Summary of HORIZON BANCORP /IN/

Management's Discussion and Analysis of Financial Condition And Results of Operations For the Three and Six Months Ended June 30, 2009
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 "Company") and Horizon Bank, N.A. (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. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of Horizon, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. 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 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.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Overview
Horizon Bancorp ("Horizon" or the "Company") 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 Bank, N.A. (the "Bank") and other affiliated entities. 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 and uncertain economic environment. Within the Company's primary market areas of Northwest Indiana and Southwest Michigan unemployment rates have increased over the last year. 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. Like numerous other parts of the country, Northwest Indiana and Southwest Michigan are experiencing a rise in mortgage delinquencies and bankruptcy filings as a result of increased unemployment rates. Despite these economic factors, Horizon continues to post positive results through the first half of 2009.

Table of Contents

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, 2009 Following are some of the major factors that impacted Horizons financial performance for the second quarter:
• The net interest margin contracted during the second quarter as Horizon elected to keep higher money market deposits on its balance sheet as a precaution against future cash needs. The cash balances returned to more historic levels during the month of June.

• Horizon continued to experience high residential mortgage refinance volumes through the second quarter generating additional interest and fee income.

• Horizon's quarterly provision for loan losses reserve increased by approximately $100,000 from the first quarter of 2009.

• Horizon's non-performing loans increased to approximately $13.5 million as of June 30, 2009 from $10.5 million at the end of the first quarter.

• Horizon's special FDIC assessment of $663,000 that was recorded in the second quarter of 2009

• Horizon's capital ratios continue to be maintained above the regulatory standards for well-capitalized banks.

• Horizon opened its 19th branch on June 8, 2009 in Munster, Indiana.

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 2008 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.
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. Statement of Financial Accounting Standard ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets" establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At June 30, 2009, Horizon had core deposit intangibles of $1.6 million subject to amortization and $5.8 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

Table of Contents

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, 2009 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. SFAS No. 142 requires an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. For the first time in Horizon's history, the market value for Horizon's stock dropped below the book value during the fourth quarter of 2008. Market price at the close of business on June 30, 2009 was $16.25 per share compared to a book value of $25.62 per common share. Horizon reported record earnings for the ninth consecutive year in 2008 and has continued to report strong earnings through the first half of 2009 and believes the decline in market price relates to an overall decline in the financial industry sector and is not specific to Horizon. Horizon engaged a third party to perform an impairment test of its goodwill in 2008. The evaluation included three approaches: 1) income approach using a discounted cash flow based on earnings capacity, 2) price to earnings multiples and 3) price to book value ratios. Approaches two and three use median results from 17 bank sale transactions that occurred during 2007 and 2008. The selling banks ranged in size from $763.0 million to $2.1 billion. The impairment test was performed as of November 30, 2008 and provided support that no impairment to the Company's goodwill was required based on its results.
Due to the evaluation being done as of November 30, 2008, the financial results for December 2008 were anticipated and included as part of this analysis. An additional $20 million of capital was injected into Horizon Bank by the holding company but the calculated fair value of Horizon Bank was still well above its book value. There were no significant changes in the Company's stock price, book value, or earnings as of June 30, 2009 that would change the results of the evaluation completed at the end of 2008. Horizon has concluded that, based on its own internal evaluation and the independent impairment test conducted by a third party, the recorded value of goodwill is not impaired. Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment speeds 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 adversely.
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

Table of Contents

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, 2009 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.
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 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as revised and further interpreted by SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," ("SFAS 133") and other related accounting guidance. 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 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 SFAS No. 157 "Fair Value Measurement" ("SFAS 157"), 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 rates 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.

Table of Contents

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, 2009 Financial Condition
On June 30, 2009, Horizon's total assets were $1.3 billion, an increase of $36.4 million from December 31, 2008 but a decrease of $100.0 million from March 31, 2009. Due to the economic environment the financial institution industry was experiencing at the beginning of 2009, management determined it would be prudent to maintain higher liquidity levels. During that same time the Company's mortgage warehouse business line was experiencing significant growth due to the increase in mortgage loan refinancing activity, and this also created a need for additional liquidity. Management put into place several successful strategies during the first quarter of 2009 to generate the additional liquidity. As a result, the Company maintained excess cash and cash equivalents at the end of the first quarter and throughout most of the second quarter of 2009. A significant portion of that additional liquidity was generated from municipal money market deposits. This funding was designed to match the growth of assets in the mortgage warehouse business line and provide additional liquidity without utilizing asset based collateral borrowings or federal fund lines. At June 30, 2009, most of the additional funding from the municipal money market accounts was moved out of the Bank and cash and cash equivalents and the municipal money market accounts were back to more historic levels. The Bank does not anticipate a near term need to maintain the level of excess liquidity during the third quarter as it did in the second quarter.
Investment securities increased by approximately $28.7 million compared to the end of 2008. This growth was continued from the fourth quarter as additional investment securities were purchased to leverage the capital raised through the U.S. Department of Treasury's Capital Purchase Program which is part of the Economic Emergency Stabilization Act approved by Congress during the fourth quarter of 2008. The increase in investment securities held to maturity was primarily from local municipal tax anticipation warrants that will mature on December 31, 2009.
Investment securities were comprised of the following as of:

