HBNC Horizon Bancorp Inc

THE MERGER

This section of the joint proxy statement/prospectus describes material aspects of the proposed merger. While Horizon and KFI believe that the description covers the material terms of the merger, this summary may not contain all of the information that is important to you. You should read this entire joint proxy statement/prospectus and the other documents that we refer to carefully for more detailed information regarding the merger.

General

Horizon’s and KFI’s boards of directors have approved and adopted the Merger Agreement, the merger, and the transactions contemplated thereby. The Merger Agreement provides for the merger of KFI with and into Horizon, with Horizon as the surviving corporation. Simultaneously with this merger, FSB, the wholly-owned Indiana-chartered commercial bank subsidiary of KFI, will merge with and into Horizon Bank, the wholly-owned national bank subsidiary of Horizon.

In connection with the merger, each outstanding share of KFI common stock owned by shareholders owning at least 100 shares of KFI common stock will be converted into the right to receive, at the election of the shareholder, (i) 3.0122 shares of Horizon common stock (subject to certain adjustments as described in the Merger Agreement), or (ii) $81.75 in cash, subject to limitations and prorations such that 65% of the outstanding shares of KFI common stock will be converted into the stock consideration and 35% of the outstanding KFI shares will be converted into the cash consideration. KFI shareholders holding fewer than 100 shares will receive fixed consideration of $81.75 per share in cash and will not be entitled to receive any shares of Horizon common stock. All of the executive officers and members of the board of directors of KFI and FSB have entered into a voting agreement pursuant to which they have agreed to vote their shares of KFI common stock in favor of the approval and adoption of the Merger Agreement and the merger.

Under the Merger Agreement, the executive officers and directors of Horizon and Horizon Bank serving at the effective time of the merger will continue to serve as such after the merger is consummated.

Please see “ The Merger Agreement ” beginning on page      for additional and more detailed information regarding the legal documents that govern the merger, including information about the conditions to the merger and the provisions for terminating and amending the Merger Agreement.

Background of the Merger

Kosciusko Financial, Inc. was organized to become a bank holding company in October 1981 (originally named Farmers State Corporation of Mentone, amended in 1984) to own and operate Farmers State Bank. FSB and KFI grew steadily over the years and at the close of business on December 31, 2015 FSB had $148,207,500 in total assets and $132,955,090 in total liabilities with capital of $15,252,410. KFI had $16,469,206 in total assets, $0 in total liabilities, and capital of $16,469,206 as of December 31, 2015.

As a privately owned company, there is no public trading market for KFI common stock. There has been minimal trading of the KFI common stock since KFI’s inception. In addition, since the trades are privately transacted, KFI is not always aware of the sales price of its stock. The regular quarterly dividend paid to holders of KFI stock has been $0.25 for the last four calendar quarters. A non-recurring special dividend of $0.50 was paid on May 15, 2015.

Over the years FSB grew steadily, and in 1978 FSB entered the Warsaw market, and then later the Syracuse market becoming a truly Kosciusko county-wide bank. The bank continued to grow in the 1980’s and 1990’s, but at a rate slower than the total market opportunity. The bank remained smaller than many of its competitors, and that has continued to the present date. The bank’s loan portfolio was reduced from $78 million to $70 million during 2007 and 2008 due to the early effects of the recent recession. Later, with a focus on agricultural opportunities, the loan balances began to grow again, and were near $105 million at December 31, 2015. FSB’s market niche has historically been residential mortgage loans and agricultural loans and those sectors held up reasonably well in Kosciusko County during the recession. Despite some credit costs in 2008 and 2009, the bank’s profitability has been constantly improving over the last decade.

As part of KFI’s ongoing strategic planning process, the KFI Board of Directors regularly discussed issues impacting the future success of KFI. Among the issues discussed were the impact on earnings in the event of rising

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interest rates, residential lending activity in a rising interest rate environment, management succession in all functional areas of the company, and the cost of complying with current and increasing bank and business regulations. The directors also were aware of the increasing inability to meet the credit needs of some borrowing customers due to the size and scope of our company. In addition, the KFI Board of Directors discussed the lack of liquidity in KFI’s common stock.

As a result of KFI’s improved performance and standing in the industry, several financial institutions had inquired as to KFI’s interest in combining organizations, including an inquiry from Horizon. On May 15, 2015, Mr. Greg Maxwell, President and CEO of KFI and FSB, met with Mr. Craig Dwight, Chairman and CEO of Horizon, to discuss their interest in a possible business combination.

After several months of strategic discussions, in early August, 2015, the KFI Board of Directors decided to undertake the potential sale of KFI. The directors instructed Mr. Maxwell to pursue the possibility of a business combination that would fulfill the interests of all of the stakeholders of the company, those being principally the shareholders, but also including our customers, the communities we serve, and our employees.

To that end, and at the instruction of the board of directors, Mr. Maxwell contacted Mr. Richard Maroney, Managing Director and Principal of Austin Associates, LLC, Toledo, Ohio. FSB and KFI have been clients of Austin for over 25 years working with Mr. Maroney on several strategic planning sessions over the past few years. On August 10, 2015, Mr. Maroney submitted an engagement letter to KFI and FSB.

