Edgar Filing: HORIZON BANCORP /IN/

Horizon Bancorp 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

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		46360

(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, no par value		The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Exchange Act Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K 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 Smaller Reporting Company þ

(Do not check if a smaller reporting company)

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the average bid price of such stock as of June 30, 2007, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $66,408,840.

As of March 14, 2008, the registrant had 3,252,232 shares of Common Stock outstanding.


		Part of Form 10-K into which
Documents Incorporated by Reference Document		portion of document is incorporated
Portions of the Registrant’s Proxy Statement to be filed for its May 8, 2008 annual meeting of shareholders		III

Horizon Bancorp

2007 Annual Report on Form 10-K
Table of Contents


	Page
PART I
Item 1. Business		3
Item 1A Risk Factors		12
Item 1B Unresolved Staff Comments		15
Item 2. Properties		15
Item 3. Legal Proceedings		15
Item 4. Submission of Matters to a Vote of Security Holders		16
Special Item: Executive Officers of Registrant		16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17
Item 6. Selected Financial Data		17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation		18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		35
Item 8. Financial Statements and Supplementary Data		36
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure		75
Item 9A(T). Controls and Procedures		75
Item 9B. Other Information		75
PART III
Item 10. Directors, Executive Officers and Corporate Governance		76
Item 11. Executive Compensation		76
Item 12. Security Ownership of Certain Beneficial Owners and Management		77
Item 13. Certain Relationships and Related Transactions; and Director Independence		77
Item 14. Principal Accountant Fees and Services		77
PART IV
Item 15. Exhibits and Financial Statement Schedules		78
SIGNATURES		79
EXHIBIT INDEX		81
EX-10.1
EX-10.2
EX-10.3
EX-21
EX-23
ex-31.1
ex-31.2
ex-32.1
EX-32.2

PART I

BUSINESS

General

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.

On June 10, 2005, Horizon acquired Alliance Financial Corporation and its wholly owned bank subsidiary, Alliance Banking Company (collectively referred to as Alliance). Alliance had three offices in southwest Michigan, and one office in Michigan City, Indiana, $141 million of assets and $117 million of deposits at the date of the acquisition. See Note 2 of the Consolidated Financial Statements for further discussion regarding the acquisition.

On April 23, 2007, the Bank opened a full service branch in Benton Harbor, Michigan and on January 28, 2008 the Bank opened its second full service branch in Valparaiso, Indiana. The Bank maintains fourteen other full service facilities and one loan production office in Northwest Indiana . At December 31, 2007, the Bank had total assets of $1.259 million and total deposits of $894 million. The Bank has four wholly-owned subsidiaries: Horizon Trust & Investment Management, N.A. (“Horizon Trust”), Horizon Investments, Inc. (“Horizon Investments”), Horizon Insurance Services, Inc. (“Horizon Insurance”) and Horizon Grantor Trust. Horizon Trust offers corporate and individual trust and agency services and investment management services. Horizon Investments manages the investment portfolio of the Bank. Horizon Insurance offered a full line of personal insurance products until March 2005, at which time the majority of its assets were sold to a third party. Horizon Grantor Trust holds title to certain company owned life insurance policies.

Horizon formed Horizon Bancorp Capital Trust II in 2004 (“Trust II”) and Horizon Bancorp Capital Trust III in 2006 (“Trust III”) for the purpose of participating in pooled trust preferred securities offerings. The Company assumed additional debentures as the result of the acquisition of Alliance in 2005, which formed Alliance Financial Statutory Trust I (“Alliance Trust”). See Note 10 of the Consolidated Financial Statements for further discussion regarding these previously consolidated entities that are now reported separately. The business of Horizon is not seasonal to any material degree.

No material part of Horizon’s business is dependent upon a single or small group of customers, the loss of any one or more of whom would have a materially adverse effect on the business of Horizon. In 2007, revenues from loans accounted for 73% of the total consolidated revenue and revenues from investment securities accounted for 13% of total consolidated revenue.

Employees

The Bank, Horizon Trust and Horizon Investments employed approximately 265 full and part-time people as of December 31, 2007. Horizon does not have any employees.

Competition

A high degree of competition exists in all major areas where Horizon engages in business. The Bank’s primary market consists of Porter, LaPorte, St. Joseph and Elkhart Counties, Indiana, and Berrien County, Michigan. The Bank competes with commercial as well as with savings and loan associations, consumer finance companies and credit unions. To a more moderate extent, the Bank competes with Chicago money center banks, mortgage banking companies, insurance companies, brokerage houses, other institutions engaged in money market financial services and certain government agencies.

Based on deposits as of June 30, 2007, Horizon was the largest of the 11 bank and thrift institutions in LaPorte County with a 35.74% market share and the fifth largest of the 16 such institutions in Porter County with an 8.18% market share. In Berrien County, Michigan, Horizon was the fourth largest of the 10 bank and thrift institutions with an 8.09% market share. In 2005, Horizon opened new offices in St. Joseph and Elkhart Counties, Indiana. Horizon’s market share of deposits was less than 1.00% in each of these counties. (Source: FDIC Summary of Deposits Market Share Reports, available at www.fdic.gov).

Supervision and Regulation

Horizon is registered as a bank holding company and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Federal Reserve has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity.

The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting interest of any bank or bank holding company. Additionally, the BHC Act restricts Horizon’s nonbanking activities to those, which are determined by the Federal Reserve to be closely related to banking and a proper incident thereto.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” (as defined in FDICIA) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency.

Bank holding companies are required to comply with the Federal Reserve’s risk-based capital guidelines. The Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Comptroller of the Currency (the “OCC”) have adopted risk-based capital ratio guidelines to which depository institutions under their respective supervision are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. For Horizon’s regulatory capital ratios and regulatory requirements as of December 31, 2007, see the information in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below, which is incorporated herein by reference.

The Bank is (i) subject to the provisions of the National Bank Act; (ii) supervised, regulated, and examined by the OCC; and (iii) subject to the rules and regulations of the OCC, Federal Reserve, and the FDIC.

The Bank’s deposits are insured to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into law in February 2006, has resulted in significant changes to the federal deposit insurance program:

	•		Effective March 31, 2006, the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) were merged to create a new fund, called the Deposit Insurance Fund (“DIF”)

	•		The current $100,000 deposit insurance coverage is subject to adjustment for inflation beginning in 2010 and every succeeding five years

	•		Deposit insurance coverage for individual retirement accounts and certain other retirement accounts has been increased from $100,000 to $250,000 and also will be subject to adjustment for inflation

Pursuant to the Reform Act, the FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.5% of estimated insured deposits and the FDIC has been given discretion to set assessment rates according to risk regardless of the level of the fund reserve ratio. On November 2, 2006, the FDIC adopted final regulations that set the designated reserve ratio for the DIF at 1.25% beginning January 1, 2007.

Insured depository institutions that were in existence on December 31, 1996, and paid assessments prior to that date (or their successors) are entitled to a one-time credit against future assessments based on their past contributions to the BIF or SAIF. In 2006, the Bank received a one-time credit of $457,534 against future assessments. Of the initial credit, $143,623 remained unused at December 31, 2007.

Also on November 2, 2006, the FDIC adopted final regulations that establish a new risk-based premium system. Under the new system, the FDIC will evaluate each institution’s risk based on three primary sources of information: supervisory ratings for all insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have such ratings. An institution’s assessments will be based on the insured institution’s ranking in one of four risk categories. Effective January 1, 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 are grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between five and seven cents for every $100 of domestic deposits. Institutions in Risk Categories II, III and IV will be assessed at annual rates of 10, 28 and 43 cents, respectively. An increase in assessments could have a material adverse effect on the Company’s earnings.

FDIC-insured institutions remain subject to the requirement to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. For the quarter ended December 31, 2007, the FICO assessment rate was equal to 1.14 cents for each $100 in domestic deposits maintained at an institution.

Both federal and state law extensively regulates various aspects of the banking business, such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Branching by the Bank is subject to the jurisdiction and requires notice to or the prior approval of the OCC.

Horizon and the Bank are subject to the Federal Reserve Act, which restricts financial transactions between banks and affiliated companies. The statute limits credit transactions between banks, affiliated companies and its executive officers and its affiliates. The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank’s extension of credit to an affiliate.

The FDICIA accomplished a number of sweeping changes in the regulation of depository institutions and their holding companies. The FDICIA requires, among other things, federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. The FDICIA further directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value of publicly traded shares and such other standards as the agency deems appropriate.

On November 12, 1999, the President signed into law comprehensive legislation that modernizes the financial services industry for the first time in decades. The Gramm-Leach-Bliley Act (“GLBA”) permits bank holding companies to conduct essentially unlimited securities and insurance activities, in addition to other activities determined by the Federal Reserve to be related to financial services. As a result of the GLBA, Horizon may underwrite and sell securities and insurance. It may acquire, or be acquired by, brokerage firms and insurance underwriters. Horizon does not anticipate significant changes in its products or services as a result of the GLBA.

The USA PATRIOT Act of 2001 (the “PATRIOT Act”) is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The PATRIOT Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes. Many of the provisions in the PATRIOT Act were to have expired December 31, 2005, but the U.S. Congress authorized renewals that extended the provisions until March 10, 2006. In early March 2006, the U.S. Congress approved the USA PATRIOT Improvement and Reauthorization Act of 2005 (the “Reauthorization Act”) and the USA PATRIOT Act Additional Reauthorizing Amendments Act of 2006 (the “PATRIOT Act Amendments”), and they were signed into law by President Bush on March 9, 2006. The Reauthorization Act makes permanent all but two of the provisions that had been set to expire and provides that the remaining two provisions, which relate to surveillance and the production of business records under the Foreign Intelligence Surveillance Act, will expire in three years. The PATRIOT Act Amendments include provisions allowing recipients of certain subpoenas to obtain judicial review of nondisclosure orders and clarifying the use of certain subpoenas to obtain information from libraries. Horizon does not anticipate that these changes will materially affect its operations.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934 (the “1934 Act”). In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Management expects that significant additional efforts and expense will continue to be required to comply with the provisions of the Sarbanes-Oxley Act.

The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) amended the Fair Credit Reporting Act and made permanent certain federal preemptions that form the basis for a national credit reporting system. The FACT Act was also intended to (i) address identity theft, (ii) increase access to credit information, (iii) enhance the accuracy of credit reporting, (iv) facilitate the opt-out by consumers from certain marketing solicitations, (v) protect medical information, and (vi) promote financial literacy. The statute applies to credit reporting agencies (commonly referred to as “credit bureaus”), financial institutions, other users of credit reports and those who furnish information to credit bureaus.

In addition to the matters discussed above, Horizon Bank is subject to additional regulation of its activities, including a variety of consumer protection regulations affecting its lending, deposit, and collection activities and regulations affecting secondary mortgage market activities. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign, and by the monetary and fiscal policies of the United States Government and its various agencies, particularly the Federal Reserve.

Additional legislative and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislative or administrative action will be enacted or the extent to which the banking industry in general or Horizon and its affiliates will be affected.

BANK HOLDING COMPANY STATISTICAL DISCLOSURES

	I.		DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL

			Information required by this section of Securities Act Industry Guide 3 is presented in Management’s Discussion and Analysis as set forth in Item 7 below, herein incorporated by reference.

	II.		INVESTMENT PORTFOLIO

The following is a schedule of the amortized cost and fair value of investment securities available for sale at December 31, 2007, 2006 and 2005:


(dollar amounts in thousands)	2007				2006				2005
Available for Sale	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value

U.S. Treasury and U.S. Government agencies and corporations	$	25,660	$	26,220	$	58,595	$	58,445	$	72,153	$	70,367
State and municipal		86,389		86,931		81,363		81,800		64,608		65,972
Mortgage-backed securities		108,247		107,371		93,591		91,174		119,392		116,020
Collateralized mortgage obligations		13,650		13,552		11,215		11,010		22,781		22,153
Corporate notes		632		601		632		649		632		665

Total investment securities	$	234,578	$	234,675	$	245,396	$	243,078	$	279,566	$	275,177

The following is a schedule of maturities of each category of debt securities and the related weighted-average yield of such securities as of December 31, 2007:


						After One Year					After Five Years
(dollar amounts in thousands)	One Year or Less					Through Five Years					Through Ten Years					After Ten Years
Available for Sale	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

U.S. Treasury and U.S. Government agency securities (1)	$	1,012		4.77	%	$	1,700		4.39	%	$	7,475		5.06	%	$	16,033		5.88	%
Obligations of states and political subdivisions		4,127		4.76			5,888		4.15			22,802		4.24			54,114		4.21
Mortgage-backed securities (2)		2,677		3.40			43,602		4.34			35,427		4.90			25,665		5.54
Collateralized mortgage obligations (2)		1,360		4.56			8,937		5.43			321		4.22			2,934		4.82
Other securities		—					—					—					601		7.58


Total	$	9,177		4.33		$	60,127		4.49		$	66,025		4.69		$	99,346		4.86


(1)		Fair value is based on contractual maturity or call date where a call option exists

(2)		Maturity based upon final maturity date

The weighted-average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. Yields are not presented on a tax-equivalent basis.

Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer that exceeded 10% of the consolidated stockholders’ equity of Horizon at December 31, 2007.

III.

LOAN PORTFOLIO

Types of Loans — Total loans on the balance sheet are comprised of the following classifications at December 31 for the years indicated.


(dollar amounts in thousands)	2007		2006		2005		2004		2003

Commercial, financial, agricultural and commercial tax-exempt loans	$	307,535	$	271,457	$	273,310	$	203,966	$	152,362
Mortgage warehouse loans		78,225		112,267		97,729		127,992		126,056
Real estate mortgage loans		216,019		222,235		159,312		89,139		67,428
Installment loans		287,073		237,875		202,383		142,945		101,872


Total loans	$	888,852	$	843,834	$	732,734	$	564,042	$	447,718

Maturities and Sensitivities of Loans to Changes in Interest Rates — The following is a schedule of maturities and sensitivities of loans to changes in interest rates, excluding real estate mortgage, mortgage warehousing and installment loans, as of December 31, 2007:


Maturing or repricing	One Year or		One Through		After Five Years
(dollar amounts in thousands)	Less		Five Years				Total

Commercial, financial, agricultural and commercial tax-exempt loans	$	189,501	$	115,316	$	2,718	$	307,535

The following is a schedule of fixed-rate and variable-rate commercial, financial, agricultural and commercial tax-exempt loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)


	Fixed		Variable
(dollar amounts in thousands)	Rate		Rate

Total commercial, financial, agricultural and commercial tax-exempt loans due after one year	$	67,260	$	50,773

Risk Elements

Nonaccrual, Past Due and Restructured Loans — The following schedule summarizes nonaccrual, past due and restructured loans.


December 31 (dollar amounts in
thousands)	2007		2006		2005		2004		2003

a. Loans accounted for on a nonaccrual basis	$	2,862	$	2,481	$	1,822	$	1,358	$	1,707
b. Accruing loans which are contractually past due 90 days or more as to interest and principal payments		87		144		251		—		176
c. Loans not included in (a) or (b) which are “Troubled Debt Restructuring’s” as defined by SFAS No. 15		—		—		—		—		—


Totals	$	2,949	$	2,625	$	2,073	$	1,358	$	1,883

LOAN PORTFOLIO (continued)

The increase in non-accrual loans in 2007 is primarily due to an increase in commercial real estate loans of $281 thousand and an increase in consumer loans of $381 thousand. This increase was partially offset by a decrease in mortgage loans of $281. The increase in non-accrual loans in 2006 was primarily due to an increase in commercial real estate loans of $761 thousand. This increase was partially offset by a decrease in mortgage loans and consumer loans of $67 thousand and $36 thousand, respectively. The increase in non-accrual loans in 2005 was primarily due to non-accrual loans acquired from Alliance of $389 thousand, an increase in consumer and commercial loans of $44 thousand and $189 thousand, respectively. The decrease in non-accrual loans in 2004 was primarily due to decreases in consumer loans of $125 thousand and mortgage loans of $337 thousand partially offset by an increase in commercial loans of $112 thousand. The increase in non-accrual loans in 2003 was primarily due to increases in consumer loans of $89 thousand, mortgage loans of $254 thousand and commercial loans of $146 thousand.


(dollar amounts in thousands)
Gross interest income that would have been recorded on non-accrual loans outstanding as of December 31, 2007, in the period if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period	$	287
Interest income actually recorded on non-accrual loans outstanding as of December 31, 2007, and included in net income for the period		165

Interest income not recognized during the period on non-accrual loans outstanding as of December 31, 2007	$	122

Discussion of Non-Accrual Policy

From time to time, the Bank obtains information, which may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of such, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. Further, it is management’s policy to place a commercial loan on a non-accrual status when delinquent in excess of 90 days, unless the Loan Committee approves otherwise. The officer responsible for the loan, the senior lending officer and the senior collection officer must review all loans placed on non-accrual status. The senior collection officer monitors the loan portfolio for any potential problem loans.

