HORIZON BANCORP INC /IN/ - Quarter Report: 2011 June (Form 10-Q)

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HORIZON BANCORP

FORM 10-Q

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


		QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

Commission file number 0-10792

HORIZON BANCORP

(Exact name of registrant as specified in its charter)


Indiana		35-1562417

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

515 Franklin Square, Michigan City, Indiana		46360

(Address of principal executive offices)		(Zip Code)

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

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

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

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 þ No o

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


Large Accelerated Filer o		Accelerated Filer o		Non-accelerated Filer o Do not check if smaller reporting company		Smaller Reporting Company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,329,576 shares of Common Stock, $.2222 par value, at August 12, 2011.

HORIZON BANCORP

FORM 10-Q

INDEX


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets			3

Condensed Consolidated Statements of Income			4

Condensed Consolidated Statement of Stockholders’ Equity			5

Condensed Consolidated Statements of Cash Flows			6

Notes to Condensed Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32

Item 3. Quantitative and Qualitative Disclosures about Market Risk			46

Item 4. Controls and Procedures			46

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			47

Item 1A. Risk Factors			47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47

Item 3. Defaults Upon Senior Securities			47

Item 4. (Removed and reserved)			47

Item 5. Other Information			48

Item 6. Exhibits			49

Signatures

Index To Exhibits
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1 — FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)


	June 30
	2011		December 31
	(Unaudited)		2010

Assets
Cash and due from banks	$	20,832	$	15,683
Investment securities, available for sale		449,817		382,344
Investment securities, held to maturity		10,632		9,595
Loans held for sale		4,343		18,833
Loans, net of allowance for loan losses of $18,586 and $19,064		820,684		863,813
Premises and equipment		33,255		34,194
Federal Reserve and Federal Home Loan Bank stock		12,390		13,664
Goodwill		5,910		5,910
Other intangible assets		2,515		2,741
Interest receivable		6,778		6,519
Cash value life insurance		27,611		27,195
Other assets		18,970		20,428

Total assets	$	1,413,737	$	1,400,919

Liabilities
Deposits
Non-interest bearing	$	113,747	$	107,606
Interest bearing		906,529		877,892

Total deposits		1,020,276		985,498
Borrowings		230,141		260,741
Subordinated debentures		30,630		30,584
Interest payable		705		781
Other liabilities		10,478		11,032

Total liabilities		1,292,230		1,288,636

Commitments and contingent liabilities Stockholders’ Equity
Preferred stock, no par value, $1,000 liquidation value Authorized, 1,000,000 shares Issued 18,750 shares		18,301		18,217
Common stock, $.2222 stated value Authorized, 22,500,000 shares Issued, 3,329,576 and 3,300,659 shares		1,139		1,122
Additional paid-in capital		10,471		10,356
Retained earnings		84,417		80,240
Accumulated other comprehensive income		7,179		2,348

Total stockholders’ equity		121,507		112,283

Total liabilities and stockholders’ equity	$	1,413,737	$	1,400,919

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)


	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Interest Income
Loans receivable	$	11,891		$	13,212		$	23,779		$	25,817
Investment securities
Taxable		2,786			2,517			5,286			4,963
Tax exempt		1,035			1,078			2,078			2,159

Total interest income		15,712			16,807			31,143			32,939

Interest Expense
Deposits		2,195			2,706			4,532			5,469
Borrowed funds		1,600			2,338			3,177			4,781
Subordinated debentures		454			395			904			768

Total interest expense		4,249			5,439			8,613			11,018

Net Interest Income		11,463			11,368			22,530			21,921
Provision for loan losses		1,332			3,000			2,880			6,233

Net Interest Income after Provision for Loan Losses		10,131			8,368			19,650			15,688

Other Income
Service charges on deposit accounts		825			964			1,620			1,829
Wire transfer fees		137			185			245			325
Interchange fees		639			560			1,184			1,014
Fiduciary activities		932			1,007			1,895			2,002
Gain on sale of securities		365			131			639			131
Gain on sale of mortgage loans		1,308			1,674			1,841			3,056
Mortgage servicing income net of impairment		99			(97	)		863			(32	)
Increase in cash surrender value of bank owned life insurance		211			197			416			353
Other income		(68	)		302			59			619

Total other income		4,448			4,923			8,762			9,297

Other Expenses
Salaries and employee benefits		5,470			5,190			10,831			9,988
Net occupancy expenses		1,039			979			2,120			2,041
Data processing		494			570			901			972
Professional fees		331			530			680			1,001
Outside services and consultants		386			424			767			789
Loan expense		694			771			1,456			1,521
FDIC insurance expense		303			408			690			796
Other losses		246			10			277			37
Other expenses		1,524			1,302			3,023			2,593

Total other expenses		10,487			10,184			20,745			19,738

Income Before Income Tax		4,092			3,107			7,667			5,247
Income tax expense		999			592			1,809			941

Net Income		3,093			2,515			5,858			4,306
Preferred stock dividend and discount accretion		(277	)		(352	)		(553	)		(704	)

Net Income Available to Common Shareholders	$	2,816		$	2,163		$	5,305		$	3,602

Basic Earnings Per Share	$	0.86		$	0.66		$	1.61		$	1.10
Diluted Earnings Per Share		0.83			0.65			1.57			1.09

See notes to condensed consolidated financial statements

Horizon Bancorp and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

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


														Accumulated
					Additional									Other
	Preferred		Common		Paid-in			Comprehensive			Retained			Comprehensive
	Stock		Stock		Capital			Income			Earnings			Income			Total

Balances, December 31, 2010	$	18,217	$	1,122	$	10,356					$	80,240		$	2,348		$	112,283
Net income								$	5,858			5,858						5,858

Other comprehensive income, net of tax:
Unrealized gain on securities									5,148						5,148			5,148
Unrealized gain on derivative instruments									(317	)					(317	)		(317	)

Comprehensive income								$	10,689


Amortization of unearned compensation						49												49
Issuance of restricted shares				16		(16	)
Exercise of stock options				1		54												55
Tax benefit related to stock options						8												8
Stock option expense						20												20
Cash dividends on preferred stock (5.00%)												(469	)					(469	)
Cash dividends on common stock ($.34 per share)												(1,128	)					(1,128	)

Accretion of discount on preferred stock		84										(84	)					—

Balances, June 30, 2011	$	18,301	$	1,139	$	10,471					$	84,417		$	7,179		$	121,507

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)


	Six Months Ended June 30
	2011			2010
	(Unaudited)			(Unaudited)

Operating Activities
Net income	$	5,858		$	4,306
Items not requiring (providing) cash
Provision for loan losses		2,880			6,233
Depreciation and amortization		1,227			1,112
Share based compensation		20			12
Mortgage servicing rights impairment		(728	)		59
Deferred income tax		—			5
Premium amortization on securities available for sale, net		1,026			764
Gain on sale of investment securities		(639	)		(131	)
Gain on sale of mortgage loans		(1,841	)		(3,056	)
Proceeds from sales of loans		109,902			104,014
Loans originated for sale		(108,061	)		(101,447	)
Increase in cash surrender value of life insurance		(416	)		(353	)
(Gain) loss on sale of other real estate owned		86			(183	)
Net change in
Interest receivable		(259	)		(58	)
Interest payable		(76	)		(120	)
Other assets		1,977			655
Other liabilities		(812	)		(680	)

Net cash provided by operating activities		10,144			11,132

Investing Activities
Purchases of securities available for sale		(108,989	)		(92,230	)
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale		49,049			68,839
Purchase of securities held to maturity		(2,437	)		(15,332	)
Proceeds from maturities of securities held to maturity		1,400			13,032
Proceeds from the sale of Federal Home Loan Bank stock		1,274			—
Net change in loans		50,962			4,929
Proceeds on the sale of OREO and repossessed assets		1,069			3,392
Purchases of premises and equipment		(13	)		(1,733	)
Purchases and assumption of ATSB		—			3,406

Net cash used in investing activities		(7,685	)		(15,697	)

Financing Activities
Net change in
Deposits		34,778			(26,731	)
Borrowings		(30,554	)		(10,628	)
Proceeds from issuance of stock		55			110
Tax benefit from issuance of stock		8			70
Dividends paid on common shares		(1,128	)		(1,117	)
Dividends paid on preferred shares		(469	)		(625	)

Net cash provided by (used in) financing activities		2,690			(38,921	)

Net Change in Cash and Cash Equivalent		5,149			(43,486	)
Cash and Cash Equivalents, Beginning of Period		15,683			68,702

Cash and Cash Equivalents, End of Period	$	20,832		$	25,216

Additional Cash Flows Information
Interest paid	$	8,689		$	11,137
Income taxes paid		100			180
Transfer of loans to other real estate owned		3,717			4,137

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 1 — Accounting Policies

The accompanying condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2011 and June 30, 2010 are not necessarily indicative of the operating results for the full year of 2011 or 2010. 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 2010 filed with the Securities and Exchange Commission on March 11, 2011. The consolidated condensed balance sheet of Horizon as of December 31, 2010 has been derived from the audited balance sheet of Horizon as of that date.

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


	Three months ended				Six months ended
	June 30				June 30
	2011		2010		2011		2010
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Basic earnings per share
Net income	$	3,093	$	2,515	$	5,858	$	4,306
Less: Preferred stock dividends and accretion of discount		277		352		553		704

Net income available to common shareholders	$	2,816	$	2,163	$	5,305	$	3,602

Weighted average common shares outstanding		3,291,833		3,278,392		3,287,258		3,274,327

Basic earnings per share	$	0.86	$	0.66	$	1.61	$	1.10


Diluted earnings per share
Net income available to common shareholders	$	2,816	$	2,163	$	5,305	$	3,602

Weighted average common shares outstanding		3,291,833		3,278,392		3,287,258		3,274,327
Effect of dilutive securities:
Warrants		73,673		41,250		75,479		26,135
Restricted stock		4,759		12,738		9,806		12,220
Stock options		6,704		1,388		6,915		3,989

Weighted average shares outstanding		3,376,969		3,333,768		3,379,458		3,316,671

Diluted earnings per share	$	0.83	$	0.65	$	1.57	$	1.09

At June 30, 2011 and 2010, there were 34,117 shares and 39,000 shares that were not included in the computation of diluted earnings per share because they were non-dilutive.