                                                             June 30, 2009                       December 31, 2008
                                                      Amortized            Fair             Amortized            Fair
Investment securities                                   Cost               Value              Cost               Value

Available for sale
U.S. Treasury and federal agencies                   $  19,880          $  20,145          $  23,661          $  24,914
State and municipal                                     95,174             94,372             88,282             86,985
Federal agency collateralized mtg. obligations          17,521             17,282             13,063             12,951
Federal agency mortgage-backed pools                   183,236            186,886            174,227            176,389
Corporate notes                                            587                381                587                399

Total available for sale                               316,398            319,066            299,820            301,638

Total held to maturity, state and municipal             12,875             12,978              1,630              1,634


Total investment securities                          $ 329,273          $ 332,044          $ 301,450          $ 303,272

Net loans increased $12.2 million since December 31, 2008. This increase was almost entirely related to the growth in the Company's mortgage warehouse business line as its customers utilized their warehouse lines to fund residential mortgage refinancing activity.
Total deposits increased $7.0 million during the first half of 2009 and as indicated above, decreased $129.3 million since March 31, 2009. The decrease in deposits during the second quarter was primarily the result of the additional funding that was generated during the first quarter of 2009 from the municipal money market accounts moving out of the Bank.

Table of Contents

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, 2009 The Company's borrowings have increased $25.1 million since December 31, 2008. The Company implemented three major funding initiatives during the first half of 2009. The first initiative was to generate liquidity as described above from municipal money market accounts. The second initiative was to reduce the outstanding balances in the Company's short-term borrowing lines, to make those lines available and provide more daily liquidity. The third initiative was to continue to take steps to extend the duration of liabilities in a low interest rate environment and lock in long-term funding costs. The short-term borrowings of $52.2 million at December 31, 2008 were replaced with a $50.0 million fixed rate long-term corporate repurchase agreement therefore extending the duration of liabilities and increasing the available daily liquidity. The Company also added $33.6 million of long-term brokered certificates of deposit during the first quarter to also help in extending the duration of deposits. The Company will continue to look for opportunities to extend the duration of liabilities while long-term rates remain low.
Stockholders' equity totaled $107.2 million at June 30, 2009 compared to $103.4 million at December 31, 2008. The increase in stockholders' equity during the period was the result of net income and an increase in the market value of investment securities available for sale, reduced by dividends declared. At June 30, 2009, the ratio of average stockholders' equity to average assets was 7.80% compared to 6.65% at December 31, 2008. Book value per common share at June 30, 2009 increased to $25.85 compared to $24.68 at December 31, 2008. Results of Operations
Overview
Consolidated net income for the three-month period ended June 30, 2009 was $2.1 million, a decrease of 31.0% compared to $3.0 million for the same period in 2008. Earnings per common share for the three months ended June 30, 2009 decreased to $0.53 basic and $0.52 diluted, compared to $0.93 basic and $0.92 diluted for the same three-month period in 2008. Diluted earnings per share were reduced by $0.11 per share due to the preferred stock dividends and the accretion of the discount on preferred stock, which is not available to common stockholders. The preferred stock was issued in the fourth quarter of 2008 and therefore did not affect the first quarter of 2008. The results from the second quarter of 2009 were also impacted by the special FDIC assessment of $663,000, which reduced diluted earnings per share by $0.13 per share. In addition, the second quarter of 2008 included a death benefit from officer life insurance of $538,000, which was tax-free income, and increased diluted earnings per share for the quarter by $0.17 per share.
Consolidated net income for the six-month period ended June 30, 2009 was $4.7 million, a decrease of 14.8% compared to $5.5 million for the same period in 2008. Earnings per common share for the six months ended June 30, 2009 decreased to $1.25 basic and $1.22 diluted, compared to $1.72 basic and $1.70 diluted for the same six-month period in 2008. Diluted earnings per share were reduced by $0.21 per share due to the preferred stock dividends and the accretion of the discount on preferred stock, which is not available to common stockholders. The special FDIC assessment expense during the second quarter of 2009 and the income from the death benefit on officer life insurance during the second quarter of 2008 also affected the six-month results. 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, net interest spread, and 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.

Table of Contents

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, 2009 The reduction in short-term interest rates over the last six months has influenced the cost of the Company's interest bearing liabilities more significantly then the reduction in yields received on the Company's interest earning assets, resulting in an increase of the net interest margin for both the three and six month periods ending June 30, 2009. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company's net interest margin. Management does not expect a 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, 2009 was $11.3 million, an increase of $2.0 million or 20.6% over the $9.3 million earned during the same period in 2008. Yields on the Company's interest-earning assets decreased by 52 basis points to 5.70% for the three months ended June 30, 2009, from 6.22% for the same period in 2008. Interest income increased $1.5 million from $17.3 million for the three months ended June 30, 2008 to $18.8 million for the same period in 2009. This increase was due to the increased volume of . . .