	2.		Potential Problem Loans

			Impaired loans for which the discounted cash flows or collateral value exceeded the carrying value of the loan totaled $1,870,000 and $1,768,000 at December 31, 2007 and 2006, respectively. The allowance for impaired loans, included in the Bank’s allowance for loan losses totaled $345,000 and $406,000 at those respective dates. The average balance of impaired loans during 2007 and 2006 was $1,673,000 and $942,000, respectively.

	3.		Foreign Outstandings

			None

	4.		Loan Concentrations

			As of December 31, 2007, there are no significant concentrations of loans exceeding 10% of total loans. See Item III A above for a listing of the types of loans by concentration.

	D.		Other Interest-Bearing Assets

			There are no other interest-bearing assets as of December 31, 2007, which would be required to be disclosed under Item III C.1 or 2 if such assets were loans.

IV.

SUMMARY OF LOAN LOSS EXPERIENCE

The following is an analysis of the activity in the allowance for loan losses account:


(dollar amounts in thousands)	2007		2006		2005		2004		2003

LOANS
Loans outstanding at the end of the period (1)	$	888,852	$	843,834	$	732,734	$	564,042	$	447,718
Average loans outstanding during the period (1)	$	839,591		780,555		640,758		514,916	$	512,441


(1)		Net of unearned income and deferred loan fees


	2007			2006			2005			2004			2003

ALLOWANCE FOR LOAN LOSSES
Balance at beginning of the period	$	8,738		$	8,368		$	7,193		$	6,909		$	6,255

Loans charged-off:
Commercial and agricultural loans		—			23			305			161			—
Real estate mortgage loans		36			—			29			41			226
Installment loans		2,701			1,120			1,096			863			758

Total loans charged-off		2,737			1,143			1,430			1,065			984

Recoveries of loans previously charged-off:
Commercial and agricultural loans		48			201			161			79			20
Real estate mortgage loans		—			—			2			2			23
Installment loans		674			407			364			278			245
Total loan recoveries		722			608			527			359			288
Net loans charged-off		2,015			535			903			706			696
Provision charged to operating expense		3,068			905			1,521			990			1,350
Acquired through acquisition		—			—			557			—			—


Balance at the end of the period	$	9,791		$	8,738		$	8,368		$	7,193		$	6,909

Ratio of net charge-offs to average loans outstanding for the period		.24	%		.07	%		.14	%		.14	%		.14	%

The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and the percentage of loans in each category to total loans.

Allocation of the Allowance for Loan Losses at December 31 (dollar amounts in thousands)


	2007					2006					2005					2004					2003
			% of					% of					% of					% of					% of
			Loans					Loans					Loans					Loans					Loans
	Allowance		to Total			Allowance		to Total			Allowance		to Total			Allowance		to Total			Allowance		to Total
	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loan

Commercial, financial and agricultural	$	2,656		35	%	$	2,987		32	%	$	2,733		37	%		2,469		36	%	$	1,829		28	%
Real estate mortgage		779		24			768		27			585		22			808		16			834		12
Mortgage warehousing		1,309		9			1,762		13			1,958		13			2,029		23			2,445		37
Installment		5,047		32			3,181		28			2,958		28			1,860		25			1,524		23
Unallocated		—		—			40		—			134		—			27		—			277		—


Total	$	9,791		100	%	$	8,738		100	%	$	8,368		100	%	$	7,193		100	%	$	6,909		100	%

In 1999, Horizon began a mortgage warehousing program. This program is described in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below and in the Notes to the Financial Statements in Item 8 below, which are incorporated herein by reference. The greatest risk related to these loans is transaction and fraud risk. During 2007, Horizon processed over $1.8 billion in mortgage warehouse loans.

V. DEPOSITS

Information required by this section is found in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below and in the Consolidated Financial Statements and related notes in Item 8 below, which are incorporated herein by reference.

VI.

RETURN ON EQUITY AND ASSETS

VII.

SHORT TERM BORROWINGS

The following is a schedule of statistical information relative to securities sold under agreements to repurchase which are secured by U.S. Treasury and U.S. Government agency securities and mature within one year. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of stockholders’ equity at the end of the period.


December 31 (dollar amounts in thousands)	2007			2006

Outstanding at year end	$	41,369		$	38,642
Approximate weighted-average interest rate at year-end		2.54	%		3.09	%
Highest amount outstanding as of any month-end during the year	$	42,961		$	40,179
Approximate average outstanding during the year	$	39,931		$	35,334
Approximate weighted-average interest during the year		2.94	%		2.91	%

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

A cautionary note about forward-looking statements: In its oral and written statements, Horizon from time to time includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can include statements about estimated cost savings, plans and objectives for future operations and expectations about Horizon’s financial and business performance as well as economic and market conditions. They often can be identified by the use of words like “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe” or “anticipate.”

Horizon may include forward-looking statements in filings with the Securities and Exchange Commission (“SEC”), such as this Form 10-K, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. It is intended that these forward-looking statements speak only as of the date they are made, and Horizon undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events.

By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. You are cautioned that actual results may differ materially from those contained in the forward-looking statement. The discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operation in Item 7 of this Form 10-K lists some of the factors that could cause Horizon’s actual results to vary materially from those expressed in or implied by any forward-looking statements. Your attention is directed to this discussion.

Other risks and uncertainties that could affect Horizon’s future performance are set forth immediately below in Item 1A — Risk Factors

ITEM 1A. RISK FACTORS

As a financial institution, we are subject to a number of types of risks. Although we undertake a variety of efforts to manage and control those risks, many of the risks are outside of our control. Among the risks we face are the following:

	•		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 our 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; and

	•		operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.

Investors should consider carefully these risks and the other risks and uncertainties described below. Any of the following risks could materially adversely affect our business, financial condition or operating results which could cause our stock price to decline. The risks and uncertainties described below are not, however, the only ones that we may face. Additional risks and uncertainties not currently known to us, or that we currently believe are not material, could also materially adversely affect our business, financial condition or operating results.

Our financial performance may be adversely impacted if we are unable to continue to grow our commercial and consumer loan portfolios, obtain low-cost funds and compete with other providers of financial services.

Our ability to maintain our history of record earnings year after year will depend, in large part, on our ability to continue to grow our commercial and consumer loan portfolios and obtain low-cost funds. During 2006 and 2007, we focused on increasing consumer loans, and we intend to continue to emphasize and grow consumer, as well as commercial types of loans in the foreseeable future. This

represented a shift in our emphasis from 2002 and 2003 when we focused on mortgage banking services, which generated a large portion of our income during those years.

We have also funded our growth with low-cost consumer deposits, and our ability to sustain our growth will depend in part on our continued success in attracting such deposits or finding other sources of low-cost funds.

Another factor in maintaining our history of record earnings will be our ability to expand our scope of available financial services to our customers in an increasingly competitive environment. In addition to other banks, our competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, and finance and insurance companies. Competition is intense in most of our markets. We compete on price and service with our competitors. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking reform.

Our commercial and consumer loans expose us to increased credit risks.

We have a large percentage of commercial and consumer loans. Commercial loans generally have greater credit risk than residential mortgage loans because repayment of these loans often depends on the successful business operations of the borrowers. These loans also typically have much larger loan balances than residential mortgage loans. Consumer loans generally involve greater risk than residential mortgage loans because they are unsecured or secured by assets that depreciate in value. Although we undertake a variety of underwriting, monitoring and reserving protections with respect to these types of loans, there can be no guarantee that we will not suffer unexpected losses.

Changes in market interest rates could adversely affect our financial condition and results of operations.

Our financial condition and results of operations are significantly affected by changes in market interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets and the interest expense that we pay on our interest-bearing liabilities. Our profitability depends on our ability to manage our assets and liabilities during periods of changing market interest rates. If rates increase rapidly as a result of an improving economy, we may have to increase the rates paid on our deposits and borrowed funds more quickly than loans and investments reprice, resulting in a negative impact on interest spreads and net interest income. The impact of rising rates could be compounded if deposit customers move funds from savings accounts to higher rate certificate of deposit accounts. Conversely, should market interest rates fall below current levels, our net interest margin could also be negatively affected, as competitive pressures could keep us from further reducing rates on our deposits, and prepayments and curtailments on assets may continue. Such movements may cause a decrease in our interest rate spread and net interest margin, and therefore, decrease our profitability.

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities.

An economic slowdown in Northwestern Indiana and Southwestern Michigan could affect our business.

Our primary market area for deposits and loans consists of LaPorte and Porter Counties in Northwestern Indiana and Berrien County in Southwestern Michigan. An economic slowdown in these areas could hurt our business. Possible consequences of such a downturn could include the following:

	•		increases in loan delinquencies and foreclosures;

	•		declines in the value of real estate and other collateral for loans; and

	•		a decline in the demand for our products and services.

Because our stock is thinly traded, it may be more difficult for you to sell your shares or buy additional shares when you desire to do so and the price may be volatile.

Although our common stock has been listed on the NASDAQ Capital Market since December 2001 and since February 1, 2007, has been listed on NASDAQ Global Market, our common stock is thinly traded. Average daily trading volume during 2007 was only 1,689 shares. The prices of thinly traded stocks, such as ours, are typically more volatile than stocks traded in a large, active public market and can be more easily impacted by sales or purchases of large blocks of stock. Thinly traded stocks are also less liquid, and because of the low volume of trades, you may be unable to sell your shares when you desire to do so.

The preparation of our financial statements requires the use of estimates that may vary from actual results.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not have to increase the allowance for loan losses and/or sustain loan losses that are significantly higher than the provided allowance.

Our mortgage warehouse and indirect lending operations are subject to a higher fraud risk than our other lending operations.

We buy loans originated by mortgage bankers and automobile dealers. Because we must rely on the mortgage bankers and automobile dealers in making and documenting these loans, there is an increased risk of fraud to us on the part of the third-party originators and the underlying borrowers. In order to guard against this increased risk, we perform investigations on the loan originators with whom we do business, and we review the loan files and loan documents we purchase to attempt to detect any irregularities or legal noncompliance. However, there is no guarantee that our procedures will detect all cases of fraud or legal noncompliance.

We are subject to extensive regulation and changes in laws, regulations and policies could adversely affect our business.

Our operations are subject to extensive regulation by federal agencies. See “Supervision and Regulation” in the description of our Business in Item 1 above for detailed information on the laws and regulations to which we are subject. Changes in applicable laws, regulations or regulator policies could materially affect our business. The likelihood of any major changes in the future and their effects are impossible to determine.

Our inability to continue to accurately process large volumes of transactions could adversely impact our business and financial results.

In the normal course of business, we process large volumes of transactions. If systems of internal control should fail to work as expected, if systems are used in an unauthorized manner, or if employees subvert the system of internal controls, significant losses could result.

We process large volumes of transactions on a daily basis and are exposed to numerous types of operational risk. Operational risk resulting from inadequate or failed internal processes, people and systems includes the risk of fraud by persons inside or outside the company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.

We establish and maintain systems of internal operational controls that provide us with timely and accurate information about our level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost-effective levels. Procedures exist that are designed to ensure that policies relating to conduct, ethics and business practices are followed. From time to time, losses from operational risk may occur, including the effects of operational errors.

While we continually monitor and improve the system of internal controls, data processing systems and corporate-wide processes and procedures, there can be no assurance that future losses will not occur.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

The main office of Horizon and the Bank is located at 515 Franklin Square, Michigan City, Indiana. The building located across the street from the main office of Horizon and the Bank, at 502 Franklin Square, houses the credit administration, operations, facilities and purchasing and information technology departments of the Bank. In addition to these principal facilities, the Bank has 16 sales offices located at:

3631 South Franklin Street, Michigan City, Indiana

113 W. First St., Wanatah, Indiana

1500 W. Lincolnway, LaPorte, Indiana

423 South Roosevelt Street, Chesterton, Indiana

4208 N. Calumet, Valparaiso, Indiana

902 Lincolnway, Valparaiso, Indiana

2650 Willowcreek Road, Portage, Indiana

233 East 84th Drive, Merrillville, Indiana

811 Ship Street, St. Joseph, Michigan

2608 Niles Road, St. Joseph, Michigan

1041 E. Napier Ave., Benton Harbor, Michigan

233 South Main Street, South Bend, Indiana

1909 East Bristol Street, Elkhart, Indiana

500 West Buffalo Street, New Buffalo, Michigan

13696 Redarrow Highway, Harbert, Michigan

6801 West U.S. 12 Three Oaks, Michigan

Horizon owns all of the facilities, except for the South Bend and Merrillville, Indiana offices, which are leased from third parties.

ITEM 3. LEGAL PROCEEDINGS

No material pending legal proceedings, other than ordinary routine litigation incidental to the business to which Horizon or any of its subsidiaries is a party or of which any of their property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of Horizon’s stockholders during the fourth quarter of the 2007 fiscal year.

SPECIAL ITEM: EXECUTIVE OFFICERS OF REGISTRANT


Robert C. Dabagia	69	Chairman of Horizon since 1998; Chief Executive Officer of Horizon and the Bank until July 1, 2001.

Craig M. Dwight	51	Chairman and Chief Executive Officer of the Bank since January 2003; President and Chief Executive Officer of Horizon and the Bank since July 1, 2001.

Thomas H. Edwards	55	President and Chief Operating Officer of the Bank since January 2003.

James H. Foglesong	62	Chief Financial Officer of Horizon and the Bank since January 2001.

James D. Neff	48	Corporate Secretary of Horizon since 2007; Executive Vice President-Mortgage Banking of Horizon Bank since January 2004; Senior Vice President of Horizon Bank since October 1999.

PART II


ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There were no purchases by the Company of its common stock during the fourth quarter.

The Securities and Exchange Commission requires Horizon to include a line graph comparing Horizon’s cumulative five-year total shareholder returns on the Common Shares with market and industry returns over the past five years. SNL Financial LC prepared the following graph. The return represented in the graph assumes the investment of $100 on January 1, 2003, and further assumes reinvestment of all dividends. The Common Shares began trading on the NASDAQ Global Market February 1, 2007. Prior to that date, the Common Shares were traded on the NASDAQ Capital Market.

Horizon Bancorp



	*Period Ending*
*Index*	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
Horizon Bancorp		100.00		159.04		158.62		157.28		167.20		159.77
Russell 2000		100.00		147.25		174.24		182.18		215.64		212.26
SNL Bank $1B-$5B Index		100.00		135.99		167.83		164.97		190.90		139.06

The other information regarding Horizon’s common stock is included under the caption “Horizon’s Common Stock and Related Stockholders’ Matters” in Item 8 below, which is incorporated by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information required under this item is incorporated by reference to the information appearing under the caption “Summary of Selected Financial Data” in Item 8 of this Form 10-K.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Horizon Bancorp and Subsidiaries

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Table Dollar Amounts in Thousands)

Overview

Horizon’s net interest margin at 3.03% for 2007 declined two basis points from 2006. Average earning assets increased approximately $54 million, which was the primary cause of an increase of $1.3 million or 4.0% in net interest income. Growth in earning assets occurred in commercial and consumer loans. Growth in these higher yielding asset categories offset a higher cost core deposits.

Non-interest income increased $2.1 million or 21% over the prior year, which was the largest contributor to the growth in net income. Growth occurred in most areas of non-interest income, especially gain on sale of loans which increased due to a higher percentage of new loans being sold and better sales execution.

Non-interest expenses increased $689 thousand or 2.3% over the prior year. Horizon began to see positive impact from staff reductions initiated during 2007 and other expense categories were held constant with the previous year.

Critical Accounting Policies

Horizon has established various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation the Company’s financial statements. The significant accounting policies of the Company are described in the notes to the consolidated financial statements included in Part II, Item 8 on Form 10-K. 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 following as critical accounting policies:

Allowance for Loan Losses

An allowance for loan losses is maintained to absorb 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 December 31, 2007, Horizon had core deposit intangibles of $2.068 million subject to amortization and $5.787 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 impact 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. Horizon has concluded that 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 impact 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.

Analysis of Financial Condition

Investment Securities

Investment securities totaled $234.675 million at December 31, 2007, and consisted of U. S. Treasury and Government Agency securities of $26.220 million (11.2)%; Municipal securities of $86.931 million (37.0)%; Mortgage-backed securities of $107.371 million (45.8)%; collateralized mortgage obligations of $13.552 million (5.8)%; and corporate securities of $601 thousand (.2)%.

As indicated above, 51.9% of the investment portfolio consists of mortgage-backed securities and collateralized mortgage obligations. These instruments are secured by residential mortgages of varying maturities. Principal and interest payments are received monthly as the underlying mortgages are repaid. These payments also include prepayments of mortgage balances as borrowers either sell their homes or refinance their mortgages. Therefore, mortgage-backed securities and collateralized mortgage obligations have maturities that are stated in terms of average life. The average life is the average amount of time that each dollar of principal is expected to be outstanding. As of December 31, 2007, the mortgage-backed securities and collateralized mortgage obligations in the investment portfolio had an average life of 6.46 years. Securities that have interest rates above current market rates are purchased at a premium. These securities may experience a significant increase in prepayments when lower market interest rates create an incentive for the borrower to refinance the underlying mortgage. This may result in a decrease of current income, however, this risk is mitigated by a shorter average life. Management currently believes that prepayment risk on these securities is nominal.