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2010 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2010 consolidated financial statements to be comparable to 2011. These reclassifications had no effect on net income.

Note 2 — Securities

The fair value of securities is as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2011 (Unaudited)	Cost		Gains		Losses			Value

Available for sale
U.S. Treasury and federal agencies	$	19,468	$	311	$	(9	)	$	19,770
State and municipal		134,371		4,488		(225	)		138,634
Federal agency collateralized mortgage obligations		130,406		3,300		—			133,706
Federal agency mortgage-backed pools		147,936		4,933		(11	)		152,858
Private labeled mortgage-backed pools		4,157		126		—			4,283
Corporate notes		569		7		(10	)		566

Total available for sale investment securities	$	436,907	$	13,165	$	(255	)	$	449,817

Held to maturity, State and Municipal	$	10,632	$	—	$	—		$	10,632


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2010	Cost		Gains		Losses			Value

Available for sale
U.S. Treasury and federal agencies	$	24,727	$	643	$	(119	)	$	25,251
State and municipal		132,380		1,511		(2,402	)		131,489
Federal agency collateralized mortgage obligations		100,106		1,945		(214	)		101,837
Federal agency mortgage-backed pools		114,390		3,865		(360	)		117,895
Private labeled mortgage-backed pools		5,197		126		—			5,323
Corporate notes		555		—		(6	)		549

Total available for sale investment securities	$	377,355	$	8,090	$	(3,101	)	$	382,344

Held to maturity, State and Municipal	$	9,595	$	—	$	—		$	9,595

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

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At June 30, 2011, 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 U.S. Treasury and federal agencies, securities of state and municipal governmental agencies, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

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, 2011.

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2011 and December 31, 2010, 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, 2011 (Unaudited)
	Amortized		Fair
	Cost		Value

Available for sale
Within one year	$	970	$	977
One to five years		26,845		27,834
Five to ten years		56,701		58,432
After ten years		69,892		71,728

		154,408		158,971
Federal agency collateralized mortgage obligations		130,406		133,706
Federal agency mortgage-backed pools		147,936		152,857
Private labeled mortgage-backed pools		4,157		4,283

Total available for sale investment securities	$	436,907	$	449,817


Held to maturity
Within one year	$	10,532	$	10,532
One to five years		100		100

Total held to maturity investment securities	$	10,632	$	10,632

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


	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2011 (Unaudited)	Value		Losses			Value		Losses			Value		Losses

U.S. Treasury and federal agencies	$	5,048	$	(9	)	$	—	$	—		$	5,048	$	(9	)
State and municipal		9,794		(215	)		797		(10	)		10,591		(225	)
Federal agency collateralized mortgage obligations		—		—			—		—			—		—
Federal agency mortgage-backed pools		580		(11	)		28		—			608		(11	)
Corporate notes		—		(10	)		—		—			—		(10	)

Total temporarily impaired securities	$	15,422	$	(245	)	$	825	$	(10	)	$	16,247	$	(255	)


	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2010	Value		Losses			Value		Losses			Value		Losses

U.S. Treasury and federal agencies	$	9,881	$	(119	)	$	—	$	—		$	9,881	$	(119	)
State and municipal		60,401		(2,370	)		568		(32	)		60,969		(2,402	)
Federal agency collateralized mortgage obligations		21,130		(214	)		—		—			21,130		(214	)
Federal agency mortgage-backed pools		27,033		(360	)		32		—			27,065		(360	)
Corporate notes		26		(6	)		—		—			26		(6	)

Total temporarily impaired securities	$	118,471	$	(3,069	)	$	600	$	(32	)	$	119,071	$	(3,101	)

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)


	Three months ended June 30				Six months ended June 30
	2011		2010		2011		2010

Sales of securities available for sale (Unaudited)
Proceeds	$	8,116	$	18,938	$	17,390	$	18,938
Gross gains		365		135		639		135
Gross losses		—		4		—		4

Note 3 – Loans


	June 30			December 31
	2011 (Unaudited)			2010

Commercial
Working capital and equipment	$	157,169		$	151,414
Real estate, including agriculture		171,182			167,785
Tax exempt		2,768			2,925
Other		7,320			7,894

Total		338,439			330,018

Real estate
1—4 family		159,608			157,478
Other		4,195			4,957

Total		163,803			162,435

Consumer
Auto		132,683			136,014
Recreation		5,218			6,086
Real estate/home improvement		27,335			29,184
Home equity		91,601			90,580
Unsecured		3,148			3,091
Other		1,986			1,726

Total		261,971			266,681

Mortgage warehouse		75,057			123,743

Total		75,057			123,743

Total loans		839,270			882,877
Allowance for loan losses		(18,586	)		(19,064	)

Loans, net	$	820,684		$	863,813

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 higher 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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

affected by conditions in the real estate markets or in the general economy. The properties securing The Company’s commercial real estate portfolio are diverse in terms of property type, which 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, such as churches, schools, restaurants, and golf courses unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Real Estate and Consumer

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

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with 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 payoff 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 is typically less than 30 days.

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)


	Loan					Deferred			Recorded
June 30, 2011	Balance			Interest Due		Fees / (Costs)			Investment

Owner occupied real estate	$	125,398		$	384	$	20		$	125,802
Non owner occupied real estate		141,451			428		86			141,965
Residential spec homes		2,828			3		—			2,831
Development & spec land loans		7,890			30		—			7,920
Commercial and industrial		60,762			193		4			60,959

Total commercial		338,329			1,038		110			339,477

Residential mortgage		154,923			601		50			155,574
Residential construction		8,830			17		—			8,847
Mortgage warehouse		75,057			—		—			75,057

Total real estate		238,810			618		50			239,478

Direct installment		23,378			83		(356	)		23,105
Direct installment purchased		1,243			—		—			1,243
Indirect installment		125,533			435		2			125,970
Home equity		112,911			531		(740	)		112,702

Total consumer		263,065			1,049		(1,094	)		263,020


Total loans		840,204			2,705		(934	)		841,975
Allowance for loan losses		(18,586	)		—		—			(18,586	)

Net loans	$	821,618		$	2,705	$	(934	)	$	823,389


	Loan					Deferred			Recorded
December 31, 2010	Balance			Interest Due		Fees / (Costs)			Investment

Owner occupied real estate	$	125,883		$	442	$	26		$	126,351
Non owner occupied real estate		136,986			364		87			137,437
Residential spec homes		2,257			4		(2	)		2,259
Development & spec land loans		6,439			14		—			6,453
Commercial and industrial		58,336			234		6			58,576

Total commercial		329,901			1,058		117			331,076

Residential mortgage		154,891			592		76			155,559
Residential construction		7,467			13		1			7,481
Mortgage warehouse		123,743			332		—			124,075

Total real estate		286,101			937		77			287,115

Direct installment		23,527			97		(338	)		23,286
Direct installment purchased		1,869			—		—			1,869
Indirect installment		128,122			491		7			128,620
Home equity		114,202			563		(708	)		114,057

Total consumer		267,720			1,151		(1,039	)		267,832


Total loans		883,722			3,146		(845	)		886,023
Allowance for loan losses		(19,064	)		—		—			(19,064	)

Net loans	$	864,658		$	3,146	$	(845	)	$	866,959

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 4 — Allowance for Loan Losses

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


	Three Months Ended				Six Months Ended
	June 30		June 30		June 30		June 30
	2011		2010		2011		2010

Balance at beginning of the period	$	19,090	$	16,120	$	19,064	$	16,015
Loans charged-off:
Commercial
Owner occupied real estate		113		894		124		958
Non owner occupied real estate		114		—		114		288
Residential development		—		—		—		—
Development & Spec Land Loans		—		—		—		780
Commercial and industrial		160		57		210		757

Total commercial		387		951		448		2,783
Real estate
Residential mortgage		669		287		751		597
Residential construction		—		—		—		—
Mortgage warehouse		—		—		—		—

Total real estate		669		287		751		597
Consumer
Direct Installment		217		254		402		339
Direct Installment Purchased		—		—		—		—
Indirect Installment		331		651		786		1,729
Home Equity		552		766		1,529		868

Total consumer		1,100		1,671		2,717		2,936

Total loans charged-off		2,156		2,909		3,916		6,316
Recoveries of loans previously charged-off:
Commercial
Owner occupied real estate		18		—		18		—
Non owner occupied real estate		—		—		—		—
Residential development		—		66		—		66
Development & Spec Land Loans		—		—		—		—
Commercial and industrial		3		—		5		—

Total commercial		21		66		23		66
Real estate
Residential mortgage		10		—		10		1
Residential construction		—		—		—		—
Mortgage warehouse		—		—		—		—

Total real estate		10		—		10		1
Consumer
Direct Installment		19		19		67		40
Direct Installment Purchased		—		—		—		—
Indirect Installment		220		244		389		499
Home Equity		50		3		69		5

Total consumer		289		266		525		544

Total loan recoveries		320		332		558		611

Net loans charged-off		1,836		2,577		3,358		5,705
Provision charged to operating expense		1,332		3,000		2,880		6,233

Balance at the end of the period	$	18,586	$	16,543	$	18,586	$	16,543

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

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

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

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be 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:


					Mortgage
June 30, 2011 (Unaudited)	Commercial		Real Estate		Warehousing		Consumer		Total Allowance

Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,490	$	—	$	—	$	—	$	1,490
Collectively evaluated for impairment		5,588		1,710		1,516		8,282		17,096

Total ending allowance balance	$	7,078	$	1,710	$	1,516	$	8,282	$	18,586


Loans:
Individually evaluated for impairment	$	9,655	$	—	$	—	$	—	$	9,655
Collectively evaluated for impairment		329,822		164,421		75,057		263,020		832,320

Total ending loans balance	$	339,477	$	164,421	$	75,057	$	263,020	$	841,975


					Mortgage
December 31, 2010	Commercial		Real Estate		Warehousing		Consumer		Total Allowance

Allowance For Loan Losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,457	$	—	$	—	$	—	$	1,457
Collectively evaluated for impairment		6,097		2,379		1,435		7,696		17,607

Total ending allowance balance	$	7,554	$	2,379	$	1,435	$	7,696	$	19,064


Loans:
Individually evaluated for impairment	$	8,123	$	—	$	—	$	—	$	8,123
Collectively evaluated for impairment		322,953		163,040		124,075		267,832		877,900

Total ending loans balance	$	331,076	$	163,040	$	124,075	$	267,832	$	886,023

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 5 — Non-performing Assets and Impaired Loans

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


			Loans Past
			Due Over 90		Non				Total Non-
			Days Still		Performing		Performing		Performing
June 30, 2011	Nonaccrual		Accruing		TDR’s		TDR’s		Loans

Commercial
Owner occupied real estate	$	2,471	$	—	$	—	$	—	$	2,471
Non owner occupied real estate		5,113		—		413		—		5,526
Residential development		—		—		—		—		—
Development & Spec Land Loans		214		—		—		—		214
Commercial and industrial		414		—		147		840		1,401

Total commercial		8,212		—		560		840		9,612

Real estate
Residential mortgage		2,834		—		1,352		2,301		6,487
Residential construction		204		—				293		497
Mortgage warehouse		—		—		—		—		—

Total real estate		3,038		—		1,352		2,594		6,984

Consumer
Direct Installment		274		1		—		—		275
Direct Installment Purchased		—		1		—		—		1
Indirect Installment		1,182		53		—		—		1,235
Home Equity		1,724		—		—		793		2,517

Total Consumer		3,180		55		—		793		4,028


Total	$	14,430	$	55	$	1,912	$	4,227	$	20,624


			Loans Past
			Due Over 90		Non				Total Non-
			Days Still		Performing		Performing		Performing
December 31, 2010	Nonaccrual		Accruing		TDR’s		TDR’s		Loans

Commercial
Owner occupied real estate	$	1,358	$	—	$	—	$	—	$	1,358
Non owner occupied real estate		5,439		—		421		—		5,860
Residential development		16		—		—		—		16
Development & Spec Land Loans		250		—		—		—		250
Commercial and industrial		445		—		153		—		598

Total commercial		7,508		—		574		—		8,082

Real estate
Residential mortgage		5,278		222		241		3,380		9,121
Residential construction		205		—		—		—		205
Mortgage warehouse		—		—		—		—		—

Total real estate		5,483		222		241		3,380		9,326

Consumer
Direct Installment		251		23		—		—		274
Direct Installment Purchased		—		5		—		—		5
Indirect Installment		1,328		98		—		—		1,426
Home Equity		2,103		10		37		165		2,315

Total Consumer		3,682		136		37		165		4,020


Total	$	16,673	$	358	$	852	$	3,545	$	21,428

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

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

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

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

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

The Company’s TDR’s are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 2011 the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of June 30, 2011, the Company had $6.1 million in TDR’s and $4.2 million were performing according to the restructured terms. The Company experienced no TDR default for the three months ending June 30, 2011 and one during the twelve months ending December 31, 2010.

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

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


							Six Months Ending				Three Months Ending
							Average				Average
	Unpaid				Allowance For		Balance in		Interest		Balance in		Interest
	Principal		Recorded		Loan Loss		Impaired		Income		Impaired		Income
June 30, 2011	Balance		Investment		Allocated		Loans		Recognized		Loans		Recognized
With no recorded allowance Commercial
Owner occupied real estate	$	1,027	$	1,030	$	—	$	732	$	10	$	894	$	9
Non owner occupied real estate		813		813		—		701		5		851		1
Residential development		—		—		—		13		—		10		—
Development & Spec Land Loans		124		124		—		104		—		124		—
Commercial and industrial		1,067		1,069		—		1,056		6		1,072		6

Total commercial		3,031		3,036		—		2,606		21		2,951		16

With an allowance recorded Commercial
Owner occupied real estate		1,444		1,443		460		1,083		—		1,339		—
Non owner occupied real estate		4,713		4,752		665		4,818		—		4,751		—
Residential development		—		—		—		—		—		—		—
Development & Spec Land Loans		90		90		125		223		—		197		—
Commercial and industrial		334		334		240		473		2		444		2

Total commercial		6,581		6,619		1,490		6,597		2		6,731		2


Total	$	9,612	$	9,655	$	1,490	$	9,203	$	23	$	9,682	$	18


							Twelve Months Ending
							Average
December 31, 2010	Unpaid				Allowance For		Balance in		Interest
	Principal		Recorded		Loan Loss		Impaired		Income
	Balance		Investment		Allocated		Loans		Recognized
With no recorded allowance Commercial
Owner occupied real estate	$	720	$	721	$	—	$	2,434	$	19
Non owner occupied real estate		928		929		—		1,195		36
Residential development		—		—		—		—		—
Development & Spec Land Loans		—		—		—		770		—
Commercial and industrial		118		118		—		785		—

Total commercial		1,766		1,768		—		5,184		55

With an allowance recorded Commercial
Owner occupied real estate		639		640		385		68		15
Non owner occupied real estate		4,932		4,970		665		2,677		115
Residential development		16		16		16		7		2
Development & Spec Land Loans		250		250		126		250		—
Commercial and industrial		479		479		265		316		13

Total commercial		6,316		6,355		1,457		3,318		145


Total	$	8,082	$	8,123	$	1,457	$	8,502	$	200

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

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


	30 - 59 Days		60 - 89 Days		Greater than 90				Loans Not Past
June 30, 2011	Past Due		Past Due		Days Past Due		Total Past Due		Due		Total
Commercial
Owner occupied real estate	$	363	$	—	$	—	$	363	$	125,035	$	125,398
Non owner occupied real estate		1,058		13		—		1,071		140,380		141,451
Residential development		—		—		—		—		2,828		2,828
Development & Spec Land Loans		42		—		—		42		7,848		7,890
Commercial and industrial		137		20		—		157		60,605		60,762

Total commercial		1,600		33		—		1,633		336,696		338,329

Real estate
Residential mortgage		540		—		—		540		154,383		154,923
Residential construction		—		—		—		—		8,830		8,830
Mortgage warehouse		—		—		—		—		75,057		75,057

Total real estate		540		—		—		540		238,270		238,810

Consumer
Direct Installment		192		55		1		248		23,130		23,378
Direct Installment Purchased		29		9		1		39		1,204		1,243
Indirect Installment		1,959		215		53		2,227		123,306		125,533
Home Equity		229		42		—		271		112,640		112,911

Total consumer		2,409		321		55		2,785		260,280		263,065


Total	$	4,549	$	354	$	55	$	4,958	$	835,246	$	840,204


	30 - 59 Days		60 - 89 Days		Greater than 90				Loans Not Past
December 31, 2010	Past Due		Past Due		Days Past Due		Total Past Due		Due		Total
Commercial
Owner occupied real estate	$	229	$	—	$	—	$	229	$	125,654	$	125,883
Non owner occupied real estate		461		—		—		461		136,525		136,986
Residential development		—		—		—		—		2,257		2,257
Development & Spec Land Loans		—		—		—		—		6,439		6,439
Commercial and industrial		74		—		—		74		58,262		58,336

Total commercial		764		—		—		764		329,137		329,901

Real estate
Residential mortgage		317		91		222		630		154,261		154,891
Residential construction		293		—		—		293		7,174		7,467
Mortgage warehouse		—		—		—		—		123,743		123,743

Total real estate		610		91		222		923		285,178		286,101

Consumer
Direct Installment		294		156		23		473		23,054		23,527
Direct Installment Purchased		51		31		5		87		1,782		1,869
Indirect Installment		2,360		433		98		2,891		125,231		128,122
Home Equity		899		218		10		1,127		113,075		114,202

Total consumer		3,604		838		136		4,578		263,142		267,720


Total	$	4,978	$	929	$	358	$	6,265	$	877,457	$	883,722

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

•		For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure of $500,000 or greater are validated by the Loan Committee, which is chaired by the Chief Operating Officer (COO).

•		Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the COO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the COO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the COO however, lenders must present their factual information to either the Loan Committee or the COO when recommending an upgrade. One of the requirements for a loan officer to meet the annual bonus criteria is that the loan officer did not have any of his/her loans downgraded by either Internal Loan Review or Bank Regulators to a classified grade; that is, substandard, doubtful or loss.