Discussions with Mr. Maroney led to a meeting with the KFI Board of Directors on September 4, 2015 where he presented his analysis of the community banking environment in Indiana, and ways to increase shareholder value. Mr. Maroney also presented an update on the merger and acquisition market for community banks, and some likely acquirers. Mr. Maroney then left the meeting. After a lengthy discussion describing the fees and costs of the investment banking agreement, KFI entered into a joint agreement with Austin and Investment Banking Services, Inc. on September 4, 2015.

Mr. Maroney and Mr. Maxwell worked together to develop a list of possible purchasers. The process resulted in a list of 13 potential purchasers. Austin contacted each of those companies, including Horizon. Horizon’s management and board of directors regularly review the financial services industry environment, including the trend towards consolidation in the industry, and periodically discuss ways in which to enhance Horizon’s competitive position, including the possible acquisition of another financial institution. Twelve of the thirteen companies signed nondisclosure agreements and were provided confidential information on KFI. The parties were invited to submit nonbinding indications of interest on or before November 12, 2015. During the months of October and November, 2015, several of the interested parties held targeted diligence calls seeking additional information and representatives of Horizon had discussions with management of KFI and Austin. Horizon’s management team also discussed, on a preliminary basis, with Horizon’s board of directors the opportunity to submit an indication of interest for KFI. Seven companies submitted nonbinding indications of interest, which contained information on pricing, the form of consideration, timing, and an indication of the proposed structure of a combined organization. Prior to submitting its bid, Horizon’s board of directors reviewed and approved Horizon’s indication of interest, after discussion with Horizon’s management and financial advisors.

After receiving and reviewing the offers, there was very little difference between the financial terms of the seven proposals. Some of the proposals were all cash and some offered a mix of stock and cash. The bidders were then invited and encouraged to adjust their offers. Six of the seven companies increased their offers and submitted the revised offers by November 18, 2015. The price increases ranged from 2% to 9% from the original offers. The KFI Board of Directors then met on November 19, 2015. Mr. Maroney from Austin presented the offers and discussed the merits of each offer. The KFI Board of Directors asked a number of questions and those questions were answered by Mr. Maroney to their satisfaction. The KFI Board of Directors then decided to proceed with two finalist banks, one being Horizon. Subsequent to that meeting, Mr. Maroney received a verbal increase in a proposal from one of the parties who was not selected, which resulted in the aggregate per share offer from this party being marginally in excess of Horizon’s offer. The KFI Board of Directors convened a meeting via teleconference on November 20, 2015 to discuss the verbal proposal and its terms. After considering a number of factors, the Board unanimously reaffirmed the decision of the prior day to proceed with the two selected parties, one being Horizon.

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During the remainder of November and early December, the two banks completed their review of KFI’s loan portfolio and additional due diligence investigation. The CEOs of both banks also had discussions with Mr. Maxwell and other officers of KFI. In addition, on December 17, 2015, both parties met with the Board of Directors of KFI to discuss their respective companies and the proposed transaction. Throughout the process, Horizon’s board of directors was kept apprised of its management’s and financial advisors’ continuing discussions with KFI, and on December 1, 2015, Horizon’s board of directors approved a revised indication of interest, after reviewing updated modeling projections with Horizon’s management and financial advisors.

Mr. Craig Dwight, Chairman and CEO, Mr. Thomas Edwards, President and Chief Credit Officer, and Mr. Maury Winkler, III, Director of Horizon and Horizon Bank, met with the KFI Board of Directors and presented the profile of Horizon and Horizon Bank. Horizon is an Indiana banking corporation headquartered in Michigan City Indiana, with 46 banking centers in Indiana and Michigan. Horizon has $2.7 billion in assets and $1.3 billion in trust assets under management. They discussed their steady growth, superior returns, financial strength, and seasoned executive management team. They felt our cultures and structures were very similar to theirs. It was noted that since there was no overlap in the footprint of each bank’s branch system they did not plan to close any branches as a result of the proposed merger. The KFI directors asked each of the attendees several questions and thanked them for the presentation. After the presentations, Mr. Maroney led a discussion with the KFI Board of Directors concerning the offers from the two banks. Mr. Maroney reviewed the revised letters of intent that both banks had provided to KFI. Following the review of each letter of intent, questions and discussions were held about each of the offers. Much of the discussion was centered on the value and the fairness of each of the offers. The board then requested that Mr. Maroney finalize a few questions for each of the banks and to re-convene with the KFI Board of Directors the following week. Both of the banks were also invited to make any final adjustments to their offer after finalizing all of the due diligence.

A special meeting of the KFI Board of Directors was held offsite in Warsaw, Indiana on December 22, 2015. Mr. Maroney was invited to share the latest communications from each bank and to present the final offers. Mr. Maroney had prepared a detailed comparison of the two banks and the two offers. A lengthy discussion with the KFI Board of Directors ensued with a great deal of focus on the fairness and the quality of the offers. Horizon had made a final upward adjustment to their offer, while the other bank decided not to make any changes to their final offer.

The KFI Board of Directors agreed, with input from Mr. Maroney, that the offer from Horizon was fair. The Board of Directors believed that Horizon represented the best fit for KFI and all of its constituents. The final offer received from Horizon on December 21, 2015 was for an increase in the purchase price for KFI stock to $81.75. Horizon offered to acquire KFI under the following terms: the option for each shareholder to elect to receive $81.75 per share in cash, or 3.0122 shares of Horizon’s common stock, (the “Exchange Ratio” ), or a combination thereof, provided the overall shares exchanged consist of 65% stock and 35% cash. KFI’s shareholders holding less than 100 shares will receive $81.75 in cash for each share.