At December 31, 2007 and 2006, all investment securities were classified as available for sale. Securities classified as available for sale are carried at their fair value, with both unrealized gains and losses recorded, net of tax, directly to stockholders’ equity. Net appreciation on these securities totaled $97 thousand, which resulted in a $63 thousand increase, net of tax, to stockholders’ equity at December 31, 2007. This compared to a $1.507 million, net of tax, reduction in stockholders’ equity at December 31, 2006.

As a member of the Federal Reserve and Federal Home Loan Bank system, Horizon is required to maintain an investment in the common stock of each entity. The investment in common stock is based on a predetermined formula. At December 31, 2007, Horizon has investments in the common stock of the Federal Reserve and Federal Home Loan Bank totaling $12.625 million compared to $12.136 million at December 31, 2006.

At December 31, 2007, Horizon does not maintain a trading account and is not using any derivative products for hedging or other purposes.

Loans

Total loans, the principal earning asset of the Bank, were $888.852 million at December 31, 2007. The current level of loans is an increase of 5.3% from the December 31, 2006, level of $843.834 million. As the table below indicates, the increase is related to growth in Commercial and Consumer loans. The categories related to residential real estate lending, Real estate and Mortgage warehouse, declined during 2007.


(dollar amounts in thousands)					Dollar			Percent
December 31	2007		2006		Change			Change

Real estate loans
1 - 4 family	$	206,914	$	214,031	$	(7,117	)		(3.33	)%
Other		9,105		8,204		901			10.98

Total		216,019		222,235		(6,216	)		(2.80	)


Commercial loans
Working capital and equipment		154,459		128,500		25,959			20.20
Real estate, including agriculture		141,733		131,103		10,630			8.11
Tax exempt		3,809		3,861		(52	)		(1.35	)
Other		7,534		7,993		(459	)		(5.74	)

Total		307,535		271,457		36,078			13.29


Consumer loans
Auto		174,331		125,542		48,789			38.86
Recreation		7,074		8,862		(1,788	)		(20.18	)
Real estate/home improvement		41,684		43,590		(1,906	)		(4.37	)
Home equity		59,131		54,527		4,604			8.44
Unsecured		1,979		1,979		—			—
Other		2,874		3,375		(501	)		(14.84	)

Total		287,073		237,875		49,198			20.68


Mortgage warehouse loans
Prime		69,894		53,547		16,347			30.53
Sub-Prime		8,331		58,720		(50,389	)		(85.81	)

Total		78,225		112,267		(34,042	)		(30.32	)


Grand total	$	888,852	$	843,834	$	45,018			5.33	%

The acceptance and management of credit risk is an integral part of the Bank’s business as a financial intermediary. The Bank has established underwriting standards including a policy that monitors the lending function through strict administrative and reporting requirements as well as an internal loan review of consumer and small business loans. The Bank also uses an independent third-party loan review function that regularly reviews asset quality.

Real Estate Loans

Real estate loans totaled $216.019 million or 24.3% of total loans as of December 31, 2007, compared to $222.235 million or 26.3% of total loans as of December 31, 2006. This category consists of home mortgages that generally require a loan to value of no more than 80%. Some special guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio.

In addition to the customary real estate loans described above, the Bank also has outstanding on December 31, 2007, $58.809 million in home equity lines of credit compared to $54.527 million at December 31, 2006. Credit lines normally limit the loan to collateral value to no more than 89%. These loans are classified as consumer loans in the table above and in Note 4 of the consolidated financial statements.

Residential real estate lending is a highly competitive business. As of December 31, 2007, the real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but could generally be categorized as follows:


	2007								2006
			Percent of								Percent of
(dollar amounts in thousands)	Amount		Portfolio			Yield			Amount		Portfolio			Yield

Fixed rate
Monthly payment	$	41,491		19.21	%		6.47	%	$	46,301		20.84	%		6.35	%
Biweekly payment		2,663		1.23			6.49			3,047		1.37			6.45

Adjustable rate
Monthly payment		171,845		79.55			5.90			172,860		77.78			5.72
Biweekly payment		20		.01			7.79			27		.01			7.50


Total	$	216,019		100.00	%		6.03	%	$	222,235		100.00	%		5.88	%

During 2007 and 2006, approximately $135 million and $96 million, respectively, of residential mortgages were sold into the secondary market.

In addition to the real estate loan portfolio, the Bank sells real estate loans and retains the servicing rights. Loans serviced for others are not included in the consolidated balance sheets. During 2006 Horizon sold a large portion of its mortgage servicing business. The unpaid principal balances and number of loans serviced for others totaled approximately $26,191,000 and 324 and $23,702,000 and 279 at December 31, 2007 and 2006, respectively.

The Bank began capitalizing mortgage servicing rights during 2000 and the aggregate fair value of capitalized mortgage servicing rights at December 31, 2007, totaled approximately $269,000. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.


(dollar amounts in thousands)	2007			2006			2005

Mortgage Servicing Rights
Balances, January 1	$	28		$	1,278		$	1,473
Servicing rights capitalized		79			83			239
Amortization of servicing rights		(51	)		(251	)		(434	)
Servicing rights sold		—			(862	)		—

		276			248			1,278
Impairment allowance		(7	)		(3	)		(44	)


Balances, December 31	$	269		$	245		$	1,234

Commercial Loans

Commercial loans totaled $307.535 million, or 34.6% of total loans as of December 31, 2007, compared to $271.457 million, or 32.1% as of December 31, 2006.

Commercial loans consisted of the following types of loans at December 31:


	2007							2006
					Percent of							Percent of
(dollar amounts in thousands)	Number		Amount		Portfolio			Number		Amount		Portfolio

SBA guaranteed loans		17	$	3,863		1.26	%		20	$	4,321		1.60	%
Municipal government		26		3,809		1.24			42		3,861		1.42
Lines of credit		346		59,025		19.19			395		49,549		18.25
Real estate and equipment term loans		959		240,838		78.31			997		213,726		78.73


Total		1,350	$	307,535		100.00	%		1,454	$	271,457		100.00	%

Consumer Loans

Consumer loans totaled $287.073 million, or 32.3% of total loans as of December 31, 2007, compared to $237.875 million, or 28.2% as of December 31, 2006. The total consumer loan portfolio increased 20.7% in 2007. The growth in consumer loans came from the indirect automobile segment of the portfolio as Horizon continued to expand its dealer network in southwest Michigan and north central Indiana that started in 2006 and into Northern Illinois in 2007. The Illinois indirect program was begun in the first quarter with the intent to sell the loans originated. Due to changes in economic conditions, efforts to sell these loans were unsuccessful and the program was terminated during the third quarter. Approximately $25 million of loans were originated under this program. These loans remain on Horizon’s books and are generally performing as agreed. Direct consumer loans, mostly consisting of home equity term and revolving loans, were relatively stable in 2007.

Mortgage Warehouse Loans

Horizon’s mortgage warehousing business line 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 under SFAS 140 paragraph 9 (c) and therefore is accounted for as a secured borrowing with pledge of collateral under paragraph 12 of SFAS 140 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 recorded when collected 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.

Allowance and Provision for Loan Losses/Critical Accounting Policy

At December 31, 2007, the allowance for loan losses was $9.791 million, or 1.10% of total loans outstanding, compared to $8.738 million, or 1.03% at December 31, 2006. During 2007, the provision for loan losses totaled $3.068 million compared to $905 thousand in 2006. The need for an additional provision is a direct result of deterioration of loan quality in the wholesale mortgage (which total approximately $8.0 million) and indirect automobile portfolios.

In December, Horizon discovered a $189 thousand fraudulent loan in the wholesale mortgage portfolio. This, combined with three other delinquent wholesale mortgage loans, prompted Horizon to conduct an internal review of the portfolio. This review included approximately 65% of the portfolio and, while no additional fraudulent loans were detected, the review resulted in a specific allocation of over $1.400 million of the total allowance to this portfolio. The allocation included a combination of specific reserves assigned to certain loans as well as an amount based on Horizon’s recent loss history and national charge off statistics of sub-prime mortgage loans.

Horizon’s analysis of the indirect loan portfolio gave added weight to recent charge off history plus a comparison of current credit scores compared to original credit scores on approximately 65% of the borrowers in this portfolio. Original credit scores had only six percent of the borrowers at or below a 624 credit score. The recent analysis indicated that 19% of these borrowers now have credit scores of 624 or below. Based on this analysis, Horizon increased its allocation of the allowance by $500 thousand for future indirect loan losses.

Despite the increased allowance, 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 adequate to cover losses inherent in the loan portfolio as of December 31, 2007.

Nonperforming Loans

Nonperforming loans are defined as loans that are greater than 90 days delinquent or have had the accrual of interest discontinued by management. Management continues to work diligently toward returning nonperforming loans to an earning asset basis. Nonperforming loans for the previous three years ending December 31 are as follows:


(dollar amounts in thousands)	2007		2006		2005

Nonperforming loans	$	2,949	$	2,625	$	1,822

Nonperforming loans total 31% of the allowance for loan losses at December 31, 2007, compared to 30% and 22% of the allowance for loan losses on December 31, 2006 and 2005, respectively.

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. (See Note-4 of the audited financial statements for further discussion of impaired loans)

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 nonaccrual 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.

Other real estate owned (OREO) net of any related allowance for OREO losses for the previous three years ending December 31 are as follows:


(dollar amounts in thousands)	2007		2006		2005

Other real estate owned	$	238	$	75	$	23

Deposits

The primary source of funds for the Bank comes from the acceptance of demand and time deposits. However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank and other sources when it can do so at interest rates and terms that are superior to those required for deposited funds or loan demand is greater than the ability to grow deposits. Total deposits were $893.664 million at December 31, 2007, compared to $913.973 million at December 31, 2006, or a decrease of 2.2%. Average deposits and rates by category for the pervious three years ended December 31 are as follows:


	Average Balance Outstanding for the						Average Rate Paid for the Year
	Year Ended December 31						Ended December 31
(dollar amounts in thousands)	2007		2006		2005		2007			2006			2005

Noninterest-bearing demand deposits	$	76,530	$	78,654	$	73,501
Interest-bearing demand deposits		202,453		178,773		165,767		2.73	%		2.43	%		1.44	%
Savings deposits		31,431		34,637		38,231		.28			.28			.36
Money market		112,266		139,177		143,652		3.30			3.28			2.37
Time deposits		402,287		387,365		320,014		4.75			4.37			3.42


Total deposits	$	824,967	$	818,606	$	741,165

Horizon continually revises and enhances its interest-bearing consumer and commercial demand deposit products based on local market conditions and its need for funding to support various types of assets. These product changes caused the changes in the average balances and rates paid as displayed in the table above.

Certificates of deposit of $100,000 or more, which are considered to be rate sensitive and are not considered a part of core deposits, mature as follows as of December 31, 2007:


(dollar amounts in thousands)
Due in three months or less	$	82,417
Due after three months through six months		53,390
Due after six months through one year		38,751
Due after one year		53,223

Interest expense on time certificates of $100,000 or more was approximately $5.134 million, $5.533 million and $2.059 million for 2007, 2006 and 2005, respectively.

Off-Balance Sheet Arrangements

As of December 31, 2007, Horizon does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

Contractual Obligations


			Within One		One to		Three to		After Five
(dollar amounts in thousands)	Total		Year		Three Years		Five Years		Years

Deposits	$	893,664	$	795,469	$	78,353	$	19,329	$	513
Long-term debt obligations (1)		212,756		762		80,880		60,837		70,277
Subordinated debentures (2)		27,837		—		—		—		27,837


(1)		Includes debt obligations to the Federal Home Loan Bank and term repurchase agreements with maturities beyond one year borrowed by Horizon’s banking subsidiary. See Note 10 in Horizon’s Consolidated Financial Statements.

(2)		Includes Trust Preferred Capital Securities issued by Horizon Statutory Trusts II and III and those assumed in the acquisition of Alliance. See Note 11 in Horizon’s Consolidated Financial Statements.


	Expiration by Period
			Greater
	Within One		Than One
	Year		Year

Letters of credit	$	1,617	$	312
Unfunded loan commitments		90,063		51,666

Shareholder Value Plan

During 2001, Horizon initiated a Shareholder Value Plan. The Plan is a comprehensive strategic plan to broaden and improve the market for Horizon’s common stock with local community investors who have a long-term, personal interest in helping Horizon remain an independent community bank. It includes improved communications with stockholders and customers as well as efforts to improve the marketability of its common stock. During the fourth quarter of 2001, two important components of the Shareholder Value Plan were completed. These included a 3-for-1 stock split and the listing of Horizon’s stock on the NASDAQ Capital Market (formerly named the NASDAQ SmallCap Market) and effective February 1, 2007, Horizon is listed on Nasdaq Global Market. Before this, Horizon’s stock was traded on the Bulletin Board. A dividend reinvestment plan was implemented in early 2002 and the quarterly per share dividend was increased to $.102/3 in the fourth quarter of 2002. In October of 2003, Horizon’s Board of Director’s declared a 3-for-2 stock split and in December of 2003 increased the dividend to $.12. In December 2004, the Board of Director’s increased the quarterly dividend to $.13 per share and to $.14 per share and $.15 per share in December 2005 and June 2007 respectively.

Capital Resources

The capital resources of Horizon and the Bank exceed regulatory capital ratios for “well capitalized” banks at December 31, 2007. Stockholders’ equity totaled $70.645 million as of December 31, 2007, compared to $61.877 million as of December 31, 2006. At year-end 2007, the ratio of stockholders’ equity to assets was 5.61% compared to 5.06% for 2006. Horizon’s capital increased during the year 2007 as a result of increased earnings, net of dividends declared, exercise of stock options net of tax, improvement in unrealized gain (loss) on securities available for sale and the amortization of unearned compensation.

Horizon declared dividends in the amount of $.59 per share in 2007, and $.56 per share in 2006 and $.53 per share in 2005. The dividend payout ratio (dividends as a percent of net income) was 24% during 2007 and 2006 and 23% during 2005. For additional information regarding dividend conditions, see Note 1 of the Notes to the Consolidated Financial Statements.

In October of 2004, Horizon formed Horizon Statutory Trust II (Trust II), a wholly owned statutory business trust. Trust II issued $10.310 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90 day LIBOR plus 1.95% and mature on October 21, 2034, and are non-callable for five years. After that period, the securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $17,500 were capitalized and are being amortized to the first call date of the securities.

In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (Trust III), a wholly owned statutory business trust. Trust III issued $12.372 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90 day LIBOR plus 1.65% and mature on January 30, 2037, and are noncallable for five years. After that period, the securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $12,647 were capitalized and are being amortized to the first call date of the securities. The proceeds of this issue were used to redeem the securities issued by Trust I on March 26, 2007.

The Company assumed additional debentures as the result of the acquisition of Alliance in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I a wholly owned business trust (Alliance Trust) to sell $5.155 million in trust preferred securities. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Alliance. The junior subordinated debentures are the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 2.65%, mature in June 2034, and are non-callable for five years. After that period, the securities may be called at any quarterly interest payment date at par.

The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1 Capital for regulatory purposes. At December 31, 2007, $6.049 million of the $27.837 million in securities were not included in Tier 1 Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded as interest expense.

As of December 31, 2007, management is not aware of any recommendations by banking regulatory authorities, which, if they were to be implemented, would have or are reasonably likely to have a material effect on Horizon’s liquidity, capital resources or operations.

Results of Operations

Net Income

Consolidated net income was $8.140 million or $2.51 per diluted share in 2007, $7.484 million or $2.33 per diluted share in 2006 and $7.091 million or $2.24 per share in 2005.

Net Interest Income

The primary source of earnings for Horizon is net interest income. Net interest income is the difference between what Horizon has earned on assets it has invested and the interest paid on deposits and other funding sources. The net interest margin is net interest income expressed as a percentage of average earning assets. Horizon’s earning assets consist of loans, investment securities and interest-bearing balances in banks.