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

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

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

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

Risk Grade 1: Excellent (Pass)

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

Risk Grade 2: Good (Pass)

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

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

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

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

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

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

Risk Grade 4: Satisfactory/Monitored (Pass)

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

Risk Grade 5: Special Mention

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

Risk Grade 6:Substandard

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

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

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

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

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

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

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

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

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

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

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

Risk Grade 7: Doubtful

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

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

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

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

Risk Grade 8: Loss

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)


			Special
June 30, 2011	Pass		Mention		Substandard		Doubtful		Total

Commercial
Owner occupied real estate	$	98,823	$	7,659	$	18,916	$	—	$	125,398
Non owner occupied real estate		117,696		9,774		13,981		—		141,451
Residential development		822		535		1,471		—		2,828
Development & Spec Land Loans		3,259		1,046		3,585		—		7,890
Commercial and industrial		49,388		2,574		8,800		—		60,762

Total commercial		269,988		21,588		46,753		—		338,329

Real estate
Residential mortgage		148,436		—		6,487		—		154,923
Residential construction		8,333		—		497		—		8,830
Mortgage warehouse		75,057		—		—		—		75,057

Total real estate		231,826		—		6,984		—		238,810

Consumer
Direct Installment		23,103		—		275		—		23,378
Direct Installment Purchased		1,242		—		1		—		1,243
Indirect Installment		124,298		—		1,235		—		125,533
Home Equity		110,394		—		2,517		—		112,911

Total Consumer		259,037		—		4,028		—		263,065


Total	$	760,851	$	21,588	$	57,765	$	—	$	840,204


			Special
December 31, 2010	Pass		Mention		Substandard		Doubtful		Total

Commercial
Owner occupied real estate	$	94,722	$	13,656	$	17,506	$	—	$	125,883
Non owner occupied real estate		119,041		6,107		11,838		—		136,986
Residential development		834		537		886		—		2,257
Development & Spec Land Loans		4,378		746		1,315		—		6,439
Commercial and industrial		45,831		6,856		5,649		—		58,336

Total commercial		264,805		27,902		37,195		—		329,901

Real estate
Residential mortgage		145,770		—		9,121		—		154,891
Residential construction		7,262		—		205		—		7,467
Mortgage warehouse		123,743		—		—		—		123,743

Total real estate		276,775		—		9,326		—		286,101

Consumer
Direct Installment		23,253		—		274		—		23,527
Direct Installment Purchased		1,864		—		5		—		1,869
Indirect Installment		126,696		—		1,426		—		128,122
Home Equity		111,888		—		2,314		—		114,202

Total Consumer		263,701		—		4,019		—		267,720


Total	$	805,281	$	27,902	$	50,539	$	—	$	883,722

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 6 – Derivative financial instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 5.63% on a notional amount of $30.6 million at June 30, 2011. Under these agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of the other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At June 30, 2011, the Company’s cash flow hedge was effective and is not expected to have a significant impact the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending activities. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At June 30, 2011, the Company’s fair value hedges were effective and are not expected to have a significant impact 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 $47.6 million at June 30, 2011.

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, 2011, the Company’s fair value of these derivatives was recorded and over the next 12 months is not expected to have a significant impact on the Company’s net income.

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

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


	Asset Derivative			Liability Derivatives
	June 30, 2011			June 30, 2011
	Balance Sheet			Balance Sheet
Derivatives designated as hedging instruments	Location	Fair Value		Location	Fair Value

Interest rate contracts	Loans	$	1,128	Other liabilities	$	1,980
Interest rate contracts	Other Assets		852	Other liabilities		1,865

Total derivatives designated as hedging instruments			1,980			3,845


Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		455	Other liabilities		64

Total derivatives not designated as hedging instruments			455			64

Total derivatives		$	2,435		$	3,909


	Asset Derivative			Liability Derivatives
	December 31, 2010			December 31, 2010
	Balance Sheet			Balance Sheet
Derivatives designated as hedging instruments	Location	Fair Value		Location	Fair Value

Interest rate contracts	Loans	$	1,388	Other liabilities	$	2,039
Interest rate contracts	Other Assets		651	Other liabilities		1,376
Total derivatives designated as hedging instruments			2,039			3,415


Derivatives not designated as hedging instruments
Mortgage loan contracts	Other assets		407	Other liabilities		—

Total derivatives not designated as hedging instruments			407			—

Total derivatives		$	2,446		$	3,415

The effect of the derivative instruments on the consolidated statement of income for the three-month period ended is as follows:

Amount of Loss Recognized in

Other Comprehensive Income on

Derivative (Effective Portion)

Three Months Ended June 30

Six Months Ended June 30

Derivative in cash flow

2011

2010

2011

2010

hedging relationship

(Unaudited)

Interest rate contracts

(611

)

(1,421

)

(318

)

(1,694

)

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.

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)


		Amount of Gain (Loss)						Amount of Gain (Loss)
		Recognized on Derivative						Recognized on Derivative
		Three Months Ended June 30						Six Months Ended June 30
	Location of gain (loss)	2011			2010			2011			2010
Derivative in fair value hedging relationship	recognized on derivative	(Unaudited)			(Unaudited)

Interest rate contracts	Interest income - loans	$	351		$	810		$	(59	)	$	1,213
Interest rate contracts	Interest income - loans		(351	)		(810	)		59			(1,213	)

Total		$	—		$	—		$	—		$	—


		Amount of Gain (Loss)				Amount of Gain (Loss)
		Recognized on Derivative				Recognized on Derivative
		Three Months Ended June 30				Six Months Ended June 30
	Location of gain (loss)	2011		2010		2011		2010
Derivative not designated as hedging relationship	recognized on derivative	(Unaudited)		(Unaudited)

Mortgage contracts	Other income - gain on sale of loans	$	165	$	362	$	799	$	600

Total		$	165	$	362	$	799	$	600

Note 7 – Disclosures about fair value of assets and liabilities

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

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

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

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy.

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 United States Department of the Treasury (“U.S. Treasury”) and federal agency securities, state and municipal securities, federal agency 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.

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Hedged loans

Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 3 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 and cannot be corroborated by observable market data and, therefore, are classified within Level 3 of the valuation hierarchy.

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


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

June 30, 2011
Available-for-sale securities
U.S. Treasury and federal agencies	$	19,770		$	—	$	19,770	$	—
State and municipal		138,634			—		138,634		—
Federal agency collateralized mortgage obligations		133,706			—		133,706		—
Federal agency mortgage-backed pools		152,858			—		152,858		—
Private labeled mortgage-backed pools		4,283			—		4,283		—
Corporate notes		566			547		20		—

Total available-for-sale securities		449,817			547		449,271		—

Hedged loans		49,618			—		—		49,618
Forward sale commitments		455			—		—		455
Interest rate swap agreements		(3,846	)		—		—		(3,846	)
Commitments to originate loans		(64	)		—		—		(64	)

December 31, 2010
Available-for-sale securities
U.S. Treasury and federal agencies	$	25,251		$	—	$	25,251	$	—
State and municipal		131,489			—		131,489		—
Federal agency collateralized mortgage obligations		101,837			—		101,837		—
Federal agency mortgage-backed pools		117,895			—		117,895		—
Private labeled mortgage-backed pools		5,323			—		5,323		—
Corporate notes		549			456		20		—

Total available-for-sale securities		382,344			456		381,815		—

Hedged loans		50,088			—		—		50,088
Forward sale commitments		407			—		—		407
Interest rate swap agreements		(3,415	)		—		—		(3,415	)
Commitments to originate loans		—			—		—		—

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)


				Forward Sale			Interest Rate			Commitments to
	Hedged Loans			Commitments			Swaps			Originate Loans

Beginning balance December 31, 2010	$	50,088		$	407		$	(3,415	)	$	—
Total realized and unrealized gains and losses
Included in net income		(410	)		(126	)		410			(56	)
Included in other comprehensive income, gross		—			—			451			—
Purchases, issuances, and settlements		(352	)		—			—			—
Principal payments		(915	)		—			—			—

Ending balance March 31, 2011		48,411			281			(2,554	)		(56	)
Total realized and unrealized gains and losses
Included in net income		351			174			(351	)		(8	)
Included in other comprehensive income, gross		—			—			(941	)		—
Purchases, issuances, and settlements		1,200			—			—			—
Principal payments		(344	)		—			—			—

Ending balance June 30, 2011	$	49,618		$	455		$	(3,846	)	$	(64	)


				Forward Sale		Interest Rate			Commitments to
	Hedged Loans			Commitments		Swaps			Originate Loans

Beginning balance December 31, 2009	$	31,153		$	265	$	(715	)	$	(135	)
Total realized and unrealized gains and losses
Included in net income		403			141		(403	)		97
Included in other comprehensive income, gross		—			—		(420	)		—
Purchases, issuances, and settlements		7,991			—		—			—
Principal payments		(216	)		—		—			—

Ending balance March 31, 2010		39,331			406		(1,538	)		(38	)
Total realized and unrealized gains and losses
Included in net income		810			324		(810	)		38
Included in other comprehensive income, gross		—			—		(2,186	)		—
Purchases, issuances, and settlements		4,041			—		—			—
Principal payments		(284	)		—		—			—

Ending balance June 30, 2010	$	43,898		$	730	$	(4,534	)	$	—

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


	Period Ended June 30
Non Interest Income	2011			2010

Total gains and losses from:
Hedged loans	$	351		$	403
Fair value interest rate swap agreements		(351	)		(403	)
Derivative loan commitments		165			237

	$	165		$	237

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)


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

June 30, 2011
Impaired loans	$	9,612	$	—	$	—	$	9,612

December 31, 2010
Impaired loans	$	9,919	$	—	$	—	$	9,919

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

Note 8 – 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, 2011 and December 31, 2010. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

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

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

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

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

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

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

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

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

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

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

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

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

The estimated fair values of Horizon’s financial instruments are as follows:


	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Assets
Cash and due from banks	$	20,832	$	20,832	$	15,683	$	15,683
Investment securities available for sale		449,817		449,817		382,344		382,344
Investment securities held to maturity		10,632		10,632		9,595		9,595
Loans held for sale		4,343		4,343		18,833		18,833
Loans, net		820,684		825,994		863,813		867,054
Stock in FHLB and FRB		12,390		12,390		13,664		13,664
Interest receivable		6,778		6,778		6,519		6,519

Liabilities
Non-interest bearing deposits	$	113,747	$	113,747	$	107,606	$	107,606
Interest-bearing deposits		906,529		884,277		877,892		854,617
Borrowings		230,141		260,919		260,741		289,381
Subordinated debentures		30,630		30,902		30,584		30,734
Interest payable		705		705		781		781

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

Note 9 – Other Comprehensive Income (Loss)


	Three Months Ended						Six Months Ended
	June 30			June 30			June 30			June 30
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Unrealized gains on securities:
Unrealized holding gains arising during the period	$	(574	)	$	(420	)	$	151		$	1,380
Less: reclassification adjustment for gains realized in net income		365			131			639			131

		(939	)		(551	)		(488	)		1,249
Unrealized gain (loss) on derivative instruments		5,731			(2,535	)		7,920			(2,608	)

Net unrealized gains		4,792			(3,086	)		7,432			(1,359	)
Tax benefit		(1,677	)		1,080			(2,601	)		476

Other comprehensive income	$	3,115		$	(2,006	)	$	4,831		$	(883	)


	June 30			December 31
	2011			2010

Unrealized gain on securities available for sale	$	12,910		$	4,989
Unrealized gain (loss) on derivative instruments		(1,866	)		(1,377	)
Tax effect		(3,865	)		(1,264	)

Total accumulated other comprehensive income	$	7,179		$	2,348

Note 10 – Future accounting matters

ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accounting Standards board (“FASB”) issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company is required to disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existing disclosures to be presented on a disaggregated basis include a roll-forward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company adopted the applicable required additional disclosures effective December 31, 2010, and adoption of these additional disclosures did not have a material effect on its financial position or results of operations.