At the conclusion of its meeting on December 22, 2015, the Board of Directors of KFI voted to accept the most recent offer from Horizon and to begin the process of negotiating a definitive agreement to combine with Horizon.

Horizon’s legal counsel submitted a draft merger agreement to the parties on December 29, 2015. From December 29, 2015, and through February 3, 2016, the parties exchanged comments and negotiated changes to the draft agreement.

On February 3, 2016, the board of directors of Horizon met with Horizon’s management and financial advisors who presented the terms of the merger agreement that had been distributed to the board prior to the meeting and the strategic rationale for the transaction. Following this presentation, the board of directors of Horizon reviewed and discussed the draft of the merger agreement and the consideration to be paid by Horizon to KFI. Horizon’s management and financial advisors responded to questions from the board regarding the merger and the merger consideration. Following a lengthy discussion, the board voted to approve management’s finalization and execution of the merger agreement and all related documents.

On February 4, 2016 the KFI Board of Directors met by teleconference to discuss and ratify the final Merger Agreement between Horizon Bancorp and KFI. Chairman Caskey opened the meeting by noting that all directors had had access to the agreement via the KFI Board portal and asked if there were any general questions.

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Mr. Caskey then asked Mr. Maroney to present the financial analysis of the agreement, and to make any other general comments. Mr. Maroney orally reviewed the entire lengthy and complete sales process to date, beginning with the invitations to the original banks and ending with the presentation of the fairness opinion. Mr. Maroney then presented the KFI Board of Directors with Austin’s fairness opinion. This opinion presented a financial perspective for the shareholders of KFI of the terms of the Agreement and Plan of Merger dated February 4, 2016 by and between Horizon Bancorp and Kosciusko Financial, Inc. A draft of this opinion letter had also been provided to each of the board members a few days earlier for their review prior to the meeting. The KFI board members had several questions for Mr. Maroney, which were all answered to their satisfaction.

Attorneys Stanley Pequignot with Rockhill-Pinnick, and Thomas Blank with Shumaker, Loop & Kendrick, LLP, then reviewed the terms of the Merger Agreement. The attorneys indicated that the Merger Agreement was typical of agreements in this type of transaction. Mr. Blank noted that the Merger Agreement contained a provision providing for indemnification of the directors and officers of KFI and FSB by Horizon for a period of six years after closing of the transaction, which obligation would be supported by an appropriate insurance policy. Mr. Pequignot reviewed the language and explained the downside price protection KFI has if the value of Horizon stock should drop in excess of a specified bank index. The KFI Board of Directors then reviewed the terms of the agreement, and unanimously passed a resolution to approve the Merger Agreement between Horizon and KFI.

KFI and Horizon executed the definitive Merger Agreement after the close of business on February 4, 2016. Horizon and KFI issued a joint press release publicly announcing the transaction on the morning of February 5, 2016.

KFI’s Reasons for the Merger; Board Recommendation

KFI’s board of directors has determined that the Merger Agreement and the merger are in the best interests of KFI and its shareholders and recommends that KFI’s shareholders vote “FOR” the approval of the Merger Agreement and the transactions contemplated by the Merger Agreement.

KFI’s board of directors believes that the merger with Horizon is consistent with KFI’s goal of enhancing shareholder value and providing liquidity for the holders of KFI common stock. In addition, the board of directors believes that the merger with Horizon addresses the board’s priorities that any potential transaction be in the best interest of the customers, the communities we serve, and the employees of FSB. To this end, KFI’s board of directors considered a variety of factors including the following:

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The foregoing discussion of the information and factors considered by the KFI board of directors is not intended to be exhaustive, but includes all material factors they considered in arriving at this determination to approve the Merger Agreement and the transactions it contemplates and recommend that the KFI shareholders vote to approve it. The KFI board did not assign any relative or specific weights to the above factors and individual directors may have given different weights to different factors.

For the reasons set forth above, KFI’s board of directors unanimously determined that the merger and the Merger Agreement are advisable and in the best interests of KFI and its shareholders, and unanimously approved and adopted the Merger Agreement. The KFI board of directors unanimously recommends that KFI’s shareholders vote “FOR” approval of the Merger Agreement and the merger.

Horizon’s Reasons for the Merger

In reaching its decision to approve the Merger Agreement, Horizon’s board of directors consulted with Horizon’s management, as well as its financial and legal advisors, and considered a number of factors, including:

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The foregoing discussion of the factors considered by Horizon’s board of directors is not intended to be exhaustive, but rather includes the material factors considered by Horizon’s board of directors. In reaching its decision to approve the Merger Agreement and the merger, Horizon’s board of directors did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. Horizon’s board of directors considered all these factors as a whole, including discussions with, and questioning of, Horizon’s management and its financial and legal advisors, and overall considered the factors to be favorable to, and to support, its determination.

For the reasons set forth above, Horizon’s board of directors unanimously approved the Merger Agreement and the merger, and the transactions contemplated by the Merger Agreement.

Effects of the Merger

The respective boards of directors of Horizon and KFI believe that, over the long-term, the merger will be beneficial to Horizon’s shareholders, including the current shareholders of KFI who receive the stock consideration and become Horizon shareholders if the merger is completed. The Horizon board of directors believes that one of the potential benefits of the merger is the cost savings that may be realized by combining the two companies and integrating FSB into Horizon’s banking subsidiary, which savings are expected to enhance Horizon’s earnings.

