Note 2 – Acquisitions

Kosciusko Financial, Inc.

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

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


ASSETS
Cash and due from banks	$	38,950
Investment securities, available for sale		1,191

Commercial		70,006
Residential mortgage		26,244
Consumer		6,319

Total loans		102,569

Premises and equipment, net		1,466
FRB and FHLB stock		582
Goodwill		6,443
Core deposit intangible		526
Interest receivable		636
Cash value of life insurance		2,745
Other assets		765

Total assets purchased	$	155,873


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

Total estimated purchase price	$	22,983


LIABILITIES
Deposits
Non-interest bearing	$	27,871
NOW accounts		35,213
Savings and money market		26,953
Certificates of deposits		32,771

Total deposits		122,808

Borrowings		9,038
Interest payable		55
Other liabilities		989

Total liabilities assumed	$	132,890

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

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

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

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

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


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

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

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

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

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

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


ASSETS
Cash and due from banks	$	154,849
Investment securities, available for sale		23,779

Commercial		153,750
Residential mortgage		42,603
Consumer		16,801
Mortgage Warehousing		99,752

Total loans		312,906

Premises and equipment, net		6,022
FHLB stock		4,029
Goodwill		20,993
Core deposit intangible		2,514
Interest receivable		844
Cash value of life insurance		15,267
Other assets		8,334

Total assets purchased	$	549,537


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

Total estimated purchase price	$	98,634


LIABILITIES
Deposits
Non-interest bearing	$	66,733
NOW accounts		99,346
Savings and money market		117,688
Certificates of deposits		87,605

Total deposits		371,372

Borrowings		64,793
Interest payable		178
Subordinated debt		4,504
Other liabilities		10,056

Total liabilities assumed	$	450,903

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

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


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

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

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

CNB Bancorp

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

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


ASSETS
Cash and due from banks	$	27,860
Investment securities, available for sale		16,393

Commercial		2,267
Residential mortgage		6,624
Consumer		1,579

Total loans		10,470

Premises and equipment, net		444
FHLB stock		50
Goodwill		609
Core deposit intangible		190
Interest receivable		154
Other assets		49

Total assets purchased	$	56,219


Cash paid		5,311

Total estimated purchase price	$	5,311


LIABILITIES
Deposits
Non-interest bearing	$	24,079
NOW accounts		9,038
Savings and money market		13,829
Certificates of deposits		3,342

Total deposits		50,288

Borrowings		459
Interest payable		7
Other liabilities		154

Total liabilities assumed	$	50,908

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

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

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


	Three Months Ended
	March 31		March 31
	2017		2016
Summary of Operations:
Net Interest Income	$	25,568	$	25,497
Provision for Loan Losses		330		532

Net Interest Income after Provision for Loan Losses		25,238	$	24,965
Non-interest Income		7,559		8,473
Non-Interest Expense		21,521		24,908

Income before Income Taxes		11,276		8,530
Income Tax Expense		3,052		2,385

Net Income		8,224		6,145
Net Income Available to Common Shareholders	$	8,224	$	6,103

Basic Earnings Per Share	$	0.37	$	0.34
Diluted Earnings Per Share	$	0.37	$	0.34

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

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

Bargersville Branch Purchase

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