Acquisitions

6 Months Ended

Jun. 30, 2019

Note 2 – Acquisitions

Salin Bancshares, Inc.

On March 26, 2019, Horizon completed the acquisition of Salin Bancshares, Inc. (“Salin”), an Indiana corporation, and Horizon Bank’s acquisition of Salin Bank and Trust Company (“Salin Bank”), an Indiana commercial bank and wholly-owned subsidiary of Salin, through mergers effective March 26, 2019. Under the terms of the Merger Agreement, shareholders of Salin received

23,907.5

shares of Horizon common stock and $

87,417.17

in cash for each outstanding share of Salin common stock. Salin shares outstanding at the closing to be exchanged were 275, and the shares of Horizon common stock issued to Salin shareholders totaled 6,563,697. The Salin shareholders received cash in lieu of fractional shares. Based upon the March 25, 2019 closing price of $15.65 per share of Horizon common stock immediately prior to the effectiveness of the merger the transaction has an implied valuation of approximately

$126.7 million. The Company incurred approximately $5.6 million in costs related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and are primarily located in the data processing, professional fees, outside services and consultants and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the Salin acquisition is detailed in the following table. Final estimates of fair value on the date of acquisition have not been received yet. Prior to the end of the one-year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively.

The measurement period adjustments will be calculated as if the accounting had been completed as of the acquisition date.

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


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

Residential mortgage		131,008
Consumer		85,112

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

Total assets purchased	$	964,442

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

Total purchase price	$	126,722


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

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

Total liabilities assumed	$	837,720

Of the total purchase price of $

126.7

million, $

19.8

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

31.2

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

years on a straight line basis.

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

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 assumptions, such as default rates, severity and prepayment speeds.

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

310-30

as of March 26, 2019. Final valuation estimates have not yet been determined for acquired loans as of June 30, 2019. If information becomes available which would indicate adjustments to the purchase price allocation, such adjustments would be made prospectively.


Contractually required principal and interest at acquisition	$	22,672
Contractual cash flows not expected to be collected (nonaccretable differences)		6,694

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

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

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

has occurred

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

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

pro-forma

results for the three and six months ended June 30, 2019 and 2018 as if the Salin acquisition had occurred as of the beginning of the comparable prior reporting periods.


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

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

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

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

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

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

The

pro-forma

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

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.