				2007								2006								2005
	Average					Yield/			Average					Yield/			Average					Yield/
(dollar amounts in thousands)	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate

Assets
Interest-bearing assets
Loans — total (1) (3)	$	853,314		$	63,619		7.45	%	$	785,448		$	57,282		7.29	%	$	640,758		$	44,749		6.98	%
Taxable investment securities, including FRB and FHLB stock		169,295			8,121		4.80			190,670			8,348		4.38			244,495			9,610		3.93
Nontaxable investment securities (2)		74,222			3,061		4.12			65,773			2,796		4.25			54,806			2,372		4.32
Interest-bearing balances and money market investments (4)		2,602			125		4.80			4,469			153		3.42			1,177			38		3.23
Federal funds sold		2,854			142		4.97			1,890			101		5.34			755			24		3.18

Total interest-earning assets		1,102,287			75,068		6.81			1,048,250			68,680		6.55			941,991			56,793		6.03

Noninterest-earning assets
Cash and due from banks		20,312								21,525								19,610
Allowance for loan losses		(8,680	)							(8,723	)							(7,615	)
Other assets		66,481								57,053								46,127


Total assets	$	1,180,400							$	1,118,105							$	1,000,113

Liabilities and Stockholders’ Equity
Interest-bearing liabilities Savings deposits	$	31,431			88		.28	%	$	34,637			96		.28	%	$	38,231			139		.36
Money market		112,266			3,701		3.30			139,177			4,559		3.28			143,652			3,414		2.37
Interest-bearing demand deposits		202,453			5,531		2.73			178,773			4,164		2.33			165,767			2,385		1.44
Time deposits		402,287			19,122		4.75			387,365			16,915		4.37			320,014			10,934		3.42
Short-term borrowings		72,920			2,930		4.02			78,747			2,035		2.58			45,517			1,573		3.46
Long-term debt		209,419			10,888		5.20			157,179			9,366		5.95			155,393			7,475		4.81

Total interest-bearing liabilities		1,030,776			42,260		4.10			975,878			37,135		3.81			868,574			25,920		2.98

Noninterest-bearing liabilities Demand deposits		76,530								78,654								73,501
Other liabilities		6,870								6,138								6,153
Stockholders’ equity		66,224								57,435								51,885


Total liabilities and stockholders’ equity	$	1,180,400							$	1,118,105							$	1,000,113


Net interest income				$	32,808							$	31,545							$	30,873


Net interest income as a percent of interest earning assets							2.98	%							3.01	%							3.28	%


(1)		Nonaccruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

(2)		Yields are not presented on a tax-equivalent basis.

(3)		Loan fees and late fees included in interest on loans aggregated $ 3,296,000, $3,470,000 and $3,246,000 in 2007, 2006 and 2005 respectively.

(4)		Horizon has no foreign office and, accordingly, no assets or liabilities to foreign operations. Horizon’s subsidiary bank had no funds invested in Eurodollar Certificates of Deposit at December 31, 2007.


	2007 - 2006									2006 - 2005
	Increase/(Decrease)									Increase/(Decrease)
				Change			Change						Change			Change
	Total			Due to			Due to			Total			Due to			Due to
(dollar amounts in thousands)	Change			Volume			Rate			Change			Volume			Rate

Interest Income
Loans — total	$	6,337		$	5,037		$	1,300		$	12,533		$	10,479		$	2,054
Taxable investment securities		(227	)		(984	)		757			(1,310	)		(2,281	)		971
Nontaxable investment securities		265			350			(85	)		424			467			(43	)
Interest-bearing balances and money market investments		(28	)		(77	)		49			115			113			2
Federal funds sold		41			48			(7	)		77			53			24

Total interest income		6,388			4,375			2,013			11,839			8,831			3,008


Interest Expense
Savings deposits		(8	)		(9	)		1			(43	)		(12	)		(31	)
Money market		(858	)		(887	)		29			1,145			(109	)		1,254
Interest-bearing demand deposits		1,367			593			774			1,779			200			1,579
Time deposits		2,207			669			1,538			5,981			2,577			3,404
Short-term borrowings		895			(160	)		1,055			462			933			(471	)
Long-term debt		1,522			2,826			(1,304	)		1,843			87			1,756

Total interest expense		5,125			3,032			2,093			11,167			3,676			7,491


Net Interest Earnings	$	1,263		$	1,343		$	(80	)	$	672		$	5,155		$	(4,483	)

Horizon’s average earning assets were $1,102.287 million in 2007 compared to $1,048.250 million in 2006 and $941.991 million in 2005. The net interest margin for 2007 was 2.98% compared to 3.01% and 3.28% in 2006 and 2005, respectively. Short-term interest rates began to increase in the third quarter of 2004 and continued through 2005 until June of 2006. Short-term interest remained relatively stable until the fourth quarter of 2007 at which point they began to decline.

Horizon’s net interest margin declined three basis points for 2007 compared to 2006. During 2006, low yielding investment securities were sold and the proceeds were reinvested in higher yielding securities, which improved the yield on the investment portfolio. Increases in commercial and consumer loans improved the yield on the total loan portfolio. These caused an increase in yield on total earning assets. Offsetting this was were increases in the cost of short term funding from both negotiable certificates of deposit and short term borrowings. The cost of long term debt increased due to maturities of certain debt at low yields which were replaced with higher costing debt. Average loans outstanding during 2007 showed growth from 2006, however, the total growth was limited due to a decline in mortgage warehouse loans caused by a slow down in the residential lending market. Changes in the mix of the loan portfolio is shown in the following table.


(dollar amounts in thousands)	2007		2006		2005

Commercial loans	$	291,656	$	267,263	$	234,971
Mortgage warehouse loans		70,279		96,334		108,298
Real estate loans		228,466		201,756		123,815
Installment loans		262,913		220,095		173,674


Total average loans outstanding	$	853,314	$	785,448	$	640,758

Average commercial loans grew nearly 9%, consumer loans increased by over 19% and residential real estate loans increased by over 12%. Commercial loan growth came from nonresidential commercial real estate loans. Average consumer loans grew as a result of expansion of indirect lending into southwest Michigan and north central Indiana. Average consumer loans increased due to indirect loans originated within Horizon’s normal market area, which are held in the portfolio, as well as approximately $24 million of indirect loans originated in the suburban Chicago market. Horizon terminated its Illinois indirect loan operation in October of 2007. Mortgage loans, while showing an increase in average balance, have declined since the end of 2006. This was intentional as Horizon shifts its emphasis to more traditional commercial and consumer banking lines of business. The decline in mortgage demand caused mortgage warehouse loans to decrease by over 27%.

Average interest-bearing deposits increased by over 11% during 2007. Short-term deposit rates increased due to a higher concentration of deposits in higher cost deposit products. The overall cost of time deposits increased as maturing certificates of deposit renewed at higher rates and a greater reliance on higher cost short term negotiable certificates of deposit.

The increase in net interest income during 2007 and 2006 is primarily the result of increased earning assets. The increase in net interest income resulting from increased earning assets was partially offset by declines in the net interest margin.

Non-interest Income

The major components of non-interest income consist of service charges on deposit accounts, gain on sale of loans and fiduciary fees. Service charges on deposit accounts are based upon: a) recovery of direct operating expenses associated with providing the service, b) allowing for a profit margin that provides an adequate return on assets and stockholders’ equity and c) competitive factors within the Bank’s markets. Service charges on deposits were $3.469 million, $3.102 million and $2.966 million, for 2007, 2006 and 2005, respectively.

Gain on sale of loans was $2.566 million for 2007, $1.681 million for 2006 and $1.756 million in 2005. Horizon has sold between 50% and 60% of its residential mortgage loan production in 2005 and 2006. In 2007 Horizon sold approximately 77% of its residential mortgage loan production. The loans retained are predominantly adjustable rate mortgage loans. During 2007, Horizon sold $135 million of current production of residential mortgage loans into the secondary market compared to $96 million in 2006 and $98 million in 2005.

Fiduciary fees were $3.556 million in 2007 compared to $3.100 million in 2006 and $2.748 million in 2005. Fiduciary income increased due to an increase in assets under administration, additional income from the ESOP line of business and a fee increase implemented in January of 2007.

Non-interest Expense

Non-interest expense totaled $31.144 million in 2007 compared to $30.455 million in 2006 and $29.129 million in 2005.

Salaries and benefits increased 4.4% during 2007 compared to a decrease of .6% during 2006. Incentive compensation accruals for various Horizon employees were reduced during the fourth quarter of 2006, as incentive targets were not met, while normal incentive compensation accruals continued all of 2007 as incentive targets were met. The reduction to the incentive accruals in 2006 is the main cause of the increase in salaries and employee benefits in 2007. The staff reductions, which took place in 2006 and 2007, are now favorably impacting compensation expense. The staff reductions in 2006 were accomplished through normal attrition and were the result of an efficiency study. The staff reduction in 2007 was the result of a reduction in force by eliminating certain positions. The 2007 expense includes approximately $262 thousand of severance benefits paid to the terminated employees. The ongoing annual impact of the 2007 staff reductions will be approximately $1.5 million.

Total other expenses, excluding salaries and benefits, decreased .4% in 2007 and increased 11.2% in 2006. During 2006 other expenses were impacted by a full year of additional costs related to the acquisition of Alliance including expenses relative to the operation of the additional branches, and the amortization of the core deposit intangible acquired in the acquisition. 2006 was also impacted by an increase in the deferred loan fees being amortized over the life of the loan. Efforts to maintain non-interest expenses at current levels were successful. Professional fees declined due to a reduction in legal fees.

Income Taxes

Income tax expense totaled $2.727 million in 2007 compared to $2.838 million in 2006 and $2.945 million in 2005. The effective tax rate was 25.1%, 27.5% and 29.3% for 2007, 2006 and 2005, respectively. The decrease in the effective tax rate was due to an increase in the percentage of tax-exempt income to pre-tax income.

Liquidity and Rate Sensitivity Management

Management and the Board of Directors meet regularly to review both the liquidity and rate sensitivity position of Horizon. Effective asset and liability management ensures Horizon’s ability to monitor the cash flow requirements of depositors along with the demands of borrowers and to measure and manage interest rate risk. Horizon utilizes an interest rate risk assessment model designed to highlight sources of existing interest rate risk and consider the effect of these risks on strategic planning. Management maintains (within certain parameters) an essentially balanced ratio of interest sensitive assets to liabilities in order to protect against the effects of wide interest rate fluctuations.

Liquidity

The Bank maintains a stable base of core deposits provided by long standing relationships with consumers and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayments, investment security sales and maturities, sale of real estate loans and borrowing relationships with correspondent banks, including the Federal Home Loan Bank (FHLB). At December 31, 2007, Horizon has available approximately $171.2 million in available credit from various money center banks, including the FHLB. During 2007, cash flows were generated primarily from proceeds from borrowings of $185.0 million and sales, maturities, and prepayments of investment securities of $62.5 million. Cash flows were used to purchase investments totaling $56.5 million, increase loans $47.8 million and repay debt $100.5 million. The net cash and cash equivalent position decreased by $3.8 million during 2007.

Interest Sensitivity

The degree by which net interest income may fluctuate due to changes in interest rates is monitored by Horizon using computer simulation models, incorporating not only the current GAP position but the effect of expected repricing of specific financial assets and liabilities. When repricing opportunities are not properly aligned, net interest income may be affected when interest rates change. Forecasting results of the possible outcomes determines the exposure to interest rate risk inherent in Horizon’s balance sheet. The goal is to manage imbalanced positions that arise when the total amount of assets that reprice or mature in a given time period differs significantly from liabilities that reprice or mature in the same time period. The theory behind managing the difference between repricing assets and liabilities is to have more assets repricing in a rising rate environment and more liabilities repricing in a declining rate environment. At December 31, 2007, the amount of assets that reprice within one year were 103% of liabilities that reprice within one year. At December 31, 2006, the amount of assets that reprice within one year were approximately 96% of the amount of liabilities that reprice within the same time period.


	Rate Sensitivity
			> 3 Months
	3 Months or		and < 6		> 6 Months		Greater Than
	Less		Months		and < 1 Year		1 Year		Total

Loans	$	270,683	$	82,169	$	115,202	$	429,211	$	897,265
Federal funds sold		35,314		—		—		—		35,314
Interest-bearing balances with Banks		249		—		—		—		249
Investment securities and FRB and FHLB stock		22,954		10,259		13,579		200,508		247,300
Other assets		22,931		—		—		55,815		78,746


Total assets	$	352,131	$	92,428	$	128,781	$	685,534	$	1,258,874


	Rate Sensitivity
			> 3 Months
	3 Months or		and < 6			> 6 Months			Greater Than
	Less		Months			and < 1 Year			1 Year			Total

Noninterest-bearing deposits	$	6,959	$	6,959		$	11,614		$	58,565		$	84,097
Interest-bearing deposits		210,485		148,059			129,524			321,499			809,567
Borrowed funds		33,799		1,916			8,812			242,161			286,688
Other liabilities		—		—			—			7,877			7,877
Stockholders’ equity		—		—			—			70,645			70,645


Total liabilities and stockholders’ equity	$	251,243	$	156,934		$	149,950		$	700,747		$	1,258,874


GAP	$	100,888	$	(64,506	)	$	(21,169	)	$	(15,213	)

Cumulative GAP	$	100,888	$	36,382		$	15,213

Included in the GAP analysis are certain interest-bearing demand accounts and savings accounts. These interest-bearing accounts are subject to immediate withdrawal. However, Horizon considers approximately 58% of these deposits to be insensitive to gradual changes in interest rates and generally to behave like deposits with longer maturities based upon historical experience.

Quantitative and Qualitative Disclosures About Market Risk

Horizon’s primary market risk exposure is interest rate risk. Interest rate risk (IRR) is the risk that Horizon’s earnings and capital will be adversely affected by changes in interest rates. The primary approach to IRR management is one that focuses on adjustments to the asset/liability mix in order to limit the magnitude of IRR.

Horizon’s exposure to interest rate risk is due to repricing or mismatch risk, embedded options risk, and yield curve risk. Repricing risk is the risk of adverse consequence from a change in interest rates that arise because of differences in the timing of when those interest rate changes affect Horizon’s assets and liabilities. Basis risk is the risk that the spread, or rate difference, between instruments of similar maturities will change. Options risk arises whenever products give the customer the right, but not the obligation, to alter the quantity or timing of cash flows. Yield curve risk is the risk that changes in prevailing interest rates will affect instruments of different maturities by different amounts. Horizon’s objective is to remain reasonably neutral with respect to IRR. Horizon utilizes a variety of strategies to maintain this position including the sale of mortgage loans on the secondary market and varying maturities of FHLB advances, certificates of deposit funding and investment securities.

The table, which follows, provides information about Horizon’s financial instruments that are sensitive to changes in interest rates as of December 31, 2007. The table incorporates Horizon’s internal system generated data related to the maturity and repayment/withdrawal of interest-earning assets and interest-bearing liabilities. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the historical experience of Horizon related to the impact of interest rate fluctuations on the prepayment of residential loans and mortgage-backed securities. From a risk management perspective, Horizon believes that repricing dates are more relevant than contractual maturity dates when analyzing the value of financial instruments. For deposits with no contractual maturity dates, the table presents principal cash flows and weighted average rate, as applicable, based upon Horizon’s experience and management’s judgment concerning the most likely withdrawal behaviors.

Horizon had no derivative financial instruments or trading portfolio as of December 31, 2007.

Quantitative Disclosure of Market Risk


																2013 and						Fair Value
	2008			2009			2010			2011			2012			Beyond			Total			12/31/07

Rate-sensitive assets
Fixed interest rate loans	$	176,129		$	94,934		$	63,179		$	41,398		$	24,662		$	25,757		$	426,059		$	428,991
Average interest rate		7.22	%		7.59	%		7.88	%		8.16	%		8.34	%		7.59	%		7.58	%
Variable interest rate loans		291,924			62,478			50,792			41,773			15,767			8,472			471,206			483,650
Average interest rate		7.06	%		6.20	%		6.25	%		6.39	%		6.55	%		6.17	%		6.77	%
Total loans		468,053			157,412			113,971			83,171			40,429			34,229			897,265			912,641
Average interest rate		7.12	%		7.04	%		7.15	%		7.27	%		7.64	%		7.24	%		7.15	%
Securities, including FRB and FHLB stock		46,793			23,188			23,089			21,903			27,040			105,287			247,300			247,300
Average interest rate		4.83	%		4.92	%		5.18	%		5.22	%		4.49	%		4.58	%		4.76	%
Other interest-bearing assets		35,563																		35,563			35,563
Average interest rate		2.30	%																	2.30	%
Total earnings assets		550,409			180,600			137,060			105,074			67,469			139,516			1,180,128			1,195,504
Average interest rate		7.32	%		6.29	%		6.26	%		6.26	%		6.30	%		5.09	%		6.60	%

Rate-sensitive liabilities
Noninterest-bearing deposits	$	25,533		$	17,780		$	12,382		$	8,623		$	6,005		$	13,774		$	84,097		$	84,097
NOW accounts		100,361			28,285			20,551			15,181			10,616			55,580			230,574			229,914
Average interest rate		3.43	%		2.27	%		2.19	%		2.15	%		2.00	%		2.12	%		2.71	%
Savings and money market accounts		36,785			26,921			19,234			13,634			9,636			23,691			129,901			128,310
Average interest rate		2.33	%		2.38	%		2.39	%		2.40	%		2.41	%		2.39	%		2.37	%
Certificates of deposit		350,897			53,731			24,623			11,034			8,295			512			449,092			450,797
Average interest rate		4.75	%		4.48	%		4.85	%		4.63	%		4.14	%		1.00	%		4.71	%
Total deposits		513,576			126,717			76,790			48,472			34,552			93,557			893,664			893,118
Average interest rate		4.08	%		2.91	%		2.74	%		2.40	%		2.28	%		1.87	%		3.41	%
Fixed interest rate borrowings		5,789			65,465			45,415			30,375			30,462			35,277			212,783			219,728
Average interest rate		3.61	%		4.71	%		5.12	%		5.03	%		5.07	%		3.97	%		4.74	%
Variable interest rate borrowings		73,906																		73,906			73,906
Average interest rate		3.93	%																	3.93	%
Total funds		593,271			192,182			122,205			78,847			65,014			128,834			1,180,353			1,186,752
Average interest rate		4.06	%		3.53	%		3.62	%		3.41	%		3.59	%		2.44	%		3.68	%

