortgage		1,248			49			—			1,297			587,061			588,358
Residential construction		63			—			—			63			15,964			16,027
Mortgage warehouse		—			—			—			—			94,508			94,508

Total real estate		1,311			49			—			1,360			697,533			698,893
Consumer
Direct installment		78			10			—			88			37,753			37,841
Indirect installment		1,859			244			167			2,270			225,053			227,323
Home equity		502			527			—			1,029			196,549			197,578

Total consumer		2,439			781			167			3,387			459,355			462,742

Total	$	6,426		$	2,903		$	167		$	9,496		$	2,816,206		$	2,825,702

Percentage of total loans		0.23	%		0.10	%		0.01	%		0.34	%		99.66	%


	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended						Six Months Ended
		June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Derivative in fair value hedging relationship
Interest rate contracts	Interest income - loans	$	2,768		$	679		$	574		$	426
Interest rate contracts	Interest income - loans		(2,768	)		(679	)		(574	)		(426	)

Total		$	—		$	—		$	—		$	—


	Location of gain (loss) recognized on derivative	Amount of Gain (Loss) Recognized on Derivative
		Three Months Ended						Six Months Ended
		June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Derivative not designated as hedging relationship
Mortgage contracts	Other income - gain on sale of loans	$	112		$	(153	)	$	195		$	(212	)


Non-interest Income	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Total gains and losses from:
Hedged loans	$	976		$	679		$	3,744		$	426
Fair value interest rate swap agreements		(976	)		(679	)		(3,744	)		(426	)
Derivative loan commitments		71			(153	)		183			(212	)

	$	71		$	(153	)	$	183		$	(212	)


	June 30, 2018
	Fair		Valuation	Unobservable	Range
	Value		Technique	Inputs	(Weighted Average)
Impaired loans	$	8,804	Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	0%-54.8% (2.0%)
Mortgage servicing rights		11,670	Discounted cash flows	Discount rate, Constant prepayment rate, Probability of default	10.3%-11.3% (10.3%), 8.3%-16.5% (8.6%), 0.1%-1.7% (0.6%)

	December 31, 2017
	Fair		Valuation	Unobservable	Range
	Value		Technique	Inputs	(Weighted Average)
Impaired loans	$	6,957	Collateral based measurement	Discount to reflect current market conditions and ultimate collectability	0%-46.8% (2.6%)
Mortgage servicing rights		11,602	Discounted cash flows	Discount rate, Constant prepayment rate, Probability of default	9.6%-10.8% (9.7%), 9.2%-27.7% (10.5%), 0%-1.5% (0.2%)


	Actual					Required for Capital¹Adequacy Purposes					Required For Capital¹ Adequacy Purposes with Capital Buffer					Well Capitalized Under Prompt¹ Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2018
Total capital¹(to risk-weighted assets)
Consolidated	$	403,480		13.07	%		246,952		8.00	%		285,539		9.25	%		N/A		N/A
Bank		392,814		12.77	%		246,109		8.00	%		284,563		9.25	%	$	307,636		10.00	%
Tier 1 capital¹ (to risk-weighted assets)
Consolidated		386,409		12.52	%		185,214		6.00	%		223,800		7.25	%		N/A		N/A
Bank		375,684		12.21	%		184,581		6.00	%		223,035		7.25	%		246,108		8.00	%
Common equity tier 1 capital¹ (to risk-weighted assets)
Consolidated		347,946		11.27	%		138,910		4.50	%		177,497		5.75	%		N/A		N/A
Bank		375,684		12.21	%		138,436		4.50	%		176,890		5.75	%		199,963		6.50	%
Tier 1 capital¹ (to average assets)
Consolidated		386,409		9.94	%		155,556		4.00	%		155,556		4.00	%		N/A		N/A
Bank		375,684		9.65	%		155,805		4.00	%		155,805		4.00	%		194,756		5.00	%
December 31, 2017
Total capital¹(to risk-weighted assets)
Consolidated	$	384,800		12.91	%	$	238,543		8.00	%	$	275,816		9.25	%		N/A		N/A
Bank		382,788		12.85	%		238,386		8.00	%		275,634		9.25	%	$	297,982		10.00	%
Tier 1 capital¹ (to risk-weighted assets)
Consolidated		368,355		12.35	%		178,907		6.00	%		216,180		7.25	%		N/A		N/A
Bank		366,343		12.29	%		178,790		6.00	%		216,038		7.25	%		238,386		8.00	%
Common equity tier 1 capital¹ (to risk-weighted assets)
Consolidated		329,892		11.06	%		134,181		4.50	%		171,454		5.75	%		N/A		N/A
Bank		366,343		12.29	%		134,092		4.50	%		171,340		5.75	%		193,689		6.50	%
Tier 1 capital¹ (to average assets)
Consolidated		368,355		9.92	%		148,503		4.00	%		148,503		4.00	%		N/A		N/A
Bank		366,343		9.89	%		148,116		4.00	%		148,116		4.00	%		185,145		5.00	%


	Three Months Ended
Non-interest Expense	June 30 2018		June 30 2017		Amount Change			Percent Change
Salaries	$	10,043	$	9,116	$	927			10.2	%
Commission and bonuses		1,509		1,389		120			8.6	%
Employee benefits		2,257		1,961		296			15.1	%
Net occupancy expenses		2,520		2,196		324			14.8	%
Data processing		1,607		1,502		105			7.0	%
Professional fees		376		535		(159	)		-29.7	%
Outside services and consultants		1,267		1,265		2			0.2	%
Loan expense		1,525		1,250		275			22.0	%
FDIC deposit insurance		345		243		102			42.0	%
Other losses		269		78		191			244.9	%
Other expenses		3,224		2,953		271			9.2	%

Totalnon-interest expense	$	24,942	$	22,488	$	2,454			10.9	%