Horizon expects to reduce expenses by combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which will enable Horizon to achieve economies of scale in these areas. Promptly following the completion of the merger, which is expected to occur during the second quarter

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of 2016, Horizon plans to begin the process of eliminating redundant functions and eliminating duplicative expenses. It is contemplated that after the merger Horizon Bank will continue to operate the main offices and branch offices of FSB. For more information about FSB’s branch offices, see “ Additional Information About KFI – Properties ” beginning on page     .

The amount of any cost savings Horizon may realize in 2016 will depend upon how quickly and efficiently Horizon is able to implement the processes outlined above during the year.

Horizon believes that it will achieve cost savings based on the assumption that it will be able to:

Horizon has based these assumptions on its present assessment of where savings could be realized based upon the present independent operations of the two companies. Actual savings in some or all of these areas could be higher or lower than is currently expected.

Horizon also believes that the merger will be beneficial to the customers of KFI as a result of the additional products and services offered by Horizon and because of its increased lending capability.

Negotiations, Transactions, or Materials Contracts

Except as set forth above or elsewhere in this joint proxy statement/prospectus, none of KFI, FSB, nor any of their respective directors, executive officers, or other affiliates had any negotiations, transactions, or material contracts with Horizon, Horizon Bank, or any of their directors, executive officers, or other affiliates during the past three years that would require disclosure under the rules and regulations of the SEC applicable to this joint proxy statement/prospectus.

Opinion of KFI’s Financial Advisor

In September 2015, KFI jointly engaged Austin Associates, LLC (“Austin”) and Investment Bank Services (“IBS”), a registered broker dealer, to provide financial advisory services in connection with the potential sale of KFI. Austin is an investment banking and consulting firm specializing in community bank mergers and acquisitions. Principals of Austin’s investment banking team that assisted KFI are also limited registered representatives of IBS. KFI selected Austin and IBS as its financial advisors on the basis of their experience and expertise in representing community banks in similar transactions and their familiarity with KFI.

Austin acted as financial advisor to KFI in connection with the proposed merger and participated in the negotiations leading to the Merger Agreement. As part of its engagement, Austin assessed the fairness, from a financial point of view, of the merger consideration being received by the shareholders of KFI. Austin attended the February 4, 2016 meeting (telephonically) at which KFI’s board considered and approved the Merger Agreement. At that meeting, Austin presented its financial analysis of the transaction and delivered to the board its opinion, in writing, that the merger consideration was fair to KFI, and its shareholders, from a financial point of view. The full text of Austin’s opinion is attached as Appendix B to this Proxy Statement. The description of the opinion set forth below is qualified in its entirety by reference to the opinion. 

You should consider the following when reading the discussion of Austin’s opinion in this document:

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The preparation of a fairness opinion involves various determinations as to the most appropriate methods of financial analysis and the application of those methods to the particular circumstances. It is, therefore, not readily susceptible to partial analysis or summary description. In performing its analyses, Austin made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of KFI and Horizon and may not be realized. Any estimates contained in Austin’s analyses are not necessarily predictive of future results or values, and may be significantly more or less favorable than the estimates. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which the companies or their securities may actually be sold. Unless specifically noted, none of the analyses performed by Austin was assigned a greater significance by Austin than any other. The relative importance or weight given to these analyses is not affected by the order of the analyses or the corresponding results. The summaries of financial analyses include information presented in tabular format. The tables should be read together with the text of those summaries.

With respect to the internal projections and estimates for KFI and Horizon, and the expected transaction costs, purchase accounting adjustments and cost savings, KFI’s and Horizon’s management and advisors confirmed to us that they reflected the best currently available estimates and judgments of management of the future financial performance of KFI and Horizon, respectively, and we assumed that such performance would be achieved. We express no opinion as to such financial projections and estimates or the assumptions on which they are based. We have also assumed that there has been no material change in KFI or Horizon’s assets, financial condition, results of operations, business or prospects since the date of the most recent financial statements made available to us. We have assumed in all respects material to our analysis that KFI and Horizon will remain as going concerns for all periods relevant to our analyses, that all of the representations and warranties contained in the Agreement are true and correct, that each party to the Agreement will perform all of the covenants required to be performed by such party under the Agreement, and that the closing conditions in the Agreement are not waived. Finally, we have relied upon the advice KFI has received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the merger and the other transactions contemplated by the Merger Agreement.

Austin has relied, without independent verification, upon the accuracy and completeness of the information it reviewed for the purpose of rendering its opinion. Austin did not undertake any independent evaluation or appraisal of the assets and liabilities of KFI or Horizon, nor was it furnished with any appraisals. Austin has not reviewed any individual credit files of KFI or Horizon, and has assumed that KFI’s and Horizon’s allowances are, in the aggregate, adequate to cover inherent credit losses. Austin’s opinion is based on economic, market and other conditions existing on the date of its opinion. No limitations were imposed by KFI’s board or its management upon Austin with respect to the investigations made or the procedures followed by Austin in rendering its opinion.

In rendering its opinion, Austin made the following assumptions:

In connection with its opinion, Austin reviewed:

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Austin also discussed with certain members of senior management of KFI the business, financial condition, results of operations and prospects of KFI, including certain operating, regulatory and other financial matters. We held similar discussions with certain members of senior management of Horizon regarding the business, financial condition, results of operations and prospects of Horizon.