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required under this item is incorporated by reference to the information appearing in Management’s Discussion and Analysis of Financial Condition and Results of Operation included in Item 7.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Horizon Bancorp
Consolidated Financial Statements
Table of Contents


	Page(s)
Consolidated Financial Statements

Balance Sheets		37

Statements of Income		38

Statements of Stockholders’ Equity		39

Statements of Cash Flows		40-41

Notes to Financial Statements		42-69

Report of Independent Registered Public Accounting Firm		70

Other Information

Management’s Report on Financial Statements		71

Summary of Selected Financial Data		72-73

Horizon’s Common Stock and Related Stockholders’ Matters		74

Horizon Bancorp

Consolidated Balance Sheets

(Dollar Amounts in Thousands)


December 31	2007			2006

Assets
Cash and due from banks	$	19,714		$	52,311
Interest-bearing demand deposits		1			1
Federal funds sold		35,314			6,500

Cash and cash equivalents		55,029			58,812
Interest-bearing deposits		249			898
Investment securities, available for sale		234,675			243,078
Loans held for sale		8,413			13,103
Loans, net of allowance for loan losses of $9,791 and $8,738		879,061			835,096
Premises and equipment		24,607			23,394
Federal Reserve and Federal Home Loan Bank stock		12,625			12,136
Goodwill		5,787			5,787
Other intangible assets		2,068			2,412
Interest receivable		5,897			6,094
Cash value life insurance		22,384			13,464
Other assets		8,079			8,156


Total assets	$	1,258,874		$	1,222,430


Liabilities
Deposits
Noninterest bearing	$	84,097		$	81,949
Interest bearing		809,567			832,024

Total deposits		893,664			913,973
Borrowings		258,852			199,793
Subordinated debentures		27,837			40,209
Interest payable		2,439			1,771
Other liabilities		5,437			4,807

Total liabilities		1,188,229			1,160,553


Commitments and Contingencies

Stockholders’ Equity
Preferred stock, no par value Authorized, 1,000,000 shares No shares issued
Common stock, $.2222 stated value Authorized, 22,500,000 shares Issued, 5,011,656 and 4,998,106 shares		1,114			1,111
Additional paid-in capital		25,638			25,229
Retained earnings		60,982			54,196
Accumulated other comprehensive income (loss)		63			(1,507	)
Less treasury stock, at cost, 1,759,424 shares		(17,152	)		(17,152	)

Total stockholders’ equity		70,645			61,877


Total liabilities and stockholders’ equity	$	1,258,874		$	1,222,430

See notes to consolidated financial statements

Horizon Bancorp

Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)


Years Ended December 31	2007		2006			2005

Interest Income
Loans receivable	$	63,618	$	57,282		$	44,749
Investment securities
Taxable		8,389		8,602			9,720
Tax exempt		3,061		2,796			2,372

Total interest income		75,068		68,680			56,841


Interest Expense
Deposits		28,442		25,734			16,374
Federal funds purchased and short-term borrowings		2,930		2,035			1,210
Long-term borrowings		8,575		7,100			6,789
Subordinated debentures		2,313		2,266			1,595

Total interest expense		42,260		37,135			25,968

Net Interest Income		32,808		31,545			30,873
Provision for loan losses		3,068		905			1,521


Net Interest Income After Provision for Loan Losses		29,740		30,640			29,352


Other Income
Service charges on deposit accounts		3,469		3,102			2,966
Wire-transfer fee income		357		396			438
Fiduciary activities		3,556		3,100			2,748
Commission income from insurance agency		—		—			46
Gain on sale of loans		2,566		1,681			1,756
Gain on sale of mortgage servicing rights		—		656			—
Increase in cash surrender value of life insurance		920		470			487
Gain (loss) on sale of securities available for sale		2		(764	)		4
Other income		1,401		1,496			1,368

Total other income		12,271		10,137			9,813


Other Expenses
Salaries and employee benefits		17,154		16,433			16,518
Net occupancy expenses		2,418		2,338			2,217
Data processing and equipment expenses		2,516		2,560			2,342
Professional fees		1,169		1,386			1,225
Outside services and consultants		1,022		1,100			1,064
Loan expenses		2,106		1,952			1,427
Other expenses		4,759		4,686			4,336

Total other expenses		31,144		30,455			29,129


Income Before Income Tax		10,867		10,322			10,036
Income tax expense		2,727		2,838			2,945


Net Income	$	8,140	$	7,484		$	7,091


Basic Earnings Per Share	$	2.54	$	2.36		$	2.31

Diluted Earnings Per Share	$	2.51	$	2.33		$	2.24

See notes to consolidated financial statements.

Horizon Bancorp

Consolidated Statements of Stockholders’ Equity

(Dollar Amounts in Thousands)


													Restricted			Accumulated
				Additional									Stock,			Other
	Common			Paid-in			Comprehensive			Retained			Unearned			Comprehensive			Treasury
	Stock			Capital			Income			Earnings			Compensation			Income (Loss)			Stock			Total

Balances, January 1, 2005	$	1,062		$	22,729					$	43,092		$	(972	)	$	894		$	(16,373	)	$	50,432
Net income							$	7,091			7,091												7,091
Other comprehensive loss, net of tax, unrealized holding losses on securities								(3,747	)								(3,747	)					(3,747	)


Comprehensive income							$	3,344

Cash dividends ($.53 per share)											(1,660	)											(1,660	)
Exercise of stock options		30			916																		946
Tax benefit related to stock options					907																		907
Purchase treasury stock																				(651	)		(651	)
Amortization of unearned compensation														212									212


Balances, December 31, 2005		1,092			24,552						48,523			(760	)		(2,853	)		(17,024	)		53,530
Net income							$	7,484			7,484												7,484
Other comprehensive loss, net of tax, unrealized holding gains on securities, net of reclassification adjustment								1,346									1,346						1,346


Comprehensive income							$	8,830

Cash dividends ($.56 per share)											(1,811	)											(1,811	)
Reclassification of restricted stock, unearned compensation to paid-in capital upon adoption of SFAS 123 (R)					(760	)								760
Exercise of stock options		19			716																		735
Tax benefit related to stock options					469																		469
Stock option expense					40																		40
Purchase treasury stock																				(128	)		(128	)
Amortization of unearned compensation					212																		212


Balances, December 31, 2006		1,111			25,229						54,196			—			(1,507	)		(17,152	)		61,877
Net income							$	8,140			8,140												8,140
Other comprehensive income, net of tax, unrealized holding gains on securities, net of reclassification adjustment								1,570									1,570						1,570


Comprehensive income							$	9,710

Adjustment to accrued income taxes upon adoption of financial interpretation 48											563												563
Cash dividends ($.59 per share)											(1,917	)											(1,917	)
Issuance of restricted stock		2			(2	)
Exercise of stock options		3			132																		135
Tax benefit related to stock options					68																		68
Stock option expense					53																		53
Reversal of compensation expense for forfeiture of non-vested shares		(2	)		(82	)																	(84	)
Amortization of unearned compensation					240																		240


Balances, December 31, 2007	$	1,114		$	25,638					$	60,982		$	—		$	63		$	(17,152	)	$	70,645

See notes to consolidated financial statements.

Horizon Bancorp

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)


Years Ended December 31	2007			2006			2005

Operating Activities
Net income	$	8,140		$	7,484		$	7,091
Items not requiring (providing) cash
Provision for loan losses		3,068			905			1,521
Depreciation and amortization		2,278			2,471			2,281
Share based compensation		53			40			—
Premium amortization on securities available for sale		121			240			764
Mortgage servicing rights impairment (recovery)		2			(41	)		(97	)
Deferred income tax		(225	)		(78	)		174
(Gain) loss on sales of securities available for sale		(2	)		764			(4	)
Gain on sale of mortgage servicing rights		—			(656	)		—
Gain on sale of loans		(2,566	)		(1,681	)		(1,756	)
Proceeds from sales of loans		135,436			95,471			98,150
Loans originated for sale		(128,180	)		(104,453	)		(94,998	)
(Gain) loss on sale of other real estate owned		(10	)		4			(38	)
(Gain) loss on sale of premises and equipment		10			16			(22	)
Tax benefit of options exercised		(68	)		(469	)		(907	)
Increase in cash surrender value of life insurance		(920	)		(470	)		(487	)
Net change in
Interest receivable		197			(281	)		(596	)
Interest payable		668			108			497
Other assets		(670	)		536			912
Other liabilities		648			(879	)		(1,269	)

Net cash provided by (used in) operating activities		17,980			(969	)		11,216


Investing Activities
Net change in interest-bearing deposits		649			14,837			(10,048	)
Purchases of securities available for sale		(51,822	)		(91,791	)		(38,417	)
Proceeds from maturities, calls and principal repayments of securities available for sale		34,546			33,695			54,071
Proceeds from sales of securities available for sale		27,973			91,265			7,150
Purchase of FRB and FHLB stock, net of redemption		(539	)		(81	)		(712	)
Proceeds from sale of mortgage servicing rights		—			1,273			—
Proceeds from sale of Federal Home loan Bank Stock		50			928			—
Net change in loans		(47,773	)		(112,203	)		(83,118	)
Proceeds from sale of fixed assets		—			1			723
Recoveries on loans previously charged-off		722			608			527
Proceeds from sale of other real estate owned		768			44			409
Purchases of premises and equipment		(3,001	)		(3,877	)		(1,421	)
Purchase of trust preferred securities		—			(372	)		—
Purchase of bank owned life insurance		(8,000	)		—			—
Acquisition, net of cash acquired		—			—			(2,901	)

Net cash used in investing activities		(46,427	)		(65,673	)		(73,737	)

Horizon Bancorp

Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)


Years Ended December 31	2007			2006			2005
(Continued)
Financing Activities
Net change in
Deposits	$	(20,309	)	$	58,407		$	126,213
Repurchase agreements and note payable		39,222			(7,183	)		(2,256	)
Proceeds from long-term borrowings		220,000			250,000			107,000
Repayment of long-term borrowings		(200,163	)		(226,657	)		(146,982	)
Proceeds from issuance of trust preferred securities		—			12,372			—
Redemption of trust preferred securities		(12,372	)		—			—
Dividends paid		(1,917	)		(1,811	)		(1,660	)
Exercise of stock options		135			735			946
Tax benefit of options exercised		68			469			907
Purchase of treasury stock		—			(128	)		(651	)

Net cash provided by financing activities		24,664			86,204			83,517


Net Change in Cash and Cash Equivalents		(3,783	)		19,562			20,996

Cash and Cash Equivalents, Beginning of Year		58,812			39,250			18,254


Cash and Cash Equivalents, End of Year	$	55,029		$	58,812		$	39,250


Additional Cash Flows Information
Interest paid	$	41,592		$	36,960		$	25,281
Income tax paid		2,630			1,530			1,870

See notes to consolidated financial statements.

Horizon Bancorp

Notes to Consolidated Financial Statements

(Table Dollar Amounts in Thousands)

Note 1 — Nature of Operations and Summary of Significant Accounting Policies

Nature of Business — The consolidated financial statements of Horizon Bancorp (Horizon) and its wholly owned subsidiary, Horizon Bank, N.A. (Bank) conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry.

The Bank is a full-service commercial bank offering a broad range of commercial and retail banking and other services incident to banking. The Bank has three active wholly owned subsidiaries: Horizon Trust & Investment Management, Inc. (HTIM), Horizon Investments, Inc. (Investment Company) and Horizon Grantor Trust. HTIM offers corporate and individual trust and agency services and investment management services. Horizon Investments, Inc. manages the investment portfolio of the Bank. Horizon Grantor Trust holds title to certain company owned life insurance policies. The Bank maintains sixteen full service facilities and one loan production office throughout Northwest Indiana and Southwest Michigan. The Bank also maintains a loan production office in Lake County Indiana. The Bank also wholly owns Horizon Insurance Services, Inc. (Insurance Agency) which is inactive, but previously offered a full line of personal insurance products. The net income generated from the insurance operations was not significant to the overall operations of Horizon and the majority of the insurance agency assets were sold during 2005. Horizon conducts no business except that incident to its ownership of the subsidiaries.

Horizon formed Horizon Statutory Trust II in 2004 and Horizon Bancorp Capital Trust III in 2006 for the purpose of participating in Pooled Trust Preferred Stock offerings. The Company assumed additional debentures as the result of the acquisition of Alliance in 2005 which formed Alliance Financial Statutory Trust I (Alliance Trust). See Note 10 for further discussion regarding these previously consolidated entities that are now reported separately.

Basis of Reporting — The consolidated financial statements include the accounts of Horizon and subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Investment Securities Available for Sale — Horizon designates its investment portfolio as available for sale based on management’s plans to use such securities for asset and liability management, liquidity and not to hold such securities as long-term investments. Management repositions the portfolio to take advantage of future expected interest rate trends when Horizon’s long-term profitability can be enhanced. Investment securities available for sale and marketable equity securities are carried at estimated fair value and any net unrealized gains/losses (after tax) on these securities are included in accumulated other comprehensive income. Gains/losses on the disposition of securities available for sale are recognized at the time of the transaction and are determined by the specific identification method.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Loans Held for Sale — Loans held for sale are reported at the lower of cost or market value in the aggregate.

Interest and Fees on Loans — Interest on commercial, mortgage and installment loans is recognized over the term of the loans based on the principal amount outstanding. When principal or interest is past due 90 days or more, and the loan is not well secured or in the process of collection, or when serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. Loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as a yield adjustment.

Concentrations of Credit Risk — The Bank grants commercial, real estate and consumer loans to customers located primarily in Northwest Indiana and southwest Michigan and provides mortgage warehouse lines to mortgage companies in the United States. Commercial loans make up approximately 35% of the loan portfolio and are secured by both real estate and business assets. These loans are expected to be repaid from cash flows from operations of the businesses. Residential real estate loans make up approximately 24% of the loan portfolio and are secured by residential real estate. Installment loans make up approximately 32% of the loan portfolio and are primarily secured by consumer assets. Mortgage warehouse loans make up approximately 9% of the loan portfolio and are secured by residential real estate.

Mortgage Warehouse Loans — Horizon’s mortgage warehousing business line 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 under SFAS 140 paragraph 9 (c) and therefore is accounted for as a secured borrowing with pledge of collateral under paragraph 12 of SFAS 140 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 recorded when collected and no costs are deferred due to the term between each loan funding and related payoff is typically less than 30 days.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Allowance for Loan Losses — An allowance for loan losses is maintained to absorb loan losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of the probable losses inherent in the loan portfolio. The allowance is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. Horizon’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the general allowance, specific allowances for identified problem loans and the qualitative allowance.

The general allowance is calculated by applying loss factors to pools of outstanding loans. Loss factors are based on a historical loss experience and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

Specific allowances are established in cases where management has identified conditions or circumstances related to a credit that management believes indicate the probability that a loss will be incurred in excess of the amount determined by the application of the formula allowance.

The qualitative allowance is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the general and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the qualitative allowance may include factors such as local, regional and national economic conditions and forecasts, concentrations of credit and changes in the composition of the portfolio.

Loan Impairment — When analysis determines a borrower’s operating results and financial condition are not adequate to meet 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 placed on non-accrual status when 90 days or more past due. These loans are also often considered impaired. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. This typically occurs when the loan is 120 or more days past due.

Loans are considered impaired if full principal or interest payments are not made in accordance with the original terms of the loan. Impaired loans are measured and carried at the lower of cost or the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.

Smaller balance homogenous loans are evaluated for impairment in the aggregate. Such loans include residential first mortgage loans secured by one to four family residences, residential construction loans and automobile, home equity and second mortgages. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment.

Premises and Equipment — Buildings and major improvements are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 3 to 40 years. Furniture and equipment are capitalized and depreciated using primarily the straight-line method with useful lives ranging from 2 to 20 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations.

Federal Reserve and Federal Home Loan Bank Stock — The stock is a required investment for institutions that are members of the Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) systems. The required investment in the common stock is based on a predetermined formula.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Mortgage Servicing Rights — Mortgage servicing rights on originated loans that have been sold are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenue. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. Amortization expense and charges related to an impairment write-down are included in other income.

Goodwill — Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Goodwill totaled $5.787 million at December 31, 2007 and 2006. A large majority of the goodwill relates to the acquisition of Alliance financial Corporation.

Income Taxes — Horizon files annual consolidated income tax returns with its subsidiaries. Income tax in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes.

The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, no material liabilities for uncertain tax positions have been recorded. However, the Company reduced its liabilities for certain tax position by $563,000. This reduction was recorded as a cumulative effect adjustment to equity. The following financial statement line items for 2007 were affected by the change in accounting principle.

Trust Assets and Income — Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by Horizon.