ASU No. 2011-02; A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”). In April, 2011, FASB issued ASU No. 2011-02, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. Early adoption is permitted. The Company intends to adopt the methodologies prescribed by this ASU by the date required, and is continuing to evaluate the impact of adoption of this ASU.

ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income. In June, 2011, FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of

HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)

comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Due to this pronouncement only recently announced, the Company is evaluating its timing of adoption of ASU 2011-05, but will adopt the ASU retrospectively by the due date.

Note 11 – Subsequent Events

On July 29, 2011, the U.S. Treasury preliminarily approved Horizon’s application for participation in the Small Business Lending Fund by issuing $12.5 million of a new series of preferred stock to the U.S. Treasury Department. The SBLF, which is part of the Small Business Jobs Act of 2010, provides incentives for participating banks to increase small business lending. Horizon intends to use the proceeds from the SBLF investment, together with Horizon’s available funds, to redeem in full the remaining $18.75 million of outstanding preferred stock Horizon issued to the U.S Treasury under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program. Horizon expects to close on the repurchase of the preferred stock before August 31, 2011. A binding obligation and final approval of Horizon’s application for the SBLF funds will not arise until a Stock Purchase Agreement is executed by the U.S. Treasury and Horizon. The execution of the Stock Purchase Agreement and the transfer of the funds by the U.S. Treasury are subject to, in the U.S. Treasury’s sole discretion, due diligence and the satisfaction of the closing conditions set forth in the Stock Purchase Agreement, including the absence of any material adverse changes in Horizon’s business, results of operation or condition (financial or otherwise).

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

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

Forward—Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp (“Horizon” or the “Company”) and Horizon Bank, N.A. (the “Bank”). Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “project,” “intend,” “plan,” “believe,” “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.

Horizon’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on Horizon’s future activities and operating results include, but are not limited to:

	•		*Credit risk*: the risk that loan customers or other parties will be unable to perform their contractual obligations;

	•		*Market risk*: the risk that changes in market rates and prices will adversely affect the Company’s financial condition or results of operation;

	•		*Liquidity risk*: the risk that Horizon or the Bank will have insufficient cash or access to cash to meet its operating needs;

	•		*Operational risk*: the risk of loss resulting from fraud, inadequate or failed internal processes, people and systems, or external events;

	•		*Economic risk*: the risk that the economy in the Company’s markets could decline further resulting in increased unemployment, decreased real estate values and increased loan charge-offs; and

	•		*Compliance risk*: the risk of additional action by Horizon’s regulators or additional regulation could hinder the Company’s ability to do business profitably.

Additional risks and uncertainties that could cause actual results to differ materially include risk factors relating to the banking industry and the other factors detailed from time to time in Horizon’s reports filed with the Securities and Exchange Commission, including those described in Item 1A “Risk Factors” of Part I of Horizon’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and in Item 1A “Risk Factors” of Part II of this Form 10-Q for the quarter ended June 30, 2011. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this report. Horizon does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement is made, or reflect the occurrence of unanticipated events, except to the extent required by law.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

Overview

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

Horizon continues to operate in a challenging economic environment. Within the Company’s primary market areas of Northwest Indiana and Southwest Michigan, unemployment rates increased during 2009 and have remained at high levels during 2010 and the first six months of 2011. This rise in unemployment has been driven by factors including slowdowns in the steel and recreational vehicle industries as well as a continued slowdown in the housing industry. The Company’s higher than historical levels of non-performing loans at June 30, 2011 and over the past two years can be attributed to the continued slow economy and continued high local unemployment causing lower business revenues and increased bankruptcies. Despite these economic factors, Horizon continued to post positive results through the first six months of 2011.

Following are some highlights of Horizons financial performance through the second quarter of 2011:

	•		Horizon’s second quarter 2011 net income was $3.1 million or $.83 diluted earnings per share, a 23.0% increase in net income from the same period in 2010 and the highest second quarter net income in the Company’s history.

	•		Horizon’s net income for the first half of 2011 was $5.9 million or $1.57 diluted earnings per share, a 36.0% increase in net income from the same period in 2010 and the highest first half net income in the Company’s history.

	•		Total deposits surpassed $1.0 billion at June 30, 2011 and increased $34.8 million from December 31, 2010.

	•		Borrowings decreased by $30.6 million since December 31, 2010.

	•		Net interest income, after provisions for loan losses, during the six months of 2011 was $19.7 million compared with $15.7 million for the same period in the prior year.

	•		Horizon’s non-performing loans decreased by 6.7% in the second quarter of 2011 compared to the first quarter of 2011.

	•		The provision for loan losses decreased to $2.9 million for the first six months of 2011 compared to $6.2 million for the same period in 2010.

	•		The Company’s mortgage servicing asset recovered $728,000 of impairment during the first six months of 2011 as mortgage loan refinancing activity slowed.

	•		Horizon’s tangible book value per share rose to $28.76 compared with $25.39 at the close of the second quarter of 2010.

	•		Horizon’s capital ratios, including Tier 1 Capital to total risk weighted assets of 13.61%, continue to be well above the regulatory standards for well-capitalized banks.

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for 2010 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 the allowance for loan losses, intangible assets and hedge accounting as critical accounting policies.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

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, 2011, Horizon had core deposit intangibles of $2.5 million subject to amortization and $5.9 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, 2011 was $26.90 per share compared to a book value of $31.32 per common share. Horizon reported record earnings for the eleventh consecutive year in 2010 and the first six months of 2011 were the highest first six months of net income in the Company’s history, therefore, the Company believes the below book market price relates to an overall decline in the financial industry sector and is not specific to Horizon.

The financial markets are currently reflecting significantly lower valuations for the stocks of financial institutions, when compared to historic valuation metrics, largely driven by the constriction in available credit and losses suffered related to residential mortgage markets. The Company’s stock activity, as well as the price, has been affected by the economic conditions affecting the banking industry. Management believes this downturn has impacted the Company’s stock and has concluded that the recent stock price is not indicative or reflective of fair value (per ASC Topic 820 Fair Value).

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

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

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

Derivative Instruments

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

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815-10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non-interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains 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

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.

Valuation Measurements

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

Financial Condition

On June 30, 2011, Horizon’s total assets were $1.4 billion, an increase of $12.8 million from December 31, 2010. Total assets increased primarily due to the increase in investment securities as excess liquidity was reinvested, offset by the reduction in net loans from the lower balance of mortgage warehouse loans compared to December 31, 2010.

Cash and cash equivalents increased during the period from the decrease in net loans and an increase in total deposits. The excess liquidity was used to repay borrowings held at December 31, 2010 and increase investment securities. However, at June 30, 2011, all excess cash and due from banks had been reinvested.

Investment securities were comprised of the following as of:


	June 30, 2011 (Unaudited)				December 31, 2010

	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Available for sale
U.S. Treasury and federal agencies	$	19,468	$	19,770	$	24,727	$	25,251
State and municipal		134,371		138,634		132,380		131,489
Federal agency collateralized mortgage obligations		130,406		133,706		100,106		101,837
Federal agency mortgage-backed pools		147,936		152,858		114,390		117,895
Private labeled mortgage-backed pools		4,157		4,283		5,197		5,323
Corporate notes		569		566		555		549

Total available for sale investment securities	$	436,907	$	449,817	$	377,355	$	382,344

Held to maturity, State and Municipal	$	10,632	$	10,632	$	9,595	$	9,595

Investment securities increased by approximately $67.4 million compared to the end of 2010. This growth was the result of the Company deploying excess cash held during the first six months in cash and cash due from banks into investment securities as net loans decreased.

Net loans decreased $43.1 million since December 31, 2010. This decrease was primarily the result of a reduction in mortgage warehouse loans of $48.7 million. Horizon’s consumer loans decreased during the first six months of 2011 as new loan production has not completely replaced all of the loan run-off from scheduled amortization and pay-offs, however, commercial loans increased $8.4 million and residential mortgage loans increased $1.4 million during the same period.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

Total deposits increased $34.8 million during the first six months of 2011 primarily due to consumer and municipal deposits.

The Company’s borrowings decreased $30.6 million since December 31, 2010. At June 30, 2011 the Company had $7.0 million in short-term federal funds borrowed compared to $31.5 million at December 31, 2010, and this was the primary reason for the reduction in borrowings.