The following is a summary of the material factors considered and analyses performed by Austin in connection with its opinion dated February 4, 2016. The summary does not purport to be a complete description of the analyses performed by Austin. Capitalized terms used herein without definition shall have the meanings given to such terms in the Merger Agreement.

Summary of Financial Terms of Merger Agreement.   Austin reviewed the financial terms of the Merger Agreement, including the form of consideration, the exchange ratio for the stock portion of the consideration, and the resulting value per share to be received by KFI common shareholders pursuant to the proposed merger.

The financial terms of the Merger Agreement provide for each share of KFI common stock to receive, at the election of the holder, either (or a combination of): (i) 3.0122 shares of Horizon common stock (“Exchange Ratio”); or (ii) $81.75 in cash. KFI stockholders owning less than 100 shares of KFI common stock will only be entitled to receive $81.75 per share in cash and will not be entitled to receive any of the stock consideration. The Merger Agreement allows for 193,338 shares of KFI common stock (65 percent of KFI shares outstanding) to be converted into the stock consideration and the remaining shares of KFI common stock outstanding shall be converted into the cash consideration.

Based on 297,444 common shares of KFI outstanding and Horizon’s closing stock price of $23.99 on February 3, 2016, the implied deal value per share equaled $75.58 and the aggregate transaction value approximates $22.5 million. Austin calculated that the value of $22.5 million represented as of December 31, 2015:

Comparable Transaction Analysis.   Austin compared the financial performance of certain selling institutions and the prices paid in selected transactions to KFI’s financial performance and the transaction multiples being paid by Horizon for KFI. Specifically, Austin reviewed certain information relating to Indiana, Ohio and Michigan bank and thrift transactions since January 1, 2014 (with seller’s last 12 months return on average assets of greater than zero percent and total assets of less than $250 million). Eighteen transactions were included in the three state region based on the selected criterion. The following lists the transactions reviewed by Austin:

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The following table highlights the results of the guideline M&A transaction comparison:

The median last twelve month (“LTM”) ROAA of the guideline transactions was 0.59 percent compared to 0.82 percent for KFI. The median nonperforming assets (“NPA”) to assets ratio measured 2.52 percent for the guideline transaction group compared to 0.07 percent for KFI. The indicated price to tangible book ratio being paid by Horizon for KFI of 137 percent was higher than the median price to tangible book ratio of 131 percent for this guideline transaction group. The price-to-earnings multiple for KFI of 20.0 was lower than the median multiple of 29.0.

KFI Financial Performance and Peer Analysis.   Austin compared selected results of Farmers State Bank’s (KFI’s wholly owned bank subsidiary) operating performance to those of 26 selected Indiana headquartered banks with total assets between $100 and $200 million. Austin considered this group of financial institutions comparable to Farmers State Bank on the basis of asset size and geographic location.

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This peer group consisted of the following banks:

Austin noted the following selected financial measures for the peer group as compared to Farmers State Bank:

PTPP = Pre-Tax Pre-Provision = Net Interest Income + Noninterest Income - Noninterest Expense

This comparison indicated that Farmers State Bank was between the median and 75 ^th percentile of the peer group in profitability (ROAA and ROAE). Farmers State Bank’s nonperforming asset levels were more favorable than the 75 ^th percentile of the peer group when measured as a percent of total assets and as a percent of tangible equity plus ALLL. Farmers State Bank’s tier 1 leverage ratio approximated the median of the peer group while the total risk-based ratio was slightly below the peer 25 ^th percentile.

Horizon Financial Performance and Market Trading Data versus Peer.   Austin compared selected results of Horizon’s operating performance to those of 16 selected Indiana and Ohio publicly traded banks. Austin considered this group of financial institutions comparable to Horizon on the basis of asset size and geographic location. This peer group consisted of the following companies:

Austin noted the following selected financial measures for the peer group as compared to Horizon:

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PTPP = Pre-Tax Pre-Provision = Net Interest Income + Noninterest Income - Noninterest Expense

This comparison indicated that Horizon was between median and 75 ^th percentile of the peer group for core ROAA and exceeded peer group’s 75 ^th percentile in core ROAE. Horizon ranked between the 25 ^th percentile and median in NPAs/Total Assets and was below the 25 ^th percentile in NPAs/Tangible Equity + ALLL. The following presents a summary of the market trading data of Horizon compared to this same peer group as of February 3, 2016:

Horizon traded between the median and the 75 ^th percentile of the peer group as measured by price to tangible book and below the 25 ^th percentile as measured by price to LTM Core EPS. Horizon’s dividend yield was between the median and 75 ^th percentile of the peer. Horizon was between the guideline group median and 75 ^th percentile in average monthly trading volume to shares.

Austin also considered the stock price change of Horizon compared to selected banking indices between December 31, 2015 and February 3, 2016. The following table provides additional data:

Note: SNL = SNL Financial (provides financial industry specific financial and market data).

Over this time period, Horizon’s stock price declined from $27.96 to $23.99 representing a decrease of 14.2 percent. The banking sector was down approximately 15.0 percent over the same time period as measured by the SNL Bank Price Index. Other indices including SNL’s Small Cap Bank and SNL Mid Cap Bank declined 8.5 percent and 11.7 percent, respectively, for the same time period.