Earnings per Common Share — Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In August 2002, substantially all of the participants in Horizon’s Stock Option and Stock Appreciation Rights Plans voluntarily entered into an agreement with Horizon to cap the value of their stock appreciation rights (SARS) at $14.67 per share and cease any future vesting of the SARS. These agreements with option holders make it more advantageous to exercise an option rather than a SAR whenever Horizon’s stock price exceeds $14.67 per share, therefore, the option becomes potentially dilutive at $14.67 per share or higher. The number of shares used in the computation of basic earnings per share is 3,200,440 for 2007, 3,177,272 for 2006 and 3,067,632 for 2005. The number of shares used in the computation of diluted earnings per share is 3,243,565 for 2007, 3,217,050 for 2006 and 3,162,950 for 2005. There were 18,000 and 5,000 shares for 2007 and 2006 respectively that were excluded from diluted earnings per share, as they were anti-dilutive. There were no anti-dilutive shares for 2005.

Horizon Bancorp

Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Dividend Restrictions — Regulations of the Comptroller of the Currency limit the amount of dividends that may be paid by a national bank to its parent holding company without prior approval of the Comptroller of the Currency. At December 31, 2007, $7.787 million was available for payment of dividends from the Bank to Horizon. Additionally, the Federal Reserve Board limits the amount of dividends that may be paid by Horizon to its stockholders under its capital adequacy guidelines.

Consolidated Statements of Cash Flows — For purposes of reporting cash flows, cash and cash equivalents are defined to include cash and due from banks, money market investments and federal funds sold with maturities of one day or less. Horizon reports net cash flows for customer loan transactions, deposit transactions, short-term investments and short-term borrowings.

Share-Based Compensation — At December 31, 2007, Horizon has stock option plans, which are described more fully in Note 18. Effective January 1, 2006, Horizon adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123(R) requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. Horizon has elected the modified prospective application and, as a result, has recorded approximately $53 thousand and $40 thousand for 2007 and 2006 respectively in compensation expense relating to vesting of stock options less estimated forfeitures for the 12 month period ended December 31, 2007 and 2006. Prior to adoption of SFAS 123(R), unearned compensation related to restricted stock awards was classified as a separate component of stockholders’ equity. Upon the adoption of SFAS 123(R) on January 1, 2006, the balance in unearned compensation was reclassified to additional paid-in capital.

Prior to the adoption of SFAS 123(R), Horizon accounted for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if Horizon had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.


Years Ended December 31	2005

Net income, as reported	$	7,091
Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes		(35	)


Pro forma net income	$	7,056


Earnings per share:
Basic – as reported	$	2.31
Basic – pro forma	$	2.30
Diluted – as reported	$	2.24
Diluted – pro forma	$	2.23

Reclassifications — Certain reclassifications have been made to the 2006 and 2005 consolidated financial statements to be comparable to 2007. These reclassifications had no effect on net income.

Horizon Bancorp
Notes to Consolidated Financial Statements

(Table Dollar Amounts in Thousands)

Recent Accounting Pronouncements

Fair Value Measurements — In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157) on fair value measurement. SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS 157 does not expand the use of fair value in any new circumstances.

Over forty current accounting standards within generally accepted accounting principles require (or permit) entities to measure assets and liabilities at fair value. Prior to SFAS 157, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. In the case of derivatives, the FASB consulted with investors, who generally supported fair value, even when market data are not available, along with expanded disclosure of the methods used and the effect on earnings.

Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy.

SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. Horizon has not determined the impact that SFAS 157 will have on its consolidated financial condition or results of operations.

Fair Value Option for Financial Assets and Financial Liabilities — In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities; including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities with an irrevocable option to report most financial assets and liabilities at fair value, with subsequent changes in fair value reported in earnings. The election can be applied on an instrument-by-instrument basis. The statement establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. The provisions of FAS 159 are effective for the fiscal year beginning January 1, 2008. The Company does not expect the adoption of SFAS No. 159 to have a material impact on the operations of the Company.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”), which replaces the FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets required, the liabilities assumed, any non-controlling interests in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on the Company’s financial condition, results of operations and cash flows.

Note 2 — Acquisition

On June 10, 2005, Horizon acquired Alliance Financial Corporation and its wholly owned bank subsidiary, Alliance Banking Company (collectively referred to as Alliance). Horizon purchased the outstanding shares of Alliance for $42.50 per share in cash. The cost of the transaction, including legal, accounting, and investment fees was $13.348 million. The assets and liabilities of Alliance were recorded on the balance sheet at their fair value as of the acquisition date. The results of Alliance’s operations have been included in Horizon’s consolidated statement of income from the date of acquisition. The $5,629,000 of goodwill is not deductible for tax purposes.

The following table summarizes the estimated fair values of the net assets acquired as of the June 10, 2005, acquisition date:


Assets
Cash and cash equivalents	$	10,447
Investment securities		28,922
Loans, net of allowance for loan losses		86,447
Premises and equipment		4,983
Goodwill		5,629
Core deposit intangible		2,952
Other assets		1,711

Total assets		141,091


Liabilities
Deposits		117,137
Borrowings		9,040
Other liabilities		1,566

Total liabilities		127,743


Net Assets Acquired	$	13,348

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

The following pro forma disclosures, including the effect of the purchase accounting adjustments, depict the results of operations as though the merger had taken place January 1, 2004:


Year ended December 31	2005

Net interest income	$	32,884
Net income		6,111
Per Share – combined
Basic net income	$	1.99
Diluted net income		1.93

Note 3 — Investment Securities


	2007
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31	Cost		Gains		Losses		Value

Available for sale
U.S. Treasury and federal agencies	$	25,660	$	560	$	—	$	26,220
State and municipal		86,389		906		364		86,931
Federal agency collateralized mortgage obligations		13,650		53		151		13,552
Federal agency mortgage-backed pools		108,247		253		1,129		107,371
Corporate notes		632		—		31		601


Total investment securities	$	234,578	$	1,772	$	1,675	$	234,675


	2006
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31	Cost		Gains		Losses		Value

Available for sale
U.S. Treasury and federal agencies	$	58,595	$	58	$	208	$	58,445
State and municipal		81,363		806		369		81,800
Federal agency collateralized mortgage obligations		11,215		19		224		11,010
Federal agency mortgage-backed pools		93,591		54		2,471		91,174
Corporate notes		632		17		—		649


Total investment securities	$	245,396	$	954	$	3,272	$	243,078

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

The amortized cost and fair value of securities available for sale at December 31, 2007, 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.


	Amortized		Fair
	Cost		Value

Within one year	$	5,099	$	5,139
One to five years		7,457		7,588
Five to ten years		30,017		30,277
After ten years		70,108		70,748

		112,681		113,752
Federal agency collateralized mortgage obligations		13,650		13,552
Federal agency mortgage-backed pools		108,247		107,371


Totals	$	234,578	$	234,675

Securities with a carrying value of $116,931,000 and $78,795,000 were pledged at December 31, 2007 and 2006, respectively, to secure certain public and trust deposits and securities sold under agreements to repurchase.

Proceeds from sales of securities available for sale during 2007 were $27,973,000. Gross gains of $164,000 and gross losses of $162,000 were recognized on these sales in 2007. Proceeds from sales of securities available for sale during 2006 were $91,265,000. Gross gains of $1,247,000 and gross losses of $2,011,000 were recognized on these sales. Proceeds from the sales of securities available for sale during 2005 were $7,150,000. Gross gains of $37,000 and gross losses of $33,000 were recognized on these sales. The tax expense on net realized gains for 2007 and 2005 was $700 and $1,400 respectively. The tax benefit on net realized losses for 2006 was $267,000.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2007 and 2006, was $101,674,000 and $150,402,000, respectively, which is approximately 43% and 62% of Horizon’s available-for-sale investment portfolio. These declines primarily resulted from decreases in market interest rates.

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. Horizon does not have a history of actively trading securities, but keeps the securities available for sale should liquidity or other needs develop that would warrant the sale of securities. 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.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 and 2006:


	Less than 12 Months				12 Months or More				Total
Description of			Unrealized				Unrealized				Unrealized
Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

2007
State and municipal	$	21,498	$	161	$	11,177	$	203	$	32,675	$	364
Federal agency collateralized mortgage obligations		2,665		22		4,995		129		7,660		151
Federal agency mortgage-backed pools		692		15		60,046		1,114		60,738		1,129

Corporate notes		601		31		—		—		601		31


Total temporarily impaired securities	$	25,456	$	229	$	76,218	$	1,446	$	101,674	$	1,675


	Less than 12 Months				12 Months or More				Total
Description of			Unrealized				Unrealized				Unrealized
Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

2006
U.S. Treasury and federal agencies	$	10,804	$	30	$	10,899	$	178	$	21,703	$	208
State and municipal		22,354		121		10,615		248		32,969		369
Federal agency collateralized mortgage obligations		—		—		9,203		224		9,203		224
Federal agency mortgage-backed pools		1,742		10		84,785		2,461		86,527		2,471


Total temporarily impaired securities	$	34,900	$	161	$	115,502	$	3,111	$	150,402	$	3,272

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 4 — Loans and Allowance


December 31	2007			2006

Commercial loans	$	307,535		$	271,457
Mortgage warehouse loans		78,225			112,267
Real estate loans		216,019			222,235
Installment loans		287,073			237,875

		888,852			843,834
Allowance for loan losses		(9,791	)		(8,738	)


Total loans	$	879,061		$	835,096


December 31	2007			2006			2005

Allowance for loan losses
Balances, January 1	$	8,738		$	8,368		$	7,193
Acquired through acquisition		—			—			557
Provision for losses		3,068			905			1,521
Recoveries on loans		722			608			527
Loans charged off		(2,737	)		(1,143	)		(1,430	)


Balances, December 31	$	9,791		$	8,738		$	8,368

Impaired loans for which the carrying value of the loans exceeded the discounted cash flows or collateral value totaled approximately $1,870,000 and $1,768,000 at December 31, 2007 and 2006, respectively. The allowance for impaired loans, included in the Bank’s allowance for loan losses, totaled $345,000 and $406,000 at December 31, 2007 and 2006, respectively. The average balance of impaired loans during 2007 was $1,673,000 and $942,000 during 2006. There was $165,000, $117,000 and $63,000 of interest income recorded on the cash and accrual basis during 2007, 2006 and 2005, respectively, on impaired loans.

At December 31, 2007, loans past due more than 90 days and still accruing interest totaled approximately $87,000. At December 31, 2006, loans past due more than 90 days and still accruing interest totaled approximately $144,000. Non-accruing loans at December 31, 2007, 2006 and 2005, totaled approximately $2,862,000, $2,481,000 and $1,822,000, respectively. Interest income not recognized on these loans totaled approximately $122,000, $77,000 and $60,000 in 2007, 2006 and 2005, respectively.

Loans to directors and executive officers of Horizon and the Bank, including associates of such persons, amounted to $15,217,000 and $5,834,000, as of December 31, 2007 and 2006, respectively. During 2007, new loans or advances were $12,282,000 and loan payments were $2,899,000.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 5 — Premises and Equipment


December 31	2007			2006

Land	$	7,006		$	6,641
Buildings and improvements		25,453			23,565
Furniture and equipment		10,366			9,809


Total cost		42,825			40,015
Accumulated depreciation		(18,218	)		(16,621	)


Net	$	24,607		$	23,394

Note 6 — Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others totaled approximately $26,191,000 and $23,702,000 at December 31, 2007 and 2006, respectively.

The aggregate fair value of capitalized mortgage servicing rights at December 31, 2007, totaled approximately $309,000. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.


	2007			2006			2005

Mortgage Servicing Rights
Balances, January 1	$	248		$	1,278		$	1,473
Servicing rights capitalized		79			83			239
Servicing rights sold		—			(862	)		—
Amortization of servicing rights		(51	)		(251	)		(434	)

		276			248			1,278
Impairment allowance		(7	)		(3	)		(44	)


Balances, December 31	$	269		$	245		$	1,234

During 2006, the Bank sold mortgage servicing rights with a book value of $862,000. The principal balance of the loans on which the servicing was sold amounted to $134,465,000. During 2007, the Bank recorded additional impairment of approximately $2,000. During 2006, the Bank recorded a gross recovery of the impairment allowance totaling approximately $41,000.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 7 — Intangible Assets

As a result of the acquisition of Alliance (Note 2) in 2005, the Company has recorded certain amortizable intangible assets related to core deposit intangibles. The Core deposit intangible is being amortized over ten years using an accelerated method. Additionally, the Company has a non-compete agreement being amortized over four years from the acquisition of a mortgage company in 2003. Amortizable intangible assets are summarized as follows:


	2007					2006
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
December 31	Amount		Amortization			Amount		Amortization

Amortizable intangible assets
Core deposit intangible	$	2,952	$	(884	)	$	2,952	$	(553	)
Noncompete agreement		90		(90	)		90		(77	)


	$	3,042	$	(974	)	$	3,042	$	(630	)

Amortization expense for intangible assets totaled $344,000, $368,000 and $230,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Estimated amortization for the years ending December 31 are as follows:


2008	$	317
2009		305
2010		292
2011		280
2012		269
Thereafter		605

	$	2,068

Note 8 — Deposits


December 31	2007		2006

Noninterest-bearing demand deposits	$	84,097	$	81,949
Interest-bearing demand deposits		230,574		307,147
Money market (variable rate)		100,792		129,981
Savings deposits		29,110		31,495
Certificates of deposit of $100,000 or more		227,781		151,342
Other certificates and time deposits		221,310		212,059


Total deposits	$	893,664	$	913,973

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Certificates and other time deposits maturing in years ending December 31 are as follows:


2008	$	350,922
2009		53,731
2010		24,623
2011		11,034
2012		8,295
Thereafter		486


	$	449,091

Note 9 — Borrowings


December 31	2007		2006

Federal Home Loan Bank advances, variable and fixed rates ranging from 2.86% to 7.53%, due at various dates through November 15, 2024	$	157,783	$	137,951
Securities sold under agreements to repurchase		96,369		56,642
Notes payable		4,700		5,200


Total short-term borrowings	$	258,852	$	199,793

The Federal Home Loan Bank advances are secured by first and second mortgage loans and mortgage warehouse loans totaling approximately $427,815,000. Advances are subject to restrictions or penalties in the event of prepayment. In addition, $75,200,000 of the advances outstanding at December 31, 2007 contained options with dates ranging from March 17, 2008 to April 29, 2013, whereby the interest rate may be adjusted by the Federal Home Loan Bank, at which time the advances may be repaid at the option of the Company without penalty.

Securities sold under agreements to repurchase consist of obligations of the Bank to other parties. The obligations are secured by U.S. agency and mortgage-backed securities and such collateral is held in safekeeping by third parties. The maximum amount of outstanding agreements at any month end during 2007 and 2006 totaled $97,677,000 and $70,179,000 and the daily average of such agreements totaled $75,588,000 and $63,098,000, respectively. The agreements at December 31, 2007, mature at various dates through September 11, 2017. Securities sold under repurchase agreements totaling $20,000,000 may be cancelled at the discretion of the lender on various dates beginning on September 11, 2010.

Horizon has an unsecured $12,000,000 line of credit, of which, $4.7 million was outstanding at December 31, 2007. The line of credit is from an unrelated financial institution with interest payable quarterly at a rate indexed to LIBOR. The note matures within one year.

At December 31, 2007, the Bank has available approximately $171,167,000 in credit lines with various money center banks, including the FHLB.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Contractual maturities in years ending December 31


2008	$	51,355
2009		40,125
2010		45,133
2011		30,142
2012		41,568
Thereafter		50,529


	$	258,852

Note 10 — Subordinated Debentures

In March of 2002, Horizon formed Horizon Statutory Trust I (Trust I), a wholly owned statutory business trust. Trust I sold $12.372 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust I and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90-day LIBOR plus 3.60% and mature on March 26, 2032, and are noncallable for five years. After that period, the securities may be called at any quarterly interest payment date at par. These securities have been called and were redeemed on March 26, 2007. Costs associated with the issuance of the securities totaling $362,000 were capitalized and were amortized to the March 26,2007 first call date of the securities.

In October of 2004, Horizon formed Horizon Statutory Trust II (Trust II), a wholly owned statutory business trust. Trust II sold $10.310 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90 day LIBOR plus 1.95% and mature on October 21, 2034, and are non-callable for five years. After that period, the securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $17,500 were capitalized and are being amortized to the first call date of the securities.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (Trust III), a wholly owned statutory business trust. Trust III sold $12.372 million of Trust Preferred Capital Securities as a participant in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of 90 day LIBOR plus 1.65% and mature on January 30, 2037, and are noncallable for five years. After that period, the securities may be called at any quarterly interest payment date at par. Costs associated with the issuance of the securities totaling $12,647 were capitalized and are being amortized to the first call date of the securities. The proceeds of this issue were used to redeem the securities issued by Trust I on March 26, 2007.

Note 11 — Employee Stock Ownership Plan

Effective January 1, 2007, Horizon converted its stock bonus plan to an employee stock ownership plan (“ESOP”). Prior to that date Horizon maintained an employee stock bonus plan that covered substantially all employees. The stock bonus plan was noncontributory and Horizon made matching contributions of amounts contributed by the employees to the Employee Thrift Plan and discretionary contributions. Prior to the establishment of the employee stock bonus plan, Horizon maintained an ESOP that was terminated in 1999. The prior ESOP accounts of active employees and the discretionary accounts of active employees will remain in the new ESOP. The Matching contribution accounts under the Stock Bonus Plan will be transferred to the Horizon Bancorp Employees’ Thrift Plan.