Stockholders’ equity totaled $121.5 million at June 30, 2011 compared to $112.3 million at December 31, 2010. The increase in stockholders’ equity during the period was the result of generating net income and an increase in accumulated other comprehensive income, net of dividends declared. At June 30, 2011, the ratio of average stockholders’ equity to average assets was 8.51% compared to 8.22% for December 31, 2010. Book value per common share at June 30, 2011 increased to $31.32 compared to $28.68 at December 31, 2010.

Results of Operations

Overview

Consolidated net income for the three-month period ended June 30, 2011 was $3.1 million, an increase of 23.0% from the $2.5 million for the same period in 2010. Earnings per common share for the three months ended June 30, 2011 increased to $0.86 basic and $0.83 diluted, compared to $0.66 basic and $0.65 diluted for the same three-month period in 2010. Earnings per share increased $.03 per share in the second quarter of 2011 compared to the same period in 2010 from the reduction in the preferred stock dividend paid due to the repayment of $6.25 million of U.S. Treasury’s Capital Purchase Plan capital during the fourth quarter of 2010. Earnings per share were impacted by $.08 for the three months ending June 30, 2011 and $.11 for the three months ending June 30, 2010 due to the preferred stock dividends and the accretion of the discount on the preferred stock.

Consolidated net income for the six-month period ended June 30, 2011 was $5.9 million, an increase of 36.0% from the $4.3 million for the same period in 2010. Earnings per common share for the six months ended June 30, 2011 increased to $1.61 basic and $1.57 diluted, compared to $1.10 basic and $1.09 diluted for the same six-month period in 2010. Earnings per share increased $.06 per share during the first six months of 2011 compared to the same period in 2010 from the reduction in the preferred stock dividend paid due to the repayment of $6.25 million of U.S. Treasury’s Capital Purchase Plan capital during the fourth quarter of 2010. Earnings per share were impacted by $.16 for the six months ending June 30, 2011 and $.22 for the six months ending June 30, 2010 due to the preferred stock dividends and the accretion of the discount on the preferred stock.

Net Interest Income

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

The reduction in interest rates has influenced the yields received on the Company’s interest earning assets more significantly than the reduction in the cost of the Company’s interest bearing liabilities, resulting in a decrease of the net interest margin. Management believes that the current level of interest rates is driven by

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

external factors and therefore impacts the results of the Company’s net interest margin. Management does not expect a significant rise in interest rates in the short term, but an increase in rates is expected at some time in the future due to the current historically low interest rate environment.

Net interest income during the three months ended June 30, 2011 was $11.5 million, an increase of $95,000 over the $11.4 million earned during the same period in 2010. Yields on the Company’s interest-earning assets decreased by 53 basis points to 4.98% from 5.51% for the three months ended June 30, 2011 and 2010, respectively. Interest income decreased $1.1 million from $16.8 million for the three months ended June 30, 2010 to $15.7 million for the same period in 2011. This decrease was primarily due to a decrease in the yield on new and repriced earning assets but partially offset by an increase in interest earning assets. However, the asset yields on loans receivable has not declined at the same pace as some market indices partially due to interest rate floors that are in place on approximately $256.1 million of the Company’s $388.7 million of adjustable rate loans.

Rates paid on interest-bearing liabilities decreased by 44 basis points for the three months ended June 30, 2011 compared to the same period in 2010 due to the lower interest rate environment. Interest expense decreased $1.2 million from $5.4 million for the three-months ended June 30, 2010 to $4.2 million for the same period in 2011. This decrease was due to the lower rates being paid on the Company’s interest bearing liabilities partially offset with a higher volume of interest bearing liabilities. Due to a more significant decrease in the yields received on the Company’s interest-earning assets compared to the decrease in the rates paid on the Company’s interest-bearing liabilities the net interest margin decreased 11 basis points from 3.78% for the three months ended June 30, 2010 to 3.67% for the same period in 2011.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

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


	Three Months Ended								Three Months Ended
	June 30, 2011								June 30, 2010
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets
Federal funds sold	$	14,529		$	5		0.14	%	$	10,968		$	4		0.15	%
Interest-earning deposits		8,333			5		0.24	%		6,988			4		0.23	%
Investment securities — taxable		351,596			2,776		3.17	%		283,883			2,509		3.54	%
Investment securities — non-taxable (1)		112,279			1,035		5.28	%		110,940			1,078		5.73	%
Loans receivable (2)		814,581			11,891		5.86	%		849,296			13,212		6.25	%

Total interest-earning assets (1)		1,301,318			15,712		4.98	%		1,262,075			16,807		5.51	%

Noninterest-earning assets
Cash and due from banks		15,476								14,904
Allowance for loan losses		(19,089	)							(16,723	)
Other assets		96,056								92,376


	$	1,393,761							$	1,352,632


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Interest-bearing deposits	$	893,836		$	2,195		0.98	%	$	840,647		$	2,706		1.29	%
Borrowings		224,864			1,600		2.85	%		264,964			2,338		3.54	%
Subordinated debentures		31,446			454		5.79	%		30,181			395		5.25	%

Total interest-bearing liabilities		1,150,146			4,249		1.48	%		1,135,792			5,439		1.92	%

Noninterest-bearing liabilities
Demand deposits		115,659								90,301
Accrued interest payable and other liabilities		9,297								9,216
Shareholders’ equity		118,659								117,323


	$	1,393,761							$	1,352,632


Net interest income/spread				$	11,463		3.50	%				$	11,368		3.59	%


Net interest income as a percent of average interest earning assets (1)							3.67	%							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. Interest income 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.

Net interest income during the six months ended June 30, 2011 was $22.5 million, an increase of $609,000 over the $21.9 million earned during the same period in 2010. Yields on the Company’s interest-earning assets decreased by 48 basis points to 4.95% for the six months ended June 30, 2011 from 5.43% for the same period in 2010. Interest income decreased $1.8 million from $32.9 million for the six months ended June 30, 2010 to $31.1 million for the same period in 2011. This decrease was due to the reduction in the yield on interest earning assets offset by an increase in interest earning assets.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

Rates paid on interest-bearing liabilities decreased by 46 basis points for the six months ended June 30, 2011 compared to the same period in 2010 due to the lower interest rate environment. Interest expense decreased $2.4 million from $11.0 million for the six-months ended June 30, 2010 to $8.6 million for the same period in 2011. This decrease was due to the lower rates being paid on the Company’s interest bearing liabilities partially offset with a higher volume of interest bearing liabilities. Due to a more significant decrease in the yields received on the Company’s interest-earning assets compared to the decrease in the rates paid on the Company’s interest-bearing liabilities the net interest margin decreased 4 basis points from 3.66% for the six months ended June 30, 2010 to 3.62% for the same period in 2011.

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


	Six Months Ended								Six Months Ended
	June 30, 2011								June 30, 2010
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets
Federal funds sold	$	38,740		$	44		0.23	%	$	39,431		$	13		0.07	%
Interest-earning deposits		5,771			6		0.21	%		5,928			38		1.29	%
Investment securities — taxable		326,790			5,236		3.23	%		268,949			4,912		3.68	%
Investment securities — non-taxable (1)		113,281			2,078		5.07	%		111,604			2,159		5.42	%
Loans receivable (2)		817,468			23,779		5.88	%		830,429			25,817		6.28	%

Total interest-earning assets (1)		1,302,050			31,143		4.95	%		1,256,341			32,939		5.43	%

Noninterest-earning assets
Cash and due from banks		15,039								14,381
Allowance for loan losses		(19,077	)							(16,365	)
Other assets		96,513								88,667


	$	1,394,525							$	1,343,024


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities
Interest-bearing deposits	$	898,635		$	4,532		1.02	%	$	834,775		$	5,469		1.32	%
Borrowings		226,161			3,177		2.83	%		267,145			4,781		3.61	%
Subordinated debentures		31,446			904		5.80	%		29,015			768		5.34	%

Total interest-bearing liabilities		1,156,242			8,613		1.50	%		1,130,935			11,018		1.96	%

Noninterest-bearing liabilities
Demand deposits		112,618								86,501
Accrued interest payable and other liabilities		9,390								8,822
Shareholders’ equity		116,275								116,766


	$	1,394,525							$	1,343,024


Net interest income/spread				$	22,530		3.45	%				$	21,921		3.46	%


Net interest income as a percent of average interest earning assets (1)							3.62	%							3.66	%

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

Provision for Loan Losses

Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly reviewing the performance of its loan portfolios. During the second quarter of 2011, a provision for loan losses of $1.3 million was required to adequately fund the ALLL compared to a provision of $3.0 million for the second quarter of 2010. The 2011 second quarter provision was the lowest since the first quarter of 2008. The provision for the current quarter resulted from losses primarily in the commercial and installment loan portfolios as a result of current economic conditions. Commercial loan net charge-offs during the second quarter of 2011 were $366,000, residential mortgage loan net charge-offs were $659,000, and installment loans net charge-offs were $811,000. Due to the use of specific reserves for a portion of the charge offs during both during the three months and six months ending June 30, 2011, the ALLL decreased. The ALLL balance at June 30, 2011 was $18.6 million or 2.20% of total loans. This compares to an ALLL balance of $19.1 million at December 31, 2010 or 2.11% of total loans and $16.5 million at June 30, 2010 or 1.77% of total loans.

For the six months ended June 30, 2011, the provision for loan losses totaled $2.9 million compared to $6.2 million in the prior year for the same period. Commercial loan net charge-offs during the first six months of 2011 were $425,000, real estate loan net charge-offs were $741,000, and installment loan net charge-offs were $2.2 million. The $2.2 million in installment loan net charge-offs were comprised of $397,000 of indirect automobile loans, $854,000 of home equity lines, and $941,000 primarily of direct home equity installment loans.

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 losses inherent in the loan portfolio as of June 30, 2011.