Pro Forma Merger Analysis.   Austin analyzed the potential pro forma effect of the merger assuming the merger will be completed on June 30, 2016. Assumptions were made regarding the fair value accounting adjustments, cost savings and other acquisition adjustments based on discussions with management of KFI and

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Horizon and their representatives. Austin assumed 75 percent phased in of cost savings during 2016 and fully phased in for 2017. For Horizon, management provided 2016 and 2017 earnings estimates. The analysis indicated that the Merger is expected to be accretive to Horizon’s estimated stand-alone core EPS in 2017. Austin calculated that Horizon’s tangible book value per share would be diluted at closing, but recovered in approximately four years.

Pro Forma Dividends Per Share to KFI. Based on the 3.0122 exchange ratio and Horizon’s current annual cash dividend rate of $0.60 per share, KFI’s common stockholders electing Stock Consideration would have received $1.81 in equivalent cash dividends per share. KFI’s annual cash dividend for 2015 was $1.00 per share. As a result, KFI shareholders would have received an 81 percent increase in annual cash dividends.

Austin’s Compensation and Other Relationships with KFI and Horizon. KFI agreed to pay Austin and IBS certain fees for its services as financial advisor in connection with the merger. KFI paid Austin a cash fee of $10,000 upon execution of the engagement letter. KFI paid Austin a cash fee of $25,000 upon the issuance of the Austin fairness opinion. KFI has agreed to pay IBS a cash transaction fee of 1.00 percent of the closing transaction value payable at the closing of the merger.

KFI agreed to reimburse Austin and IBS for its reasonable out-of-pocket expenses, and to indemnify Austin and IBS against certain liabilities, including liabilities under securities laws. Austin has provided various consulting services to KFI in the past, including during the two years preceding the date of Austin’s opinion delivered to the board of directors of KFI. For these services, Austin received compensation totaling approximately $51,100. Austin does not have any existing or pending engagements with Horizon. Except as disclosed above, there are no material relationships that existed during the two years prior to the date of Austin’s opinion or that are mutually understood to be contemplated, in which any compensation was received or is intended to be received as a result of the relationship between Austin, IBS, and any party to the merger.

Summary.   Based on the preceding summary discussion and analysis, and subject to the qualifications described herein, Austin determined the terms of the Merger Agreement to be fair, from a financial point of view, to KFI and its shareholders.

The opinion expressed by Austin was based on market, economic and other relevant considerations as they existed and could be evaluated as of the date of the opinion. Events occurring after the date of issuance of the opinion, including, but not limited to, changes affecting the securities markets, the results of operations or material changes in the financial condition of either Horizon or KFI could materially affect the assumptions used in preparing this opinion.

Certain Financial Projections Utilized by the KFI Board of Directors and KFI’s Financial Advisors

KFI does not, as a matter of course, publicly disclose forecasts or internal projections as to future performance, earnings, or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. However, KFI’s management provided its financial advisors, Austin and IBS, and Horizon with certain nonpublic unaudited prospective financial information regarding FSB prepared by KFI’s management that was considered by Austin for the purpose of preparing its fairness opinion, as described in this joint proxy statement/prospectus under the heading “ – Opinion of KFI’s Financial Advisor ” beginning on page     . This nonpublic unaudited prospective financial information was prepared as part of KFI’s overall process of analyzing various strategic initiatives, and was not prepared for the purposes of, or with a view toward, public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, published guidelines of the SEC regarding forward-looking statements, or GAAP. A summary of certain significant elements of this information is set forth below. The information included below does not comprise all of the prospective financial information provided by KFI to Austin, IBS, and Horizon.

Although presented with numeric specificity, the financial forecasts reflect numerous estimates and assumptions of KFI’s management made at the time they were prepared, and assume execution of various strategic initiatives that KFI is no longer pursuing in light of the merger. These and the other estimates and assumptions underlying the financial forecasts involve judgments with respect to, among other things, the future interest rate environment and other economic, competitive, regulatory, and financial market conditions and future business decisions that may not be realized and that are inherently subject to significant business, economic, competitive, and regulatory uncertainties and contingencies, including, among other things, the inherent uncertainty of the business

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and economic conditions affecting the industry in which KFI operates, and the risks and uncertainties described under “ Risk Factors ” beginning on page      and “ Cautionary Note About Forward-Looking Statements ” beginning on page     , all of which are difficult to predict and many of which are outside the control of KFI and will be beyond the control of the combined company. There can be no assurance that the underlying assumptions would prove to be accurate or that the projected results would be realized, and actual results likely would differ materially from those reflected in the financial forecasts, whether or not the merger is completed. Further, these assumptions do not include all potential actions that management could or might have taken during these time periods.

The inclusion in this joint proxy statement/prospectus of the nonpublic unaudited prospective financial information below should not be regarded as an indication that KFI, Horizon, their respective boards of directors, Austin, or IBS considered, or now consider, these projections and forecasts to be a reliable predictor of future results. The financial forecasts are not fact and should not be relied upon as being necessarily indicative of future results, and this information should not be relied on as such. In addition, this information represents KFI management’s evaluation at the time it was prepared of certain measures of FSB’s expected future financial performance on a stand-alone basis, assuming execution of certain strategic initiatives. The unaudited prospective financial information does not give effect to the merger, including the impact of negotiating or executing the Merger Agreement, the expenses that may be incurred in connection with consummating the merger, the potential synergies that may be achieved by the combined company as a result of the merger, the effect on either Horizon or KFI, as applicable, of any business or strategic decision or action that has been or will be taken as a result of the Merger Agreement having been executed, or the effect of any business or strategic decisions or actions which would likely have been taken if the Merger Agreement had not been executed, but which were instead altered, accelerated, postponed, or not taken in anticipation of the merger.

