Note 2 – Acquisition

On July 17, 2012 Horizon closed its acquisition of Heartland Bancshares, Inc. and Horizon Bank N.A.’s acquisition of Heartland Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.81 shares of Horizon’s common stock for each share of Heartland common stock outstanding. Heartland shares outstanding at the closing were 1,442,449, and the shares of HBNC common stock issued to Heartland shareholders totaled 1,168,383. Horizon’s stock price was $16.83 per share at the close of business on July 17, 2012. Based upon these numbers, the total value of the consideration, including the retirement of TARP, for the acquisition was $26.9 million. For the year ended December 31, 2012, the Company had approximately $1.5 million is costs related to the acquisition. These expenses are classified in the other expense section of the income statement primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

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


ASSETS
Cash and due from banks	$	33,531
Investment securities, available for sale		63,707
Commercial		70,343
Residential mortgage		20,838
Consumer		23,423

Total loans		114,604
Premises and equipment		2,647
FRB and FHLB stock		943
Goodwill		13,838
Core deposit intangible		2,332
Interest receivable		820
Cash value life insurance		4,012
Other assets		9,210

Total assets purchased	$	245,644

Common shares issued	$	19,668
Retirement of TARP preferred shares		7,248

Total estimated purchase price	$	26,916


LIABILITIES
Deposits
Non-interest bearing	$	59,350
NOW accounts		42,681
Savings and money market		61,465
Certificates of deposits		47,749

Total deposits		211,245
Borrowings		1,186
Subordinated debentures		1,537
Interest payable		90
Other liabilities		4,670




Total liabilities assumed	$	218,728

Of the total estimated purchase price of $26.9 million, $2.3 million has been allocated to core deposit intangible. Additionally, $13.8 million has been allocated to goodwill and $10.8 million of the purchase price is deductible and was assigned to the business assets. The core deposit intangible will be amortized over seven years on a straight line basis.

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

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

The Company acquired the $131.1 million loan portfolio at a fair value discount of $16.5 million. The performing portion of the portfolio, $95.4 million, had an estimated fair value or $91.6 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

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

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of July 17, 2012.


Contractually required principal and interest at acquisition	$	35,574
Contractual cash flows not expected to be collected (nonaccretable differences)		5,264

Expected cash flows at acquisition		30,310
Interest component of expected cash flows (accretable discount)		7,494

Fair value of acquired loans accounted for under ASC 310-30	$	22,816

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

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at December 31. The amounts of loans at December 31, are as follows:


	2013		2012
Commercial	$	37,048	$	63,952
Real estate		11,761		18,662
Consumer		11,485		16,289

Outstanding balance	$	60,294	$	98,903

Carrying amount, net of allowance of $ 389 and $ 0	$	59,905	$	98,903

Accretable yield, or income expected to be collected, is as follows:


	2013			2012
Balance at January 1	$	6,111		$	—
Additions		—			7,494
Accretion		(1,267	)		(807	)
Reclassification from nonaccreatable difference		—			—
Disposals		(1,659	)		(576	)

Balance at December 31	$	3,185		$	6,111

During the year ended December 31, 2013 and 2012, the Company increased the allowance for loan losses by a charge to the income statement by $2.6 million and $0, respectively. No allowances for loan losses were reversed in 2013 and 2012.