Non-performing loans totaled $20.6 million on June 30, 2011, down from $22.1 million on March 31, 2011, and from $21.2 million on June 30, 2010. As a percentage of total loans non-performing loans were 2.44% on June 30, 2011, down from 2.71% on March 31, 2011, but up from 2.26% on June 30, 2010. The increase from a year ago was due to a decrease in total loans.

The decrease of non-performing loans from the prior quarter was primarily due to lower non-performing mortgage loans, partially offset by higher non-performing installment and commercial loans. Non-performing mortgage loans declined from $8.7 million at March 31, 2011, to $7.0 million on June 30, 2011. This decrease was primarily due to $2.7 million of loans moving to OREO during the quarter. It was also reduced by $384,000 for a loan brought current and $659,000 of charge-offs. These reductions were partially offset by the addition of $2.1 million of mortgage loans to non-performing status.

Non-performing installment loans increased from $3.9 million on March 31, 2011 to $4.0 million during the quarter. Non-performing commercial loans increased from $9.4 million on March 31, 2011 to $9.6 million on June 30, 2011.

Real estate and installment non-performing loans on June 30, 2011 include $1.7 million and $2.7 million, respectively, of loans in bankruptcy. This compares to $1.8 million and $2.0 million on March 31, 2011. These loans are not considered troubled debt restructures (TDRs) while they are going through bankruptcy, a process that can take six to eighteen months. The Company’s experience with loans in bankruptcy has demonstrated that some debtors continue to make payments during the bankruptcy process, many reaffirm their obligations to the Company when they come out of bankruptcy, and some loans are discharged or restructured by the court.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

TDRs are also included in total non-performing loans. TDRs increased from $4.7 million on March 31, 2011 to $6.1 million on June 30, 2011. Of these, $3.9 million were mortgage loans, $1.4 million were commercial loans, and $793,000 were consumer installment loans. The increase was primarily due to the addition of one commercial loan to a developer totaling $841,000 and a mortgage and second mortgage to one individual totaling $1.1 million. The commercial loan did not increase the total non-performing loans since it was comprised of the refinancing of several previously non-performing commercial loans.

Non-accrual loans totaled $14.4 million on June 30, 2011, down from $17.4 million on March 31, 2011, and $17.7 million on June 30, 2010. On June 30, 2011, non-accrual commercial loans were the largest component at $8.2 million. Non-accrual commercial loans to hotel owners totaled $4.3 million, with no other group over $1.0 million. Loans 90 days delinquent but still on accrual totaled $55,000 on June 30, 2011, similar to $57,000 on March 31, 2011, and down from $77,000 on June 30, 2010. Horizon’s policy is to place loans over 90 days delinquent on non-accrual status unless they are in the process of collection and a full recovery is expected.

Other Real Estate Owned (OREO) totaled $4.1 million on June 30, 2011, up from $2.3 million on March 31, 2011, and $2.9 million on June 30, 2010. During the quarter five properties with a book value of $477,000 as of March 31, 2010 were sold. Seventeen properties with a book value of $2.4 million on June 30, 2011 were transferred to OREO status during the quarter. On June 30, 2011, OREO was comprised of 28 properties. Of these, five totaling $1.6 million were commercial properties and 23 totaling $2.5 million were residential real estate.

Non-Interest Income

The following is a summary of changes in non-interest income:


	Three Months Ended
	June 30			June 30			Amount			Percent
Non-interest income	2011			2010			Change			Change

Service charges on deposit accounts	$	825		$	964		$	(139	)		-14.4	%
Wire transfer fees		137			185			(48	)		-25.9	%
Interchange fees		639			560			79			14.1	%
Fiduciary activities		932			1,007			(75	)		-7.4	%
Gain (loss) on sale of securities		365			131			234			100.0	%
Gain on sale of mortgage loans		1,308			1,674			(366	)		-21.9	%
Mortgage servicing net of impairment		99			(97	)		196			-202.1	%
Increase in cash surrender value of bank owned life insurance		211			197			14			7.1	%
Other income		(68	)		302			(370	)		-122.5	%

Total non-interest income	$	4,448		$	4,923		$	(475	)		-9.6	%

Service charges on deposit accounts were $139,000 lower during the second quarter of 2011 compared to the same period in 2010 due to the regulatory changes on overdraft fees. The residential mortgage loan activity during the second quarter of 2011 generated $1.3 million of income from the gain on sale of mortgage loans, down $366,000 from the same period in 2010. This decrease was primarily due to less favorable pricing on loans sold. In addition, competition has increased for purchase transactions which drove down pricing and reduced gain. Horizon also incurred a gain on the sale of securities of $365,000 during the second quarter of 2011 as the result of restructuring a portion of the investment portfolio. Other income was $370,000 less for the three months ended June 30, 2011 compared to the same period in 2010 as OREO losses were included in 2011 and one-time income items were included in the 2010 results.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011


	Six Months Ended
	June 30		June 30			Amount			Percent
Non-interest income	2011		2010			Change			Change

Service charges on deposit accounts	$	1,620	$	1,829		$	(209	)		-11.4	%
Wire transfer fees		245		325			(80	)		-24.6	%
Interchange fees		1,184		1,014			170			16.8	%
Fiduciary activities		1,895		2,002			(107	)		-5.3	%
Gain (loss) on sale of securities		639		131			508			387.8	%
Gain on sale of mortgage loans		1,841		3,056			(1,215	)		-39.8	%
Mortgage servicing net of impairment		863		(32	)		895			-2796.9	%
Increase in cash surrender value of bank owned life insurance		416		353			63			17.8	%
Other income		59		619			(560	)		-90.5	%

Total non-interest income	$	8,762	$	9,297		$	(535	)		-5.8	%

Service charges on deposit accounts were $209,000 lower during the first six months of 2011 compared to the same period in 2010 due to the regulatory changes on overdraft fees. Interchange fees increase $170,000 during the first half of 2011 compared to the same period of 2010 due to increased activity. The residential mortgage loan activity during the first six months of 2011 generated $1.8 million of income from the gain on sale of mortgage loans, down $1.2 million from the same period in 2010. This decrease was primarily due to less favorable pricing on loans sold as interest rates abruptly increased at the end of the fourth quarter of 2010 negatively impacting gain-on-sale. In addition competition increased for purchase transactions which drove down pricing and reduced gain. This reduction in gain on sale of mortgage loans was partially offset by $728,000 of impairment recovered on the Company’s mortgage servicing asset. In addition, Horizon incurred a gain on the sale of securities of $639,000 during the first half of 2011 as the result of an analysis that determined that market conditions provided the opportunity to add gains to capital without negatively impacting long-term earnings and the result of restructuring a portion of the investment portfolio. Other income was $560,000 less for the six months ended June 30, 2011 compared to the same period in 2010 as OREO losses were included in 2011 and one-time income items were included in the 2010 results.

Non-Interest Expense

The following is a summary of changes in non-interest expense:


	Three Months Ended
	June 30		June 30		Amount			Percent
Non-interest expense	2011		2010		Change			Change

Salaries	$	3,786	$	3,612	$	174			4.8	%
Commission and bonuses		719		693		26			3.8	%
Employee benefits		965		885		80			9.0	%
Net occupancy expenses		1,039		979		60			6.1	%
Data processing		494		570		(76	)		-13.3	%
Professional fees		331		530		(199	)		-37.5	%
Outside services and consultants		386		424		(38	)		-9.0	%
Loan expense		694		771		(77	)		-10.0	%
FDIC deposit insurance		303		408		(105	)		-25.7	%
Other losses		246		10		236			2360.0	%
Other expenses		1,524		1,302		222			17.1	%

Total non-interest expense	$	10,487	$	10,184	$	303			3.0	%

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

Total non-interest expenses were $303,000 higher in the second quarter of 2011 compared to the second quarter of 2010. Salaries, commissions and bonuses, and employee benefits increased $280,000 compared to the same quarter in 2010. This increase is the result of additional payroll expense from the consolidation of the American Trust & Savings Bank transaction that closed at the end of the second quarter of 2010, the expansion into Portage, Michigan, and annual merit pay increases. Data processing and professional fees decreased during the second quarter of 2011 as transaction costs associated with the American Trust & Savings Bank transaction we included in the 2010 results. FDIC deposit insurance expense decreased during the second quarter of 2011 compared to 2010 as the new assessment calculation resulted in lower expense for the Bank. Other losses for the three months ending June 30, 2011 included a write down of $140,000 on bank owned property. The increase in other expenses compared to the same period in 2010 included increases primarily in reoccurring items due to higher costs and growth.


	Six Months Ended
	June 30		June 30		Amount			Percent
Non-interest expense	2011		2010		Change			Change

Salaries	$	7,534	$	6,938	$	596			8.6	%
Commission and bonuses		1,216		1,098		118			10.7	%
Employee benefits		2,081		1,952		129			6.6	%
Net occupancy expenses		2,120		2,041		79			3.9	%
Data processing		901		972		(71	)		-7.3	%
Professional fees		680		1,001		(321	)		-32.1	%
Outside services and consultants		767		789		(22	)		-2.8	%
Loan expense		1,456		1,521		(65	)		-4.3	%
FDIC deposit insurance		690		796		(106	)		-13.3	%
Other losses		277		37		240			648.6	%
Other expenses		3,023		2,593		430			16.6	%

Total non-interest expense	$	20,745	$	19,738	$	1,007			5.1	%

Total non-interest expenses were $1.0 million higher in the first six months of 2011 compared to the same period in 2010. Salaries, commissions and bonuses, and employee benefits increased $843,000 compared to the same period in 2010. This increase is the result of additional payroll expense from the consolidation of the American Trust & Savings Bank transaction that closed at the end of the second quarter of 2010, the expansion into Portage, Michigan, and annual merit pay increases. Data processing and professional fees decreased during the first half of 2011 as transaction costs associated with the American Trust & Savings Bank transaction were included in the 2010 results. FDIC deposit insurance expense decreased during the first half of 2011 compared to 2010 as the new assessment calculation resulted in lower expense for the Company. Other losses for the six months ending June 30, 2011 included a write down of $140,000 on bank owned property. The increase in other expenses compared to the same period in 2010 included increases primarily in reoccurring items due to higher costs and growth.