The ESOP exists for the benefit of substantially all employees. Contributions to the ESOP are by Horizon and are determined by the Board of Directors at their discretion. The contributions may be made in the form of cash or common stock. Shares are allocated among participants each December 31 on the basis of each participant’s eligible compensation to total eligible compensation. Eligible compensation is limited to $225,000 for each participant. Dividends on shares held by the plan, at the discretion of each participant, may be distributed to an individual participant or left in the plan to purchase additional shares.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Total cash contributions and expense recorded for the ESOP was $300,000 in 2007. The expense recorded for the Stock Bonus Plan was $200,000 in 2006 and 2005.

The ESOP, which is not leveraged, owns a total of 380,332 shares of Horizon’s stock or 13.9% of the outstanding shares.

Note 12 — Employee Thrift Plan

The Employee Thrift Plan (“Plan”) provides that all employees of Horizon with the requisite hours of service are eligible for the Plan. The Plan permits voluntary employee contributions and Horizon may make discretionary matching and profit sharing contributions. Each eligible employee is vested according to a schedule based upon years of service. Employee voluntary contributions are vested at all times and Horizon’s discretionary contributions vest over a six-year period. The Bank’s expense related to the thrift plan totaled approximately $348,000 in 2007, $332,000 in 2006 and $384,000 for 2005.

Note 13 — Other Expenses


Years Ended December 31	2007		2006		2005

Supplies and printing	$	452	$	466	$	452
Advertising		630		613		659
Communication		561		479		480
Directors fees		280		279		272
Insurance expense		430		466		509
Postage		354		340		301
Amortization of intangibles		344		367		230
Travel and entertainment		548		530		527
Other		1,160		1,146		906


Total other expenses	$	4,759	$	4,686	$	4,336

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 14 — Income Tax


Years Ended December 31	2007			2006			2005

Income tax expense
Currently payable
Federal	$	2,671		$	2,381		$	2,226
State		281			535			545
Deferred		(225	)		(78	)		174


Total income tax expense	$	2,727		$	2,838		$	2,945


Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34%	$	3,695		$	3,510		$	3,412
Tax exempt interest		(1,097	)		(1,009	)		(841	)
Tax exempt income		(318	)		(170	)		(175	)
Nondeductible and other		261			154			189
Effect of state income taxes		186			353			360


Actual tax expense	$	2,727		$	2,838		$	2,945

A cumulative net deferred tax asset is included in other assets. The components of the asset are as follows:


December 31	2007			2006

Assets
Allowance for loan losses	$	3,944		$	3,757
Difference in expense recognition		—			101
Director and employee benefits		829			855
Net operating loss carryforward		—			60
Tax credit carry forward		—			82
Unrealized loss on securities available for sale		—			811

Total assets		4,773			5,666


Liabilities
Depreciation		(899	)		(1,062	)
Difference in expense recognition		(111	)		—
Federal Home Loan Bank stock dividends		(326	)		(326	)
Difference in basis of intangible assets		(826	)		(959	)
Difference in basis of assets		—			(185	)
Difference in basis of liabilities		—			(5	)
Unrealized gain on securities available for sale		(34	)		—
Other		(178	)		(110	)

Total liabilities		(2,374	)		(2,647	)


Net deferred tax asset	$	2,399		$	3,019

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 15 — Other Comprehensive Income (Loss)


Years Ended December 31	2007			2006			2005

Unrealized losses on securities:
Unrealized holding gains (losses) arising during the year	$	2,413		$	1,307		$	(5,765	)
Less: reclassification adjustment for gains (losses) realized in net income		2			(764	)		4

Net unrealized gains (losses)		2,415			2,071			(5,769	)
Tax (expense) benefit		(845	)		(725	)		2,022


Other comprehensive income (loss)	$	1,570		$	1,346		$	(3,747	)

Note 16 — Commitments, Off-Balance Sheet Risk and Contingencies

Because of the nature of its activities, Horizon is subject to pending and threatened legal actions that arise in the normal course of business. In management’s opinion, after consultation with counsel, none of the litigation to which Horizon or any of its subsidiaries is a party will have a material effect on the consolidated financial position or results of operations of Horizon.

The Bank was required to have approximately $2,367,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31, 2007. These balances are included in cash and cash equivalents and do not earn interest.

The Bank is a party to financial instruments with off-balance sheet risk in the ordinary course of business to meet financing needs of its customers. These financial instruments include commitments to make loans and standby letters of credit. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements.

At December 31, 2007 and 2006, commitments to make loans amounted to approximately $141,729,000 and $154,686,000 and commitments under outstanding standby letters of credit amounted to approximately $1,929,000 and $3,000,000. Since many commitments to make loans and standby letters of credit expire without being used, the amount does not necessarily represent future cash advances. No losses are anticipated as a result of these transactions. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation.

Note 17 — Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier I capital and Tier I leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity’s activities that are not part of the calculated ratios.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank’s operations. At December 31, 2007 and 2006, Horizon and the Bank are categorized as well capitalized and met all subject capital adequacy requirements.

Horizon’s and the Bank’s actual and required capital amounts and ratios are as follows:


											Minimum Required To
											Be Well
						Minimum Required					Capitalized¹ Under
						for Capital¹					Prompt Corrective
	Actual					Adequacy Purposes					Action Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2007

Total capital ¹ (to risk-weighted assets)
Consolidated	$	99,491		10.90	%	$	72,998		8.00	%		N/A		N/A
Bank		96,448		10.58			72,923		8.00		$	91,154		10.00	%

Tier I capital ¹ (to risk-weighted assets)
Consolidated		83,651		9.17			36,499		4.00			N/A		N/A
Bank		86,657		9.51			36,462		4.00			54,692		6.00

Tier I capital ¹ (to average assets)
Consolidated		83,651		6.99			47,853		4.00			N/A		N/A
Bank		86,657		7.29			47,573		4.00			59,466		5.00

As of December 31, 2006

Total capital ¹ (to risk-weighted assets)
Consolidated	$	102,897		12.92	%	$	63,738		8.00	%		N/A		N/A
Bank		89,327		11.26			63,444		8.00		$	79,305		10.00	%

Tier I capital ¹ (to risk-weighted assets)
Consolidated		73,554		9.23			31,869		4.00			N/A		N/A
Bank		80,589		10.16			31,722		4.00			47,583		6.00

Tier I capital ¹ (to average assets)
Consolidated		73,554		6.25			47,040		4.00			N/A		N/A
Bank		80,589		6.89			46,760		4.00			58,449		5.00


¹		As defined by regulatory agencies

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 18 — Share Based Compensation

Under Horizon’s 1997 Stock Option and Stock Appreciation Right Plan (1997 Plan), which is accounted for in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS 123R), Horizon may grant certain officers and employees stock option awards or stock appreciation rights which vest and become fully exercisable at the end of five years of continued employment. SARs entitle eligible employees to receive cash, stock or a combination of cash and stock totaling the excess, on the date of exercise, of the fair market value of the shares of common stock covered by the option over the option exercise price. The underlying stock options are deemed to have been cancelled upon exercise of the SARs. In the third quarter of 2002, Horizon entered into agreements with participants that capped the value of their SARs at $14.67 per share and discontinued any future vesting. No additional compensation expense is recognized when the fair value of Horizon stock exceeds $14.67 per share as there is a presumption that participants will exercise their options rather than the SARs. No compensation expense relating to the SARs was recorded in 2007, 2006 or 2005.

A summary of option activity under the 1997 Plan as of December 31, 2007 and changes during the year then ended, is presented below:


						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
	Shares			Exercise Price		Term		Value

Outstanding, beginning of year		37,520		$	7.95
Exercised		(9,750	)		9.44


Outstanding, end of year		27,770		$	8.07		3.65	$	488


Exercisable, end of year		26,870		$	7.74		5.01	$	481

There were no options granted during the years 2007, 2006 and 2005. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005, was $166,613, $1,860,528 and $3,321,166, respectively.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

On January 21, 2003, the Board of Directors adopted the Horizon Bancorp 2003 Omnibus Equity Incentive Plan (2003 Plan) which was approved by stockholders on May 8, 2003. Under the 2003 Plan, Horizon may issue up to 150,000 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2003 Plan limits the number of shares available to 150,000 for incentive stock options and to 75,000 for the grant of non-option awards. The shares available for issuance under the 2003 Plan may be divided among the various types of awards and among the participants as the Compensation Committee (Committee) determines. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2003 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award. The restricted shares vest over a period of time established by the committee at the time of each grant. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over the vesting period. The options shares granted under the 2003 plan vest at a rate of 20% per year. The restricted shares granted under the 2003 Plan vest at the end of each grant’s vesting period.

The fair value of options granted is estimated on the date of the grant using an option-pricing model with the following weighted-average assumptions:


December 31	2007			2006			2005

Dividend yields		2.18	%		2.14	%		1.87	%
Volatility factors of expected market price of common stock		20.47	%		18.10	%		19.97	%
Risk-free interest rates		5.05	%		5.20	%		4.37	%
Expected life of options	6 years			9 years			9 years

A summary of option activity under the 2003 Plan as of December 31, 2007, and changes during the year then ended, is presented below:


						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Shares			Exercise Price		Term		Value

Outstanding, beginning of year		33,000		$	24.96
Granted		5,000			27.50
Exercised		(1,400	)		23.56
Forfeited or expired		(7,600	)		25.65


Outstanding, end of year		29,000		$	25.28		7.66	$	11


Exercisable, end of year		11,000		$	24.34		6.95	$	14

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

The weighted average grant-date fair value of options granted during the years 2007, 2006 and 2005 was $6.59, $7.12 and $7.66, respectively. The total intrinsic value of options exercised during the year ended December 31, 2007 was $4,258. No options granted under the 2003 Plan were exercised in 2006.

A summary of the status of Horizon’s non-vested, restricted shares as of December 31, 2007 and 2006, is presented below:


	2007				2006
			Weighted Average				Weighted Average
			Grant Date Fair				Grant Date Fair
	Shares		Value		Shares		Value

Non-vested beginning of year		45,000	$	23.56		45,000	$	23.56
Granted		10,000		27.22		—		—
Exercised		2,400		23.56		—		—
Forfeited		7,600		23.56		—		—


Non-vested, end of year		45,000	$	24.37		45,000	$	23.56

All grants vest at the end of five years of continuous employment.

Total compensation cost recognized in the income statement for option-based payment arrangements during 2007 was $53,000 and the related tax benefit recognized was $21,000. Total compensation cost recognized in the income statement for option-based payment arrangements during 2006 was $40,000 and the related tax benefit recognized was $16,000. No cost was recognized for the year 2005.

Total compensation cost recognized in the income statement for restricted share based payment arrangements during 2007, 2006 and 2005 was $240,000, $212,000 and $212,000, respectively. The recognized tax benefit related thereto was $96,000, $84,000 and $84,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2007, 2006 and 2005 was $135,000, $735,000 and $946,000, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $68,000, $723,000 and $1,139,000, respectively, for the years ended December 31, 2007, 2006 and 2005.

As of December 31, 2007, there was $569,000 of total unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under all of the plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 19 — FDIC One-Time Assessment Credit

Effective November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to eligible institutions. The purpose of the credit is to recognize contributions made by certain institutions to capitalize the Bank Insurance Fund and Savings Association Insurance Fund, which have now been merged into the Deposit Insurance Fund. The Bank is an eligible institution and has received notice from the FDIC that its share of the credit is $457,534. Horizon utilized $313,911 of this credit during 2007 which reduced the Company’s FDIC insurance expense. The remaining credit of $143,623 is not reflected in the accompanying financial statements as it represents contingent future credits against future insurance assessment payments. As such, the timing and ultimate recoverability of the one-time credit may change.

Note 20 — Fair Values of Financial Instruments

The estimated fair value amounts 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 derived 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 December 31, 2007 and 2006. 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 SFAS No. 107, Disclosures about Fair Value of Financial Instruments.

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

Cash and Cash Equivalents — The carrying amounts approximate fair value.

Interest-Bearing Deposits — The carrying amounts approximate fair value.

Investment Securities — For debt and marketable equity securities available for sale and 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.

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.

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Interest Receivable/Payable — The carrying amounts 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.

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:


	2007				2006
	Carrying		Fair		Carrying		Fair
December 31	Amount		Value		Amount		Value

Assets
Cash and cash equivalents	$	55,029	$	55,029	$	52,312	$	52,312
Interest-bearing deposits		249		249		898		898
Investment securities available for sale		234,675		234,675		243,078		243,078
Loans including loans held for sale, net		887,474		902,837		848,199		855,468
Interest receivable		5,897		5,897		6,094		6,094
Stock in FHLB and FRB		12,625		12,625		12,136		12,136

Liabilities
Noninterest-bearing deposits		84,097		84,097		81,949		81,949
Interest-bearing deposits		809,567		809,021		832,024		821,701
Borrowings		258,852		265,797		199,793		215,100
Subordinated debentures		27,837		27,860		40,209		44,032
Interest payable		2,439		2,439		1,771		1,771

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 21 — Condensed Financial Information (Parent Company Only)

Presented below is condensed financial information as to financial position, results of operations and cash flows of Horizon Bancorp:

Condensed Balance Sheets


December 31	2007		2006

Assets
Total cash and cash equivalents	$	71	$	481
Investment securities, available for sale		—		12,024
Investment in Bank		94,602		87,307
Other assets		9,326		8,295


Total assets	$	103,999	$	108,107


Liabilities
Short-term borrowings	$	4,700	$	5,200
Subordinated debentures		27,837		40,209
Other liabilities		817		821

Stockholders’ Equity		70,645		61,877


Total liabilities and stockholders’ equity	$	103,999	$	108,107

Condensed Statements of Income


Years Ended December 31	2007			2006			2005

Operating Income (Expense)
Dividend income from Bank	$	4,250		$	5,900		$	9,900
Investment income		139			91			48
Other income		—			4			—
Interest expense		(2,571	)		(2,675	)		(1,800	)
Employee benefit expense		(509	)		(433	)		(412	)
Other expense		(97	)		(155	)		(153	)


Income Before Undistributed Income of Subsidiaries		1,212			2,732			7,583

Undistributed Income (Loss) of Subsidiaries		5,725			3,497			(1,435	)


Income Before Tax		6,937			6,229			6,148

Income Tax Benefit		1,203			1,255			943


Net Income	$	8,140		$	7,484		$	7,091

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Condensed Statements of Cash Flows


Years Ended December 31	2007			2006			2005

Operating Activities
Net income	$	8,140		$	7,484		$	7,091
Items not requiring (providing) cash
Distributions in excess (equity in undistributed) net income of Bank		(5,725	)		(3,497	)		1,435
Change in
Income taxes receivable		(1,836	)		(1,745	)		—
Dividends receivable from Bank		400			(100	)		(1,600	)
Share based compensation		53			40			—
Reversal of compensation expense		(84	)		—			—
Amortization of unearned compensation		240			212			—
Other assets		596			298			(1,348	)
Other liabilities		(4	)		149			(785	)

Net cash provided by operating activities		1,780			2,629			4,793


Investing Activities
Purchases of securities available for sale		—			(12,024	)		—
Proceeds from maturities, calls and principal repayments of securities available for sale		12,024			—			—
Investment in Bank		—			—			(8,764	)
Investment in Statutory Trusts		—			(372	)		—
Redemption of Statutory Trust		372			—			—
Acquisition, net of cash acquired		—			—			(2,901	)

Net cash used in investing activities		12,396			(12,396	)		(11,665	)


Financing Activities
Dividends paid		(1,917	)		(1,811	)		(1,660	)
Change in short-term borrowings		(500	)		(2,000	)		7,200
Exercise of stock options		135			735			946
Tax benefit of stock options		68			469			907
Proceeds from issuance of trust preferred securities		—			12,372			—
Redemption of trust preferred securities		(12,372	)		—			—
Purchase of treasury stock		—			(128	)		(651	)

Net cash provided by financing activities		(14,586	)		9,637			6,742


Net Change in Cash and Cash Equivalents		(410	)		(130	)		(130	)

Cash and Cash Equivalents at Beginning of Year		481			611			741


Cash and Cash Equivalents at End of Year	$	71		$	481		$	611

Horizon Bancorp
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)

Note 22 — Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly consolidated results of operations:


Three Months Ended 2007	March 31		June 30		September 30		December 31

Interest income	$	17,948	$	18,566	$	19,173	$	19,381
Interest expense		10,312		10,524		10,914		10,510

Net interest income		7,636		8,042		8,259		8,871
Provision for loan losses		225		365		550		1,928
Net income		1,844		2,016		2,270		2,010

Earnings per share
Basic	$	.58	$	.63	$	.71	$	.63


Diluted	$	.57	$	.62	$	.70	$	.62


Average shares outstanding
Basic		3,194,309		3,200,259		3,202,341		3,204,715


Diluted		3,239,479		3,243,537		3,242,919		3,247,843


Three Months Ended 2006	March 31		June 30		September 30		December 31

Interest income	$	15,663	$	16,650	$	17,758	$	18,609
Interest expense		7,853		8,814		9,946		10,522


Net interest income		7,810		7,836		7,812		8,087
Loss on sale of securities available for sale		158		91		515		—
Provision for loan losses		380		225		120		180
Net income		1,449		1,834		1,968		2,233

Earnings per share
Basic	$	.46	$	.58	$	.62	$	.70


Diluted	$	.45	$	.57	$	.61	$	.69


Average shares outstanding
Basic		3,142,219		3,183,870		3,189,004		3,193,306


Diluted		3,203,206		3,209,294		3,211,777		3,238,648

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders
Horizon Bancorp
Michigan City, Indiana

We have audited the accompanying consolidated balance sheets of Horizon Bancorp as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horizon Bancorp as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1, in 2007, the Company changed its method of accounting for income taxes.