No assurances can be given that these financial forecasts and the underlying assumptions are reasonable or that, if they had been prepared as of the date of this joint proxy statement/prospectus, similar assumptions would be used. In addition, the financial forecasts may not reflect the manner in which Horizon would operate the FSB business after the merger.  Horizon and KFI do not intend to, and each disclaims any obligation to, make publicly available any update or other revision to this unaudited prospective financial information to reflect circumstances occurring since its preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, or to reflect changes in general economic or industry conditions.

The financial forecasts summarized in this section were prepared by and are the responsibility of the management of KFI. No independent registered public accounting firm has examined, compiled, or otherwise performed any procedures with respect to the prospective financial information contained in these financial forecasts and, accordingly, no independent registered public accounting firm has expressed any opinion or given any other form of assurance with respect thereto and no independent registered public accounting firm assumes any responsibility for the prospective financial information.

Further, the unaudited prospective financial information does not take into account the effect on KFI or FSB of any possible failure of the merger to occur. None of KFI, FSB, Austin, or IBS, or their respective affiliates, officers, directors, advisors, or other representatives has made, makes, or is authorized in the future to make any representation to any shareholder of KFI, or other person regarding KFI’s ultimate performance compared to the information contained in the unaudited prospective financial information or that the projected results will be achieved. The inclusion of the unaudited prospective financial information herein should not be deemed an admission or representation by Horizon or KFI that it is viewed as material information of KFI or FSB particularly in light of the inherent risks and uncertainties associated with such projections.

In light of the foregoing, and taking into account that the KFI Special Meeting will be held several months after the unaudited prospective financial information was prepared, as well as the uncertainties inherent in any forecasted information, KFI shareholders are cautioned not to place unwarranted reliance on such information.

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The following table presents select unaudited prospective financial data of FSB for the fiscal year ending December 31, 2016 prepared by KFI’s management and provided to Horizon, Austin, and IBS.

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THE MERGER AGREEMENT

The following is a summary of the material provisions of the Merger Agreement. This summary is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Appendix A to this document and is incorporated into this document by reference. You should read the Merger Agreement in its entirety, as it is the legal document governing the merger.

Structure of the Merger

Subject to the terms and conditions of the Merger Agreement, at the completion of the merger, KFI will merge with and into Horizon, with Horizon as the surviving corporation of such merger. The separate existence of KFI will terminate. The shares of Horizon common stock will continue to be listed on the NASDAQ Global Select Market under the symbol “HBNC.” Simultaneously with the merger, FSB will be merged with and into Horizon Bank, a wholly owned subsidiary of Horizon.

Under the Merger Agreement, the executive officers and directors of Horizon and Horizon Bank serving at the effective time of the merger will continue to serve as such after the merger is consummated.

Merger Consideration

If the merger is completed, each share of KFI common stock issued and outstanding immediately prior to the effective time of the merger (other than dissenting shares, shares held as treasury stock of KFI, and shares held by Horizon) will be converted into the right to receive, at the election of the shareholder, (i) 3.0122 shares of Horizon common stock (which we refer to as the “exchange ratio” or the “stock consideration”), or (ii) $81.75 in cash (which we refer to as the “cash consideration,” and together with the stock consideration, the “merger consideration”); provided, however, that KFI shareholders owning of record and/or beneficially fewer than 100 shares of KFI common stock as of the effective time will only be entitled to receive $81.75 per share in cash and will not be entitled to receive any Horizon common stock. The election by a shareholder of the stock consideration and/or cash consideration is subject to limitations and prorations such that the aggregate merger consideration will be paid 65% in Horizon common stock and 35% in cash. If the holders of more than 65% of the outstanding KFI shares make valid elections to receive the stock consideration or if the holders of more than 35% of the outstanding KFI shares make valid elections to receive the cash consideration, those KFI shareholders electing the over-subscribed form of consideration will have the over-subscribed form of consideration proportionately reduced and will receive a portion of their consideration in the other form, despite their election.

No fractional shares of Horizon common stock will be issued in the merger. Instead, Horizon will pay to each holder of KFI common stock who otherwise would be entitled to a fractional share of Horizon common stock an amount in cash (without interest) determined by multiplying such fraction by the average per share closing price of a share of Horizon common stock as quoted on the NASDAQ Global Select Market during the fifteen consecutive trading days immediately preceding the second business day prior to the closing of the merger on which such shares were actually traded.

The exchange ratio is subject to adjustment as follows:

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If KFI elects to exercise its termination right as described above, Horizon may elect to avoid termination of the Merger Agreement by increasing the exchange ratio to the lesser of the amounts determined pursuant to the following formula: (i) a quotient, the numerator of which is equal to the product of the $25.58 (the initial Horizon market value), the exchange ratio (as then in effect), and the average daily closing value of the SNL Small Cap U.S. Bank and Thrift Index for the fifteen consecutive trading days immediately preceding the determination date divided by the closing value of the SNL Small Cap U.S. Bank and Thrift Index on February 4, 2016, minus 0.15, and the denominator of which is equal to Horizon market value on the determination date; or (ii) the quotient determined by dividing $25.58 by the closing price for Horizon’s common stock for the fifteen consecutive trading days immediately preceding the determination date, and multiplying the quotient by the product of the exchange ratio (as then in effect) and 0.85. Since the formula is dependent on the future price of Horizon’s common stock and that of the SNL Small Cap U.S. Bank and Thrift Index, it is not possible to determine at this time if the merger consideration will be adjusted pursuant to the foregoing provisions or what any such adjusted merger consideration would be. However, in general, more shares of Horizon common stock would be issued, to take into account the extent by which the average price of Horizon’s common stock exceeded the decline in the average price of the common stock of the index group.