Income Taxes

Income tax expense for the second quarter of 2011 was $999,000 compared to $592,000 of tax expense for the second quarter of 2010. The effective tax rate for the second quarter of 2011 was 24.4% compared to 19.1% in 2010. The increase in the effective tax rate is primarily due to higher income before income tax for the second quarter of 2011 compared to the same period in 2010 with a similar level of tax exempt income.

Income tax expense for the first half of 2011 was $1.8 million compared to $941,000 of tax expense for the first half of 2010. The effective tax rate for the first half of 2011 was 23.6% compared to 17.9% in 2010. The increase in the effective tax rate is primarily due to higher income before income tax for the first half of 2011 compared to the same period in 2010 with a similar level of tax exempt income.

HORIZON BANCORP AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Six Months Ended June 30, 2011

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 form the sale of residential mortgage loans, and borrowing relationships with correspondent banks, including the FHLB. During the six months ended June 30, 2011, cash and cash equivalents increased by approximately $5.1 million. The increase was primarily due to the decrease in mortgage warehouse balances. At June 30, 2011, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $304.6 million in unused credit lines with various money center banks, including the FHLB at June 30, 2011 compared to $380.8 million at December 31, 2010 and $395.1 million at June 30, 2010.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2011. Stockholders’ equity totaled $121.5 million as of June 30, 2011, compared to $112.3 million as of December 31, 2010. At June 30, 2011, the quarter’s ratio of average stockholders’ equity to average assets was 8.51% compared to 8.22% at December 31, 2010. Horizon’s capital increased during the six months as a result of increased earnings and an increase in accumulated other comprehensive income, net of dividends declared and the amortization of unearned compensation.

Horizon declared dividends in the amount of $0.34 per share during the first six months of 2011 which was the same amount for the same period of 2010. The dividend payout ratio (dividends as a percent of basic earnings per share) was 21.1% and 30.9% for the first six months of 2011 and 2010, respectively. Horizon is a participant in the Capital Purchase Program, which is a program of the TARP established by the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”). Pursuant to the agreements Horizon entered into as part of the Capital Purchase Program, Horizon is not permitted to increase dividends on its common shares above the amount of the last quarterly cash dividend per common share declared prior to October 14, 2008 ($0.17 per common share) without the U.S. Treasury’s approval until December 23, 2011, unless all of the Series A Preferred Shares issued to the U.S. Treasury pursuant to the Capital Purchase Program have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties. For additional information regarding dividend conditions, see Horizon’s Annual Report on Form 10-K for 2010.

Recent Developments

On July 29, 2011, the U.S. Treasury preliminarily approved Horizon’s application for participation in the Small Business Lending Fund by issuing $12.5 million of a new series of preferred stock to the U.S. Treasury Department. The SBLF, which is part of the Small Business Jobs Act of 2010, provides incentives for participating banks to increase small business lending. Horizon intends to use the proceeds from the SBLF investment, together with Horizon’s available funds, to redeem in full the remaining $18.75 million of outstanding preferred stock Horizon issued to the U.S Treasury under the TARP Capital Purchase Program. Horizon expects to close on the repurchase of the preferred stock before August 31, 2011. A binding obligation and final approval of Horizon’s application for the SBLF funds will not arise until a Stock Purchase Agreement is executed by the U.S. Treasury and Horizon. The execution of the Stock Purchase Agreement and the transfer of the funds by the U.S. Treasury are subject to, in the U.S. Treasury’s sole discretion, due diligence and the satisfaction of the closing conditions set forth in the Stock Purchase Agreement, including the absence of any material adverse changes in Horizon’s business, results of operation or condition (financial or otherwise).

HORIZON BANCORP AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market Risk
For the Three and Six Months Ended June 30, 2011

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Horizon’s 2010 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 2010 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, 2011, 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, 2011, 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.

46

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information
For the Three and Six Months Ended June 30, 2011

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.

As previously reported, on September 2, 2010, Capitol Bancorp and one of its subsidiaries, Michigan Commerce Bank, filed a Verified Complaint in Kalamazoo County Circuit Court, Case No. 2010 — 0300-CK and obtained an ex-parte temporary restraining order in Michigan state court. The Complaint asserted a variety of claims against Horizon and certain ex-employees of Michigan Commerce Bank including, without limitation, breach of contract, tortious interference, misappropriation of trade secretes, and civil conspiracy. The temporary restraining order and preliminary injunction primarily sought to restrain the ex-employees from soliciting or doing business with any of Michigan Commerce Bank’s customers and from using or disclosing any of Michigan Commerce Bank’s confidential information. A hearing on the preliminary injunction was held, and the court dissolved the temporary restraining order and denied the preliminary injunction. After the temporary restraining order was dissolved, Plaintiffs stipulated to the dismissal of all the ex-employees on September 9, 2010, except one. As a result, Capitol Bancorp and Michigan Commerce Bank amended their complaint to reflect the dismissal of these ex-employees as defendants and added Horizon Bank, N.A. as an additional defendant.

As a result, this matter now primarily involves damage claims against one of the ex-employees for alleged breaches of his duty of loyalty to Michigan Commerce Bank and alleged breaches of the confidentiality agreement he signed while employed at Michigan Commerce Bank and claims against Horizon for alleged breaches of an employee non-solicitation provision contained in a confidentiality agreement between Horizon, Capitol Bancorp and certain of its affiliates (which was entered into in 2009 in connection with Horizon’s investigation of potentially purchasing two affiliate banks of Capitol Bancorp) and similar claims relating to the hiring of the ex-employee who remains a party to the lawsuit. On February 16, 2011, the parties met to attempt to settle the case through mediation; but were unsuccessful in doing so. Horizon continues to evaluate the case as it moves through the discovery phase and will continue to attempt to settle the case if it is reasonable to do so.

ITEM 1A. RISK FACTORS

Other than as reflected in the updated risk factor noted below, there were no material changes to the risk factors set forth under Part I, Item 1A “Risk Factors” in Horizon’s 2010 Annual Report on Form 10-K.

Our ability to repurchase the preferred shares issued to the Treasury under the TARP Capital Purchase Program (and therefore obtain relief from the limitations and restrictions of TARP and ARRA) is limited.

Any redemption of the securities sold to the Treasury pursuant to the TARP Capital Purchase Program requires prior Federal Reserve and Treasury approval. Based on Federal Reserve guidelines, institutions seeking to redeem the preferred stock issued pursuant to the Capital Purchase Program must demonstrate an ability to access the long-term debt markets without reliance on the FDIC’s Temporary Liquidity Guarantee Program, successfully demonstrate access to public equity markets and meet a number of additional requirements and considerations before they can redeem any securities sold to the Treasury.

Horizon repurchased 6,250 of the 25,000 outstanding Series A Preferred Shares held by the Treasury on November 10, 2010. Horizon paid $6.25 million to repurchase the preferred shares along with the accrued dividend for the shares repurchased. Horizon intends to use available funds to repurchase an additional 6,250 of the Series A Preferred Shares during August 2011. In addition, on July 29, 2011, Horizon received preliminary approval from the Treasury to receive an investment in the amount of $12.5 million pursuant to

47

Table of Contents

HORIZON BANCORP AND SUBSIDIARIES
Part II – Other Information
For the Three and Six Months Ended June 30, 2011

the recently implemented Small Business Lending Fund program (the “SBLF”). Enacted into law as part of the Small Business Jobs Act of 2010, the SBLF is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. The SBLF program provides an option for community banks to refinance preferred stock issued to the Treasury through the Capital Purchase Program, and the SBLF program does not impose many of the restrictions that Horizon is currently subject to under TARP. If Horizon receives final approval from the Treasury for the SBLF investment, Horizon plans to use the SBLF proceeds to repurchase the remaining Series A Preferred Shares from the Treasury with those proceeds. If Horizon redeems all of the Series A Preferred Shares, then Horizon will no longer be subject to the TARP Capital Purchase Program limitations and restrictions.

The Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to Horizon and general economic conditions that we are not able to predict.

On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to Horizon and could exacerbate the other risks to which Horizon is subject.

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

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. (REMOVED AND RESERVED)

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES
Part II – Other Information
For the Three and Six Months Ended June 30, 2011

ITEM 6. EXHIBITS

(a) Exhibits

Exhibit 31.1
Certification of Craig M. Dwight

Exhibit 31.2
Certification of Mark E. Secor

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

Exhibit 101
Interactive Data File*

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

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Table of Contents

SIGNATURES

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

HORIZON BANCORP

Dated: August 12, 2011 /s/ Craig M. Dwight
Craig M. Dwight
Chief Executive Officer

Dated: August 12, 2011 /s/ Mark E. Secor
Mark E. Secor
Chief Financial Officer

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Table of Contents

INDEX TO EXHIBITS

The following documents are included as Exhibits to this Report.

Exhibit

31.1
Certification of Craig M. Dwight

31.2
Certification of Mark E. Secor

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

101
Interactive Data File*

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

51


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


Exhibit 31.1		Certification of Craig M. Dwight

Exhibit 31.2		Certification of Mark E. Secor

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

Exhibit 101		Interactive Data File*


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


	HORIZON BANCORP
Dated: August 12, 2011	/s/ Craig M. Dwight
	Craig M. Dwight
	Chief Executive Officer


Dated: August 12, 2011	/s/ Mark E. Secor
	Mark E. Secor
	Chief Financial Officer


31.1		Certification of Craig M. Dwight

31.2		Certification of Mark E. Secor

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

101		Interactive Data File*