Indianapolis, Indiana
March 10, 2008


201 N. Illinois Street, Suit 700 P.O. Box 44998 Indianapolis, IN 46244-0998 317 383-400 Fax. 317 383-4200 Beyond Your Numbers

bkd.com

Horizon Bancorp

Management’s Report on Financial Statements

Management is responsible for the preparation and presentation of the consolidated financial statements and related notes on the preceding pages. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and include amounts that are based on management’s best estimates and judgments. Financial information elsewhere in the Annual Report is consistent with that in the consolidated financial statements.

In meeting its responsibility for the accuracy of the consolidated financial statements, management relies on Horizon’s system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded to permit the preparation of appropriate financial information. The system of internal controls is supplemented by a program of internal audits to independently evaluate the adequacy and application of financial and operating controls and compliance with Company policies and procedures.

The Audit Committee of the Board of Directors meets periodically with management, the independent accountants and the internal auditors to ensure that each is properly discharging its responsibilities with regard to the consolidated financial statements and internal accounting controls. The independent accountants have full and free access to the Audit Committee and meet with it to discuss auditing and financial reporting matters.

The consolidated financial statements in the Annual Report have been audited by BKD, LLP, independent registered public accounting firm, for 2007, 2006 and 2005. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and included consideration of internal accounting controls, tests of accounting records and other audit procedures to the extent necessary to allow them to express their opinion on the fairness of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.

Horizon Bancorp

Summary of Selected Financial Data

(Dollar Amounts In Thousands Except Per Share Data and Ratios)


	2007		2006		2005		2004		2003

Earnings
Net interest income	$	32,808	$	31,545	$	30,873	$	25,422	$	24,151
Provision for loan losses		3,068		905		1,521		990		1,350
Total non-interest income		12,271		10,137		9,813		10,669		11,140
Total non-interest expense		31,144		30,455		29,129		25,672		24,771
Provision for income taxes		2,727		2,838		2,945		2,494		2,636


Net income	$	8,140	$	7,484	$	7,091	$	6,935	$	6,534


Cash dividend declared	$	1,917	$	1,811	$	1,660	$	1,481	$	1,311


Per Share Data
Net income basic	$	2.54	$	2.36	$	2.31	$	2.32	$	2.19
Net income diluted		2.51		2.33		2.24		2.22		2.10
Cash dividends declared		.59		.56		.53		.49		.44
Book value at period end		21.72		19.11		17.01		16.56		15.48
Weighted average shares outstanding
Basic		3,200,440		3,177,272		3,067,632		2,993,696		2,978,161
Diluted		3,243,565		3,217,050		3,162,950		3,123,325		3,108,178

Period End Totals

Loans, net of deferred loan fees and unearned income	$	888,852	$	843,834	$	732,734	$	564,042	$	447,718

Allowance for loan losses		9,791		8,738		8,368		7,193		6,909

Total assets		1,258,874		1,222,430		1,127,875		913,831		757,443

Total deposits		893,664		913,973		855,566		612,217		546,168

Total borrowings		286,689		240,002		211,470		244,668		158,585

Horizon Bancorp

Summary of Selected Financial Data
(Dollar Amounts In Thousands Except Per Share Data and Ratios)
(Continued)


	2007			2006			2005			2004			2003

Ratios
Loan to deposit		99.46	%		93.76	%		85.64	%		92.76	%		81.97	%
Loan to total funding		75.30			76.73			68.67			65.67			63.53
Return on average assets		.69			.67			.71			.85			.88
Average stockholders’ equity to average total assets		5.61			5.14			5.19			5.90			6.01
Return on average stockholders’ equity		12.29			13.03			13.67			14.38			14.65
Dividend payout ratio (dividends divided by net income)		23.51			24.20			21.21			21.36			20.06
Price to book value ratio		118.09			143.53			166.42			162.74			184.40
Price to earnings ratio		10.21			11.77			12.24			12.14			13.12

All share and per share amounts have been adjusted for the 3-for-2 stock split declared on October 21, 2003.

Horizon Bancorp

Horizon’s Common Stock and Related Stockholders’ Matters

Horizon common stock is traded on the NASDAQ Global Market under the symbol “HBNC.” The following table sets forth, for the periods indicated, the high and low prices per share. Also summarized below are the cash dividends declared by quarter for 2007 and 2006.


	2007
					Dividends
	Common Stock Prices				Declared
	High		Low		Per Share

First Quarter	$	28.10	$	26.60	$	.14

Second Quarter		27.97		26.80		.15

Third Quarter		27.52		25.75		.15

Fourth Quarter		26.40		24.40		.15


	2006
					Dividends
	Common Stock Prices				Declared
	High		Low		Per Share

First Quarter	$	32.23	$	26.30	$	.14

Second Quarter		31.00		25.16		.14

Third Quarter		26.93		25.50		.14

Fourth Quarter		27.89		25.92		.14

There can be no assurance as to the amount of future dividends on Horizon common stock since future dividends are subject to the discretion of the Board of Directors, cash needs, general business conditions and dividends from the bank subsidiary.

The approximate number of holders of record of Horizon’s outstanding common stock as of December 31, 2007, is 578.


ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A(T). CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision of and with the participation of its management, including the Chief Executive Officer and Chief Financial Office, Horizon has evaluated the effectiveness of the design and operation of its disclosure controls (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. 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 or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods 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.

Management’s Report on Internal Control Over Financial Reporting

Management of Horizon Bancorp is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Horizon’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Management assessed the effectiveness of Horizon’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth in “Internal Control – Integrated Framework” issued by the Committee of sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management has determined that Horizon’s internal control over financial reporting as of December 31, 2007 is effective based on the specified criteria.

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 December 31, 2007, there were 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.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

This information is omitted from this report pursuant to General Instruction G. (3) of Form 10-K as Horizon intends to file with the Commission its definitive Proxy Statement for its 2008 Annual Meeting of Shareholders (the “Proxy Statement”) pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 2007.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information relating to Horizon’s directors required by this item is found in the Proxy Statement under “Proposal I — Election of Directors” and is incorporated into this report by reference. The information relating to the Audit Committee of the Board of Directors required by this item is found in the Proxy Statement under “Corporate Governance — The Audit Committee” and is incorporated into this report by reference.

The information relating to Horizon’s executive officers required by this item is included in Part I of this Form 10-K under “Special Item: Executive Officers” and is incorporated into this item by reference.

The information relating to certain filing obligations of directors and executive officers required by this item is found in the Proxy Statement under “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated into this report by reference.

Horizon has a code of ethics that applies to its directors, chief executive officer and chief financial officer. The code is available on Horizon’s website at http://www.accesshorizon.com/.

ITEM 11. EXECUTIVE COMPENSATION

The information on executive and director compensation and compensation committee matters required by this item can be found in the Proxy Statement under “Corporate Governance,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Executive Compensation” and “Compensation of Directors” and is incorporated into this report by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Equity Compensation Plan Information

The following table presents information regarding grants under all equity compensation plans of Horizon through December 31, 2007.

Number of Securities

Remaining Available for

Weighted-Average

Future Issuance Under

Number of Securities to

Exercise Price of

Equity Compensation

be Issued Upon Exercise

Outstanding

Plans (Excluding

of Outstanding Options,

Options, Warrants

Securities Reflected in

Plan Category

Warrants and Rights

and Rights

the First Column)

Equity compensation plans approved by security holders (1)

56,770

16.86

138,802

Equity compensation plans not approved by security holders

—

Total

56,770

16.86

138,802


(1)		Represents options granted or available under the 1997 Key Employees’ Stock Option and Stock Appreciation Rights Plan of Horizon Bancorp and the Horizon Bancorp 2003 Omnibus Equity Incentive Plan.

The remaining information required by this item can be found in the Proxy Statement under “Common Stock Ownership by Directors and Executive Officers” and “Stock Ownership of Certain Beneficial Owners” and is incorporated by reference into this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTOR INDEPENDENCE

The information required by this item is found in the Proxy Statement under “Corporate Governance” and “Certain Business Relationships and Transactions” and is incorporated by reference into this report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference from the Proxy Statement section captioned “Accountant Fees and Services.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents Filed As Part of This Annual Report on Form 10-K:

1. Financial Statement

See the Financial Statements included in Item 8.

2. Financial Statement Schedules

Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements.

3. Exhibits

The exhibits filed as part of this Annual Report on Form 10-K are identified in the Exhibit Index, which Exhibit Index specifically identifies those exhibits that describe or evidence all management contracts and compensation plans or arrangements required to be filed as exhibits to this Report. Such Exhibit Index is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 Registrant
Date: March 11, 2008	By:	/s/ Craig M. Dwight
		Craig M. Dwight
		President and Chief Executive Officer (Principal Executive Officer)


Date: March 11, 2008	By :	/s/ James H. Foglesong
		James H. Foglesong
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Date		Signature and Title

March 11, 2008		/s/ Robert C. Dabagia

		Robert C. Dabagia, Chairman of the Board
		and Director

March 11, 2008		/s/ Craig M. Dwight

		Craig M. Dwight, President and Chief
		Executive Officer and Director

March 11, 2008		/s/ Susan D. Aaron

		Susan D. Aaron, Director

March 11, 2008		/s/ James B. Dworkin

		James B. Dworkin, Director

March 11, 2008		/s/ Charley E. Gillispie

		Charley E. Gillispie, Director


Date		Signature and Title

March 11, 2008		/s/ Daniel F. Hopp

		Daniel F. Hopp, Director

March 11, 2008		/s/ Robert E. McBride

		Robert E. McBride, Director

March 11, 2008		/s/ Peter L. Pairitz

		Peter L. Pairitz, Director

March 11, 2008		/s/ Larry N. Middleton

		Larry N. Middleton, Director

March 11, 2008		/s/ Bruce E. Rampage

		Bruce E. Rampage, Director

March 11, 2008		/s/ Robert E. Swinehart

		Robert E. Swinehart, Director

March 11, 2008		/s/ Spero W. Valavanis

		Spero W. Valavanis, Director

EXHIBIT INDEX

The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table:


Exhibit
Number	Description	Incorporated by Reference/Attached
1.1	Placement Agreement, dated December 15, 2006, among Horizon Bancorp, Horizon Capital Trust III and J.P. Morgan Securities Inc.	Incorporated by Reference to Exhibit 1.1 to Registrant’s Form 8-K filed December 21, 2006

2.1	Agreement of Merger and Plan of Reorganization for Horizon Bancorp and Alliance Financial Corporation	Incorporated by Reference to Exhibit 2.1 to Registrant’s Form 8-K filed March 1, 2005

2.2	Amendment to Agreement of Merger and Plan of Reorganization for Horizon Bancorp and Alliance Financial Corporation	Incorporated by Reference to Exhibit 2.1 to Registrant’s Form 8-K filed March 24, 2005

3.1	Articles of Incorporation of Horizon Bancorp, as amended	Incorporated by Reference to Exhibit 3to Registrant’s Form 10-Q for the Quarter Ended September 30, 2007

3.2	Amended and Restated Bylaws of Horizon Bancorp (as adopted January 21, 2003)	Incorporated by Reference to Exhibit 3.2 to Registrant’s Form 10-K for the Year Ended December 31, 2002

4.1	Indenture, dated as of October 21, 2004, between Horizon Bancorp and Wilmington Trust Company related to the issuance of Trust Preferred Securities	Incorporated by Reference to Exhibit 4.1 to Registrant’s Form 8-K filed October 27, 2004

4.2	Amended and Restated Declaration of Trust of Horizon Bancorp Capital Trust II, dated as of October 21, 2004, related to the issuance of Trust Preferred Securities	Incorporated by Reference to Exhibit 4.2 to Registrant’s Form 8-K filed October 27, 2004

4.3	Junior Subordinated Indenture, dated as of December 15, 2006, between Horizon Bancorp and Wilmington Trust Company.	Incorporated by Reference to Exhibit 4.1 to Registrant’s Form 8-K filed December 21, 2006

4.4	Amended and Restated Trust Agreement of Horizon Bancorp Capital Trust III, dated as of December 15, 2006	Incorporated by Reference to Exhibit 4.2 to Registrant’s Form 8-K filed December 21, 2006

10.1*	Supplemental Employee Retirement Plan, as amended	Attached

10.2*	1997 Key Employees Stock Option and Stock Appreciation Rights Plan	Attached

10.3*	Form of Amendment No. 1 to Horizon Bancorp Stock Option and Stock	Attached


Exhibit
Number	Description	Incorporated by Reference/Attached
	Appreciation Rights Agreement and Schedule Identifying Material Details of Individual Amendments

10.4*	Horizon Bancorp 2003 Omnibus Equity Incentive Plan	Incorporated by Reference to Appendix B to the Registrant’s Proxy Statement for the Annual Meeting of Shareholders Held on May 8, 2003

10.5*	Agreement dated October 18, 1999, between Horizon Bank, N.A., and James D. Neff	Incorporated by Reference to Exhibit 10.11 to Registrant’s Form 10-K for the year ended December 31, 2003

10.6*	Directors Deferred Compensation Plan	Incorporated by Reference to Exhibit 10.8 to Registrant’s Form 10-K for the year ended December 31, 2004

10.7*	Form of Change of Control Agreement for certain executive officers	Incorporated by Reference to Exhibit 10.9 to Registrant’s Form 10-K for the year ended December 31, 2004

10.8*	Form of Restricted Stock Award Agreement under 2003 Omnibus Plan	Incorporated by Reference to Exhibit 10.10 to Registrant’s Form 10-K for the year ended December 31, 2004

10.9*	Form of Option Grant Agreement under 2003 Omnibus Plan	Incorporated by Reference to Exhibit 10.11 to Registrant’s Form 10-K for the year ended December 31, 2004

10.10*	Description of Executive Officer Bonus Plan	Incorporated by Reference to Exhibit 10.12 to Registrant’s Form 10-K for the year ended December 31, 2004

10.11	Guarantee Agreement of Horizon Bancorp, dated as of October 21, 2004, related to the issuance of Trust Preferred Securities	Incorporated by Reference to Exhibit 10.1 to Registrant’s Form 8-K filed October 27, 2004

10.12*	Horizon Bancorp 2005 Supplemental Executive Retirement Plan	Incorporated by Reference to Exhibit 10.14 to Registrant’s Form 10-K for the year ended December 31, 2006

10.13*	Employment Agreement, dated July 19, 2006, among Horizon Trust & Management, N.A., Horizon Bank, Horizon Bancorp and Lawrence J. Mazur	Incorporated by Reference to Exhibit 10.1 to Registrant’s Form 8-K filed July 21, 2006

10.14*	Amendment to Horizon Bancorp Restricted Stock Award Agreement, dated July 19, 2006	Incorporated by Reference to Exhibit 10.2 to Registrant’s Form 8-K filed July 21, 2006


Exhibit
Number	Description	Incorporated by Reference/Attached
10.15*	Employment Agreement, dated December 1, 2006, among Horizon Bancorp, Horizon Bank, N.A. and Craig M. Dwight	Incorporated by Reference to Exhibit 10.1 to Registrant’s Form 8-K filed December 6, 2006

10.16*	Letter Agreement, dated December 1, 2006, between Horizon Bank, N.A. and Craig M. Dwight	Incorporated by Reference to Exhibit 10.2 to Registrant’s Form 8-K filed December 6, 2006

10.17*	Guarantee Agreement of Horizon Bancorp, dated as of December 15, 2006	Incorporated by Reference to Exhibit 10.1 to Registrant’s Form 8-K filed December 21, 2006

10.18*	Employment Agreement, dated July 16, 2007, among Horizon Bancorp, Horizon Bank, N.A. and Thomas H. Edwards	Incorporated by Reference to Exhibit 10.1 to Registrant’s form 8-K filed July 19, 2007.

21	Subsidiaries of Horizon	Attached

23	Consent of BKD, Llp	Attached

31.1	Certification of Craig M. Dwight pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached

31.2	Certification of James H. Foglesong pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached

32.1	Certification of Craig M. Dwight Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached

32.2	Certification of James H. Foglesong Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached


*		Indicates exhibits that describe or evidence management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K.