Stock and Cash Election Procedures

Cash and Stock Elections.   An election form and other transmittal materials in the form designated by Horizon and its exchange agent, will be mailed prior to the closing date on such date as KFI and Horizon mutually agree upon to each holder of record of KFI common stock as of five business days prior to the election form mailing date. Each election form will permit the KFI record shareholder (or in the case of nominee record holders, the beneficial owner through proper instructions and documentation) to (i) elect to receive the cash consideration for all or a portion of such holder’s KFI shares (a “cash election”), (ii) elect to receive the stock consideration for all or a portion of such holder’s KFI shares (a “stock election”), or (iii) make no election with respect to the receipt of the cash consideration or stock consideration.

Notwithstanding the foregoing elections, no more than 193,338 shares, or 65%, of the KFI common stock issued and outstanding immediately prior to the effective time of the merger (the “Stock Conversion Number”) will be converted into the stock consideration, and the remaining shares of KFI common stock issued and outstanding immediately prior to the effective time, or 35% of such shares, will be converted into the cash consideration (the “Cash Consideration Number”). KFI shares as to which a cash election has been made are referred to herein as “Cash Election Shares.” KFI shares as to which a stock election has been made are referred to herein as “Stock Election Shares.” KFI shares as to which no election has been made (or as to which an election form is not properly completed and returned) are referred to herein as “non-election shares.” The aggregate number of KFI shares with respect to which a stock election has been made is referred to herein as the “Stock Election Number.”

Delivery of Election. To be effective, a properly completed election form must be received by the exchange agent on or before 5:00 p.m., Eastern Time, on the date mutually agreed upon by Horizon and KFI (which will be at least five business days prior to the closing date and will be publicly announced by Horizon) (the “Election Deadline”). The election form must be accompanied by the stock certificates representing the KFI common stock to which the election form relates, or by an appropriate guarantee of delivery of such certificates from a member of any registered national securities exchange or a commercial bank or trust company in the United States. Any such guarantee is subject to the condition that the stock certificates are in fact delivered to the exchange agent by the time required in the guarantee of delivery, and failure to deliver the certificates covered by the guarantee within the time set forth in the guarantee will invalidate the election, unless otherwise determined by Horizon in its sole discretion. For KFI shares held in book entry form, Horizon will establish procedures for delivery of such shares. If a KFI

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shareholder either (i) does not submit a properly completed election form in a timely fashion, or (ii) revokes the election form prior to the Election Deadline (without later submitting a properly completed election form prior to the Election Deadline), the KFI shares held by such shareholder will be designated non-election shares. All election forms will be automatically revoked, and all stock certificates returned, if the exchange agent is notified in writing by Horizon and KFI that the Merger Agreement has been terminated. The exchange agent will have reasonable discretion to determine whether any election, revocation, or change has been properly or timely made and to disregard immaterial defects in any election form. Any good faith decision of the exchange agent regarding these matters will be binding. Horizon and the exchange agent are under no obligation to notify any KFI shareholder of any defect in an election form.

Allocations of Stock and Cash Consideration.   The stock and cash consideration will be allocated among the KFI shareholders as described below.

If the Aggregate Stock Consideration Is Oversubscribed.   Cash may be paid to KFI shareholders who make stock elections if the stock consideration is oversubscribed. If the Stock Election Number exceeds the Stock Conversion Number, then the stock election is oversubscribed. If the stock election is oversubscribed, then:

If the Aggregate Stock Consideration Is Undersubscribed.   Alternatively, Horizon stock may be issued to KFI shareholders who make cash elections if the stock consideration is undersubscribed. If the Stock Election Number is less than the Stock Conversion Number, then the stock consideration is undersubscribed. The amount by which the Stock Election Number is less than the Stock Conversion Number is referred to as the “Shortfall Number.” If the stock consideration is undersubscribed, then all KFI shareholders making a stock election will receive the stock consideration for all shares of KFI common stock as to which they made a stock election. KFI shareholders making a cash election or no election will receive the stock consideration for the number of shares of KFI common stock equal to the Shortfall Number, with the stock consideration first being allocated to the non-electing KFI shares, as described below.

Shortfall Number is Less Than or Equal to Number of Non-Election Shares.  If the Shortfall Number is less than or equal to the number of non-election shares, then:

Shortfall Number Exceeds Number of Non-Election Shares.   If the Shortfall Number exceeds the number of non-election shares, then:

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Discretion to Adjust Stock Consideration.   If Horizon and KFI are unable to obtain the opinions of counsel that the merger will constitute a tax-free reorganization under Section 368(a) the Code, or if the merger otherwise fails to qualify as a tax-free reorganization under such provision, then Horizon may, in its sole discretion, increase the number of KFI shares entitled to receive stock consideration by the minimum amount necessary to enable such tax opinions to be rendered and for the merger to otherwise qualify as a tax-free reorganization.